How to reduce our trade deficit

Keynes, from Chapter 23:

If the domestic rate of interest falls so low that the volume of investment is sufficiently stimulated to raise employment to a level which breaks through some of the critical points at which the wage-unit rises, the increase in the domestic level of costs will begin to react unfavourably on the balance of foreign trade, so that the effort to increase the latter will have overreached and defeated itself.

Paraphrasing: If unemployment falls below the NAIRU, rising wages will create inflation. Rising prices will make domestic products less competitive on world markets, and will tend to push the balance of trade toward deficit.

In other words, trade deficits may be caused by high domestic costs.

You can accept this conclusion, or reject it. I accept it.

If you accept it, you can accept or reject the view that the rising wage is the only cause of high domestic costs. I reject it.

If you reject the view that the rising wage is the only cause of high domestic costs and the resulting trade imbalance, then you are free to consider other explanations.

In my view, the cost of a large and growing financial sector is the prime mover that raised domestic costs in the post-WWII period.


Your President thinks the trade imbalance is best reduced by tariffs on imports.

I think the trade imbalance would be best reduced by adding cash to the economy while reducing policy incentives to borrow and, at the same time, implementing policy incentives to repay debt. By driving the cost of finance out of products, we can reduce costs and make our products competitive on world markets again.