Bernanke Criticizes Trade Deficit, but Not Trade

In a speech on the West Coast this morning, Fed chairman Ben Bernanke at first glance appears to be agreeing with the critics of trade who blame the trade deficit for much of our economic ills. “Bernanke Calls for Action on Trade Gap,” according to the Wall Street Journal. “Bernanke warns against trade imbalances,” chimes in the French news agency, AFP.

Underneath the headlines, however, Bernanke’s comments offer no comfort for the critics. The real culprit is not “unfair trade” or “currency manipulation,” but misguided tax and spending policies in the United States and other major trading countries.

That is a point I hammer home in Chapter 5 of the new Cato book, Mad about Trade: Why Main Street America Should Embrace Globalization:

If our politicians are determined to do something about the trade deficit, the most constructive step they could take would be to promote a higher level of national savings. More domestic savings would reduce the need for foreign funds to finance domestic investment. … The most direct approach would be to reduce or eliminate the federal budget deficit. If the federal government were to borrow a few hundred billion dollars less each year, the pool of domestic savings would rise and more domestic funds would be available for investment. …Ironically, many members of Congress who complain loudest about the trade deficit have voted in the name of economic “stimulus” to plunge us ever deeper in debt.

Chairman Bernanke agrees. His policy prescription was not to raise barriers against imports, but to cut the federal government’s appetite for debt.