Trade Deficits Good?

USA today has a huge trade deficit... but beats the pants off of trade surplus countries for creating jobs, income growth, unemployment, and other measures. And in the 1930s, when the US suffered from a depression, it "enjoyed" a trade surplus. The late Professor Milton Friedman said, "Underlying most arguments against the free market is a lack of belief in freedom itself."


Tom Philpott said...

Paul, isn't the case not that the trade balance is positive or negative, but rather that it's imbalanced? The authors crow that the deficit countries have created jobs faster than the surplus countries (tho' I don't think china is mentioned in this context(!!!)). But what if the surplus countries say, hey, why should we be loaning them all of this cash to consume, which they're turning into more jobs and more consumption, while our own job growth lags? What if, say, Chinese, European and Japanese consumers start taking out huge debt loads and consuming at or near U.S. levels? That could cause prices to rise, and lead to a surge in US interest rates, and thus a slowing economy.

Seems like if your goal is smoothly functioning global markets, you'd want U.S. consumers to chill a bit on the debt and want other consumers to pick up a bit of the slack.

And I think you'll see market forces making that happen, through a continuing devaluation of the dollar. The only impediment to that happening even more now is China, which props up the dollar against the yuan by intervening in currency markets and buying US debt. Eventually, it could be forced to stop doing that -- according to your boys, it shouldn't be doing that at all; it should let the yuan find its own level against the dollar in the open market -- and then we'll see why some economists are pointing to danger from the trade deficit. Why? Because a sudden plunge in the dollar would likely spark a stock market plunge, and God knows what would happen in the housing market when interest rates spiked in response to a a falling dollar. We could see events like the 1980s S&L meltdown, or worse.

Paul Hue said...

I have never heard any advocate against free international trade express a goal of trade net zero! That is a novel claim for me! All the pro free trade nuts have been arguing against the wrong complaint, I see. I am interested to see now how Larry Kudlow, Sowell, and the Cafe Hayek boys will address this new point. It baffles me.

As to your other points, I don't understand them well enough to dissect them. But I understand enough of what my free marketeering economists say that I remain by their side even as you raise counter points that I fail to comprehend.

Tom Philpott said...

not necessarily net zero; but perhaps a bit more in balance than is the current situation.