President Trump likes to tout big numbers, but here's one new figure he won't enjoy: $891 billion, the United States' record-breaking trade deficit in goods last year.
It's the biggest ever recorded, and even if you add in services, shrinking 2018's trade deficit to $621 billion, that's still the largest gap since 2008.
Trump points to the trade deficit as evidence America is getting "ripped off." He's boasted he can close the divide and launched a multi-front trade war to that end. But while a trade deficit is never a good thing, it is something we can live with — and handle on our own.
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The basic problem with a trade deficit is it means demand from American consumers is going overseas, creating jobs in other countries instead of here at home. When America is at full employment — when there are more jobs than there are workers to take them — families and communities have more security; workers have leverage to demand bigger pay hikes and better conditions; inequality falls; and the economy as a whole is more productive. When we chronically fail to hit full employment (and we have failed for decades), we get rising inequality and income stagnation.
In isolation, a trade deficit makes full employment harder to reach. But in reality, the trade deficit never exists in isolation. Even as it drains demand from the economy, other policies can stimulate demand to offset that loss. With the right strategy, we could reach and maintain full employment even with persistently large trade deficits.
What sort of policies fit the bill? Anything that either hires more Americans directly or gives them more money to spend.
We could simply expand America's welfare programs — things like Medicaid, food stamps, and housing assistance — or add new programs. But you can't always control how Americans spend the money they receive.
A more certain approach would be something like direct industrial policy. Left-leaning Democrats are already talking about a jobs guarantee, a public option for living-wage employment designed to push us to full employment for good. This category could also include the $1 trillion or more that should be spent revamping the country's infrastructure, the massive public works and investment that would come with a Green New Deal, or even Medicare-for-All, which would free up lots of consumer spending currently going to private insurers.
Granted, these programs would be heavily deficit-financed. But that's necessary. Taxes do the same thing trade deficits do — pull demand out of the domestic economy — so by fully paying for these programs, we'd defeat their purpose. Critics might worry we'd go too far in the opposite direction and overheat the economy, but after decades of undershooting full employment, overshooting it would be a nice change of pace.
Why go this route? Why try to offset the harms of trade deficits rather than reducing the deficits themselves?
For one thing, these programs are all things America can do on our own, while closing the trade deficit would almost certainly require other countries' cooperation in the form of currency policy changes. Trump's trade war could certainly push other nations to the bargaining table, but China and our other trading partners may decide not to play ball. Realistically, it doesn't look like the Trump administration has the strategic acumen or policy know-how to pull this off.
And even if we did fix the international currency imbalance, that might not solve the problem. America's economy is doing relatively well, while other major economies are not. As long as that's the case, we will buy more of their stuff than they buy of ours. Trump cannot unilaterally solve China's economic woes, nor can he force the Eurozone to finally start running sane domestic macroeconomic policy.
The best fixes for trade deficits are ones we can do solo.
That's not all. The U.S. dollar is still used for settling almost all international trade and financial obligations, but only America can actually create fresh dollars. For all other countries, if they run out, they run out. That can devastate an economy if paired with an international debt payment crisis or a desperate need for more imports. That's why most other nations try to stockpile dollars for a rainy day. They do so by exporting to America and getting dollars in exchange for their goods and services. If they can import less from us than they sell to us, they're left with the desired surplus of dollars.
This means if the U.S. ever did completely balance our trade flows, other countries would have to give back all their dollars. Our trade parity would deprive the rest of the world of its dollar reserves.
Moreover, the way countries stockpile dollars is by investing them in an assets. Increasing U.S. deficit spending would flood global markets with more U.S. Treasuries, the epitome of safe, risk-free investment. Without that supply of Treasuries, countries might invest their dollar reserves in other, riskier assets — like mortgage-backed securities, for example. We all know how that turned out.
By running big, deficit-financed, domestic industrial policy, America can plug the demand hole created by our trade deficit. We would do the rest of the world a kindness in the process.
