Ptolemaic Economics

by Don Boudreaux on September 29, 2011

in Balance of Payments, Myths and Fallacies, Seen and Unseen, Trade

Here’s a letter to the New York Times:

C. Fred Bergsten claims that eliminating America’s trade deficit is a costless way to boost employment in America (“An Overlooked Way to Create Jobs,” Sept. 29).  He’s mistaken.  Among his several errors is his illegitimate assumption that all dollars that foreigners don’t spend on American exports remain idle, effectively withdrawn from circulation.

Consider two cases.  First, Americans buy $1 million worth of textile imports from the Chinese who then buy $1 million worth of pharmaceutical exports from Americans.  The result: balanced trade.

Second case: Americans buy $1 million worth of textile imports from the Chinese who then buy $1 million worth of land in Texas.  The American seller of the land immediately spends this $1 million on American-made pharmaceuticals.  (Perhaps the Texan is opening a pharmacy.)  The result: a $1 million U.S. trade deficit.

In both cases, Americans producers sell an additional $1 million worth of output as a consequence of Americans importing $1 million worth of goods.  So – although America runs a trade deficit only in the second case – the employment effects in both cases are identical.

Such an example, being entirely plausible, is sufficient to prove the absence of any necessary negative connection between trade deficits and employment.

Sincerely,
Donald J. Boudreaux

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