We often hear about the horrors of trade deficits, but what are they and are they all that bad?

In 1984 economist David Glasner wrote an essay for the New York Timesentitled “Thecargo Much Maligned Trade Gap.”  (I can’t tell if this essay was actually published in the NYT.)  Anyway, whether it was actually published or not 32 years ago is irrelevant: it’s excellent and deserves today a wide readership.

Earlier this month, Glasner reproduced this 1984 essay of his at his blogUneasy Money.  Here, below, is that that essay in full (but do click on Glasner’s blog post to read also his updated commentary):

The Much Maligned Trade Gap

No economic statistic is reported more dolefully these days than the country’s trade balance.

Ever on the alert for signs of impending economic disaster, the press routinely couples reports of record monthly trade deficits with warnings of experts and Government officials of the dangers of the deficit.

Just what is so dangerous about receiving more goods from foreigners than we give them back is never actually explained, but it is often suggested that that it causes a loss of American jobs.

News reports sometimes even provide estimates of the number of jobs lost owing to every billion dollar increase in the trade deficit. Heaven only knows how these estimates are made, but presumably they are based on the assumption that imports deprive Americans of jobs they could have had producing domestic substitutes for the imports.

It almost seems tedious to do so, but it apparently still needs to be pointed out that buying less from foreigners means that they will buy less from us for the simple reason that they will have fewer dollars with which to purchase our products.

Thus, even if reducing imports increases employment in industries that compete with imports, it must also reduce employment in export industries.

Moreover, the notion that the trade deficit destroys domestic jobs is contradicted by the tendency of the deficit to increase during economic expansions and to decrease during contractions.

The demand for imports rises with income, so imports normally tend to rise faster than exports when a country expands more rapidly than its trading partners. The trade deficit is a symptom or rising employment — not the cause of rising unemployment.

That balance-of-trade figures are misunderstood and misused is not surprising, since their function has never been to inform or to enlighten. Their real purpose is to provide spurious statistical and pseudo-scientific support to groups seeking protectionist legislation. These groups try to cloak their appeals to protection with an invocation of the general interest in a favorable balance of trade.

Anyone who has ever thought about it has probably wondered why a country that gives up more goods in trade than it gets back is said to have a favorable balance of trade.

If you have ever wondered about it and couldn’t think of an answer, don’t worry, because you are in good company. Adam Smith couldn’t either. “Nothing,” Smith once observed, “can be more absurd than this whole doctrine of the balance of trade, upon which . . . almost all the . . . regulations of commerce are founded.”

Continue reading the essay at Cafe Hayek.

Donald J. Boudreaux


Donald J. Boudreaux

Donald Boudreaux is a senior fellow with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University, a Mercatus Center Board Member, a professor of economics and former economics-department chair at George Mason University, and a former FEE president.

This article was originally published on FEE.org. Read the original article.

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