Err, Really?

I sorta get Kaletsky here:

The bad news is that the $400 billion worth of extra economic activity gained by US businesses and workers will be exactly matched by losses in Europe, Asia and the rest of the world.

And I sorta don\’t. He\’s saying that a switching from EU production to US consumption hurts the EU producers as much as it aids the US producers. OK. But what about the consumers? Isn\’t it a basic point of trade economics that the benefits to them have to be taken into account?

2 comments on “Err, Really?

  1. I am not even convinced by his claim that the losses in one country will exactly match the gains in all the others. Surely on average people’s consumption will shift – if people would be willing to pay more for slighly less Coke for instance while being less willing to consume quite as much for a Sony Playstation as you might think for instance?

    As for the consumers, if he is right and consumption balances out, surely they do not matter as consumption will remain, on average, the same (which I still do not believe). Where is the net benefit or loss to us?

    He may have a more interesting point if consumption and/or production in places which can least afford it are hit or benefit. If Europe suffers, then I think the Third World gains because the rest of the world is less protectionist for instance.

  2. The argument, presumably, is that the weakening US Dollar will lead Eurozone consumers to substitute lower cost US made products and services for relatively more expensive Eurozone made products and services and for US consumers to buy home products and services instead of imports. But that (together with more saving in the US) is precisely what is required to reduce the external imbalance of the US economy where the deficit on the current account of the US balance of payments is presently running at c. 5% of GDP.

    Of course, the expenditure switching will be mildly deflationary in the Eurozone but then a current policy concern of the European Central Bank (ECB) is about inflationary tendencies in the Eurozone. The mildly deflationary effect of the weakening Dollar means the ECB will be able to achieve its policy target of maintaining the average inflation rate in the Eurozone below but close to 2% by setting interest rates rather lower than would otherwise be necessary. A weaker Dollar will also help to reduce upward pressures on Eurozone costs as oil and many commodity prices are regularly priced in terms of US Dollars.

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