Crossposted from Clyde V. Prestowitz on Trade

Most leading economists argue that the U.S. economy is suffering from weakness of demand. This has long been Paul Krugman‘s theme. Joe Stiglitz along with many other well known names seem to agree. I myself do certainly believe that if billionaires from outer space suddenly appeared and began to buy lots of American produced and provided goods, services, and real estate, the outlook for the U.S. economy would be much brighter than it is.

A shiny new smartphone

In order to generate jobs, we must domestically produce goods in high demand (Photo: LGEPR / Flickr)

But I have been trying to think about this problem in the context of the current European crisis. One of the stock economist prescriptions for resolution of that situation is for Germany to go on a stimulus binge. This, it is said, would create demand in Germany that could be, at least in part, satisfied by exports from the so called “peripheral” European economies like Greece, Spain, Italy, Portugal, Ireland, and even France. These economies would then see a rise in their own domestic demand as workers found new jobs and started spending from their new pay checks, and this in turn would create new demand and jobs in a virtuous circle.

Sounds beautiful and logical, but I keep running into a difficult question: What exactly is it that the peripheral economies are going to sell to the Germans? Cars? But everybody in Europe wants a German car. Electronics? But with a few exceptions, the Europeans get their electronics from Asia. The Spanish have over 25 percent unemployment because their main product was housing and that doesn’t export too well. My point is that that while more German stimulus, demand, and even, to a certain degree, inflation might be more desirable than not, it isn’t fully clear that such stimulus would actually solve or even greatly alleviate the unemployment in the peripheral countries. This is because they don’t make or provide much of what the Germans buy. German stimulus might do a lot for the Chinese, Japanese, or South Korean economies, but not nearly as much for the Greek economy. In this instance, the problem is more than just one of insufficient demand. It is also inadequate and inappropriate economic structure. How a country produces wealth matters and the level of demand may have little to do with it.

Now let’s look at this from the perspective of the United States. As I have said before, it’s not entirely true that we suffer a paucity of demand. We have trade and current account deficits of more than 3 percent of GDP, a level generally considered by economists to be unsustainable in the long term. That means we are consuming (demanding) 3 percent more than we produce. We are borrowing from foreign lenders to fund the purchase of that 3 percent of GDP that we consume in excess of what we produce. Does that sound like lack of demand to you ?

What’s happening is that our demand is leaking abroad. The best example is the cash for clunkers program we operated a few years ago. People replaced their clunkers largely with imports. So the demand for new cars was there, but it was filled by foreign producers rather than domestic ones.

America actually has a substantial growth opportunity without spending a dime on tax cuts or new stimulus programs or quantitative easing by the Federal Reserve system. If it could cut its trade deficit in half, the United States could create 2-3 million new jobs. To do that , however , it must substantially increase the variety of goods and services it produces domestically and exports while decreasing what it buys abroad. And to do that America must avoid the profile of Europe’s peripheral nations and aim for one like that of Germany.

Although America has become a very competitive location for production of autos, it still imports more than a third of the autos it buys. Most of the high tech components of the Apple iPhone can be made quite competitively in America, but they are almost entirely made, not in China as many suppose, but in Korea, Japan, Taiwan, and Germany, countries with high wages and costs but with economies of scale and skills and experience that America has failed to match despite its capacity to do so.

So by all means, let’s be sure we are generating enough demand to keep the machine running. But at least as important if not more so is the question of what the machine is producing and of how to get it producing what will be necessary to avoid the peripheral trap and to sustain growing prosperity for all Americans.