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Big trade deficits, but more wealth

Posted by: Michael Mandel on May 10

What’s more important, big trade deficits or high productivity? Debt to foreigners is building up, but productivity is soaring. Last Thursday’s data from the BLS shows that output per hour has been rising at a 2.9% rate over the past ten years, not much below the post-war high of 3.3%.

I’d argue that productivity is winning. The best way to see this is to look at net real wealth per capita—that is, the net worth of households, subtracting government debt, and adjusting for inflation and population. This measure summarizes the combined effects of the higher borrowing from foreigners and the increased output from productivity.

By my calculations, net real worth per person is up 57% over the past ten years. That’s one of the biggest increases on records. By comparison, real net worth per person rose by 36% in the 1980s, 21% in the 1970s, and 32% in the 1960s.

I’d say that as long as net real worth per capita is rising, that’s a sign that the plus of higher productivity is stronger than the minus from the trade deficit.

(For more about the different views of the sustainability of the trade deficit, see Nouriel Roubini’s excellent and comprehensive note. )

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Reader Comments

Brandon Ammons

September 4, 2005 01:31 PM

I have done some research of government stats (you
know how I love stats) and came up with some pretty
interesting statistics on trade surpluses and trade

From 1940-1970, the US ran 30 straight years of trade
surpluses. The US was a manufacturing Juggernaut.
GDP growth was 8.06% from 1940-1970.

From 1976-2004, the US ran 28 straight years of trade
deficits. GDP growth averaged 6.87% from 1976-2004.

Free traders will argue that inflation should be lower
because of the competition of imports against American
made goods.

Wrong!!! Inflation from 1940-1970 average 3.28%.
Inflation from 1976-2004 average 4.44%.

Free traders will say well you didn't look at
unemployment stats. Wrong!!! Yes I did.

The stats only goes back to 1948 but here it
is. From 1948-1970 unemployment ran from just under
4% to a high of 8% and average of around 5.25%

From 1976-2004, unemployment went from 8% to a high of
over 10% to a low of 4%. The average was around 6%.

From 1940-1970, GDP growth was over 1% higher,
inflation was over 1% lower and unemployment was 0.75%
lower compared to 1976-2004.

This proves that free trade policy is a total failure
and a national disgrace.

Thank you for your interest. This blog is no longer active.



Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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