America Cannot Create Jobs Amidst Trade Deficits


Professor
of Management,
Pace University

This article has two objectives. First, to emphasize that “Trade Equilibrium” is the primary means to create net new jobs. Secondly, to explain that as long as the trade deficit continues, techniques — such as, free or restricted trade; infrastructural development; lower or higher taxes; less or more regulations; dollar-devaluation or reevaluation; and emphasis on technical education — cannot create net new jobs by themselves. They can help create jobs only if they work as parts of an already established national mission of “Trade Equilibrium.” And, that is a mathematical fact. The U.S. loses about ten full time jobs with every million dollars of net imports. We don’t need a rocket scientist to make that calculation.

SHORTTERM TECHNIQUES THAT CANNOT CREATE NET JOBS

Science, Math, and Engineering Education–Cannot

It is a good idea to place emphasis on more education, particularly on science, math, and engineering — especially when the American hegemony in these fields is declining. However, more education, by itself, cannot create net new jobs. First, it would take several years for students to complete such education, and then many more years to begin to innovate and help the American economy create net new jobs. Second, there is a good possibility these graduates may not have reasonable jobs waiting for them—because the goods and services based on these innovations may be produced abroad in the lower cost countries.

Free and Unfair Trade–Cannot

Alfred Marshall’s classical theory of foreign trade—supposedly an efficient distribution of resources and output–was based on the assumption of a perfectly free market (1949, 1961). Such a market did not exist in the nineteenth century, nor does it exist now. Today, America keeps losing jobs to its trading partners because they have much more freedom to export to America, than America has to export to them. A really free and fair trade would be helpful but it is non-existent.

Trade restrictions also tend to have negative economic effects for some or all trading partners. For example, trade restrictions that limit imports by American discount retailers, would reduce their profits and the jobs and wages of their millions of employees.

Dollar Devaluation–Cannot

Some people recommend further devaluation of the American dollar to help America increase its exports and reduce balance of payment deficit. Actually, they got it all backwards. The declining value of dollar is a consequence of its trade deficit, not a cause. This in turn is the result of America’s losing competitiveness in world markets. It does not export enough to have needed foreign currency required to pay for its imports. No wonder, Standard and Poor recently downgraded the U.S. credit rating.

Over the years, as the value of the dollar has been receding, American exports, relatively speaking, have also been declining while its trade deficit has been soaring.

Monetary Stimulus–Cannot

From its start, the governmental monetary stimulus—by way of monetary or fiscal policies—has failed to create net new jobs amidst continuing huge trade deficits for two obvious reasons. One, the recipient American firms are investing part of this stimulus money overseas. Two, the recipient individuals are spending a good part of the stimulus funds buying products made abroad. In effect, a good part of the stimulus money is stimulating economies of countries such as Brazil, China, India and Russia. It is like trying to fill a bucket full of holes with water. The Keynesian assumptions to stimulate economy and jobs by increasing spending by creating budgetary deficits cannot work in the state of staggering trade deficit

TRADE EQUILIBRIUM, THE LONGTERM SOLUTION TO CREATE JOBS

Trade Equilibrium, the Concept

I define “Trade Equilibrium” as a situation when trading among different countries is such that the trading partners remain generally deficit-free from one another over a cycle of 3-5 years. In other words, the value of a country’s imports is equal to the value of its exports.

Trade Equilibrium—Leadership, the foremost Requirement

First, the U.S. must resolve to bring parity between its imports and exports. Any person or institution can provide such leadership —(a) President of the U.S., (b) the U.S. Congress, (c) Democrats, (c) Republicans, (d) Chamber of Commerce, (e) labor unions, (f) IMF, IBRD, or (g) anyone else. “Trade Equilibrium” will be good for all.

Trade Equilibrium–Prerequisite for Next Economic Revolution

Trade Equilibrium would be universally beneficial as well. For example, when China would use its dollar surplus to buy goods and services from the U.S., it would save itself from sitting on dollars declining in value. Second, it would help improve its infrastructure, economy, jobs and standard of living. Third, it would earn a much higher rate of return from investments in its infrastructure (10 percent – 30 percent) than what it earns from investing in the U.S. treasuries (currently less than 2 percent).

Of course, a country can spend its extra dollars to buy goods and services from countries other than the U.S. In that case, these other countries would have the dollar surplus. Eventually, the dollars have to come home. The stockpile of dollar-bills sitting in the bank vaults of these nations has no practical value until it is used to purchase goods and services from the country of its origin.

Dollars’ homecoming would help create new investments, jobs, income, demand and profits. It would help reduce tax rates, increases tax revenues, and reduce national debt. It would help increase income and bonuses both for the workers and the management — as it would help enhance stockholders’ value.

With more jobs and higher incomes, Americans would spend more on American and foreign products. The multiplier effect of Trade Equilibrium will be incredibly beneficial to all. It will give birth to the next economic revolution — just as James Watt’s steam engine did for the first one. And this gigantic outcome would be a positive-sum phenomenon, not a zero-sum game. Currently the U.S. owes about $13 trillion to other countries. Every net billion dollars coming home would create about 10,000 net new jobs.

Trade Equilibrium — Export Promotion is one of its Parts

There are some fundamental differences between the two approaches. The traditional, bottom-up, export promotion techniques—such as tax-breaks, subsidies, conferences, trade delegations and individual corporate efforts — valuable as they are, have failed to keep and create net new U.S. jobs. These methods can help individual firms measure their performance based on their own trade goals — without any meaningful reference to the overall national trade deficit, employment and economy.

However, this theory of “Trade Equilibrium,” a top-down approach, begins with looking at the national trade deficit already accumulated. It then looks at the trade-deficit added daily. Its dual mission is first to try to prevent the additional deficits from taking hold and then to try to reduce trade deficit already accumulated. Export promotion is a part of “Trade Equilibrium.” Emphasis on “export promotion” encourages businesses to try to increase exports on individual bases. Emphasis on trade equilibrium makes it a national challenge.

Trade Equilibrium — the Promotional Challenge

Each dollar surplus country has its own reasons to hold on to the American money. For example, its dollar surplus is helping China become a rising economic, political and military superpower in the world. Economies of several countries, including that of the United States, often depend upon the decisions made in Peking. It places more value on these intangible variables than it does on the economic benefits cited above. It is in no rush to let these dollars go.

So what can the U.S. do? Simple! Take a “Marketing 101” course at Pace University — or any other institution for that purpose — in order to learn how to practice its most revered commandment, namely, that “the customer is king.” Such commonsense (which is obviously not so common) would motivate the U.S. to begin trades with countries that are able to supply goods and services it needs — as they also need to import goods and services that America can provide.

Many states in the U.S. are required to balance their budgets. The U.S. Congress is trying to balance the federal budget. So why not try to balance exports and imports too? An important bill called, “The Creating American Jobs and Ending Offshoring Act,” was introduced by Senator Richard Durbin (co-sponsored by eight other democrats) in the Senate in September 2010. This is the first bill of its kind that intends to create jobs and stop “off-shoring” of additional jobs. The bill, however, does not address the problem of the millions of jobs the U.S. has already exported. Moving toward trade equilibrium — an evolutionary long term process — is the only practical solution to this complex quandary.

Alternatively, begin learning how to deploy depleting resources to deal with escalating unemployment and poverty and their socio-economic consequences.

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