The N.Y. Times and the trade deficit

In a beautiful demonstration of the complete lack of interest and understanding of the significance of the trade deficit, we turn to the New York Times, which has assured its prosperous readers, once again, that they have nothing to worry about (previously, they have shown that oil will last for...a very long time). "Rising Exports Putting Dent in Trade Gap" , (5/14/2007) says the headline, but most of the article is a recitation of various major multinational corporations' sales outside the U.S. -- "This year, for the first time, Standard & Poor’s expects the 500 companies in its benchmark stock index to generate more than half of their sales in foreign countries" -- a trend that has been continuing since the end of World War II, and a completely different phenomenon than a trade deficit.

In fact, "many American companies are enlarging their operations overseas.", in other words, they are continuing to outsource and shut down U.S. production: "At the same time, a number of American workers have lost their jobs as companies moved more business overseas. And there is always the risk that the dollar could suddenly plunge and set off a global economic crisis." Oh yeah, that problem. A collapsing dollar and a global depression. But what were we talking about? Oh yes, large American corporations are doing well! Thanks to the crack staff at the N.Y. Times for a profound lesson in investigative journalism.

I will spare the reader the quotes from the various economists, which are even worse. Well, one quote is worthwhile; in an eery echo of the old Vietnam prediction of "turning the corner", one economist avers that "We’re past the inflection point". Good, he got to use a mathematical word, makes it sound ever so scientific.

Except that if you look at the data at the Commerce Department's Bureau of Economic Analysis, well, "it don't look so good". The trade deficit actually went up in March, but that's "only" because of oil, the Times says. But everything else in manufacturing is basically staying the same. This, even though the dollar has been going down relative to the Euro. Since the Chinese and basically the Japanese prop up the American economy by keeping their currencies ridiculously low, the trade gap with Asia doesn't move either.

A trade deficit, that is, a situation when a country imports more than it exports, is supposed to result in the currency of the offending nation going down relative to other currencies. That way, its exports are relatively cheaper, and imports are relatively more expensive, so foreigners buy more (exports therefore go up) and the people of said country buy less (therefore the imports go down). However, since the dollar started sliding against the Euro the trade deficit with Europe has worsened. Since the dollar can't go down vis-a-vis China, there has been no movement there either. But even were the Chinese to relent, my guess is that the trade deficit would not move much.

The fundamental problem is that the U.S. is losing its competence and capacity in manufacturing. So even if the dollar goes down, the U.S. can't ramp up its exports as much as it should, and seemingly can't provide its citizens with goods either, so imports don't go down, or they even go up. But the readers of the N.Y. Times, and other media and academics besotted with neoclassical economics, are not aware of this problem because they have reassured themselves and others that manufacturing doesn't matter (for a contrary view, please see my paper "Why manufacturing is central to the economy").

Meanwhile, Chrysler is going private, Ford is hemorrhaging billions, and GM just lost its leadership position to Toyota. But not to worry. We live in the best of all possible worlds.