Teaching Commerce Secretary Designate Wilbur Ross a Lesson About Trade Balances

A Don Boudreaux letter to the Wall Street Journal:

You rightly call out Commerce Secretary designate Wilbur Ross for mistakenly asserting that “Econ 101” teaches that a trade deficit reduces GDP and “weakens our economy” (“Trump’s Money Men,” Dec. 1).  Sadly, this failure to understand that a U.S. trade deficit generally expands the size of our economy’s capital stock – and, hence, is beneficial for Americans – is widespread, bipartisan, and an endless source of trade-policy follies.

If Mr. Ross really wants to know what Econ 101 teaches on this matter, he can do no better than to consult Adam Smith himself who, in 1776, observed that “Nothing, however, can be more absurd than this whole doctrine of the balance of trade”* – from which it follows that nothing can be more absurd than to base trade policies on balance-of-trade figures.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

* Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations (1776), Book IV, Chapter 3, paragraph 31.