The Pseudo-economics of Protectionism

zsignal — Sat, 01 Dec 2007 22:45:00 GMT

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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The Pseudo-economics of Protectionism