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Jobs, Investment, & the Trade Deficit

Tweet [1]

Robert Samuelson discusses [2] John Kerry’s proposal to encourage U.S. firms to invest more at home and less abroad. Kerry’s idea, of course, is to appear to address the alleged problem of job “outsourcing.”

Samuelson reports data from the Commerce Department showing that the extent of “outsourcing” is vastly exaggerated. For example, in 2002 73.1 percent of U.S. multinationals’ employees were in America compared to 77.9 percent in 1977. This difference hardly amounts to a sea-change in corporate hiring practices.

But a deeper point deserves mention. Many of the same people who fret that “outsourcing” is a major trend that will dramatically reduce American living standards simultaneously fret about the trade deficit. Paul Craig Roberts [3] leads this pack of pessimists. These frets are inconsistent with each other.

The trade deficit [4] (more precisely, the current-account deficit) rises when foreigners spend more of their dollars on American assets and, hence, spend fewer on American exports. That is, a high trade deficit in America means that foreigners are investing heavily here. Heavy foreign investment in the U.S. signals that foreigners are optimistic about the future of the U.S. economy. More importantly such investment creates capital in the U.S. – capital that raises the productivity and, hence, the wages of American workers.

My vanity compels me to report that I have a letter on this topic in the current issue of The Atlantic Monthly [5].