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Dobbs on Deficits

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In his book Exporting America [2], Lou Dobbs [3] writes

Our trade deficits and budget deficits are soaring, together amounting to a trillion dollars a year [p. 30].

Dobbs adds the trade-deficit number to the budget-deficit number – and indeed, the sum of these two numbers is huge. We could generate an even larger number by adding to the sum of the trade deficit and the budget deficit the total wages paid to Americans annually, the total number of pennies in circulation, the total number of points scored in the 1990s by all teams in the National Basketball Association, and the total number of gallons of water that spilled over Niagra Falls since 1776.

Meaningless sum. But it is big. Big and meaningless.

The ‘trade deficit’ is a deficit in the current-account [4]. When America has a trade deficit, nothing more ominous is happening than the fact that Americans are importing more goods and services (in value terms) than Americans are exporting. Foreigners earning dollars by selling goods and services to Americans are investing some of their dollars in dollar-denominated assets – mostly stocks, bonds, real-estate, and cash.

Suppose a Dutch company had spent $10 million annually, for each of the past several years, on purchases of Florida oranges. This year this company buys no oranges and instead buys $10 million worth of Dallas real estate. If there are no other changes in the pattern of trade, America’s current-account deficit will rise by $10 million. Arithmetically this $10M can be added to the dollar value of the debt that Uncle Sam ran up this year, but this sum is meaningless.

The value of foreign ownership of real estate has nothing in common with Uncle Sam’s debt to make summing these two figures meaningful.

So why does Dobbs think that this sum is meaningful? Answer: he mistakenly equates the current-account deficit with debt. It’s not debt [5].

The current-account deficit can become debt. That is, dollars that foreigners earn by selling their wares to Americans can be loaned to Americans, rather than spent on real estate or stocks, or held as cash reserves. Creation of debt owed by Americans to foreigners is what happens when foreigners buy bonds issued by private firms such as General Electric and Con Ed, and by government (including, of course, Uncle Sam).

But even in this situation it makes no sense to add the value of the trade deficit to that of the budget deficit.

Consider an extreme case. Suppose that all of the $600 billion of America’s current-account deficit is spent by foreigners on bonds issued by Uncle Sam. In this case, all of the current-account deficit has become debt – debt owed by American taxpayers to foreigners. Further suppose that Uncle Sam’s budget deficit is $600 billion (and is financed exclusively with debt and not with money creation). That is, in this hypothetical case, the entire budget deficit happens to be financed by foreign creditors.

In this hypothetical, adding the $600 billion current-account-deficit figure to the $600 billion budget-deficit figure is to double count. It would be like adding to the amount that I owe my mortgage holder the value of the account receivable that my mortgage adds to my mortgage-holder’s books. Because much, although hardly all, of the U.S. current-account deficit has become foreign holdings of debt issued by Uncle Sam, much of the trillion-dollar figure waved so ominously by Dobbs is a double-count — a meaningless double-count.


There’s a positive correlation between someone’s vigor in protesting international trade and that person’s ignorance of definitions, facts, history, and analyses.