Yet More Deficient Trade Analysis

by Don Boudreaux on August 28, 2014

in Balance of Payments, Myths and Fallacies, Trade

Here’s a letter to the New York Times:

While Jared Bernstein is correct that the dollar’s role as the international reserve currency increases the U.S trade deficit, his analysis of the consequences of a high global demand for U.S. dollars is a jumble of confusions (“Dethrone ‘King Dollar,’“ Aug. 28).

Most notably, Mr. Bernstein argues that countries, such as the U.S., that run trade deficits simultaneously suffer excess aggregate demand (“trade-deficit countries must absorb those excess [global] savings to finance their excess consumption or investment”) and deficient aggregate demand (“a result of this dance [of foreigners accumulating dollars], as seen throughout the tepid recovery from the Great Recession, is insufficient domestic demand in America’s own labor market”).

A trade deficit might either increase or decrease a country’s aggregate demand (or do neither) but, contrary to Mr. Bernstein’s muddled account, it cannot possibly do both.  Alas, Mr. Bernstein’s confusion on this point reflects a more widespread and popular misunderstanding of trade deficits.

Sincerely,
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030​​

Many other flaws infect Bernstein’s op-ed – ones that, if I have time later today or tomorrow, I’ll point out.

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