Reduce Trade Deficits, Increase Welfare?

On Election Day this past November, the US recorded its largest manufacturing trade deficit in its nearly 240-year history. Additionally, the gap between imports and exports was $69.2 billion in September and $534.40 billion for the year, according to figures released by the Bureau of Economic Analysis and the Census Bureau.

For many Americans, these startlingly high numbers are a significant cause of concern as they look toward the nation’s financial future. At first thought, this would seem to make sense—after all, if we are paying for goods abroad we are supporting jobs outside of our borders rather than within. And presidential candidates from Ronald Reagan to Barack Obama have campaigned on the platform of lowering the deficit. But according to the IGM Economic Experts Panel, such a reduction may not improve our economy.

This week panelists were asked if a typical country can increase its citizens’ welfare by enacting policies that would increase its trade surplus or decrease its trade deficit. Nearly half thought such a change would not improve the financial health of the country, while an additional quarter of the participants were uncertain.

“Crazy assertion but plenty of people seem to believe this,” said Chicago Booth’s Anil Kashyap. “To see the fallacy in this, note that banning imports would crush welfare,” he noted with his “Strongly Disagree” vote. It is a lack of evidence that motivated others to vote similarly. “A surplus is often taken to indicate a healthy economy, but it is not obvious how producing more than it consumes makes a country better off,” said Yale’s Larry Samuelson.

Others dismissed such a notion as mercantilism. “The best way to increase welfare is to engage in good policies, not go after some mercantilist ideal,” Kenneth Judd of Stanford said. Judd’s colleague, Pete Klenow, simply exclaimed “Mercantilism!” with his vote.

Many who voted “Uncertain” seemed genuinely torn. “It depends on circumstances,” said Markus Brunnermeier of Princeton. “To return to a steady state, export growth model worked well for China, Asian Tigers and Germany after World War II,” he said. Similarly, Stanford’s Caroline Hoxby said, “First principles: Neither surplus or deficit are necessarily welfare enhancing. SOME welfare-enhancing policies would raise surplus, however.”

Only two economists agreed with the trade balance statement and only one of them left a comment, which echoed the undecided voters. “Depends on circumstances,” said Bengt Holmström. “For small open economies and emerging economies, trade balance is an essential element of policy,” he said.

If reducing the trade deficit is really only going to help smaller, less developed nations, and if so many experts feel such a reduction would not be beneficial, then perhaps this is a good thing for us ordinary folk. We have so many things to worry about in connection with the economy, this insight could reduce our burden.

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