Dear Thinker:

As the following WSJ editorial explains, a trade deficit is not ipso
facto bad. It's only seen as bad because the word "deficit" has a
negative connotation. If the word "benefit" were used in lieu of the
word "deficit," there would be no negative connotation about trade
imbalances, which indeed can be very beneficial to Americans.

This is so counterintuitive that it is very difficult to grasp. Case in
point: There were 365 comments in response to the editorial, and in
reading a sampling of the responses, I saw that about half of the
respondents still couldn't accept the point. Assuming that readers of
the WSJ are more educated about economics than, let's say, readers of
USA Today or viewers of CNN, then there is no hope that the majority of
Americans will ever accept that trade deficits are not ipso facto bad.
As a result, they will embrace harmful trade policies and elect
anti-trade politicians.

It's also true that the benefits of a trade "deficit" accrue to the fact
that the U.S. dollar is strong, that the dollar is the world's reserve
currency, and that the U.S. is seen as a good place for foreigners to
invest the dollars that they get in return for selling us stuff. That
could change with the wrong monetary policies, the wrong trade policies,
or if the U.S. lost its economic prowess through internal social,
political, and fiscal rot.

Regards,
Mencken's Ghost


How to Think About the Trade Deficit


Peter Navarro is wrong about the U.S. balance of payments.



The Wall Street Journal, Updated March 10, 2017 12:12 p.m. ET

President Trump's chief trade adviser, Peter Navarro, recently argued on
these pages that trade deficits are so economically harmful that U.S.
policy should seek to eliminate them. This bad idea has been gaining
adherents, so perhaps it's time for a tutorial on trade and the wealth
of nations.

Americans may be alarmed when they hear that the U.S. buys more from the
rest of the world than it sells because they can't run a household
deficit. But national accounting isn't the same as household accounting,
and a trade deficit isn't a debt that must be repaid. It is often a sign
of economic prosperity.

Start by keeping in mind the basic formula embedded into the national
balance of payments: A trade deficit equals a capital surplus. The trade
deficit is part of the "current account" and it means that Americans are
importing more merchandise and services than they export. On the other
side of the ledger is the "capital account," which records capital
inflows. When the U.S. has a current-account deficit it has to have a
capital-account surplus of the same amount.



This is not by choice or speculation. It happens by definition because
for every buyer there must be a seller, as these columns have written
for 125 years. The national payments must "balance."

The capital-account surplus arises, in part, because in selling oil,
TVs, jewelry, cars, steel and clothing to Americans, foreigners get
dollars in return. Mexicans and Chinese could wallpaper their dining
rooms with Georges and Benjamins. But it is more common to put the money
in dollar-denominated assets like real estate, stocks, debt or dollar
bank accounts.

Eliminating a current-account deficit is not as easy as it sounds
because it is often the byproduct of a healthy economy. It means the
purchasing power of the currency is strong, and consumers are rich and
optimistic enough to spend. The opposite is also true: Countries in
recession after a devaluation tend to have trade surpluses as the
unemployed are forced to tighten their belts and even those working
cannot afford imports.

If trade surpluses were a sign of success, the 1930s might have been
different in the U.S. As George Mason economist Don Boudreaux points
out <http://cafehayek.com/2006/12/if_trade_surplu.html>on his
Cafe Hayek blog, "For only 18 of the 120 months of that dreary decade
did the United States run a trade deficit. For each of the remaining 102
months of the decade of the 1930s the U.S. ran a trade surplus."

On the other hand, the U.S. ran a trade deficit in nearly every year of
its rapidly growing first century and all through the prosperous 1980s
and 1990s.

Mr. Navarro understands this enough that he also warns about the capital
surplus—to wit, that much of it goes to finance an investment shortfall
in the U.S., especially government borrowing. Yet Americans are making
millions of individual decisions about how much to save, and foreigners
are not forcing Washington to borrow. If government weren't gobbling up
that capital, more of it would go into the private economy.

Yet much of this foreign capital does go to finance mortgages and
consumer loans, which help the U.S. standard of living. And much is
invested in land, plants and equipment and financial assets, none of
which needs to be repaid and all of which can make the U.S. economy and
exports more globally competitive. If Mr. Trump delivers on his promise
to cut taxes, investing in the U.S. will be even more attractive.

The "economic nationalists" fret about foreigners buying U.S. property,
but that hardly jeopardizes U.S. sovereignty. The U.S. capital stock
isn't a fixed amount and adding to what is here doesn't diminish U.S.
ownership. It does, however, allow current owners to cash out of their
property and put that money to other uses. The owner of a
bricks-and-mortar business might sell and invest in a tech start-up.
Restricting foreign ownership would reduce demand to hold U.S. assets,
hardly a way to make America great again.


***

Perhaps the best way to think about the U.S. trade deficit is not to
think about it. Way back in 1978 a group of economic eminences tasked
with looking at the U.S. balance of payments noted that "the words
'surplus' and 'deficit' should be avoided insofar as possible." They
added that "these words are frequently taken to mean that the
developments are 'good' or 'bad' respectively," but "that interpretation
is often incorrect."

An earlier Review Committee for Balance of Payments Statistics in 1965
warned that "No single number can adequately describe the international
position of the United States during any given period." Perhaps it's
time for another such committee to clarify this debate.

Short of that, the Trump Administration should focus on policies that
restore the economy to its 3% annual growth historical trend. If growth
is fast enough, and incomes are rising, no one will care about the trade
deficit.