The real problem is not the trade deficit and the corresponding inflow of foreign capital to the US. The problem is the Federal budget deficit which diverts foreign — as well as domestic — capital flows.

The Neo-Mercantilist Hysteria 

Over US Trade Deficits

by Joseph T. Salerno

One of the worst effects of modern Keynesian economics is that its total spending (“aggregate demand”) approach to output and employment provides a pseudo-scientific justification for the central error of mercantilism — an error that dates back to the sixteenth century. According to this ancient fallacy, a deficit in a nation's balance of payments results in a loss of demand, income, and jobs. This doctrine has been demolished time and again by economists during the past two-and-a-half centuries. Yet like the mythical Phoenix the mercantilist myth continually rises from its own ashes.

A few weeks ago the Commerce Department reported that the US trade deficit increased to $47.2 billion in April from $44.2 billion the previous month.

This $3 billion increase brought forth the usual dire warnings of economic doom from Keynesian neo-mercantilists. Dean Baker co-director of the Center for Economic Policy Research, for example, wrote:


To remind folks who never suffered through a [Keynesian] intro course or forgot their suffering, a trade deficit means that demand generated in the United States is going overseas. Money spent by businesses or consumers is going for goods and services produced in Europe, Mexico, and China rather than in the United States. ... A larger trade deficit has the same implications for the economy as a sudden cutback in consumer spending or business investment. It means less demand and fewer jobs.

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