Thursday, February 5, 2015

"The decrease in price does him no good, because the decrease in his income is greater."

Recommended reading: greg's Destruction of Production from Unbalanced Trade at Another Amateur Economist.


geerussell said...

the results of running a trade deficit demonstrate the need for government regulation of trade. Clearly, a private entity may increase his profit while destroying a part of the domestic economy, if it is not compensated for.

It's also worth pointing out that there are two ways to approach this and they are not mutually exclusive.

Net imports are a demand leakage. You can reduce the size of the leakage by regulating trade. You can also compensate for the drain by opening the faucet with fiscal offset.

The Arthurian said...


I don't know how to say this without sounding like a monetarist kook, but your two options are not equivalent. We have done the "fiscal offset" thing for a long time without restoring the balance that must be restored. Fiscal offset alone is like mopping up the water on the floor without bothering to turn off the faucet.

// I'm a little rushed right now.. the wife is bringing home a new puppy.. i am making ready.. i cannot spend time finessing my remarks as I normally do.

geerussell said...

On that same basis I could say of regulating trade "already tried and didn't work". Regulation exists and we still have a trade deficit. It's an empty critique of course, trade isn't regulated in a way and to an extent to actually eliminate the trade deficit.

Likewise for a fiscal offset of the demand leakage. As a blanket statement, "already tried and didn't work" doesn't hold up. Size matters. When it's chronically deficient, as it has been, the income adjustments from the resultant demand shortfall play out in the form of elevated unemployment.

The Arthurian said...

gee, if you looked at my old graph I think you would have noticed I am showing the monstrous size of the Federal government's attempt to stimulate the economy by deficit spending since the mid-70s.

greg said...

Hi Arthurian..Thanks for the plug. I have an improved version in PDF form if you want me to email it to you.
Also, check Lambert Strether's discussion of 'Effective Demand' over at: