Confusion over the so-called ‘trade deficit’ is ever-lasting. See, for example, David Ignatius in today’s Washington Post, and also this editorial in today’s USA Today.
Ignatius’s fear is stoked by Warren Buffett’s latest letter to his Berkshire Hathaway shareholders – a letter that I blogged on recently.
A handful of people have since e-mailed me with accusations that I don’t understand Mr. Buffett. Perhaps this is so. (I’ve been wrong too many times for me ever to stop entertaining the possibility that my suppositions and ideas might be riddled with flaws.)
But having re-read the part of Buffett’s letter dealing with the trade deficit (more accurately, the current-account deficit), I still believe that I’m right and he’s wrong. If my paying my Virginia neighbor $10 to mow my lawn creates neither debt nor other economic problems, how would my paying a Canadian $10US to mow my lawn create debt or other economic problems? What conceivable economic difference can the latitude or longitude of the seller’s residence make?
One correspondent agreed that I’m correct for cash transactions (such as in the example in my earlier post). But this correspondent noted correctly that many transactions are done on credit. In such transactions the increase in the U.S. current-account deficit might indeed also increase the indebtedness of U.S. citizens. But even then there’s nothing necessarily to worry about.
Suppose my neighbor in Virginia accepts the following offer that I put to him: "Ed, if you mow my lawn today, I’ll pay you $10 on January 1, 2006." Ed agrees and mows my lawn today. And for the rest of 2005 I’m indebted to him to the tune of $10.
This indebtedness might or might not be good for me. Was it a foolish transaction? Maybe; maybe not. No one apart from me and my wife can judge whether or not the costs of my incurring this debt to Ed exceed or fall short of the benefits we receive from having our lawn mowed today in exchange for becoming indebted to our neighbor. (Ditto for Ed.)
Either way, Warren Buffett presumably doesn’t wring his hands worryingly over this debt. He’s surely intelligent enough to realize that there’s nothing inherently wrong with this debt or with the transaction that created it.
But now suppose that I’m an American living just on the U.S. side of the U.S.-Canada border. My next-door neighbor Ed is a Canadian living just on the Canadian side of the U.S.-Canada border. Ed mows my lawn today in exchange for my promise to pay him on January 1, 2006 ten U.S. dollars.
In this case, not only does the U.S. current-account deficit for 2005 rise by $10, so, too, does Americans’ indebtedness to foreigners rise by $10 because of this neighborly transaction.
But is there even a whiff of relevant economic difference between this transaction when it takes place between two Americans and this transaction when it takes place between an American and a Canadian?
Perhaps there is a difference – a difference seen by Warren Buffett, David Ignatius, Paul Craig Roberts, Pat Buchanan, Lou Dobbs, and others, but missed by me. Please – and I’m not being facetious – if you detect an economically relevant difference between these two transactions, write to me and enlighten me.
But until I’m shown such a difference, or discover the difference on my own, I cannot but conclude that Buffett’s concerns about the trade deficit are misplaced.
