As our speakers present their initial comments, we ask them to consider three questions with one, what are the principal reasons for the trade deficit, overall bilaterally . Second, how worried should we be about the continuing merchandise trade deficit or its current size . Third, what, if anything, should the us do about the trade deficit . I have asked Caroline Freund to go first. The mic is yours. Thank you, and it is a pleasure to be here. I was planning to walk through the Peterson Institute and pick up a copy at starbucks today but instead i had coffee here. Bilateral deficit has improved a little bit. And instead we had one. I had bilateral deficit with huber that expanded. Not really worried about either of these because i have a surplus with my employer. They kept paying me for my services and at this point i am saving so i am not worried about these, this relates to the points i will make today. I will focus on two things. What is the aggregate trade balance we should be worrying about, but unlike the fiscal balance which is all about fiscal policy, the trade balance has almost nothing to do with trade policy. The trade balance has more to do with fiscal policy then trade policy. Trade balance is not about trade policy. This has me really concerned when i got to points on the list they are looking into for what we should be doing about the trade deficit, product byproduct, country by country, this is the wrong approach, that is not really a good way to go about looking at it. The other point is bilateral trade deficits dont matter so this is like my deficit with starbucks which i am not particularly worried about. The bilateral deficits dont matter. Lets think about what these aggregate trade balance is. The import more than we export. How can we buy more from the rest of the world then we sell to the rest of the world . Only one reason, we are borrowing. This is why i am saying it has more to do with borrowing, lending, saving and investment, then it has to do by definition we should be spending more than we are producing if we are running trade deficits. The trade deficit is currently 500 billion or 3 gdp. What are the causes of this . One of the causes is fiscal policy, we are running a fiscal deficit so this is why i am saying really concerned about the trade balance, important not to expand the fiscal deficit because the government will be absorbing more, it has to come from somewhere. Some will come from a broad trade deficit and this fiscal policy is super important to the trade balance. What happened over time that caused the trade deficit to rise . Some people blame china but the other side of it if you look at consumption since the 1980s, consumption to gdp has increased dramatically, 62 to 68 . People are simply consuming more. A good thing we are having a consumption who, savings have gone down, consumption has gone up, we are absorbing more than we are producing. That is the reason we are running a trade deficit with the rest of the world. It has to do with the Exchange Rate as well because the Exchange Rate, the real Exchange Rate is the price of goods and our goods and the dollar is the worlds currency, there have been periods the dollar has been overvalued and in the past there may have been currency manipulation by china though that is no longer a problem and that means our exports are more expensive, and imports are cheaper and that can contribute as well. What is really missing from this list is trade policies. Increasing a tariff isnt going to affect the trade balance unless it somehow affect saving or investment. Unless it is a really high tariff of all partners it is not going to affect savings and investment and even if it did, we dont know the direction it would take because it would reduce or increase, very different effects. We dont know what happens to the trade balance, the right tool isnt about trade policy but saving or investing. And it is a drag on growth when we are growing slowly, the rest of the world is growing slowly. And trade is heavy in manufacturing, and manufacturing jobs, lost manufacturing jobs are technology and animation and manufacturing as share in constant decline since the 1960s, there is no sudden change, and there is some benefit, and the deficit, we have a lot of Foreign Investment and it is good for the us. And research and development with the us firm and higher wages, that Foreign Investment is good for us growth and jobs. The aggregate trade balance, and sustainability over time. We are borrowing from abroad and that is adding up, with an we are earning. At some point know what is going to want to lend to me. And the external investment position, gdp in the us, and 8 trillion in the external debt come of the highest of any country in the world ever, a big number but as a ratio, 45 of gdp is not so bad. My colleagues have a book coming up in the next month on currency conquest and they note it is 60 gdp where country start having problems, countries like greece, portugal and spain passed the limit when they ran into problems. We have some time before we get there and the real concern is sustainability. And it is not about trade per se. Some countries have stuff we need in life, and saudi arabia has oil, a trade deficit with saudi arabia. Supply chains are another reason we have deficits, we have great supply chain with mexico where they produce parts of components of things we need or assemble products from high skilled parts and components and that makes our companies, in these supply chains. Germany has a huge trade surplus, the lowcost suppliers like the Czech Republic and hungary and so forth and really big ones that Car Companies benefit from cheap imports just as we benefit from cheap parts. And if we are really worried about accumulating debt over time we need to rein that in or limit it and save more, there are things we can do to save more. Oddly, brady ryan tax plan is not the border adjustment tax that can help us rein in the trade deficit and that has lots of problems, switching to a consumption tax might help because that encourages switching from debtfinanced to equity so there are features of that plan that might rain in the trade deficit, doesnt come from anything like border adjustment. There are things we can do, john williamson, and joe gagnon and others i mentioned before. Like china is doing now, they are supporting their currency running a trade surplus. What we dont want to see countries doing his intervening to weaken their currency and running a surplus, that is not okay. That is another kind of agreement you can imagine and with the bilateral deficits they are mostly political. We talked to countries 1on1, we talk about us china relations but we should think about deficits that way, it is the wrong approach, just some countries have things we need, we should be focused on the aggregate trade deficit, if we are worried but trade policy is not the answer. Thank you, peter, will you pick it up . This may be the only time any of you get to see me on the left. Did you plan this . I thought you would enjoy being there for a change. I had dinner at the aflcio. At any case, my are very different than the previous speaker. It is an accounting identity that the trade deficit equals savings and we have a trade deficit because we have a savings deficit and causality from trade deficit, if i wanted to debunk the Trump Administration that is what i would do. I was an economist as many economists do, how is it trump happens, i never endorsed donald trump, i want to be clear and i dont want to defend his policies. I could structure an argument and you just heard it, if i was worried about the economics profession being debunked before the depression i would make that argument. To focus on my argument, and the current account deficit, i could say because we have a current deficit we have capital inflows, build an argument in either direction, to accomplish that. In my mind, the trade deficit is the result of a combination of the Technological Forces driving globalization on the one hand and mercantilism and nationalism on the other. We have a rulesbased trading system which i much admire and seems sorely threatened. International trade law, i have written about this. I read about those published at my university. It is remarkable in that it is the most economically informed aspect of law along with antitrust. As long as economists sitting at the feet of the gods, lawyers that write these documents, it is conceived from the notion that it brings together groups of market economies for the purposes of trading on the basis of comparative advantage and things like Exchange Rates will adjust to inshore that the outcomes we teach on blackboard that universities when we teach comparative advantage will happen. Employment will be fool, most importantly, adjustment takes place, trade barriers effectively move from one employment to another maybe with some disruption requiring some assistance they are not displaced from the labor force. We have to recognize a couple things, most of the trade deficit was from china, 60 , it has been important and continues to be but if you saw the trade deficit you solved the problem. If you have a system based on the notion that markets prevail trade will balance out and you have three of the four largest economies which constitute half a trade, and a matter of Public Policy that we should run a trade surplus, Exchange Rates should be manipulated to that affect and a variety of ways the currency market intervention to cause by virtue of Public Policy, to cause and Exchange Rate to be overvalued the system cant work. We have to look at trade policy among other things to determine why we have a trade deficit, it requires fundamentally an open mind about these issues because it causes us to think in ways that are contrary to what we put on blackboards, and pure competition where children learn about markets. It is a beginning but not a end. The story is not the assumptions we make about free trade but their violation and whether they have consequences. And violations have consequences. We have people who have left the labor force for no apparent reason other than they feel discouraged, 7 million men between the ages of 25, and 55, unemployed and not looking for work. Alongside that, part of our fiscal deficit finance is a support program which can impose marginal tax rates of 50 to 70 , with obamacare in place, the food stamp program, modified as it has been, a healthy male 25 years of age sitting at home watching espn in 31 states is eligible for free healthcare and food stamps and can therefore sponged off his girlfriend and never have to look for work. Mindful of the Northern European countries permitting kids to go to school forever and getting a stipend to do it. That is not now. We need to talk about aggregate, specific policy that has effect on behavior. I am saying the trade policies of principle trading partners have something to do with this deficit and the way we spend our money, not just how much the government spends has something to do with it too. The paths consequences are profound. The amount of debt we are amassing is great and looking at a number like 60 is silly because we have the ability to print the worlds money. We will pierce through 60 but a meltdown on the basis of the us debt will not happen the way it did in greece because greece cant print money. Greece needs euros to pay it that. Our debt is denominated in dollars. Our meltdown will come today but private actors dont want to hold the debt but Central Banks dont want to hold it. And the American Public doesnt want to hold it. We can always print it. When do people demand such high Interest Rates, that makes our federal budget unsustainable. If it is some kind of blackhole of the kind we have never seen, we have never seen principle reserve go bust. And any financial crisis we have a long period of adjustment. When did we lets have a financial crisis in 2008. And we have no counterintuitive, we have no other examples to draw attention, we dont know what it is going to look like. It will not be nice, it would be protected and take a long time to recover. And and technology displaced workers and manufacturing. And manufacturing jobs. We know that manufacturing and import industries as well as export industries, workers are more productive than they are in domestic pursuits, we do not compete in trade. This bears out in other economies. We have more aggregate demands, to go to work, how we dealt with the social programs. It is a powerful incentive to get over the couch if those were removed, they might get off the couch, but shifting employment to raise gdp, would raise r d because most manufacturing, a good deal of r d is done by Manufacturing Type activities. I would point out that a lot of r d has followed American Manufacturing in response to trade barriers, consider the situation in china where a good way to get intellectual Property Protection is to promise to move more r d activity. To not enforce the foreign corrupt promises act, i dont know if something happened there but i would be eager to actually get the Justice Department to do what i wanted to be investigating emails on that. People have become very good at avoiding prosecution, if they know they have to avoid prosecution. And how do we get out of this mess . The gdp, we have been growing at 2 a year. Why has productivity growth gotten smaller, i find it ridiculous when i hear arguments from northwest that say all the good stuff has been invented. He hasnt been reading about robotics. Would you rather have this or a flushed toilet . Im old enough to have used an outhouse. I can use an outhouse to keep this. This keeps me more productive and provides more freedom of movement during the day. I dont have to be near a telephone all the time and so on and so forth. Remember that woody allen movie where he paid a character who called his office and told him where he is going to be and what number he is going to be at and diane keep said you forgot to tell him about the payphone we will be passing. That is what my life was like before this because i dont work at a large institution, i work alone, i was always telling people where they could find me. In terms of the solution, we need a grand bargain on Exchange Rates. We had one before. The plan is a report but the grand bargain on Exchange Rates would have to include china and china is not going to play by the rules on this sort of thing so i dont think the grand bargain is possible. That would help us get out of this mess. It does come back to what trump talked about during the campaign but i would point out romney talked about the same things when he was campaigning but didnt attract the same ridicule because lets face it, donald is a hard guy to like. He is not very politically correct. There is Something Else going on. We are at a moment in time, people say universities have become closed spaces with closed minds. That is indeed happening but the economic profession is not even willing to cast doubt on what they have been prescribing for the last 50 years because of events like trump they dont want to open their minds but to me that is the greatest barrier to finding a solution because we have to deal with china in very different ways than say please sign this agreement and comply by these rules. That simply wont happen. I never talk about outhouses and productivity the trade deficit, sure we will get to that later . Thank you to wita, ken levinson, to trade deficits matter . An easy question for any economist, the answer is yes. What is harder is precise ways to extend, conditions, trade deficits do or do not matter. Trade deficit is not about poor people and whether we provide health care. We have 20 financial crises in 1975, we have a rich data set to understand how advanced economies respond to financial crisis, and old classmate of mine. And focus on the underlying causes. And positive developments, accelerating growth drives consumers for more important trade deficit allows us to consume more than we produce including more investment goods and what happens with strong productivity and good investment, rising trade imbalance. What we use to announce the Monthly Trade figures, the Monthly Trade deficit figures in the 1990s in the midst of the longest boom in American History under secretary of commerce. Under other conditions, rising trade deficit signal negative developments. In particular areas, they are falling behind. More commonly the negative events of trade deficit arrives from financing by International Capital flows. We have to pay the net difference by selling dollars to purchase the currency they want to receive payment in. For an companies with dollars that they can only spend here so they use them to buy us Stock Companies and financial assets. The negative here is Foreign Investors take home dividend interest in capital gains. Those foreign purchases of American Assets increased supply of capital which can kill our Interest Rates. As an accounting matter the trading deficit is negative for growth. That is an economic matter. It stimulates demand and jobs especially when our saving rate is low. It would be better if us savings finance additional investments but we would be worse off if those investments did not happen at all because of an untutored president slapped tariffs on goods from places that run trade surpluses with us. Public discussion of the trade deficit focuses on jobs, not growth and investments. Trade costs and jobs especially jobs between economically disparate countries, that is trade deficits between advanced economies like ours and developing economies like chinas as opposed to trade deficits, United States and other advanced countries. Jobs are lost, companies that are at