Thursday, March 16, 2006

WSJ: Trade Deficit Disorder

The Wall Street Journal has an editorial today (subscription required) titled 'Trade Deficit Disorder: The protectionism caucus is hyperventilating'. The following is their argument distilled to its essence:
...We would all be better served by simply throwing overboard the term "trade deficit" - which inaccurately connotes a disadvantage of inferiority. To refresh some memories, that was precisely the conclusion of the U.S. Advisory Committee on the Presentation of Balance of Payment Statistics during a previous trade-deficit scare in 1976....

Back in December of last year Coyote Blog provided us a well reasoned essay, 'A Trade Deficit is Not a Debt (Nor is it Bad)', that reinforces this thesis:

...The Economy is Not Zero Sum. Repeat please: The economy is not zero-sum. Never has it been so hard to convince people of a concept that should be so obvious. I used up bushels of electrons explaining why the economy is not zero sum here, but the short proof is easy: Look at the world in 1900. Look at it today. The world as a whole and most every individual is far richer. The fact is that economies create wealth every day, and free economies create a LOT of wealth.

At the heart of every argument that the trade deficit is bad is the mercantilist notion that the US economy is a bank vault leaking funds. But this analogy that seems to be in everyone's head is flawed. The supply of money or wealth in the US, in the vault, is constantly growing. If you really have to think of it as a vault, then think of what's inside as rabbits rather than gold bars. Does anyone doubt that if you start with a hundred rabbits and every year sent a few to China that you might still have more rabbits than you started with in the vault? A free economy is like a group of rabbits on Viagra. Even if the Chinese took billions of dollars they got from selling goods to the US each year and burned the money in a big bonfire, the US still would be growing in wealth...


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