Trade Deficit a Concern?
By Arnold Kling
To what extent is the large trade deficit reported for the U.S. a cause for concern? In my Bubbleheads essay a couple months back, I discussed some of the fears about the deficit and the apparently-overvalued dollar.
Brad DeLong wonders how much we should really worry about the trade deficit.
So there you have it. Some of America’s trade deficit is not really there–the result of errors and omissions in the data, a “statistical discrepancy.” Some of America’s trade deficit is there, but is not “unsustainable”: the portion of America’s trade deficit that is the result of its three “exorbitant privileges” can continue until the age of the world changes: American can keep selling international reserve and liquidity services, political risk insurance services, and future immigration options to the central banks and rich of the rest of the world for a long time to come.
For Discussion. One challenge is to measure the extent to which the value of the dollar–and hence the trade deficit–reflect political risk insurance. Could event studies of the behavior of the dollar in response to incidents in the war on terrorism help sort this out?