… is from Timothy Taylor’s excellent March 30th blog post, “Misconceptions about Trade Deficits“:
It is blindingly apparent from the most casual acquaintance with the actual trade balance statistics that trade deficits are often not associated with periods of weak economic performance, that declines in trade deficits are not associated with strong economic performance, and that fluctuations in foreign trade barriers are a deeply implausible explanation for changes in the trade balance.
DBx: Yes. Yes. A trillion-and-one times yes. Still, mercantilists seem incapable of grasping even the meaning, and much less the implications, of so-called “trade deficits.” And demagogues have every interest in fueling this misunderstanding because it helps to pave the way for them to create special privileges and rents for their cronies.
(I note in passing that I could pick a very small nit with Taylor’s otherwise superb post. I believe that the convention of saying that a country’s trade deficit would shrink, or perhaps even disappear, if the citizens of that country saved more is mistaken. Because the amount of capital in a country is not fixed – and because the capacity of a country to be home to profitable investments is not fixed – an increase in savings by, say, Americans will not necessarily cause the U.S. trade deficit to shrink. Indeed, because investments often complement each other, an increase in Americans’ savings might even cause the U.S. trade deficit to rise.)
