What is in this article?:
- Do Trade Deficits Matter?
- The Other Side of the Trade Deficit Debate
- Why Doesn't the Currency Market Correct Trade Imbalances?
Economists disagree whether the U.S. trade deficit is good or bad for the economy. Michael Collins considers the debate, offers his opinion, and suggests a solution.
The United States has been piling up current-account trade deficits for about 40 years, and it now totals in the trillions (no not billions) of dollars. Economists disagree on whether the deficit represents good or bad news for the nation's economy. So, my question is: Does it really matter whether we have this huge trade deficit, or is it simply an accounting convention that we can ignore?
In my opinion, the answer to this question depends on who you listen to — and who are the winners and losers when the country has a trade deficit.
The idea that trade deficits might be acceptable harkens back to the early days of free-market capitalism and the Chicago School of Economics. Milton Friedman, the original disciple of the free-market school maintained that “a sustained trade deficit is the best possible outcome….we get physical goods like cars, flash memory, oil, computers, toys and all sorts of other goods for cheaply produced paper known as currency.”
Some economists assert that employment is better when there is a trade deficit. The following graph is a historical depiction showing unemployment as related to trade deficits. The author specifically cites the great depression as a time when unemployment was at its worst and the country ran surpluses every year.
Here are some other examples:
- Mark J. Perry, a scholar at the American Enterprise Institute and professor of economics and finance at the University of Michigan's Flint campus, argued, in a blog post last year, that "Imports and trade deficits do not ‘hinder’ economic growth and are not a ‘setback’ for the U.S. economy." In the post, he asserts that every voluntary market transaction creates wealth because it benefits both the buyer and the seller. He concludes: “An increase in imports usually means that American consumers are better off (not worse off), U.S. businesses are more competitive (not less competitive), which translates into higher (not lower) standard of living and an increase (not decrease) in the number of jobs.”
- Perry's colleague at the AEI, Derek Scissors, also asserts that trade deficits do not cost America jobs. He suggest that since America has an $83 trillion household net worth we can afford to buy all of the imports that American consumers want, declaring, “Forcing down the trade deficit would mean unhappy consumers, a worse economy, and fewer jobs.”
- The Cato Institute, a conservative think tank in Washington D.C., also puts a positive spin on trade deficits. Daniel Griswold, quoted in a New York Times article says, “The trade deficit is not a problem to be fixed, but a symbol of America’s global economic strength, a Good Housekeeping seal of approval from the World’s investors.”
- The Wall Street Journal editorial page has a similar view of trade deficits. In a recent opinion piece, Trade Deficit Myths, it declares that "running a trade deficit isn’t necessarily bad. In the U.S. it can signal economic health: that American consumers and businesses are saving money buying cheaper foreign goods, and that the U.S. economy is attracting overseas investment, which drives productivity and demand for domestic and imported goods.” They tend to label anybody who is against trade deficits as being protectionist.
- The Republican candidate for President, Donald Trump, has been very outspoken about our trade with China and why it is bad for the U.S. He said, "China is like having a business that continues to lose money every year. Who would do business like that?” The American Enterprise Institute followed up with post, penned by Perry, with the title: “Donald Trump Flunks ECON 101...”
Are these valid arguments?
It is easy to get confused on this subject when it is presented as trade flows, savings rates, productivity growth, and manufacturing output. So I will instead present some common sense questions:
- Is the trade deficit simply an accounting convention that we will never have to pay back?
- Isn’t it dangerous to have our trading partners owning so much of our securities (what if they decide to cash them in)?
- What if China or Japan gets mad at us and don’t want to finance the trade deficit anymore?
- What if the dollar should crash like it has for 21 countries in the last 25 years?
- Why isn’t there a plan suggested by either political party to reduce the trade deficit?
- Who are the winners and losers of trade deficits?
- The trade deficit since 1971 has added up to over $10,096,097,000,000 as of Dec. 2014, according to the U.S. International Trade in Goods and Services -Table 1. How long can we sustain this?
I think the best analogy for the trade deficit is the consumer who piles up $10,000 of credit card debt and pays $10 a month on the balance. For the short term, he is happy purchasing anything he wants, but the balance is growing with fees and interest, and he may never be able to pay it back.