Book Description

U.S. manufacturing employment has declined from a peak of nearly twenty million in 1979 to less than thirteen million in 2018. The U.S. trade deficit has increased by $600 billion, about 3 percent of U.S. GDP, since 1980. The first question analyzed in this paper is how much of the decline in U.S. manufacturing jobs since 1980 can be attributed to the increase in the U.S. trade deficit? Economists and analysts agree that the changes in the trade balance of a country reflect changes in the relationship between its domestic saving and its investment and fiscal deficit. The conventional view is that the U.S. international investment position evolved from the world's largest creditor in 1980 to the world's largest debtor in 1990 because of the increase in U.S. profligacy, including the surge in the U.S. fiscal deficit because of the two supply-side-inspired tax cuts during the Reagan presidency and the increase in defense expenditures. The competing view is that the saving in many of the major U.S. trading partners has been large relative to the domestic investment spending, and that some of the excess savings have flowed to the United States, which has led to a higher price for the U.S. dollar and a larger U.S. trade deficit. It is difficult to identify a country that believes its trade and current account surpluses are too large. The U.S. trade balance is the mirror of the trade balances of all other countries as a group. The United States developed a trade deficit because China, Germany, the Netherlands, Singapore, and numerous other countries developed trade surpluses that at times were larger than 5 percent of their GDPs.