What Bernie Sanders Doesn’t Understand

Senator Bernie Sanders’s  blames a lion’s share of the United States’s economic problems on Wall Street banks and trade deals. Given the opportunity, should he win the presidency, he would break-up the large banks and re-write the US’s international trade treaties. The net affect of all this would be zero jobs created.

The problem

Senator Sanders is correct in saying the US is exporting jobs. In fact, we are presently buying almost a half trillion dollars more goods and services annually than we are selling to other countries.

Figure 1 Source: Bureau of Economic Analysis, Table 4.1 Foreign Transactions in the National Income and Product Accounts, Revised March 25, 2016 http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&904=1980&903=128&906=a&905=1000&910=x&911=0

Bill Clinton was elected president in 1992 and was sworn in to office in January 1993. During his eight year term, he signed one major international trade agreement (GATT), a minor regional one (NAFTA) and granted China most favored nation trading status.  The U.S. Merchandise & Trade Balance in Figure 1 is the annual dollar total of all our exports minus all our imports. Exports and imports are all-encompassing and include goods, services, dividends, interest payments and everything else transacted.

As one can see, our trade balance has been negative every year in the chart (it was positive in 1991) and has gotten steadily worse since Clinton assumed office. If we stop this post right here, we can blame Bill Clinton for destroying our industrial sector and make this look clear-cut and simple, just like Senator Sanders does. Unfortunately, it isn’t simple and Clinton deserves our praise not our anger.

The rest of the story

Having a positive or negative trade balance is not dictated by trade agreements. Trade agreements impact the volume of trade, but not the direction. In 1992, our total exports were $781 billion and in 2015 they totaled $3.3 trillion.

Where this gets a bit more complicated is that each country’s annual Merchandise and Trade Balance must equal that country’s Net National Savings Rate. If the United States buys more than it sells, it must borrow money internationally to pay for the deficit. Equally, the accounts must balance if the driving force is US borrowing. Adding in employment data at first makes this more complicated, but also provides some answers.

Figure 2 illustrates how employment does not follow trends in the Merchandise and Trade Balance. In other words, a big trade deficit does not necessarily mean high unemployment. When Clinton took office, besides signing trade agreements, he passed a significant tax increase and balanced the budget. Following was one of the most sustained economic booms in our history. The blue line representing the Employment rate (100% – Unemployment rate) continued rising into the first year of the George W. Bush Administration.

Figure 2 Source: Bureau of Economic Analysis, Table 4.1 Foreign Transactions in the National Income and Product Accounts, Revised March 25,2016 http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&904=1980&903=128&906=a&905=1000&910=x&911=0 and Department of Labor, Labor Force Statistics from the Current Population Survey, Unemployment Rate, 16 years and over

At the same time that US employment was reaching record high levels, our Merchandise and Trade Balance was dramatically dropping. What was happening in this period was demand for goods and services was outpacing our ability to produce more in a full employment economy.

In days gone by, this was a prescription for rampant inflation. Now, due to more open trade, the pressure was relieved by other countries meeting our demands. Hence we imported much more than we exported even with record high employment. Consumer purchases were financed by foreign lending. Consumers got home equity loans and ran up their credit cards. Few asked where the money was coming from.

Voters put an end to the good times by electing George W. Bush in 2000. Upon assuming office in 2001, he started cutting taxes and combined this with over 7% average annual spending increases. The Clinton budget surpluses disappeared and were replaced by huge deficits. These deficits were bigger than domestic lenders could cover. Consequently, we became the world’s biggest borrower. By 2006, we were borrowing over $800 billion annually from people and governments outside the US.

This massive borrowing preceded the Great Recession starting in 2008.  Just like in the Clinton Administration, the same rules of balancing international transactions stayed in place. During the Clinton years, consumer spending drove this. During the Bush years, borrowing drove the equation. So while in 2006, we borrowed over $800 billion from outside the US, we now wound up buying an extra $800 billion of goods and services to balance the transaction.

How does this happen? The Terms of Trade (which are currency values) change enough to make domestic producers unable to compete with foreign producers. This doesn’t mean they were inefficient, it was just currency values were killing these companies. While we were borrowing everything in sight, China practiced conservative government and had huge positive Net National Savings that they lent to us. Consequently, China boomed and we busted.

American as apple pie
American as apple pie and Bernie Sanders’ populism.

The simplified equation is Net National Savings = private savings + government savings. During the years after Clinton left office, the US has had moderate to high private savings. Unfortunately, these were dwarfed by government spending deficits leaving us with negative National Savings and therefore negative Balances of Trade. When other countries balance their private savings with prudent government spending and attain a positive Net National Savings, we call it “Currency Manipulation”. I call it conservative fiscal management.

What we and Bernie Sanders should have learned

This is extremely important.  The US economy didn’t tank because of trade agreements with China. Our economy crashed because we had huge negative Net National Savings Rates caused by irresponsible spending and tax cuts that caused massive government spending deficits that overwhelmed our private savings. China followed a much different path and accumulated high positive Net National Savings Rates. Renegotiate all our trade agreements and have the same Net National Savings Rate and we will still have the same equally large negative Merchandise & Trade Balance.

Unfortunately, when President Obama assumed the presidency in 2009,  he increased spending dramatically his first year in office and even worse, continued the Bush tax cuts and added some of his own. Being somewhat lucky, the impact of his continuing $trillion deficits government spending deficits were blunted on the international credit markets because US private savings increased. This reduced the amount of needed foreign borrowing.

Thankfully Obama eliminated his own and many of the Bush tax cuts in the 2012 Budget Reconciliation Act. After his first year in office, he also dramatically cut his spending increases and currently has an average annual spending increase of just over 2.5% for his term in office. Perhaps coincidentally, the federal budget deficit has shrunk into the $500 billion range, our Net National Savings and Merchandise and Trade Balances are in the $500 billion range and employment has expanded to high levels.

All is not cream and roses. The high employment rates we have include record numbers of part-time jobs. Many US workers are under used and under paid. Things could be better.

What should Sanders do?

It makes a simple speech that even Donald Trump supporters can understand when you externalize our economic problems and blame foreigners for them. If we can move beyond worthless talk and onto solutions, what we really need are truly conservative politicians (and voters) willing to pay the entire cost of government with increased taxes while making hard decisions about government’s real purpose and follow through with needed cuts.

If we want to eliminate our trade deficit (Merchandise & Trade Balance), we need to quit wasting time blaming trade agreements and successful people (otherwise categorized as “Wall Street”). We need to be true conservatives and balance our federal government’s spending.

The fine print

During this season, promises flow like lava from a volcano. It would be remiss to leave readers with the impression that simply balancing our Net National Savings will lead to a reindustrialization of the US. This simply isn’t going to happen. The good paying jobs where people stood in a line and did the same thing over and over again all day are gone and never returning. Automation has eliminated untold numbers of jobs that aren’t coming back.

Getting our act together, dramatically lowering the budget deficit and bringing our National Savings Rate close to zero will make more US jobs internationally competitive. However these positions will demand more education and higher skill levels. These are the jobs where the US has a competitive advantage.

Summing up…

A country’s Net National Savings Rate equals  private savings plus government savings. Today, private savings are fairly reasonable. If government savings could be brought to zero, that would virtually eliminate our Net National Savings deficit and consequently our Merchandise and Trade Balance. Maybe asking voters to be responsible doesn’t win elections.  Yet, if Bernie Sanders wants to show real integrity, that is the speech he needs to give.




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