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Ptolemaic Economics

Posted By Don Boudreaux On September 29, 2011 @ 9:47 pm In Balance of Payments,Myths and Fallacies,Seen and Unseen,Trade | Comments Disabled

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 [1],” 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his illegitimate assumption that all dollars that foreigners don’t spend on American exports remain idle, effectively withdrawn from circulation.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 [2].

Donald J. Boudreaux

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URLs in this post:

[1] An Overlooked Way to Create Jobs: http://www.nytimes.com/2011/09/29/opinion/an-overlooked-way-to-create-jobs.html?_r=1&ref=opinion

[2] the absence of any necessary negative connection between trade deficits and employment: http://www.cato.org/pub_display.php?pub_id=13197


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