The Trade Deficit and the Budget Deficit

by Don Boudreaux on November 3, 2016

in Balance of Payments, Budget Issues, Debt and Deficits, Myths and Fallacies, Trade

In a comment on my recent letter to Peter Thiel – in which I point out his mistaken understanding of trade deficit – GMU Econ alum Joy Buchanan sensibly asks

I did not read the context. Could he [Thiel] be concerned about our level of debt, as opposed to who our debtors are? Our government is irresponsibly spending money on treats for voters that we cannot actually afford.

The context and content of Thiel’s remarks (which can be found here) indicate nothing but a full-throated Trumpian misunderstanding of trade, trade deficits, and (remarkably) basic rationales for investing.  But because a U.S. trade deficit might indeed be a symptom of irresponsible fiscal policy practiced by Uncle Sam, let’s grant for the sake of argument that such a concern with fiscal irresponsibility is really what underlies Thiel’s complaint.  If so – that is, if Thiel’s real concern is not about trade patterns as such but, rather, with Uncle Sam’s fiscal irresponsibility – then to complain about that irresponsibility by focusing on and griping about one of its symptoms (namely, the large U.S. trade deficit) is akin to complaining about excessive drunkenness of the population by focusing on and complaining about the large revenues earned by brewers and distillers in the south (but not about the the large revenues earned by brewers and distillers elsewhere in the country).

If the population really does drink excessively, clearly the large revenues earned by southern brewers and distillers are a symptom of this problem and not a cause of it.  And to attempt to ‘solve’ the problem of excessive drunkenness by reducing the revenues earned by southern brewers and distillers would be a stupidly mistaken approach.


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