After reading yesterday’s Cafe Hayek post on the balance of payments, Duke University emeritus economist Ed Tower sent to me the following e-mail, which I share in full with Ed’s kind permission:
My PhD advisors, Gottfried Haberler and Tom Willett in their writing advocated a policy of “benign neglect” to the exchange rate and the trade balance. An example of the silliness of worrying about the trade balance is illustrated by the following example. Years ago the Wall Street Journal told that a Chinese company sailed a floating timber mill up the amazon river to harvest timber. That would have counted as an import in the Brazilian trade accounts. Yet it is hard to see what damage it did to Brazil’s economy. What I would like to see more of in your discussion of the trade balance is that trade restrictions do not improve the trade balance. If absorption and income are unchanged, then the trade balance must be unchanged.
Max Corden argued in Inflation, Exchange Rates and the World Economy that the balance of payments is a problem only in the sense that to eliminate it causes a fall in the standard of living or that the government responds to it with unwise policies like trade restrictions. I don’t recall the precise words of Corden which I think I quoted in my review of his book in the March 1979 issue of the Economic Record.
