Studies acknowledge what has long been true of the U.S. economy: the trade deficit tends to expand along with the economy and contract when the economy slows. In fact, an analysis of economic date from the last quarter-century show that a growing deficit (as a percentage of gross domestic product) is associated with faster, not slower, economic growth, as well as rising manufacturing output and falling unemployment.
Since 1980, the U.S. deficit has shrunk as a share of GDP from the previous year in eight different years, it has grown moderately in 10 years and has grown rapidly in six years. How has the economy fared under each of those three scenarios?
By the most basic measure of economic performance – GDP, manufacturing output and the unemployment rate – the U.S. economy performs better in years when the deficit is rising than in years when it is shrinking. And it performs especially well in years when the deficit is rising most rapidly.
The conventional wisdom holds that a trade deficit destroys jobs by supposedly shipping them overseas. But again, the evidence suggests something quite different. In those years of an “improving” deficit, the unemployment rate on average by 0.8 percentage points. In years when the deficit moderately “worsened,” the unemployment rate fell by an average of 0.2 points, and in years when the deficit grew the most rapidly, the unemployment rate fell an even larger average of 0.7 points.
If a rising trade deficit is responsible for “shipping jobs overseas,” how do the critics of trade explain the fact that unemployment rises when the trade deficit shrinks and falls when it expands?
Those who seek the Holy Grail of a trade surplus should be care what they wish for. The last time America’s jobless rate reached double digits was the early 1980’s, when the deficit was a measly $5 billion.