Yesterday I shared here at the Cafe a comment that I made on one of David Henderson’s EconLog posts. In that post, David correctly took Dean Baker to task for Baker’s failure to understand the nature of a trade deficit.
In response to my comment, another EconLog commenter, Ari Andricopoulos, calling my example “contrived,” took issue with my rather sanguine view of trade deficits. You can read Mr. Andricopoulos’s objection in full here, but the summary is that my original comment is invalid in practice because I illegitimately assumed
that the $1m [that Americans spend on imports] will be spent in the domestic economy – that the marginal propensity to spend of the receiver of the money is 100%.
In this case, there is no harm to the domestic employment level.
But at every level less than 100% there is harm because less than $1m gets to the lumber producers.
Here’s my reply (also posted as a comment at EconLog):
Ari,
You miss the point. Even if we grant your rather simplistic Keynesian notion that spending is better for the economy than savings – even if we remove our economist hats in order to join you in failing to ask how funds that are saved might be invested productively – Dean Baker’s concern about a trade deficit remains unfounded.
The point is that trading internationally is no more (or less) likely to spark the potential problems you identify than is trading domestically.
In my example (in my previous comments), if American consumers had purchased the $1,000,000 of stuff from American, rather than from Japanese, producers, the American producers who made these sales are no less (or more) likely than would be the Japanese producers to save, rather than to immediately spend, some portion of those sales proceeds.
That is, if your concern is that foreign suppliers of American imports will save rather than immediately spend the dollars they earn from American consumers, why are you not equally concerned that American suppliers will not do the same? Merely assuming it to be so doesn’t work.
At the base of the case for free trade is the realization that there is nothing economically significant about trade that happens to be transacted across political borders. Economically, all the problems (some more imaginary than others) that opponents of free trade blame on free trade are problems, not with international trade but, instead, with trade – with any trade.
If you don’t like the economic change and displacement that come with, say, Americans increasing their purchases of goods from South Korea, fine – but you must then also equally dislike the change and displacement that come with, say, Americans increasing their purchases of goods from South Carolina. If you lament the lost jobs of Americans who are unemployed because fellow Americans chose, say, to buy more cars from Korea, then you must lament also the lost jobs of Americans who are unemployed because fellow Americans chose, say, to buy more used cars. If, to protect some Americans from losing their current jobs, you call on government to prevent American consumers from freely choosing to buy cars from foreign automakers, you should also call on government to prevent American consumers from freely choosing to buy cars from used-car lots.
….
Perhaps your “worry” about my students is justified; I dare not judge myself on that front. But I do strive to teach them to ask the kinds of questions that lead economists to see many phenomena that non-economists (or that poor economists) do not see.
