President Obama’s goal of “doubling exports over the next ten years” seems like a win-win in that it will boost employment and reduce the troubling U.S. trade deficit. At first glance, his position makes sense politically and economically. But there is a problem. Because of the globalization of production that U.S. companies have championed over the past 20 years, exports from sectors other than agriculture require a much higher level of imports than ever before. As a result, the job creation from expanding exports is much lower than it was in the 1980s and 1990s.
In economic terms, the President’s goal of doubling exports makes sense. Foreign demand is expected to be the fastest growing component of U.S. demand in the coming years. And other, domestic, sources of economic growth are less promising than they have been in the past.
We can’t consume our way out of our problems. Consumption demand is going through a long-term adjustment from the build up of consumer debt over the past ten years. Private investment also is not a likely singular basis for recovery. It stopped being the most dynamic source of U.S. economic growth years ago. With fear of a double-dip recession, lots of built-up excess capacity and still inexplicably tight credit, private investment spending is unlikely to be a driver of US economic growth. Government spending has been politically excluded by the bi-elections. Federal spending has grown rapidly over the period of economic crisis, but calls for deficit reduction mean that the kinds of increases we have seen in government spending over the last few years may not be politically feasible in the future.
That leaves the export sector. With the dramatic growth rates of the emerging markets — most prominently Brazil, India and China, — the potential for growth in U.S. exports is considerable.
A rapid doubling of exports also makes sense politically, since it relies on the spending power of foreigners not the U.S. government, and in this sense is a “free lunch.” Moreover, if export growth is blocked by tariffs or exchange rate manipulation, the source of the failure lies outside U.S. borders not within.
There are two problems, though, with the policy goal of doubling exports. One is that it may require beggar-thy-neighbor devaluation on the part of the U.S. This is the accusation the U.S. faces from Brazil, Korea, Germany, Japan and others as a result of the Fed’s second round of monetary easing, as we saw dramatically revealed during the President’s trip to Korea. These countries are concerned that U.S. export growth will be at the expense of their own exports.
The second problem is more serious for the President, since it relates to the employment effect in the U.S. of an export expansion. U.S. exports increasingly rely on U.S. imports, as manufacturers in the U.S. import many components of their products. This is true of Boeing’s 777, Apple’s iPod, Cisco’s servers and IBM’s consultancies. More than ever in U.S. history, U.S. exports depend on U.S. imports and (outside of the farm sector) the most profitable U.S. companies are also those most reliant on the importation of inputs.
So while a doubling of exports may be attainable, its employment effect is much less than it was 20 years ago. It would be misguided for many reasons to try to return to the nationally-integrated production structures of the 1980s. So a substantial and sustainable program of job creation will necessarily have to confront the slow pace of growth of domestic demand. This, in turn, will require a reform of firm innovation policy and perhaps even a new set of social protections that redistribute the high profits earned by many exporters (and simultaneously importers) today for social protection or decent wages to other, domestic, areas of work, along the lines described in my previous post.