Your Lying Eyes

Dedicated to uncovering the truth that stands naked before your lying eyes.

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05 December 2008

How Important is Trade?

Tyler Cowen and Dani Rodrik are in a bit of a tussle over economic stimulus and trade. The liberal Rodrik claims that the effect of a financial stimulus can be maximized by raising the Keynesian multiplier with a high import tariff. Tyler thinks this is madness. Now all this multiplier crap is b.s., but surely Rodrik has a point: if you're going to have any hope of being able to increase growth by throwing money around, you can't have people using the money to buy imported goods - like the joke about this year's tax rebates being used to buy flat-screen TV's made in China.

But both economists are pretty convinced that restricting trade is a bad thing in normal times. But why do we think the current level of trade can't possibly be reduced? Over the last 60 years, our total trade level (imports + exports) has generally grown, while the multi-year rate of growth has declined.There is in fact a modest (-0.17) inverse correlation between trade and growth. So Rodrik's proposal, even ignoring the Keynesian mumbo-jumbo, doesn't seem like a particularly bad idea.

A reader has pointed out the importance of the trade deficit and its likely effect on our current troubles. I've updated the graph to include the trade deficit. This picture is indeed rather damning.

Source: Bureau of Economic Analysis


Anonymous Anonymous said...

Maybe a better question is "how important are trade deficits?". Peter Morici has made a compelling case that they play a big role in our economic problems. He has calculated that every billion dollars in U.S. trade deficits results in a net loss of 10,000 jobs. Our $800 Billion annual trade deficit therefore costs us 8 million jobs each year.

One of the great frauds perpetrated against the American public in recent decades has been the dissemination of the nonsense, by financial journalists and many economists, that in the New Economy trade deficits "don't matter". Without this lie taking hold among our elite opinion leaders and policy makers, the lopsided U.S. trade that has lead in no small part to our current economic disaster would never have been allowed to occur.

December 06, 2008 3:05 AM  
Anonymous Anonymous said...

Plenty of American made products you can buy with that tax rebate, like ammo and guns(employing skilled craftsmen and technicians). We are going to need them...

You live in NNJ, right? Take a drive over to Meltzer's in Garfield, Ramsey Outdoor on Rt. 17 or The Bullet Hole in Belleville. Dicks over in Wharton is OK as well. See you at the range...

December 06, 2008 2:30 PM  
Blogger ziel said...

How about Ray's on 22?

December 06, 2008 7:03 PM  
Anonymous Anonymous said...

"How about Ray's on 22?"

Haven't been there, I'll give them a look. Thanks for the tip...

December 07, 2008 12:14 PM  

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