May 06, 2017
The Washington Post featured a short explainer on trade deficits by Martin Feldstein, a Harvard Professor and head of the Council of Economic Advisers under President Reagan, and George Schultz, a former Secretary of Labor, Treasury, and State.
The piece told readers that we have trade deficits because the United States as a country consumes more than it produces. It added that the only way to reduce the trade deficit is by increasing domestic savings, for example by reducing the federal budget deficit.
As every economist knows, we can also increase savings by increasing output, unless the economy is already producing at its potential level of output. This means that if we reduced the trade deficit, for example, by lowering the value of the dollar, which makes U.S.-produced goods and services more competitive internationally, we can increase output and thereby also increase savings. (Savings rise in step with income.)
While the identity between savings and trade deficit referenced by Feldstein and Schultz always holds, unless the economy is producing at its potential level of output, we can increase output and employment by reducing the trade deficit.
Simple, isn’t it? Now why would these distinguished economists try to mislead people?
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