trade_deficit_dec_2005[1]

trade_deficit_dec_2005[1] - Reflections on the Trade...

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1 Reflections on the Trade Deficit and Fiscal Policy N. Gregory Mankiw * During my two years in Washington, one fact became very clear to me: Mercantilism is alive and well. The prevailing view in the nation’s capital is precisely the view that Adam Smith campaigned against two centuries ago, and that the economics profession has long rejected. Under the mercantilist view, exports are good because they create jobs, and imports are bad because they take jobs away from Americans. Economists understand that the mercantilist view has things almost exactly backwards: In truth, imports are good because they expand our consumption opportunities, and exports are the price we have to pay because foreigners want payment for the goods they sell us. But if you try to explain this fact to one of the Beltway mercantilists, the best response you can hope for is a polite, condescending smile, as he reflects on how naïve you are. More likely, he will act outraged and offended, and if you are a public official, he will call for your resignation. And I speak from a bit of experience. Sadly, this mercantilist point of view has started to affect policy, or at least public discussion of it. It lies behind Senator Schumer’s call for a 27.5 percent tariff on all imports from China until China revalues its exchange rate. And it lays behind some the rhetoric coming out of the Bush administration. On December 5, 2005, the White House put out a “Fact Sheet” on the President’s “Agenda for Economic Growth” that lists the quotas on Chinese textiles as one of their accomplishments. I am sure that the economics team inside the White House, including Al Hubbard, John Snow, and Ben Bernanke, knows that import quotas are bad policy from a strictly economic point of view. The quotas are a response to inexorable political pressure. At best, they are an attempt to foreclose even worse outcomes, such as Senator Schumer’s tariffs. But I also know that the communications team at the White House, who drafts such Fact Sheets, often has a different take on things. They are charged not with making policy but with selling it. If mercantilist arguments resonate with the public, then mercantilist arguments is what we will get. And some people on the communications team may actually have sympathy with this mercantilist point of view. From the perspective of the Beltway mercantilists, the trade deficit is a huge
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This note was uploaded on 04/26/2008 for the course ECN 115 taught by Professor Jia during the Summer '06 term at Northeastern.

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trade_deficit_dec_2005[1] - Reflections on the Trade...

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