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"Deficit Spending Doesn't Work, Balanced Trade Does" - we're published in today's American Thinker
Howard Richman, 8/19/2012

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During his later years, Keynes came to believe that trade-deficit countries should engage in trade-balancing measures rather than economic stimulus, while trade-surplus countries should assist in balancing trade while providing economic stimulus.

An empirical implication is that economic stimulus (e.g., fiscal stimulus through running a government budget deficit) should have a more positive effect for trade-surplus countries than for trade-deficit countries. Similarly, balancing trade should have stronger economic benefits for countries running budget deficits.

To test this implication, we analyzed cross-sectional linear regression equations with an interaction between budget and current account variables. For every year except 2009, this interaction achieved at least marginal levels of statistical significance (p < 0.10 two tailed) and in the expected direction. The results were precisely as Keynes projected: countries with budget deficits had lower jobless rates if they had a trade surplus, and countries with a trade deficit had lower jobless rates if they had a budget surplus.

The graph below illustrates the results of our worldwide analysis concerning the effect of trade deficits upon unemployment. The table shows the projected unemployment rate in the United States in each of the last five years as compared with a country with the U.S. budget deficit and debt levels, but no trade deficit. The red line shows the actual U.S. unemployment rate. The blue line shows the projected unemployment rate if trade were balanced. In 2011, the actual unemployment rate in the United States was 8.5%. A country that had the U.S. budget deficit and debt levels, but no trade deficit, would be expected to have an unemployment rate of 6.6%, as shown in the graph below:

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Comment by freek, 8/23/2012:

If I got it right.

So balanced trade is basically, if country x has a trade deficit with country y. Country x puts up a scaled tarrif for just country y so less is being imported from y so a trade deficit becomes balanced. (Not sure how to word if if a country has no deficit nor surplus, English isn't my native tongue)?

Response to this comment by Howard Richman, 8/24/2012:
You are basically right. The rate of tariff would be the rate that would take in 50% of the trade deficit with each country, based upon the trade deficit of the most recent 4 quarters.
Response to this comment by freek, 8/25/2012:
It seems like the best alternative for the (sadly unrealistic total) free trade.

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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]