MMT and trade deficits

12 Apr, 2019 at 19:45 | Posted in Economics | 4 Comments

Unlike government deficits, which all countries in the world can run simultaneously, a trade deficit for one country necessarily means an equivalent trade surplus for the rest of the world. If there are countries deliberately running trade deficits, then they are forcing others to run trade surpluses. Since on this MMT argument, the trade deficit countries are the winners and the trade surplus countries are the losers, the former are behaving parasitically towards the latter. That should not be allowed if we are trying to achieve a harmonious global economy.

tradeThat is not how MMT advocates … put the argument. Instead they effectively recommend it as a policy that, presumably, all countries should adopt.

In my opinion, this goes against the spirit of the core MMT arguments with which I agree, because those core arguments can be practiced by all countries at once, to the collective benefit of the global economy: unemployment would be lower and output higher (leaving aside the caveats I noted above) if all governments ran deficits.

The same can’t be done with trade deficits, because one country’s deficit impose identical trade surpluses on all others. Since the deficit countries win from this behaviour and the surplus countries lose, this is anti-social behaviour which should be deliberately curtailed.

Steve Keen


  1. Which is a really stupid argument, with definitely no macro efficiency argument that makes any sense beyond Keen’s ideological bias.

    What he fails to state in suggesting ‘curtailment’ is nothing less than some necessity for a fully planned world economy, or a world of materially self sufficient nations. I think both would be a disaster. But, anyway, I can’t think of a greater waste of administrative effort, which is bound to fail miserably.

    Let each country manage and take responsibility for their own real real resources production. And if they have a surplus production in something, readily deliverable as exports, then why not let them decide to do that, and take a few IOUs in return, that may one day return some free real stuff from somewhere else?

    Has it harmed China in some way, or indeed Japan, to be massive trade (money) surplus countries? The notion is pretty absurd I’d say.

    Keen gets even more ridiculous when we also consider the domestic result of his ‘curtailment’ advocacy – of arbitrary balances of something we conjure from thin air, note, fiat money. This makes no more sense than basing fiscal policy on arbitrary balances of money Gov produces at will from thin air.

    His ‘curtailment’ policy must also inevitably mean a higher level of domestic unemployment resulting from his supposed ‘foreign trade’ limits to domestic net spending. How he can claim that is more macro ‘efficient’ than a pure full employment target, based on ‘Functional Finance’ principles is beyond any logic most people would recognise.

    Nor is it clear whether he gives a damn for the lives of the greater number of poor unfortunates he would see jobless, and without a Job Guarantee offer (since he disregards the JG altogether).

    Keen is just a bad macro economist, ultimately, with too much ego. No where near good enough to be proffering Gov policy advice, anywhere.

    • Prof Syll’s editing has done Prof Keen a disservice. Click thru and at least skim Keen’s article. I think you may feel differently about Keen after.

  2. Unfrotunately, people have forgotten the post-WW II consensus of over 3 decades as the neo-classical counter-revolution triumphed and the Washington consensus dominates since the early 1980s. That was the era of “full employment target” now replaced by “inflation target”. The UN Charter (Article 55) recognises full employment as part of universal human rights. Even the IMF charter (Article IV) says, the focus of economic policy should be “orderly economic growth with reasonable price stability taking into account country specific circumstances”. While there is no hint to specific inflation target, orderly economic growth is equated with maximum employment.

    The UN produced its first expert group report, “National and International Measures for Full Employment” in 1949. Aggregate demand was the focus of the report and how to face the international propagation of reductions in aggregate demand—responding, in this regard, to the problems generated by the United States’ first post-war recession. The report started by recalling the UN Charter (Article 55) pledge to achieve full employment as a historic phase in the evolution of the modern conception of the functions and responsibilities of the democratic State.

    Its key policy recommendation was, therefore, that governments ‘should adopt and announce a full employment target’ (para. 141.i) in conformity with these principles. The primacy of full employment was further reflected in the recommendation that a government ‘should announce the nature of the policies which it will adopt in order to maintain the stability of the price level and to combat inflationary tendencies in a manner consistent with the maintenance of its full-employment target’ (para 141.iv).

    The Report included a complex set of domestic measures to achieve this objective, such as active fiscal policies, but also mechanisms to encourage private investment, plan public investment, stimulate consumption, and stabilize commodity prices. Automatic compensatory measures (automatic stabilizers, as they would come to be called), particularly progressive income taxes and social security provisions, were seen as particularly important.

    According to the Report, the object of a full employment policy in its international aspects is “to create conditions under which any particular country will so behave in its international economic relations as not to prevent other countries from maintaining the stability and prosperity of their economies”. To the extent that national action alone cannot ensure this, it was recommended that concerted international measures should be taken. The report suggested measures for bringing about a new equilibrium in world trade, and for the stabilization of the flow of international trade as well as of international investment for economic development.

    In any case, the Report emphasized country-specific circumstances instead of a ‘one-size-fits-all’ approach in determining national policies. It also proposed a set of international measures: an ECOSOC programme to eliminate structural disequilibrium in international trade; stable flows of international investment from industrialized to underdeveloped areas of the world, particularly through a new International Bank for Reconstruction and Development (World Bank) credit line for general development purposes; and a new automatic IMF facility to finance current account deficits.

    We don’t have to re-invent the wheel. You can download the report from
    A follow-up report, “Measures for International Stability” (1951) can be downloaded from

    The UN expert group was composed of Prof. John Maurice Clark (Columbia University), Prof. Arthur Smithies (Harvard University), Nicholas Kaldor (Fellow of King’s College, Cambridge), Pierre Uri (Economic and Financial Adviser to the Commissariat general du Plan, Paris) and Ronald Walker (Economic Adviser to the Australian Department of External Affairs). Ronald Walker acted as Chairman.

  3. E.g. Germany, China and not least Sweden is hardly “forced” to run trade surplus. One can understand Chinas strategy with this, but what are Germany and Sweden’s plan and strategy to force their citizens to consume as little import as possible relative their export?

    Bill Mitchell had some interesting blogposts last year on MMT and trade.
    Australia have had on average 4% current account deficit since the 70s. Still a free country that aren’t “owned” by foreigners and in big crisis.
    Last time Sweden had negative export-import minus in GDP was 1981, almost 1%. And a couple of times in the 70s, all caused by booming oil prices. This caused panics in the political Sweden and the “expensive” subjects had to be punished. CC deficit in Sweden’s 90s crisis wasn’t on trade.

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