Oren:
When asked by the Wall Street Journal what capitalism will look like in 2075, you – consistent with your long-expressed hostility to U.S. trade deficits – asserted that trade will be regulated to ensure that it is “balanced.”
“Balance” is a lovely thing. Trade indeed should be balanced. Fortunately, it is. Every cent in the U.S. trade (or current-account) deficit is matched by a cent in the U.S. capital-account surplus – thus creating balance.
You will, undoubtedly, demur. You’ll insist that international capital flows are irrelevant or worse. You’ll maintain that what must be balanced are exports with imports, meaning no trade deficits or surpluses.
Because you’re forever arguing that trade must be “balanced” in this way, you must have in mind some economic theory or model on which you base your argument. I urge you to share with us that theory or model.
Specifically, tell us why, in our world of flexible exchange rates and in which the size of the world’s capital stock can and does grow, any country’s exports must annually (or over some other particular time period) equal in value that country’s imports. What is the theory that says that in an ideally working international economy every country will routinely export no less and no more than it imports? What model predicts – again, in our world of flexible exchange rates – that if a country consistently, period after period, imports more than it exports, some economic harm will necessarily befall that country?
If you reply, please do so substantively, as I love learning new things. And because in my near-half-century-long study of economics I have never encountered any theory that says that in a world with flexible exchange rates and international capital mobility each country’s imports will or should, each period, equal each country’s exports, when you share your theory I will – if it proves valid – indeed learn something new.
Sincerely,
Don
