The Nationalities of Spenders and Savers Are Irrelevant

by Don Boudreaux on January 6, 2017

in Balance of Payments, Myths and Fallacies, Trade

To complain about an American current-account (“trade”) deficit makes no more sense than to complain about Americans saving and investing too much.

In brief, America’s trade deficit rises – or is made higher than it would otherwise be – whenever foreigners use their dollars for purposes other than buying American exports.  Those other uses are called “investment.”  Dollars that foreigners do not spend to buy American exports are dollars that are invested by foreigners in the U.S. or in dollar-denominated assets.  A dollar not used by a foreigner to buy American exports might be used instead to buy assets in America – assets such as real estate in North Carolina, ownership (full or partial) of a firm in Texas, or intellectual property from an American.  Or that dollar might be lent to an American – such as when foreigners lend money to Uncle Sam by purchasing U.S. treasuries.  Or that dollar might itself be the investment: perhaps its foreign owner believes that its value will rise relative to other currencies, or perhaps that dollar’s foreign owner chooses to use it as a medium of exchange (such as how Panamanians use dollars).

Now you might have the common man-in-the-street belief that any fall in consumer spending harms the economy.  If so, then a rising American trade deficit is, for you, indeed a problem.  It is a problem because a rising trade deficit means falling demand during the current period for existing, domestically produced consumer goods and services (compared to what that demand would be were foreigners not to reduce their demands for American exports).  But if you have this (mistaken) belief about the importance of consumer spending during the current period, you should at least apply it consistently: you should gripe and moan and fret no less when Americans reduce their current demands for consumer goods and services in order to save and invest more.

That is, if an American trade deficit is a problem because it reflects the fact that some people with dollars do not spend all of their dollars buying current American outputs, then it’s equally a problem if your neighbor in Newark or your sister in Seattle does not spend all of his or her dollars buying current American outputs.  If not spending, as a consumer, all of one’s income during the current period on current-period outputs of goods and services is a problem, it matters not who is failing to spend adequately.  A dollar not spent for consumption, but instead invested, by an American causes just as much of a problem as does a dollar not spent for consumption, but instead invested, by a non-American.

If, instead, you understand correctly that saving and investing are generally good for the economy – if instead you understand correctly that using some resources today, not to satisfy today’s consumption desires, but rather to construct capital that will be used to increase output tomorrow – then you rightly applaud your fellow Americans for saving and investing.  It’s good for the economy.  Saving and investment are utterly necessary if the economy is to grow.  Yet if you applaud your neighbor in Newark or your sister in Seattle for using some of his or her dollar income, not to consume today, but instead to invest in the American economy, you should just as loudly applaud people in Norway or Singapore who use some of their dollar incomes, not to buy American exports, but instead to invest in the American economy.

A follow-up post is on the way….


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