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U.S Trade Deficit Causes Income Inequality

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The U.S. Trade Deficit Causes Income Inequality

By Joel D. Joseph, Chairman, Made in the USA Foundation, email Email address removed .

President Obama described income inequality recently, "This growing inequality is morally wrong," he said, and it "undermines the very essence of America."  At the same time the President is promoting the Trans Pacific and Trans Atlantic Trade agreements.  These two concepts are at cross purposes:  expanding trade has caused the increase in income equality in the United States.

Professor and economist  Robert J. Shiller, who was among three Americans who won the Nobel prize for economics in 2013, believes that rising economic inequality in the United States and other countries is "the most important problem that we are facing now today."

From World War II until 1980 the United States reduced income inequality significantly. Since then it has risen at a steady rate, reversing the long-term trend toward declining inequality.   Massive trade deficits are one of the major causes of extreme inequality in America.

David Rosnick, an economist for the nonpartisan Center for Economic and Policy Research said, "There are winners and losers from trade, and research has shown that trade contributes to inequality."

In the 1990s, the pro-NAFTA Peterson Institute for International Economics sought to quantify the effect of trade policy on U.S. income inequality, and found that nearly 40% of the increase in inequality was attributable to U.S. trade policy.  When the Economic Policy Institute (EPI) updated the PIIE figures, it found that the median U.S. family lost about $2,300 per year.  (in today's dollars) from the burden of rising inequality due to trade. EPI  released  a study recently that found more than 2.1 million manufacturing jobs have been lost or eliminated since 2001 due to our trade deficit with China alone.

Why Trade Deficits Cause a Rise in Inequality

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A massive trade deficit causes an increase in income inequality for several reasons.  First of all, unemployment is a symptom of the trade deficit.  Secondly, when manufacturing plants are closed in the United States and moved to China or Mexico or Vietnam, profits for the owners increase, while the workers suffer an income loss.  The workers either go on unemployment rolls or take a low-wage job with McDonalds or Walmart or doing other unskilled work.

Walmart is the largest importer in the United States.  It also employs its workers at very low wages.    Walmart reports its average wage for full-time employees in the U.S. is $12.67 an hour, although it pays many part-timers the minimum wage of $7.25 per hour.

In contrast,  Costco pays its hourly workers an average of $20.89 an hour, not including overtime.

The chart below shows the relationship between our trade deficit and the rise in income inequality:

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The blue line is the trade deficit, or "U.S. Trade in Good and Services--Balance of Payment."  As labor's share drops, more and more goes to the richest one percent. Or, as a Cleveland Federal Reserve paper by Paul Gomme and Peter Rupert remarked, "the recent strength in productivity growth has largely accrued to capital, not to labor."  The black line shows our rising inequality.  In 1980 the top one percent earned just 10% of all income.  By 2007, just before the Great Recession, that percentage had increased to 23.7%.

Correlation is not causation. But it makes sense that the trade deficit would drive wages down while increasing the already-large fortunes of those at the top, because setting low-wage workers in China against workers in the U.S. obviously creates tremendous pressure on working people's wages -- and not just in manufacturing. When you release millions of people into the job market everyone will accept  less just to keep their job. Meanwhile as the cost of labor drops the owners of companies are able to grab a bigger share of the pie for themselves, which is exactly what happened.  Note: look at  how much money   that trade deficit is sending out of our economy. Hundreds of billions every single year, seven hundred billion this year alone.  That is two thousand dollar per person taken out of the domestic economy.

The Cure

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Chairman, Made in the USA Foundation, economist and lawyer, author of ten books and hundreds of articles.

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