Wishful Thinking Won’t Balance Out Trade Deficit -- Krugman

[Donnachaidh]

http://www.truth-out.org/wishful-thinking-wo-balance-out-trade-deficit67207

The argument that the United States and China are on their way to soon reducing, or even eliminating, the trade gap between them has caused quite a stir in both the media and the blogosphere.

The discussion was sparked by a paper that Martin Feldstein, an economist at Harvard, presented earlier this month at the annual meeting of the American Economic Association. He explained that since consumers in the United States are starting to save more, and Chinese consumers possibly starting to save less, underlying trade imbalances could vanish. “It is not hard to imagine that a few years from now the current account imbalances of the U.S. and China will be very much smaller than they are today or even totally gone,” he wrote.

Not everyone who comments on Mr. Feldstein’s argument actually understands it. Many are confused by a common fallacy — though this is not a trap Mr. Feldstein has fallen into. To expose it, let’s first look at why China’s current yuan policy is a problem for the world.

Most people know that a trade deficit results from a country’s spending more than it earns. Some people then draw the conclusion, “Well, given that the problem is all about spending imbalances, exchange-rate policy has nothing to do with it.”

More at the link --

[xchrom]

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