For Best Results, Increase the Trade Deficit

The trade deficit is at an all time high of near $60 Billion. This needs to be increased to help stimulate the U.S. economy. According to Daniel Griswold, of the Cato Institute, increasing imports leads to an increase in the level of domestic manufacturing output. In the article A Package Deal: U.S. Manufacturing Imports and Output Rise and Fall Together Griswold explains the economic reasons for this phenomenon. Economic statistical data since 1989 shows that as the percentage of manufacturing imports increases so does the percentage in domestic manufacturing output.

One reason is that the main demand for real imports comes from domestic producers. Another reason is, "that in a flexible, market-driven domestic economy, resources can quickly shift from one sector to another". American companies thus focus their capital and labor in areas where they can be more competetive. In this way, imports do not lead to fewer jobs, but to a "shift in resources, production, and employment to sectors where Americans are more productive".

Therefore, while common sense may lead domestic managers to call for protection from imports in order to increase manufacturing output, historical trends do not support such logic. "The protectionist dream is really a nightmare for U.S. manufacturers." Historically, slower growth of imports means slower growth of manufacturing output. So, according to history, if the desire is to increase the GDP, we should increase the trade deficit, not decrease it.

1 comment:

Dr. Tufte said...

This seems pretty sensible to me. I have a huge trade deficit with Wal-Mart, but that doesn't bother me because I'm spending my time doing other productive things.

Modern society is schizophrenic about trade deficits because they used to matter very much when we had fixed exchange rates. Under flexible exchange, trade deficits don't have much meaning. Unfortunately, we've been under flexible exchange for over 30 years, but people haven't adjusted to the new reality yet.