The Economics of Tariffs and Trade (with Doug Irwin)

May 5 2025

Is the United States victimized by trade? What causes trade deficits? Are higher tariffs a good idea? Can manufacturing jobs return to the United States? Economist Doug Irwin of Dartmouth College answers these questions and more in this wide-ranging conversation with EconTalk's Russ Roberts.

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Time	Podcast Episode Highlights
0:37	Intro. [Recording date: April 22, 2025.] Russ Roberts: Today is April 22nd, 2025, and my guest is economist and author Doug Irwin of Dartmouth College, where he is the John French Professor of economics. Our topic for today is tariffs, trade, trade deficits, and this rather dramatic moment we're in the middle of. Although by the time this airs, things of course could be radically different, so we're going to stick to the basics. I'm hoping to create a primer for listeners, clearing up some fundamental misunderstandings some people are having. Although, I suspect at the end we'll touch on some of the details of this moment in particular. Doug last appeared on EconTalk in October of 2010, discussing the Great Depression and the gold standard in an episode I highly recommend. Doug, welcome back to EconTalk. Doug Irwin: Thanks for having me. Good to be here.
1:23	Russ Roberts: Let's start with trade deficits. What does it mean when a country runs a trade deficit? What's the definition of a trade deficit? Doug Irwin: Well, a trade deficit is simply when a country imports more than it exports to the rest of the world. That raises all sorts of questions, but that's the functional definition. Sometimes it's called a current account deficit, because it's a little bit broader than just merchandise: you have to include services. And then, other things of that sort. Russ Roberts: If the United States--I want to talk about two examples that people are discussing a lot these days. The United States runs a trade deficit with respect to the rest of the world. The entire world. That is, the United States imports more goods and services from the world than the world imports from the United States. And, it also runs a trade deficit with many individual countries of different magnitudes, that when aggregated add up to the whole entire trade deficit. What does it mean? Let's start with why a country might run a trade deficit vis-a-vis the rest of the entire world. Doug Irwin: Yeah, there's various ways one can break it down. One way to think about it--it sounds rather boring--but in terms of the Balance of Payments. So, if we are importing more than we're exporting, we are sending more dollars abroad to at least pay for that--because we're importing those goods. Those dollars don't stay abroad, in general. They come back to the United States. And, instead of buying U.S. goods, they're buying U.S. assets. So, that's one way to think about it: that actually, we're exporting assets as well as goods, and that's sort of balancing what we're importing from the rest of the world. Russ Roberts: Well, some of it is used to buy American goods and services, but not all of the dollars. So the dollars buy some American goods and services, and in addition buy American assets. And, when you add in the asset position, you tend to get balanced. There's one little tricky thing there about currency. Do you want to say anything about that? Doug Irwin: Not really, because I think that's a rather minor point of it, but you're absolutely right. I have this book, Free Trade Under Fire, and I try to update this calculation every now and then. For every dollar that we send abroad importing some foreign product, 75 cents comes back and buys a U.S. good or service. And then, 25 cents is buying U.S. assets. So, a dollar goes out, but a dollar comes back. It's just a question of: how is it divided between buying goods and services from the United States versus buying U.S. assets? Russ Roberts: And, the currency part that we're going to leave alone, because it's a little bit of a red herring, is a little complicated because the United States tends to be a reserve currency for many nations in the world. Meaning, it's an easy way for countries around the world to hold a liquid form of purchasing power.
4:15	Russ Roberts: If I am correct, the United States runs a surplus in services with respect to the rest of the world. Is that correct? Doug Irwin: That is absolutely correct. And it's been growing over time. It's pretty substantial. Obviously, it doesn't make up for the deficit on merchandise goods. But, the United States is largely a service economy. We are a premier producer of many services--architectural services, construction services, financial services--and so the rest of the world purchases those from the United States. So, we're a net exporter of services, yes. Russ Roberts: And, we're a net exporter of investment opportunities. So, the United States runs a capital account surplus, but the capital account being a way of saying the United States is a more attractive place for the world to invest than American investors find the rest of the world. So, on net, the rest of the world is investing in the United States relative to what the United States is investing elsewhere. That's called a capital account surplus. That finances, in some sense, but not literally the way--it's a bad phrase because it's not the way you and I finance our purchases. But, it is the counterpart--is a better way to say it--of the deficit that the United States has in goods and services, correct? Doug Irwin: Absolutely. You said it very well. And, I also agree with you on the financing aspect of it: the United States is very different because the dollar is the world currency. People want to invest in the United States: we have these safe assets--Treasury Notes. We have obviously a stock market that's doing very well. And, so, compared to other countries we're just a rich, deep, liquid capital market that is a safe haven and a great opportunity to earn good returns for foreign investors. Russ Roberts: Well, you said the stock market is doing very well. Historically. On average. Doug Irwin: That's correct. [inaudible 00:06:09]-- Russ Roberts: This has been a bad month: we're recording this in April. And maybe we'll get into that later. But, the United States is a very attractive place for investing. And so, on one hand, the United States runs a capital account surplus. Capital, meaning investment. So, again, just to make it clear, foreigners invest much more in the United States than the United States invests in foreign assets. And on the flip side, the United States imports more goods and services from the rest of the world than the rest of the world imports from the United States.
6:44	Russ Roberts: Is there anything good or bad about either of those? Do they tell us anything about--let's just start with the health of the economy. Doug Irwin: Yeah. Not really. Let me invoke an author I know you're a fan of, and I am as well, Adam Smith, who said: There's nothing more absurd than this doctrine of the balance of trade, either as a measure of whether you're winning or losing from trade or as something a source of concern. I also invoke the Wall Street Journal Editorial Page, which once had this memorable phrase, 'The best way to think about the trade deficit is not to think about it.' And so, the way I put it is--sometimes when I'm telling my students--you know, let's say the government didn't produce statistics, economic statistics. If we had inflation, would you know it? Absolutely you'd know it. Every time you go to the grocery store or someplace you'd see it. If we're in a recession, would you know it? Absolutely. You'd see people around you losing their jobs, maybe you yourself. If we're running a trade surplus or a deficit, would you know it? No, it is to an abstraction. It's not something that personally affects you directly. So, there are circumstances in which countries should perhaps worry about it. But, I think for the U.S. case, with the dollar being the reserve currency, it's generally not something that people have to fret about. Russ Roberts: I want to come back to that question about worrying about it, but I just want to make an historical point. Because you and I have both--we've been in these trenches so long fighting this battle, that for a while I just didn't write anything on Twitter and people were saying, 'Don't you have anything to say about it?' Yeah, about, I don't know, 100,000 words, 500,000. I don't know how much I've written about it. Look it up if you want. I'm happy to share it. And I kind of thought it was settled. I want to make a reference to in 2006, when the EconTalk started, I had the privilege of interviewing Milton Friedman. I talked about how great it is that economics taught people that price controls are bad. And he said, 'Oh, no, no, no, no. It wasn't economics that got people to oppose price controls.' And, what he said, he went on to say, 'The reason price'--you can go back and listen to it; we'll link to it--'The reason people stopped favoring price controls is because they lived through it. And, they got so horrified by it that they didn't want it anymore.' They didn't like the long lines for gasoline, for example. That was price controls on gasoline. And then, he said, 'And, when those people die off, people start thinking, maybe we should have price controls on things that get more expensive.' So, economics didn't solve this. I naively thought when I was younger, economists have kindly educated the world about how tariffs work and trade deficits. Turns out, it's more complicated than that. But, I want to go back, because having been in the trenches as long as I have, and you have, when you invoke Adam Smith, a lot of people say: 'Well, Adam Smith.' Or 'David Ricardo. They lived hundreds of years ago. Their theories--they've been shown to be incorrect. And, they're old, that's an ancient doctrine.' What those people don't realize is that Adam Smith wrote a significant piece of The Wealth of Nations to answer the people who were called mercantilists. And the mercantilists were worried about dollars leaving the country. In his case, England. And that doctrine, which was, I think, wrong--the Mercantilist doctrine--I think the first reference I've seen was in like the 1200s. If we're going to use the equivalent of an ad hominem attack on a doctrine that's outdated, mercantilism is even older and more ancient than Smith's views on trade. Doug Irwin: Yeah. I don't think Smith is out of date in really any significant way. Maybe you find this the same way. Every time I pull the book down from my shelf, The Wealth of Nations, I learn something again. I've read it, but I find there's some sentence I missed or insight. And, it's just a true book of wisdom. Here's a guy--he didn't have the Internet; limited to Britain and a little bit of time in France, but he knew so much and he interpreted things so well. And, it's so relevant for today in so many dimensions.
10:53	Russ Roberts: I want to come back to a phrase you used a few minutes ago. You said, 'The dollars come back.' So, Americans buy goods from abroad. Foreigners then have dollars. And, they then spend them, as you said, on both goods and services and then on investment opportunities--assets, acquiring assets. And of course, those assets--that sale if those assets--puts money in the hands of Americans. It's a complicated thing to talk about. But a lot of people say, 'If we're running a trade deficit, obviously we're giving foreigners more money than they're giving us.' Now, we just made it clear that's not true. That's an arbitrary way of defining giving dollars because it excludes investment opportunities. But, I just want to pose the question: Suppose they didn't come back. Suppose foreigners sold us cars and all kinds of things, and we sent them dollars. Americans sent them dollars. And, the foreigners really liked the way the dollars looked, so they put them up on their wall as wallpaper, and never bought American goods and services or invested in American assets. Would that be bad for America? I mean, we're stimulating their economy, but they're not stimulating ours. That's so unfair. Doug Irwin: Well, in some sense what we're doing is printing up worthless pieces of paper; they're giving us goods in exchange for them; and then there's no liability associated with that. They don't have to make a claim on our assets or our goods as a result of that; they'll just keep it down there. In fact, actually there are a lot of dollars circulating in the world, so that's true to some extent. In Latin American countries--you go to Argentina, dollars sort of circulate because they don't trust the domestic currency. And, elsewhere around the world. So, there's a big stock of dollars out there in the world. But, compared to the yearly flows, I think it's not huge. But, once again, it's not necessarily a problem if they never redeem those dollars as a claim on U.S. assets or goods or services. Russ Roberts: But, isn't it unfair? I mean, we're stimulating their economy and they're not stimulating ours. Doug Irwin: Not unfair. They're helping us by selling their goods at reasonable prices to consumers that want to purchase them. So, I'd still say it's a win-win. Russ Roberts: Are we going to have fewer jobs? Doug Irwin: There's a book they should read, The Choice. By you. This gets into a huge issue about manufacturing and things of that sort. So, in terms of jobs, the current unemployment rate in the United States is about 4%. It's pretty low historically. That's also close to what we think is full employment. But we have a large trade deficit. In fact, if you look at the correlation between the unemployment rate and, say, imports as a share of GDP [Gross Domestic Product], they're negatively correlated. When the unemployment rate goes down, our imports to GDP go up because we're buying more. We're robust; the economy is doing well. And, it's precisely when the unemployment rate goes up that we enter a recession--that imports as a share of GDP go down. So, imports aren't taking away from jobs in that sense: the correlation goes the wrong way for the 'imports are costing U.S. jobs' at the broad macroeconomic level. Russ Roberts: And I think economics teaches that trade doesn't affect the number of jobs. In the short run it can, of course. Trade disruptions or quick changes in economic interactions with foreign countries can affect, obviously, employment in certain industries. But in general, trade, the way economists think about it, changes the kind of jobs we have, not the number of jobs. That doesn't mean the transitions are easy. There can be people in an industry who suddenly face competition from foreigners, just like there can be tough transitions when there's innovation, and we don't need as many workers in a particular industry. We may come back and talk about that. But, that's what's going on. It's an economic change that's, on average, good for the country. It makes it richer. But not every person. We don't want to pretend that's true. It's not true. And, many people can face hardship from dislocations due to changes in the mix of trade, changes in technology and innovation. Andso, a country has to decide how they cushion, or not, those kind of transitions. But, as you point out, over the last 50, 75 years, the United States, except for recessions, generally have a very, very dynamic and healthy labor market and a rising standard of living. And, at the same time, certain industries have been hurt very badly by trade from competition from foreigners. Others have responded and innovated to make their products more cheaply and higher quality. So, it's a complicated picture. But, this idea that somehow if foreigners don't spend money here, we'll have fewer jobs because those jobs won't be stimulating the economy is, to me is a total misunderstanding of what dollars are doing. That's not what they do. This idea that we need to keep the money in America, or in your own country, is a terrible, terrible fallacy. We don't care about how many pieces of paper we have. We care about what it can buy. And, if we cut ourselves off--a nation cuts itself off from trade--it'll find itself paying more in effective terms, in real terms, for the things it wants to enjoy and have fewer things to enjoy. It still could have full employment, just have a lower standard of living. Doug Irwin: Yeah. If I could just make one qualification or footnote, which is actually a minor defense of mercantilism in some sense. Because we talked about our previous episode was on the gold standard and the Great Depression. One of the things that the mercantilists in the pre-Adam Smith period were reacting to is that the money supply was tied to how much gold you had. If there's an outflow of gold, you're going to have deflation, and that might not be good for the economy in the short run. And, that's where Milton Friedman came along and said, 'Hey, if you have flexible exchange rates you don't have to worry about that. Because then you can have an independent monetary policy.' So I think the case for free trade is actually stronger in the post-World War II period because of Friedman and making the case for flexible exchange rates, than when you're on a gold standard, which is much more rigid--you can't respond to various shocks. It's a monetary rule, but sometimes it can be a straitjacket as well. [More to come, 17:05]

Time

Podcast Episode Highlights

0:37

Intro. [Recording date: April 22, 2025.]

Russ Roberts: Today is April 22nd, 2025, and my guest is economist and author Doug Irwin of Dartmouth College, where he is the John French Professor of economics. Our topic for today is tariffs, trade, trade deficits, and this rather dramatic moment we're in the middle of. Although by the time this airs, things of course could be radically different, so we're going to stick to the basics. I'm hoping to create a primer for listeners, clearing up some fundamental misunderstandings some people are having. Although, I suspect at the end we'll touch on some of the details of this moment in particular.

Doug last appeared on EconTalk in October of 2010, discussing the Great Depression and the gold standard in an episode I highly recommend. Doug, welcome back to EconTalk.

Doug Irwin: Thanks for having me. Good to be here.

1:23

Russ Roberts: Let's start with trade deficits. What does it mean when a country runs a trade deficit? What's the definition of a trade deficit?

Doug Irwin: Well, a trade deficit is simply when a country imports more than it exports to the rest of the world. That raises all sorts of questions, but that's the functional definition.

Sometimes it's called a current account deficit, because it's a little bit broader than just merchandise: you have to include services. And then, other things of that sort.

Russ Roberts: If the United States--I want to talk about two examples that people are discussing a lot these days. The United States runs a trade deficit with respect to the rest of the world. The entire world. That is, the United States imports more goods and services from the world than the world imports from the United States. And, it also runs a trade deficit with many individual countries of different magnitudes, that when aggregated add up to the whole entire trade deficit. What does it mean? Let's start with why a country might run a trade deficit vis-a-vis the rest of the entire world.

Doug Irwin: Yeah, there's various ways one can break it down. One way to think about it--it sounds rather boring--but in terms of the Balance of Payments. So, if we are importing more than we're exporting, we are sending more dollars abroad to at least pay for that--because we're importing those goods. Those dollars don't stay abroad, in general. They come back to the United States. And, instead of buying U.S. goods, they're buying U.S. assets.

So, that's one way to think about it: that actually, we're exporting assets as well as goods, and that's sort of balancing what we're importing from the rest of the world.

Russ Roberts: Well, some of it is used to buy American goods and services, but not all of the dollars. So the dollars buy some American goods and services, and in addition buy American assets. And, when you add in the asset position, you tend to get balanced.

There's one little tricky thing there about currency. Do you want to say anything about that?

Doug Irwin: Not really, because I think that's a rather minor point of it, but you're absolutely right. I have this book, Free Trade Under Fire, and I try to update this calculation every now and then. For every dollar that we send abroad importing some foreign product, 75 cents comes back and buys a U.S. good or service. And then, 25 cents is buying U.S. assets. So, a dollar goes out, but a dollar comes back. It's just a question of: how is it divided between buying goods and services from the United States versus buying U.S. assets?

Russ Roberts: And, the currency part that we're going to leave alone, because it's a little bit of a red herring, is a little complicated because the United States tends to be a reserve currency for many nations in the world. Meaning, it's an easy way for countries around the world to hold a liquid form of purchasing power.

4:15

Russ Roberts: If I am correct, the United States runs a surplus in services with respect to the rest of the world. Is that correct?

Doug Irwin: That is absolutely correct. And it's been growing over time. It's pretty substantial. Obviously, it doesn't make up for the deficit on merchandise goods. But, the United States is largely a service economy. We are a premier producer of many services--architectural services, construction services, financial services--and so the rest of the world purchases those from the United States.

So, we're a net exporter of services, yes.

Russ Roberts: And, we're a net exporter of investment opportunities. So, the United States runs a capital account surplus, but the capital account being a way of saying the United States is a more attractive place for the world to invest than American investors find the rest of the world.

So, on net, the rest of the world is investing in the United States relative to what the United States is investing elsewhere. That's called a capital account surplus. That finances, in some sense, but not literally the way--it's a bad phrase because it's not the way you and I finance our purchases. But, it is the counterpart--is a better way to say it--of the deficit that the United States has in goods and services, correct?

Doug Irwin: Absolutely. You said it very well. And, I also agree with you on the financing aspect of it: the United States is very different because the dollar is the world currency. People want to invest in the United States: we have these safe assets--Treasury Notes. We have obviously a stock market that's doing very well. And, so, compared to other countries we're just a rich, deep, liquid capital market that is a safe haven and a great opportunity to earn good returns for foreign investors.

Russ Roberts: Well, you said the stock market is doing very well. Historically. On average.

Doug Irwin: That's correct. [inaudible 00:06:09]--

Russ Roberts: This has been a bad month: we're recording this in April. And maybe we'll get into that later.

But, the United States is a very attractive place for investing. And so, on one hand, the United States runs a capital account surplus. Capital, meaning investment. So, again, just to make it clear, foreigners invest much more in the United States than the United States invests in foreign assets.

And on the flip side, the United States imports more goods and services from the rest of the world than the rest of the world imports from the United States.

6:44

Russ Roberts: Is there anything good or bad about either of those? Do they tell us anything about--let's just start with the health of the economy.

Doug Irwin: Yeah. Not really. Let me invoke an author I know you're a fan of, and I am as well, Adam Smith, who said: There's nothing more absurd than this doctrine of the balance of trade, either as a measure of whether you're winning or losing from trade or as something a source of concern. I also invoke the Wall Street Journal Editorial Page, which once had this memorable phrase, 'The best way to think about the trade deficit is not to think about it.'

And so, the way I put it is--sometimes when I'm telling my students--you know, let's say the government didn't produce statistics, economic statistics. If we had inflation, would you know it? Absolutely you'd know it. Every time you go to the grocery store or someplace you'd see it. If we're in a recession, would you know it? Absolutely. You'd see people around you losing their jobs, maybe you yourself. If we're running a trade surplus or a deficit, would you know it? No, it is to an abstraction. It's not something that personally affects you directly. So, there are circumstances in which countries should perhaps worry about it. But, I think for the U.S. case, with the dollar being the reserve currency, it's generally not something that people have to fret about.

Russ Roberts: I want to come back to that question about worrying about it, but I just want to make an historical point. Because you and I have both--we've been in these trenches so long fighting this battle, that for a while I just didn't write anything on Twitter and people were saying, 'Don't you have anything to say about it?' Yeah, about, I don't know, 100,000 words, 500,000. I don't know how much I've written about it. Look it up if you want. I'm happy to share it.

And I kind of thought it was settled. I want to make a reference to in 2006, when the EconTalk started, I had the privilege of interviewing Milton Friedman. I talked about how great it is that economics taught people that price controls are bad. And he said, 'Oh, no, no, no, no. It wasn't economics that got people to oppose price controls.' And, what he said, he went on to say, 'The reason price'--you can go back and listen to it; we'll link to it--'The reason people stopped favoring price controls is because they lived through it. And, they got so horrified by it that they didn't want it anymore.' They didn't like the long lines for gasoline, for example. That was price controls on gasoline. And then, he said, 'And, when those people die off, people start thinking, maybe we should have price controls on things that get more expensive.'

So, economics didn't solve this. I naively thought when I was younger, economists have kindly educated the world about how tariffs work and trade deficits. Turns out, it's more complicated than that.

But, I want to go back, because having been in the trenches as long as I have, and you have, when you invoke Adam Smith, a lot of people say: 'Well, Adam Smith.' Or 'David Ricardo. They lived hundreds of years ago. Their theories--they've been shown to be incorrect. And, they're old, that's an ancient doctrine.' What those people don't realize is that Adam Smith wrote a significant piece of The Wealth of Nations to answer the people who were called mercantilists. And the mercantilists were worried about dollars leaving the country. In his case, England. And that doctrine, which was, I think, wrong--the Mercantilist doctrine--I think the first reference I've seen was in like the 1200s. If we're going to use the equivalent of an ad hominem attack on a doctrine that's outdated, mercantilism is even older and more ancient than Smith's views on trade.

Doug Irwin: Yeah. I don't think Smith is out of date in really any significant way. Maybe you find this the same way. Every time I pull the book down from my shelf, The Wealth of Nations, I learn something again. I've read it, but I find there's some sentence I missed or insight. And, it's just a true book of wisdom. Here's a guy--he didn't have the Internet; limited to Britain and a little bit of time in France, but he knew so much and he interpreted things so well. And, it's so relevant for today in so many dimensions.

10:53

Russ Roberts: I want to come back to a phrase you used a few minutes ago. You said, 'The dollars come back.' So, Americans buy goods from abroad. Foreigners then have dollars. And, they then spend them, as you said, on both goods and services and then on investment opportunities--assets, acquiring assets. And of course, those assets--that sale if those assets--puts money in the hands of Americans. It's a complicated thing to talk about.

But a lot of people say, 'If we're running a trade deficit, obviously we're giving foreigners more money than they're giving us.'

Now, we just made it clear that's not true. That's an arbitrary way of defining giving dollars because it excludes investment opportunities.

But, I just want to pose the question: Suppose they didn't come back. Suppose foreigners sold us cars and all kinds of things, and we sent them dollars. Americans sent them dollars. And, the foreigners really liked the way the dollars looked, so they put them up on their wall as wallpaper, and never bought American goods and services or invested in American assets. Would that be bad for America? I mean, we're stimulating their economy, but they're not stimulating ours. That's so unfair.

Doug Irwin: Well, in some sense what we're doing is printing up worthless pieces of paper; they're giving us goods in exchange for them; and then there's no liability associated with that. They don't have to make a claim on our assets or our goods as a result of that; they'll just keep it down there.

In fact, actually there are a lot of dollars circulating in the world, so that's true to some extent. In Latin American countries--you go to Argentina, dollars sort of circulate because they don't trust the domestic currency. And, elsewhere around the world. So, there's a big stock of dollars out there in the world. But, compared to the yearly flows, I think it's not huge. But, once again, it's not necessarily a problem if they never redeem those dollars as a claim on U.S. assets or goods or services.

Russ Roberts: But, isn't it unfair? I mean, we're stimulating their economy and they're not stimulating ours.

Doug Irwin: Not unfair. They're helping us by selling their goods at reasonable prices to consumers that want to purchase them. So, I'd still say it's a win-win.

Russ Roberts: Are we going to have fewer jobs?

Doug Irwin: There's a book they should read, The Choice. By you. This gets into a huge issue about manufacturing and things of that sort. So, in terms of jobs, the current unemployment rate in the United States is about 4%. It's pretty low historically. That's also close to what we think is full employment. But we have a large trade deficit.

In fact, if you look at the correlation between the unemployment rate and, say, imports as a share of GDP [Gross Domestic Product], they're negatively correlated. When the unemployment rate goes down, our imports to GDP go up because we're buying more. We're robust; the economy is doing well. And, it's precisely when the unemployment rate goes up that we enter a recession--that imports as a share of GDP go down. So, imports aren't taking away from jobs in that sense: the correlation goes the wrong way for the 'imports are costing U.S. jobs' at the broad macroeconomic level.

Russ Roberts: And I think economics teaches that trade doesn't affect the number of jobs. In the short run it can, of course. Trade disruptions or quick changes in economic interactions with foreign countries can affect, obviously, employment in certain industries. But in general, trade, the way economists think about it, changes the kind of jobs we have, not the number of jobs. That doesn't mean the transitions are easy. There can be people in an industry who suddenly face competition from foreigners, just like there can be tough transitions when there's innovation, and we don't need as many workers in a particular industry. We may come back and talk about that.

But, that's what's going on. It's an economic change that's, on average, good for the country. It makes it richer. But not every person. We don't want to pretend that's true. It's not true. And, many people can face hardship from dislocations due to changes in the mix of trade, changes in technology and innovation. Andso, a country has to decide how they cushion, or not, those kind of transitions. But, as you point out, over the last 50, 75 years, the United States, except for recessions, generally have a very, very dynamic and healthy labor market and a rising standard of living. And, at the same time, certain industries have been hurt very badly by trade from competition from foreigners. Others have responded and innovated to make their products more cheaply and higher quality. So, it's a complicated picture.

But, this idea that somehow if foreigners don't spend money here, we'll have fewer jobs because those jobs won't be stimulating the economy is, to me is a total misunderstanding of what dollars are doing. That's not what they do. This idea that we need to keep the money in America, or in your own country, is a terrible, terrible fallacy. We don't care about how many pieces of paper we have. We care about what it can buy. And, if we cut ourselves off--a nation cuts itself off from trade--it'll find itself paying more in effective terms, in real terms, for the things it wants to enjoy and have fewer things to enjoy. It still could have full employment, just have a lower standard of living.

Doug Irwin: Yeah. If I could just make one qualification or footnote, which is actually a minor defense of mercantilism in some sense. Because we talked about our previous episode was on the gold standard and the Great Depression. One of the things that the mercantilists in the pre-Adam Smith period were reacting to is that the money supply was tied to how much gold you had. If there's an outflow of gold, you're going to have deflation, and that might not be good for the economy in the short run. And, that's where Milton Friedman came along and said, 'Hey, if you have flexible exchange rates you don't have to worry about that. Because then you can have an independent monetary policy.'

So I think the case for free trade is actually stronger in the post-World War II period because of Friedman and making the case for flexible exchange rates, than when you're on a gold standard, which is much more rigid--you can't respond to various shocks. It's a monetary rule, but sometimes it can be a straitjacket as well. [More to come, 17:05]

The Economics of Tariffs and Trade (with Doug Irwin)

Russ Roberts on Smith, Ricardo, and Trade

David Autor on Trade, China, and U.S. Labor Markets

LEAVE A COMMENT

The Economics of Tariffs and Trade (with Doug Irwin)

Russ Roberts on Smith, Ricardo, and Trade

David Autor on Trade, China, and U.S. Labor Markets

LEAVE A COMMENT

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