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Is Trump Wrong About Trade Deficits? |
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Dear Reader, |
The president likes to hold foreign nations responsible for his own nation's behemoth trade deficits. |
He believes they deal dirty, they unjustly tariff American wares, etc. |
Perhaps in certain instances the president is correct. And perhaps his trade policies will somewhat balance the imbalances. |
I am not convinced they will. |
I am nonetheless willing to suspend belief. And I am prepared to heave my Ricardo into the roaring flames if they do. |
Yet has the president fingered the wrong culprits? Are foreign scoundrels truly responsible for this nation's trade imbalances? |
Or should the president instead finger the Federal Reserve? |
I confess it at once: The question is a leading question, as you likely suspect. |
Money Production, Not Goods Production |
Mr. David Stockman, former senior government official: |
The US manufacturing economy has been shrinking in real physical terms for the past 18 years notwithstanding the fact that during that interval the Fed has printed nearly $6 trillion in brand, spanking new money that it snatched from thin air. |
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So something big and bad happened after the Fed went all in on money-printing in response to the stock market meltdown in the fall of 2008. |
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After all, during the 28 years between 1972 and 2000 the very opposite occurred. Manufacturing output in the US rose by nearly 150%, which computes to a 3.3% growth rate per annum. |
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Yet there is no mystery as to why manufacturing output abruptly went flatter than a board after the Financial Crisis… The mad money-printers in the Eccles Building simply inflated the bejesus out of the US economy at a time when what was urgently needed was a stern deflation of an already inflation-bloated industrial sector. |
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No Wonder Why the U.S. Can't Compete |
Mr. Stockman cites fully loaded manufacturing wages. |
Fully loaded wages refer to the total costs an employer incurs to employ a laborer. |
They include not merely base compensation — but medical insurance, retirement plans and taxes — among others. |
Mr. Stockman observes that the fully loaded manufacturing wage in Vietnam is a vanishing $3.50 the hour. |
Mexico's is $5.00 the hour. China's is $6.00 the hour. |
Now move up the manufacturing productivity ladder. |
South Korea's fully loaded manufacturing wage is $22.50 the hour… Japan's is $28 the hour… the European Union's is $32.50 the hour. |
Now come home. |
What is the United States' fully loaded manufacturing wage? |
The answer is $44.25 the hour. |
That is, the United States manufacturing sector — in general — cannot compete with reduced labor costs abroad. |
Explain This |
Comes the objection: |
'Of course manufacturing wages will be higher in the United States than in Vietnam or China. That's because we have necessary environmental regulations and social insurance that these countries don't have.' |
Just so. Yet I would remind you that the European Union imposes extensive regulatory demands on industry and mandates extensive social insurance. |
And yet its fully loaded manufacturing wage falls $12 beneath that of the United States. |
Why? Look to the Federal Reserve, hollers Mr. Stockman: |
The USA has priced itself out of the global manufacturing market, which is exactly why America has been running chronic and massive trade deficits that reached the staggering annual level of $1.2 trillion in 2024. |
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Indeed, the collapse of America's trade balance has been relentless over the last 30 years—with the deficit rising by 10X, from $10 billion to $100 billion. Per month! |
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And, no, POTUS, foreign trading partners did not suddenly turn into ever worsening unfair trade cheats in the last three decades. The cause… is domiciled on the banks of the Potomac, not in foreign capitals. |
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Yup, Blame the Fed |
The fellow refers to the Marriner S. Eccles Building — headquarters of the Federal Reserve. |
The structure is not domiciled precisely on the banks of the Potomac River. Yet I indulge Mr. Stockman's writerly flourish. |
It is nonetheless the site upon which he trains his cannons. |
He believes the Federal Reserve excels at manufacturing one primary product — bubbles. |
This it has done at actual manufacturing's expense. Mr. Stockman continues: |
The vast gap between US manufacturing wages and that of our major trading partners has been building relentlessly since the early 1990s when Greenspan put the Fed in the monetary central planning business… |
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Workers who managed to keep their jobs gained barely 7% over one-third of a century from all of the Fed's pro-inflation money printing, even as the ever rising level of nominal US wages made blue collar workers a sitting duck in global markets… |
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Since 2007 unit labor costs in US manufacturing have soared by +53%, which exactly coincides with the deep plunge in the US trade deficit in goods after the turn of the century. |
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It Goes Back to Nixon |
Yet the business predates Maestro Greenspan. You must cast your gaze to old Nixon and his 1971 murder of the gold standard: |
Between that date and mid-1992, the general price level in the US rose by 250%, and now stands at 700% above its June 1971 level. Is there any wonder, then, that the US has priced itself out of the global manufacturing market? |
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In this telling, it is no wonder whatsoever. |
"Learn to code," American manufacturing workers were told. |
Alas, artificial intelligence will likely push aside many who took aboard the advice. |
In conclusion… the president may justifiably lament the state of United States manufacturing. |
He is simply wagging his index finger at the wrong rascals. |
Regards, |
Brian Maher |
for Freedom Financial News |
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