Two Cheers for Bernanke’s Speech on Trade

I was thrilled to see that Ben Bernanke’s speech today (here, courtesy of Mark Thoma) addressed the trade deficit, and whether trade imbalance might bear upon the case for international trade:

Although many readily accept that balanced trade does not reduce aggregate employment, some might argue that the United States’ current large trade deficit must mean that the number of U.S. jobs has been reduced on net. However, the existence of a trade deficit or surplus, by itself, does not have any evident effect on the level of employment. For example, across countries, trade deficits and unemployment rates show little correlation. Among our six Group of Seven partners (the world’s leading industrial countries), three have trade surpluses (Canada, Germany, and Japan). However, based on the figures for February of this year, the unemployment rates in Canada (5.3 percent) and in Germany (9.0 percent) are significantly higher than the 4.5 percent rate in the United States; and Japan’s unemployment rate, at 4.0 percent, is only a bit lower.7 Factors such as the degree of flexibility in the labor market, not trade, are the primary source of these cross-country variations in unemployment.

Though I found much to quibble over in Bernanke’s very orthodox defense of trade, this one paragraph made the whole speech worthwhile. I do agree with it. There’s no reason to think that unbalanced trade should have any effect on unemployment rates. But that’s not why I was so pleased. I was excited just to see the question of imbalance addressed, to see America’s huge trade balance actually grappled with in a major policy speech on trade. So often the fact of persistent imbalance is just ignored, maybe mentioned with a quick cough, but let’s move on and pretend we are all living in some Ricardian paradise.

Perhaps in future speeches, Bernanke could address the trade imbalance and its effect on the character of domestic investment — that is, whether persistently unbalanced trade results in a skewing of physical and human capital out of tradable sectors. He might touch upon how these dynamic effects bear on the United States’ future ability to repay its growing international debt with real goods or services. In his role as Fed chief, Bernanke could comment on whether managing the sizable debt associated with unbalanced trade might someday require a more accommodative monetary stance than would be expected under inflation targeting. (This would be a good opportunity to celebrate the US central bank’s famous dual mandate!)

Bernanke could discuss housing and asset bubbles, and future price volatility should patterns of international capital flow change or Americans become more reluctant to increase their debt load. With respect to employment, Bernanke could muse on whether and to what degree unbalanced trade affects wages, if it does not affect unemployment rates. He might offer some insight on whether the combination of sluggish wage growth, low tradables prices, unusually easy credit, and booming financial markets — all related to current trade patterns! — have anything to do with declining labor force participation in the United States.

It could happen. A boy can dream, can’t he?

So two cheers for Ben Bernanke, and his speech today on trade. May it be the first of many.

p.s. Bernanke deserves a full three cheers for a famous speech several years ago. His suggestion of a “global savings glut” was a profoundly useful contribution to the conversation on globalization and international trade. It’d be great to see a follow-up on why it is or ought to be the United States that does the world the service of accommodating that glut, and what if any limits there are or ought to be on America’s willingness to borrow the world’s copious savings.


4 Responses to “Two Cheers for Bernanke’s Speech on Trade”

  1. Aaron Krowne writes:

    I think this is a case where “conventionalist” premises render any conclusions worthless. Do these countries even remotely measure unemployment the same way? I think not. My own basic investigations into the US’s unemployment stats suggest that given an intuitive definition of the word, the rate should show as at least 6-8% presently.

    But I agree, there was also missing a treatment of long-run vs. short-run effects, and effects in general besides the unemployment rate.

  2. Yeah, that’s the thing about “unemployment rate”. It’s the biggest headline and most poorly defined. So many effects on employment can get thrown away, because times are easy (people are said to “opt-out” of the labor market, to pursue education, hobbies, early retirement, whatever), or because times are hard (and workers become discouraged).

    Fundamentally, the definition of the unemployment rate flies in the face of economic reasoning. It treats “wanting / looking for a job” as exogenous, as something a person either chooses to do, or does not do. But of course that’s not true. If you believe that incentives matter, then few people will opt out (to pursue better options) if wages are high, and few people will drop out (discouraged for not finding) if employment costs are so low as to make employers eager to hire anyone. In the real world, some groups are discouraged (say hard-to-employ workers who can’t be hired, given the minimum wage and other costs and risks of hiring borne by employers, and competition from the informal sector), and others are opting out (high skill, high savings white collar workers who have accumulated appreciating assets and good credit, and who value their leisure and freedom more than what their time is worth in dollars in competitive world labor markets). Both these groups drop out of the workforce for complex and interesting reasons, and both are conveniently excluded from the unemployment rate.

    Wages matter, but the definition of unemployment hides that.

  3. Donaldo Rodrigues writes:


    By making the case that deficits or surpluses do not have any evident effect on employment, I believe Bernanke was trying the address the increasingly louder protectionist voices in Washington. However, if I were one of those making those noises in Washington, this wouldn’t be enough to address my concerns.

    The absence of evidence linking employment level to surpluses/deficits is not in itself evidence that there is no link. I think we don’t see the link because we’re looking at the overall trade surplus/deficit – sort of a 30,000 ft view. If we look at the composition of the trade of any country, we’d probably glean more useful information. For example if a country imports labor intensive goods (e.g U.S imports from China) and exports capital intensive goods that require less labor (e.g U.S. exports to China) and has a deficit overall, chances are that the net effect of trade with that country is reduced employment in the country importing labor intensive goods. However, that reduced employment could be made up – and then some – by trade with some other country.

    Now mind you, I’m not saying trade that reduces employment is bad for either country. I understand the benefits of trade. Obviously it’s bad for the people losing their jobs. My point is that the overall trade

    figures (deficits/surpluses) and employment figures of any country are the result of too many complex variables to be useful for any meaningful analysis.

    That 9% unemployment rate in Germany is probably because East Germany had a higher unemployment rate before unification and they are still trying to accomodate that workforce. Japan’s 4% unemployment rate? Isn’t their population shrinking?

    On another point, we hear protectionist voices from populist politicians because, well they are politicians and because some of them don’t understand the benefits of trade. But I suspect a significant number of those making noises about tariffs look at trade through the prism of geopolitics. And these people will not care what Bernanke thinks or says. For these folks, if we have to bear some short term economic pain to set back an adversary’s ascendance by a few years, then so be it. Notice that the yen has been weakening against dollar for the last two years and nobody has made the case for an appreciation of the yen.

    My two cents! I love reading your posts! Specially those on the CPDOs were great!. Keep up the good work.

  4. Donaldo,

    I love reading your comments! Thanks for visiting.

    I didn’t mean to agree that current patterns of unbalanced trade have no effect on employment. Just that they needn’t have an effect on the unemployment rate, which is a particularly shifty statistic, since both the numerator and denominator are affected. It’s more likely to show up in labor force participation rates, which are more straightforward.

    I don’t agree that trade, even unbalanced trade, with a country whose comparative advantage is cheap labor, necessarily puts pressure on employment. An economy can invent as many service and nontradables jobs as it wishes, if the aggregate tradables wealth is sufficient to meet everybody’s needs. Whether it does so is a matter of the internal structure, culture, politics, etc. But if a device were invented such that every manufactured good appeared at a button-push with no labor involved, nothing would prevent us from becoming a world of singers, artists, designers, social climbers, whatever, and paying one another in claims on whatever we still considered to be scarce, celebrity face time, famous artworks, whatever. From a developed world perspective, what I find dangerous about current unbalanced trade is not that people have to find other things to do than factory work, but that the “device” by which manufactures are made to appear for free is unreliable. It will stop working as soon as social, political, and economic realities elsewhere in the world change, and it is implausible that present arrangements are indefinitely sustainable. (They might be sustainable for a long time, but that’s bad, not good. It is harder to move to an “old technology” if the arts and practices that surrounded it have disappeared entirely. It’s the change in the character of employment — not the quantity, but the habits and skills of people — that represents a hazard.)

    I’m very glad that you mentioned geopolitics, because the geopolitical dimension of this debate is very important. It’s important to avoid the kind of geopolitics you describe, designed to sabotage an adversary. The politics of manufacturing scarcity — bad for us but worse for them! — is a terrible thing. At the same time, loss of geopolitical stature creates severe risks, and I think countries are foolish to overlook that. Geopolitics needn’t be a zero-sum game — there are broad band of relative parity within which small moderate of strength and weakness don’t much matter, and mutual gains don’t change relative power relationships. But countries ought to shoot for and strive to maintain membership in the league of the relatively powerful, not by sabotaging others, but by seeing to themselves. That includes insuring against geopolitical risk. Nations ought to have more and more redundant capacity than would exist in a world of Ricardian specialized trade, because the sea lanes between England and Portugal can be disrupted, and the English will need their wine even then. Much of economics understands the rationality of insurance. But geopolitical risk is hard to price, and governments are such weird economic agents, that economists throw up their hands. Geopolitical arguments for protectionism are so liable to rent-seeking and abuse that it is easier to presume that all such arguments are false. Unfortunately, they are not, and ignoring risks that are hard to price or hedge doesn’t make them go away.

    Anyway, thank you again for the thoughtful and kind comment. I do mean to write on more finance-y matters, this week has just been a flurry of trade (anti)economics.