Trade, Jobs, and the Economic Outlook for 2005

Charles Plosser ()

Journal of Applied Corporate Finance, 2005, vol. 17, issue 1, 100-105

Abstract: From newspaper accounts, one might think that the U.S. economy is on the verge of collapse. But the economy performed well in 2004, with real GDP growth of 3.9%, inflation at only 2.2%, unemployment down to 5.4%, and over two million jobs added to the payrolls (performance that is the envy of America's trade partners in Europe). And much the same, perhaps with moderate increases in interest rates, is expected in 2005. Concerns about the trade deficit in particular have given rise to familiar calls to protect U.S. industries and jobs. But job losses due to “offshoring” amount to just 1% of total job losses each year, with little effect on the growth in overall employment. Manufacturing jobs have declined, but the value of manufactured goods as a share of real GDP has remained steady because of productivity growth in the manufacturing sector. Rather than spending vast amounts of money to protect jobs that are destined to go overseas, the correct policy response is to help people retrain and find employment elsewhere. Trade deficits arise in countries that experience either investment booms or declines in savings. Thus, trade deficits are not necessarily an indication of economic failure. Foreigners invest in America because the U.S. is still the world's largest and most productive economy. And provided that the U.S. continues to offer such investment opportunities, foreign investors' search for low‐risk assets will continue to be a major (if not the main) cause of the U.S. trade deficit.

Date: 2005
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