There Really is No Trade Imbalance to Eliminate, So Eliminating a Fictional Deficit Won't Create Jobs

Great post by Mark Perry of "Carpe Diem." Excerpt:

"1. There really is no trade "imbalance" once we take into account the fact that an annual "trade deficit" of $600 billion is exactly offset by a "capital account surplus," "capital inflow," or "foreign investment surplus" of $600 billion. The chart above shows that America's annual "trade deficits" have been balanced every year with offsetting capital inflows, and since 1980 America has benefited by a cumulative $8.1 trillion "foreign investment surplus." Because there is no real "trade imbalance" to bring into balance, it's unlikely that any correction to a fictional imbalance would create any new jobs.

2. The only way to eliminate the $600 billion trade deficit would be to simultaneously eliminate the $600 billion foreign investment surplus. With the elimination of hundreds of billions of dollar of foreign investment that likely helps create jobs, why would we expect a net job increase?

As Don Boudreaux points out, if Americans purchase $1 million of Chinese textiles, that $1 million comes back into the U.S. either to purchase: a) $1 million worth of American goods and services, or b) $1 million of American assets (stocks, bonds, real estate, direct investment in U.S. firms, etc.).

Apparently, C. Fred Bergsten assumes that the $1 million spent on American goods supports or creates U.S. jobs, while the $1 million spent on U.S. assets does nothing for U.S. jobs. That's nonsense. The $1 million invested in the U.S. to purchase American assets might create more jobs in the long run than the $1 million spent on American goods. In any case, the simple fact that there is no "trade imbalance" to start with once we account for spending on both goods and financial assets, implies that eliminating a "fictional imbalance" won't have any effect at all on U.S. employment."