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The immoral orthodoxy of the trade deficit

May 20, 2013

Few orthodoxies are more harmful, I think, than the very old Ricardian principle enforcing a trade balance.  The essential idea is that the market mechanism will automatically bring trade between countries into balance through the appreciation of the currency of the surplus nation and a corresponding depreciation of the deficit one.  The ability to import or export will then be “naturally” checked, leaving the two nations in a roughly balanced position which for some odd reason is considered inherently good.

But why, in a world of specialized mass production, is balanced trade considered desirable?  A great many people in poorer nations remain stuck in substandard living conditions because of the inability to import advanced goods while, at the very same time, the very workers producing them in the more technologically advanced countries suffer from high un/under employment.  The prime mission, in fact, of governments and businesses throughout the world is to increase exports, yet we have an army of accountants enforcing the harshest of penalties on nations whose imports happen to be higher than their exports.

Paul Krugman, like all mainstream economists, kneels in reverence to this warped accounting logic and we see it today in his support for the idea that wages in Portugal are too high versus Germany and that the way out of the crisis for the European “peripheral” countries is through the devaluation of their wages against Germany via a wage boost in Germany.  The goal is to reduce the ability of Portugal and the “peripherals” to import from both Germany and the rest of the world by reducing their relative wages and through a likely decline in the value of the euro versus the dollar and other currencies as German wages rise.  But wait!  Portugal is already a poor society having an average wage less than half that of the Germans coupled with much longer working hours.  Krugman’s orthodoxy will only worsen living standards by forcing an increase in the cost of imports and a reorientation of the economy toward exports.  This, despite the fact that the entire German economy is centered around mass production for export, the German worker is highly efficient at it, and he/she wishes nothing more than to maintain his/her employment doing precisely that.

One obvious objection would be that it’s unfair and unreasonable to expect the Germans to forever export to deficit countries without getting something in return.  But that logic doesn’t apply to the average German worker who would be unemployed without the exports.  We must remember it’s not the German worker who’s exporting; it’s the German based multinational firm.  And if a re-alignment of the entire economy away from exports is actually desired, then why not bring in workers from the importing countries or outsource there to cover the difference?  Regardless, what strange logic indeed that we should seek to cut German production and enforce substandard conditions on “peripheral” nations against the wishes of the German worker, all for the sake of maintaining an accounting balance.

The short term moral solution is to develop an international currency that would permit unrestricted imports with the goal being to guarantee expanded sustainable prosperity for all.  How value-less and fundamentally immoral it is to proclaim that a poor country’s living standards are too high and a rich country’s too low!  As with so much of the capitalist system, it’s way past time we move past the hugely harmful finance-based notions of balance.

From → Dynamics, Suppression

One Comment
  1. Max permalink

    When he talks about trade, Krugman completely forgets about Keynesian economics and goes into a “classical” mode where the problem is always prices (especially wages, which stubbornly resist decline).

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