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
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.
best, they are an attempt to foreclose even worse outcomes, such as Senator Schumer’s
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