America is running a trade deficit of nearly $100 billion a month. This is the consequence of “boost aggregate demand to avert a serious downturn” policy long advocated by economists like Paul Krugman. This is a good illustration of the bankruptcy of academic macro economics. Inflating aggregate demand (“priming the pump”) does not create new capability.
Inflation rewards existing capability, and it also degrades that capability.(5) It does so by creating a short term “make hay while the sun shines” mindset. We can clearly see that mindset right now. By running such “inflate demand” policy repeatedly for the past 20 years, America has eroded its real capability across a wide range of manufacturing industries and hence the trillion dollar trade deficit. The semiconductor industry is the latest one where this is seen.
Macro economists like Krugman point to GDP and jobs in America to justify inflating demand. When other nations supply a wide range of manufactured goods nearly free (i.e, taking dollar debt as payment), all that is needed are “token distribution jobs” to claim those goods. America has created plenty of such token distribution jobs, broadly categorized as “services” jobs even as manufacturing jobs and real industrial capability have eroded. This is the direct consequence of the very policies academic macro economists have long advocated.
India must chart a different course from America. The only path to sustainable prosperity is to build real capability across a broad segment of industries and run a balanced external trade, with short term trade deficits only to acquire critical know how and machinery.