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 Richmans' Trade and Taxes Blog

Income inequality and the trade deficit
Howard Richman, 10/18/2015

As shown in the chart below, which I just put together, there is a pretty good correlation between household income inequality and the U.S. trade deficits from 1954 to 2012:

The trade deficits began to grow in 1977 and so did household income inequality in the United States. The correlation looks pretty close, except that the trade deficits are much more volatile than income inequality. Due to trade deficits, the jobs lost to imports were not replaced by jobs producing exports. They were simply lost. This graph supports our contention in our 1988 book Trading Away the Future, that the growing trade deficits worsened the income distribution. We explained:

Those who lost their factory jobs did not remain unemployed but competed for and found other work. Their competition had the effect of bringing downward pressure on wage rates in general. The resulting wage stagnation and worsening of the distribution of income has contributed to increased income inequality in the United States over the last three decades.

The decline in manufacturing and other exportable production associated with the trade deficit is compounded by its long-term effects on American competitiveness. The loss of entire industries (e.g., television, computers and shoes) to competitors in other countries makes it difficult for the United States to reenter those markets later. A variety of economic models incorporate the benefits of building upon what already exists (factors such as increasing returns to scale and the roles of intellectual property and learning-by-doing). By continuing and allowing policies that sustain the trade deficit, we prevent American firms from gaining the scale and competitive advantage that they might otherwise achieve, and we destroy firms that previously had a competitive position (and would not have lost it were trade in balance). (pp. 25-26)

The Democratic candidates for President are all running on redistributionist planks. They want to take from the rich and give to the poor to reduce income inequality. They won't succeed. They'll just reduce the incentives to produce, which will reduce income overall. 

Meanwhile, the Democrat Party's own president, President Obama, is pushing through a treaty that will enable currency manipulation and expand the trade deficits, thus further increasing income inequality.