Say Anything Blog

By Steven M. Warshawsky, in The American Thinker:

Thinking About the Trade Deficit

George Mason University economics professor Russell Roberts, who runs the CafeHayek blog along with his colleague Don Boudreaux, has put together a short but sophisticated presentation about the trade deficit and its effect on domestic employment.  Roberts seeks to rebut the common claim that the trade deficit leads to a loss of American jobs (recall Ross Perot’s “gaint sucking sound” comment).  Roberts’ analysis is convincing.  I won’t repeat his analysis here, but I would like to make a few related comments.

As any reader of CafeHayek knows, the “trade deficit” does not represent a draining of wealth from the United States economy.  On the contrary, our purchases of goods, services, and raw materials from overseas suppliers adds to our overall level of prosperity.  Indeed, if they didn’t, we wouldn’t make the purchases.  After all, no one forces millions of Americans to buy Toyotas, for example.  They do so because they prefer the price-quality mix of Toyota automobiles to those offered by other manufacturers.

[...]

According to statistics from the federal Bureau of Economic Analysis (see here), Gross Domestic Product in 1976 was $4.54 trillion (in 2000 dollars), whereas in 2005 it was $11.05 trillion.  Spending on personal consumption saw a similar jump between 1976 and 2005, from $3.04 trillion to $7.84 trillion.  Adjusted by population, per capita GDP in 1976 was $20,825, and in 2005 it was $37,080, nearly twice as much.

[...]

In fact, our “trade deficits” are one of the sources of our prosperity.  Not only do they reflect the availability of cheaper and/or more desirable foreign products, which increases the quantity and quality of American consumption, but the competition from foreign firms (again, think Japanese auto makers) has spurred developments and improvements in our own firms beneficial to consumers. 

Furthermore, the term “trade deficit” itself is misleading, because it usually refers to the merchandise trade deficit (i.e., trade in such things as autos, steel, and textiles).  As Roberts points out, when capital accounts and services are added to the mix, our imports and our exports are almost perfectly in balance, as economic theory postulates.

So much for the notion that trade deficits undermine domestic prosperity.

But what about the idea that they undermine national security?...Read the whole thing.

As the late, great Milt Friedman had to say on the subject: “I have a trade deficit with my greengrocer.”
It’s high time we dispel the mythology surrounding the so-called “trade deficit”.  Of course, anyone who knows double-entry bookkeeping could tell you that it just doesn’t exist.  Oh well.