Crazed Economic Thought of the Day

A trade deficit increases the workers\’ wages.

No, no, hold on. We know that an increase in the capital stock raises wages…more machines are bought, productivity rises, capitalists compete for the labour to man those machines, wages rise.

A trade deficit means a capital account surplus: it must do, it\’s an accounting identity.

So a trade deficit means an increase in the capital stock, which thus drives up wages.

What have I missed?

4 comments on “Crazed Economic Thought of the Day

  1. so a trade surplus drives down wages??
    or is a sign that wages are low and are gonna get higher
    I assume a trade deficit does the opposite

  2. There was/is a lot of debate about the impact of the UK’s huge current account surpluses and overseas investment on working-class wages in the late 19th and 20th century, conclusion it was probably negative.

    But that and the opposide depends surely on how the current account imbalance is being funded, and the US position is primarily through sales of debt.

  3. “So a trade deficit means an increase in the capital stock, which thus drives up wages” ….

    trivially yes, the people of that economy have enjoyed the consumption of the “surplus” imports over and above what they have produced, so wages have indeed risen.

    Set against this easy gain is the need to repay the foreigners at some point in the future by going without that which has been made.

    The exchange rate will also have fallen, making imports more expensive until the “easy gain” is put right.

    There are more sustainable, sensible, stable and virtuous ways of increasing wages.

    Or have I got the wrong end of the stick?

  4. “more machines are bought, productivity rises, capitalists compete for the labour to man those machines, wages rise” ….

    hmmmn, “more machines are bought, productivity rises” – yes indeed,

    but “capitalists compete for the labour to” –

    Raising productivity is likely to reduce demand for workers in the short term and have no effect in the long term, employment levels are determined by macroeconomic factors in the long term (investment and consumer confidence) – a low productivity economy may have high employment levels and a high productivity economy have low employment levels.

    In practice the benefits of higher productivity tend to come through as lower prices enjoyed by all rather than higher wages for some (more highly capitalised) workers.

    The production of the plant invested in may boost demand for labour, but unless this boost is smaller than the reduction in demand for labour in the investing sector then the investment may not be worthwhile – assuming output of the investing sector is approximately unchanged, which is likely in the short term as capital seeks to take the profit from labour savings for itself.

    In the long run prices fall and output rises and the employment effects of a given investment are now long lost among whatever else has happened in the economy.

    I may be talking bollox.

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