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Current Trade Deficit:    
Is Reality on Trade and Jobs Finally Penetrating the Federal Reserve?
Alan Tonelson
Wednesday, March 01, 2006
Photo of Alan Tonelson
Alan Tonelson is a Research Fellow at the U.S. Business & Industry Educational Foundation and the author of The Race to the Bottom: Why a Worldwide Worker Surplus and Uncontrolled Free Trade are Sinking American Living Standards (Westview Press).
Aside from delightfully or maddeningly Delphic public statements (depending on the state of your investments that day), one thing you could depend on from former Federal Reserve Board Chairman Alan Greenspan was fervent support for current trade and globalization policies – along with unbending confidence that they could produce no wrong.

His successor, Ben Bernanke, calls himself a free trader, too, and surely is.  But in a recent appearance before the House Financial Services Committee, Bernanke made some comments about globalization’s emerging fall-out that would have been surprising coming from most globalization critics, much less a kingpin of the global economic policy establishment.

In particular, Bernanke challenged two major myths about globalization spread energetically by its cheerleaders generally, and by Greenspan specifically. The first is that trade deficits are at worst harmless and at best reflections of an American economy so strong that it can attract the foreign capital needed to enable its citizens to over-consume. The second is that the biggest problem in U.S. labor markets is a shortage of skilled workers that will increasingly hamstring national competitiveness.

To be technically accurate, Greenspan did take to calling the trade and broader current account deficits (the latter also includes certain investment-related flows) “unsustainable.” He also cautioned that eventually they could produce a painful adjustment for America and the entire global economy.  But Greenspan left the unmistakable impression that he never really meant it.

One of his farewell speeches – delivered last fall to an annual high-level global finance gabfest in Jackson Hole, Wyoming – was typical.  He referred to America’s international deficits as problems, but he expressed confidence that they could be reduced gradually and harmlessly, “by adjustments in prices, interest rates, and exchange rates, rather than through more wrenching changes in output, incomes, and employment.”

More revealingly, he fingered as a major threat to this soft-landing scenario “the developing protectionism regarding trade,” along with persistent budget deficits.  Indeed,
Greenspan went beyond condemning as inefficient the only measures capable of preventing or containing dangers he acknowledged were likely from soaring current account deficits.  He blamed growing popular opposition to more trade liberalization on “a fear of the changes necessary for economic progress.”

At the February 15 House Financial Services hearing, Bernanke, too, warned against “[moving] back from free trade.” He also talked up the likelihood of a soft landing, resulting from “a combination of higher national savings in the United States, increased demand by our trading partners, and greater exchange-rate flexibility.” You’re right: So far, this is nothing that armies of Washington think tank hacks and Big Media columnists don’t crank out every day.

But Bernanke also spoke with unusual precision about the costs of not reducing the deficit, acknowledging that “over a period of time, we will be building up a foreign debt to other countries which, all else equal, lowers national wealth and lowers our ability to consume in the future.”

Now would be an opportune time for Members of Congress to ask Bernanke and Bush administration officials whether these costs aren’t already being felt. After all, the United States has run a current account deficit every year since 1983, and the gap hit 6.2 percent of the national economy as of the third quarter of 2005. (Full 2005 figures will be released March 14.) The current surge in the current account deficit began in 1991, when it stood well below one percent of gross domestic product.

Does this 22-year stretch qualify as “a period of time”? And if not, how long would Bernanke counsel tempting fate and waiting for a current account crisis to actually hit?

Bernanke’s take on labor market issues was a positively refreshing departure from the stale orthodoxy peddled by Greenspan, not to mention many American policymakers and politicians on both sides of the aisle – and even on both sides of the trade policy debate.

Greenspan contended in his Jackson Hole speech that “this transition to the new high-tech economy, of which expanding global trade is a part, is proving difficult for a segment of our workforce.” He continued that this “difficulty is most evident in the increased fear of job-skill obsolescence that has induced significant numbers of our population to resist the competitive pressures inherent in globalization from workers in the major newly emerging market economies.”

The outgoing Fed Chairman then emphasized the imperative of addressing these “understandable fears...through education and training, and not by restraining the competitive forces that are so essential to overall rising standards of living....”

During Bernanke’s House appearance, many members of the Financial Services Committee – especially Democrats like Barney Frank of Massachusetts – bought into this myth of American dullards being lapped in the global competitiveness race by the armies of geniuses being raised in China and India.

At one point, Bernanke endorsed part of the labor shortage myth, agreeing that “the most important factor [behind rising income inequality in America] is...the rising skill premium, the increased return to education.”

But when asked about the need for American schools to turn out many more scientists and engineers, Bernanke brought the committee back down to earth. He suggested that many of the S&T graduates of the third world simply don’t get the same quality of education as their U.S. counterparts. He also went on to offer an insight already clear to any serious labor market analyst, but that has almost completely escaped official Washington:

“[S]imply producing more scientists and engineers may not be the answer because the labor market for those workers will simply reflect lower wages and perhaps greater unemployment for those workers. Currently, there’s not an obvious shortage of scientists and engineers in terms of the labor market indicators; that is, wages for engineers are not rising more rapidly than other professionals.”

Having pointed out the painfully obvious – that sectors with sluggish wage performances by definition can’t be suffering labor shortages, the new Fed Chairman concluded with an equally rare and valuable piece of advice: Government should focus on producing “a demand side that strengthens the market, that therefore brings in people into science and engineering because there are opportunities there, not simply creating a bigger supply which will then compete with each other and drive down the wages in that category.”

If Bernanke and anyone in Congress or even the administration is genuinely concerned about enhancing American technology competitiveness, they need to ask the logical next questions:

– Why has all the hype about emerging markets and all the new consumers they’re supposed to be generating not produced that commensurate rise in the demand side for scientists and engineers to which Bernanke just referred?

– Given that Washington clearly doesn’t understand the relationship between expanding trade and commerce with these emerging market countries on the one hand, and this critical labor market on the other, shouldn’t we re-think this trade expansion policy?

– If these expanding trade relationships have not boosted demand for scientists and engineers and all the wonders they can create, isn’t it true that instead Corporate America has been using these new trade arrangements to replace high-wage U.S. scientists with low-wage third world scientists?  

– Isn’t this mainly why wages in these fields are going nowhere?

If Bernanke and other American leaders keep ignoring these questions, it will be clearer than ever that their goal is not to improve American competitiveness and living standards, but to remain politically correct on globalization-related issues or, worse, turn high-tech industries into low-wage industries. That kind of continuity with the Greenspan Fed is the last thing the nation needs.


Alan Tonelson is a Research Fellow at the U.S. Business & Industry Educational Foundation and the author of The Race to the Bottom: Why a Worldwide Worker Surplus and Uncontrolled Free Trade are Sinking American Living Standards (Westview Press).