|The Deficit Worth Worrying About
By Judith Stein
IT WON'T BE A good Labor Day for America's jobless.
August's employment report showed the economy was still
losing jobs (54,000 of them in the month), underscoring
the weakness of the recovery.
Politicians debate the consequences of the budget
deficit, but it's the trade deficit that accounts for
meager American growth and employment. Global
imbalances - especially the U.S. trade deficit and
Chinese surplus - were at the root of the financial
crisis in 2008.
For the past 40 years, American leaders assumed high-
tech services, finance, and housing could sustain
prosperity. They stood by as East Asian and European
governments promoted manufacturing and manufacturing
exports. Too much U.S. investment went into non-
tradables: finance, housing, retail, personal services.
Americans amassed trade deficits because we didn't make
enough autos, appliances, and computers. Cheap money -
mainly from China and Japan, which accumulated dollars
from trade surpluses - funded U.S. consumption despite
stagnating wages. The trade deficit peaked at 6.5
percent of gross domestic product in 2006.
After the 2008 crisis, President Obama promised to
reform and "rebalance" the economy that brought the
world to the edge. "For too long," he said recently,
"America served as the consumer engine for the entire
Yet the president's actions have reinforced the old
imbalances. Bailing out banks resurrected finance while
industry struggles. Health-care legislation will expand
the bloated medical sector in the short run. Imports
have risen sharply since February, while exports barely
moved. The rising trade deficit will certainly reduce
the meager estimated second-quarter growth of 2.4
percent while keeping unemployment high.
Obama's $787 billion stimulus leaked. Much of the new
consumption was of foreign goods, stimulating other
economies - China's, Germany's, Japan's. The spending
produced fewer U.S. jobs than Keynesian economists
predicted. In the open U.S. economy, stimulus is
The alternative is not austerity - which would simply
shrink the economy - but rather targeting employment.
Even in the era of globalization, most countries make
sure they protect their labor markets, which usually
means running a trade surplus. China, Japan, and Europe
maintained such industrial policies during the
recession. And the European Commission plans to unveil
an industrial strategy stressing manufacturing and
downgrading services and "knowledge" industries.
By contrast, the United States imagines that markets,
not governments, determine a nation's industrial mix.
And U.S. foreign policy still trumps economic
objectives. The tolerance for China's currency
manipulation is surely related to efforts to win
Chinese support for U.S. policies on Iran and North
America does have industrial policies by default:
Sugar, housing, finance, and pharmaceuticals get
breaks, for example. But we need to ask whether those
are in the nation's interest.
To begin to rebalance, we could reduce aid to the
housing industry through tax deductions, mortgage
guarantees, and other incentives. That could be coupled
with an infrastructure program employing construction
workers no longer needed in housing. The Bush tax cuts
for the wealthiest should lapse not to reduce the
deficit, but to fund infrastructure, which could be the
core of a manufacturing renewal.
If the nation is to end the trade deficit, it has to
manufacture more. Manufactured goods make up more than
half the value of U.S. exports. American manufacturers
can also cut the deficit by competing with imported
goods. But selling more here and abroad will require
the government to enforce trade laws for a change.
Manufacturing also nurtures skilled jobs and high
wages. It will not by itself provide the huge number of
new jobs we need, but it will create additional jobs in
financial and technical services, transportation,
storage, and wholesaling.
There are pitfalls as well as promise in industrial
policy. But 9.6 percent unemployment should concentrate
Judith Stein is a professor of history at the Graduate
Center and City College of the City University of New
York, and the author of "Pivotal Decade: How the United
States Traded Factories for Finance in the Seventies"
(Yale University Press). She can be reached at