Don Boudreaux, Again, On Why The Trade Deficit Is Not A Problem

See If It Reasons Like a Duck…. Another one of his great letters (to the Christian Science Monitor):

"Ian Fletcher mixes economic ignorance with poor reasoning to peddle a horrible protectionist hash (“Cost of US ‘free’ trade: collapse of two centuries of broadly shared prosperity,” April 1).

No one should be taken seriously who writes, as Mr. Fletcher does for example, that the U.S. trade deficit “causes a huge slice of domestic demand to flow not into domestic jobs but foreign wages. Our trade deficit helps Guangdong, Seoul, Yokohama, even Munich – but not Gary, Indiana, Fontana, California, and the other badlands of America’s industrial decline.”

Such a claim reveals its author to be unaware that another name for “U.S. trade deficit” is “U.S. capital-account surplus” – that is, inflows of investment funds into America that supply (directly or indirectly) financing for more capital creation in America.

Consider Ikea, a Swedish company. When Ikea builds its stores in the U.S. it spends dollars. Almost every dollar that Ikea spends building and operating its stores in America is a dollar added to America’s “trade deficit.” But are the carpenters and electricians hired to build Ikea stores in America not employed domestically? Are the managers and clerks in each Ikea store in the U.S. not employed domestically?

Mr. Fletcher’s claim about the trade deficit is akin to an assertion by a self-proclaimed medical doctor that the liver pumps blood. Sensible people ignore such quacks."