In response to this recent post of mine on so-called “trade deficits,” Jerry Jordan, former Cleveland Fed president – and editor of Armen Alchian’s and William R. Allen’s Universal Economics – e-mailed the following note to me, which I share with his kind permission.
Don, in your excellent email to Eric Boehm, you could have also pointed out that a sure road to a trade “surplus” is to make your country a horrible place for foreigners to invest—such as Argentina. If Melei is successful in making Argentina attractive to world investors, the resulting capital inflows will be matched by a current-account ‘deficit.’ At best, a “trade surplus” is the ‘healthy glow of a fever’ in the early stages of serious economic problems (see China).
Our own country’s policies recently have made it less attractive to invest in the US; discouraging net foreign investment in order to affect a trade imbalance may work, but it is really stupid.
Jerry
In the e-mail from Jerry giving me permission to share the note above, he wrote this:
Sure; I’m delighted you have taken on the often frustrating battle to confront the nonsense that comes from national income accounting. Over 40 years ago, Beryl Sprinkel and I took on the challenge of educating the RR Cabinet about the nonsense proposals to “correct” the trade imbalance. In response to one proposal to subsidize the export of corn to foreign buyers, we explained that we produce both corn and govt. bonds, and the more successful we were at selling corn to foreign buyers, the fewer of our bonds they were likely to buy! At least one Cabinet officer responded that he had no idea what we were talking about. An honest reply.