Lately it seems that it has become fashionable on both the Left and Right to bemoan the evils of the trade deficit; however, this penchant for protectionism is founded upon a general lack of knowledge when it comes to economics.
Let's examine a few false assertions often put forth by what I like to call "pseudo-economists."
Pseudo-economic Assertion 1: A trade deficit is always bad.
This is bogus. When the average person thinks of a trade deficit, they
think it simply means "we buy from them than they do from us." However, this thinking ignores flows of foreign investment
capital. This capital is the flip side of trade deficits. People
seem to think that when a foreign good is purchased, the money is then
stuffed under a mattress. Money spent on imports often quickly returns
to buy assets here in the U.S.--stocks, bonds, real estate, factories.
This inflow of capital buys new machinery, builds new factories, funds
new research, creating jobs.
Pseudo-economic Assertion 2: A trade deficit destroys jobs.
This simple assertion ignores jobs created as a result of a trade
deficit and ignores historical data--that imports and domestic output
tend to rise together according to domestic demand.
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