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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 [2],” 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his illegitimate assumption that all dollars that foreigners don’t spend on American exports remain idle, effectively withdrawn from circulation.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 [3].
Sincerely,
Donald J. Boudreaux