PKT message, US Trade Deficit As 'World Engine Of Growth'?

Dear Gang:

In and after the mid-1970s, I made a nuisance of myself with the IMF Research Department through comments on their working papers on world economic issues to the point that, as one of the IMF's most senior officials (then and now) put it: "Gunnar thinks the world is wrong and he alone is right."

The alternative, as I saw it at the time, was to play dumb and acquiesce in the conventional wisdom embraced by leading academics, the G7 governments, and the IMF itself according to which a large U.S. trade deficit represented output- and employment-enhancing World Engine Of Growth.

And so it did - much like the proverbial punch bowl which enlivened yesterday's party at the cost of today's hangover.

And where did the conventional wisdom go wrong?

The brief answer is indicated in the following passage from Keynes' letter to John Hicks, dated September 8, 1936:

"I wish you would analyse in what way our discontent with my income concept arises. In my book [the General Theory - insert] it looks, I think, more queer and complicated than it really is. It is the final outcome of a greater amount of bad attempts and destroyed drafts than any other section. But all it comes to is really the following: I commence with the conviction that one has in some way to identify income with the value of output."

This is where the conventional wisdom parts company with Keynes.

First. It is not rooted in any intellectual "conviction" as distinct from transient fashion; and

Second. It ignores the implications for monetary economics of Keynes' "conviction" that one must "commence [by] identify[ing] income with the value of output."

When "income is [identified] with the value of output," it is immediately clear that the putative World Engine Of Growth is a misnomer for the U.S. trade deficit become World Engine of Inflation.

In turn, once that is recognized, the fact that World Inflation remains under "control" conveys a strong signal that structural aspects of world economic growth and development have been massively deflationary in the past thirty years.

And where does that leave us?

Briefly, any reduction in the U.S. trade deficit in the period ahead would create non-inflationary room for instituting Marshall-Plan type expenditures on social and economic development projects along the lines proposed by Joseph Stiglitz.

Gunnar