« The Toll of Economic Ignorance | Main | Who is We?» Don Boudreaux
December 18, 2005
A Deficit of Understanding
Don Boudreaux
Earlier this week we heard the same moaning and groaning that we always hear when the U.S. "trade deficit" increases -- and the same misinformed statements that equate a higher trade deficit with greater American indebtedness.
In fact, a trade deficit is not synonymous with debt.
And as I'll never tire of saying (as long as uninformed people never tire of giving me occasion to say), there is nothing inherently wrong or dangerous about a trade deficit.
Here's a letter that I sent recently to CBS News on the day at the latest trade-deficit figures were released:
Dear Editor:
On today's noontime CBS News radio broadcast, Christopher Glenn misleadingly described the U.S. trade deficit as "red ink" (Dec. 14). In fact, the trade deficit is simply evidence of foreigners investing in America rather than buying U.S.-made goods and services. Only insofar as these investments take the form of loans to Americans does the trade deficit become red ink. All other modes of foreign investment, such as building businesses in the U.S., increase America's trade deficit without spilling red ink.
Sincerely,
Donald J. Boudreaux
My friend Jack Wenders (Emeritus Professor of Economics at the University of Idaho) makes the point more vividly. He writes, in an e-mail to me:
If China buys lumber, concrete, steel, furniture, etc. from the US, it's considered great. But if China buys exactly the same material embedded in a building within the US, it's considered bad. Go figure.
Go figure indeed. I sincerely wish that no national trade statistics were gathered. People would then be a tad less likely to sink into nationalistic mindlessness when thinking about and discussing trade issues.
Posted by Don Boudreaux in Myths and Fallacies, Trade | Permalink
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Comments
While its true that the Trade Deficit is not synonymous with debt-- it is hardly a benign issue.
While it may not involve indebtedness, the obvious parallels are to spending more than you earn. In the case of the US, we now consume much more than we produce. Indeed, the U.S. "trade deficit" is now approaching 7% of GDP.
The implication of living beyond ones means may ultimately result in arbitraging away some of our standard of living . . .
Posted by: Barry Ritholtz | Dec 18, 2005 11:14:58 PM
The concept "we now consume much more than we produce" is a silly way of looking at things. It implies that U.S. wealth must decrease, when infact U.S wealth increases continuously. Some of those imports are actually helping to create U.S. wealth.
The trade deficit is 7% of GDP, meaning that the US produces well over 10 times what we consume but do not produce.
Moreover, why do foreigners invest the money to finance the trade deficit? Because they expect BETTER PERFORMANCE from investments in the U.S. than in their home countries. So the trade deficit is actually a global vote of condifence in U.S. future economic growth.
What is actual debt is Federal government debt. No excuses there.
Posted by: Mr. Econotarian | Dec 19, 2005 1:34:42 AM
"If China buys lumber, concrete, steel, furniture, etc. from the US, it's considered great. But if China buys exactly the same material embedded in a building within the US, it's considered bad."
Is foreign investment not an export? Does it count differently depending on whether you calculate national income using GNP or GDP?
Posted by: Mark | Dec 19, 2005 5:41:47 AM
Foreign investment is not an export.
The future income from a foreign investment could be an export, but the foreign investment itself is not an export.
The trade deficit is 7% of GDP, meaning that the US produces well over 10 times what we consume but do not produce.
I do not understand this comment, could you expand it.
A trade deficit in and of itself is not a good or a bad thing, but an ever expanding trade deficit can be a very bad thing.
Posted by: spencer | Dec 19, 2005 8:21:53 AM
"What is actual debt is Federal government debt. No excuses there."
Well, except when the 'debt' is in the form of treasuries 'owned' by another branch of the government (see the SS trust fund).
Posted by: Slocum | Dec 19, 2005 8:24:34 AM
--Only insofar as these investments take the form of loans to Americans does the trade deficit become red ink. --
Isn't the point of the worries/complaints that the deficit is indeed financed with debt to Americans? Indirectly lent to Americans, perhaps, through financing federal overspending. So the deficit isn't the problem, merely a symptom.
I worked at a big telco equipment supplier at the peak of the NASDAQ bubble. I watched as the company invested $50mil of venture capital into a startup telco. That telco promptly bought $30mil worth of gear from my company. At the time I thought, "hmmm... this can't be healthy." What I didn't think was, "Sell everything! Now!"
That situation wasn't financed with debt, but it sure feels like it parallels our situation now.
Posted by: mike simonsen | Dec 19, 2005 3:36:13 PM
A trade deficit isn't good or bad. It just IS. It isn't anything in itself; it's merely a difference between two other sums.
The problem comes when journlists -- who most certainly do not possess any understanding of economics and who absolutely cannot think or talk intelligently about these issues -- decide that a deficit must be bad, and speak in terms of "bad news" and "poor performance".
Of course, they *would*: the trade deficit is about the only "bad" economic number they can dredge up in these uncooperative times.
I've heard people incessently fret about these things my whole adult life, but, funny, what I've actually witnessed is a near perfect correlation between deficits and strong economies versus SUPLUSES and CRAPPY econonies (Japan, Germany). Maybe we just need to reverse all the language.
Posted by: Kevin | Dec 19, 2005 9:16:49 PM
"What is actual debt is Federal government debt. No excuses there."
Well, except when the 'debt' is in the form of treasuries 'owned' by another branch of the government (see the SS trust fund).
And what about the T-Bonds/Bills/notes and savings bonds that are held by Americans? In that case, the "American entity" as a whole has a mutally cancelling debt and asset.
The gov't could levy a surtax on holders of the debt, equal to the value of the debt, to retire the debt. What does that ultimately mean? That's where I get vertigo.
Posted by: Kevin | Dec 19, 2005 9:25:16 PM
I agree that it is a good indicator to several issues involving our economy but a trade deficit has to be looked at from all angels one is we have had to import alot more oil and wood this year due to natural disasters.
Posted by: Ashley Bowers | Dec 20, 2005 3:37:50 AM
I happened to watch the Lou Dobbs newscast when this was announced and the graphic on the screen said "Screaming Deficit". After breathlessly recounting the latest figures in terms that seemed to assure the loss of Western Civilization as we know it, they happened to drop this little nugget in: this is the 29th year that the United States has run a trade deficit. It kind of puts the lie to their reportage.
Posted by: Joe Roberts | Dec 20, 2005 4:55:20 PM
thanks!
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Posted by: World business for sale | Jan 19, 2006 7:03:47 AM
A trade deficit 6% of GDP is dangerous. You cannot sugar coat this imbalance. Any nation that imports more than it exports for a period of time will suffer a massive decline in its currency. The dollar shall soon collapse...
Posted by: Ames Tiedeman | Apr 22, 2006 8:10:18 PM
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