Why Trade Deficits Matter

by Michael Stumo

Neil Irwin authored another embarrassingly pseudo-academic piece recently arguing that  trade deficits don’t matter.  The deficit number is just a “scorecard”. Money flowing out of the country from trade deficits is balanced by investment from those countries coming back in, he says. Nothing to see here.

Dean Baker does a nice job taking Irwin apart on standard macro economic grounds.  The Baker piece is an important read.  Trade deficits cause higher unemployment, investment inflows don’t offset the effect.  And, the trade deficit caused our current stagnation.

Paul Krugman - continuing his journey towards trade reality - agrees with Baker’s critique of Irwin. The investment flowing back into the US from China and other surplus countries basically give us no benefits, and certainly no jobs.

As the macro-economic case for more trade deals collapses (indeed, it may never have existed), it will be important to continually insert the case for tradable goods supply chain growth in the US. The macro-economists are blind the direct and indirect job growth, innovation, and wealth creation arising from the food and goods industries.  Goods production is merely a cost in their models, and if China subsidizes production and shutters domestic industry, we should send China a thank you card for saving us money.

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