Especially absurd is Dobbs's idea that the trade deficit means we are in debt to foreigners. Except for the T-bills foreigners buy, this just isn't true. As George Mason University economist Donald Boudreaux wrote in the December issue of The Freeman magazine, "If Mr. Sony uses the $2,000 he receives from selling computers to Americans to buy $2,000 worth of equity in Exxon, the U.S. current-account deficit rises by $2,000, but no real indebtedness is created. No American owes Mr. Sony anything. ... It just ain't so that the so-called trade deficit is debt!"
Boudreaux adds, "If we applaud when citizens of Wisconsin save and invest in software firms in California or orange groves in Florida, why should we not be equally pleased when citizens of Shanghai save and invest in these same American firms?"
Good point, especially when you consider that the only way to shrink the trade deficit is for the government to prohibit us from buying whatever we want.
What the trade fearmongers don't say is that countries with trade surpluses often don't do very well. Japan had a trade surplus all during its long recession, which began in 1990 and is only now ending. By contrast, countries running trade deficits often experience economic booms. A Cato Institute study shows, "Contrary to prevailing assumptions, 'worsening' trade deficits are associated with faster GDP and manufacturing growth and more rapidly declining unemployment, while 'improving' trade deficits are associated with slower GDP and manufacturing growth and rising unemployment.
Adam Smith was right when he wrote, "Nothing, however, can be more absurd than this whole doctrine of the balance of trade."
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