Two Cheers for the Post Reporter, One for Harvard Economist

by Russ Roberts on February 12, 2006

in Trade

Two cheers for the Washington Post’s coverage of the record trade deficit by Paul Blustein.  It opens with mostly the facts:

The U.S. trade deficit soared to a record in 2005 for the fourth
year in a row, according to a government report released yesterday that
provided a reminder of the dangers hovering over a generally robust
economy.

The United States imported $725.8 billion more in goods
and services than it exported last year, the Commerce Department said.
That is up 17.5 percent from last year, and it is an all-time high not
only in dollar terms but as a proportion of the economy; the figure is
equal to 5.8 percent of gross domestic product.

For December alone, the trade gap increased to $65.7 billion from a
revised $64.7 billion in November. That is the third-highest monthly
deficit ever.

Pretty straightforward other than the "dangers hovering" remark.  Now for the analysis.  Here, the Post is quite cheerful:

In some respects, the trade deficit reflects the strength of the
U.S. economy, at least relative to other major trading partners.

Because
U.S. economic growth has been rapid in recent years, American consumers
are snapping up foreign goods of all kinds — autos, electronics and
clothing being some of the biggest categories. At the same time,
relatively sluggish growth in economies such as the European Union and
Japan has dampened demand for goods made in the United States. Thus
even though U.S. exports rose 10.4 percent last year to $1.27 trillion,
imports surged 12.9 percent to nearly $2 trillion.

But enough cheer.  Let’s let the worriers have their say, too:

But the gap worries many economists because it means the United States must borrow heavily from overseas.

As Don has pointed out many times, this simply isn’t true.  A trade deficit doesn’t mean borrowing.  It means that foreigners are buying American assets.  Some of those assets are debt.  And some are not.  See if you can find the key word in what follows that allows Blustein to mislead the reader without being dishonest:

The dollars that Americans spend on imports are often invested by
foreigners in the bonds of the U.S. Treasury and mortgage agencies such
as Fannie Mae and Freddie Mac, so the more the trade deficit widens and
the longer it persists, the greater U.S. indebtedness becomes. That is
why some analysts fret about a scenario in which foreigners would sell
off U.S. securities en masse, causing interest rates to soar and the
global economy to fall into recession.

The key word is "often."  That word contradicts the word "must" in the sentence just before it.  Oh, well.  This worrisome scenario gets invoked every month, the scenario where foreigners sell off U.S. securities.  Now why would they do that?  They bought those assets because they thought they were a useful place to park their money.  They didn’t do it as a favor.  So why would they suddenly decide to sell off those assets?  And even if they did, wouldn’t it be hard to sell them off "en masse?"  Wouldn’t that make it harder to get your money out at decent terms?  Wouldn’t the price of those assets fall?

After describing the worriers’ scenario, Blustein admits that it hasn’t happened yet:

Nothing of the sort has materialized so far. On the contrary, overseas
demand for U.S. investments last year was powerful enough to drive up
the dollar against most major currencies.

Hmm.  So not only has the scenario yet to materialize (30 years of trade deficits in a row and counting, but not one bad scenario so far), but in fact, the evidence seems to point in the other direction.   So I give two cheers to Paul Blustein.  He loses the third one for that "must" and "often" fudge. 

Even better, Blustein gets Jeffery Frankel of Harvard to admit that the worriers might be wrong:

"It’s true that many of us have been concerned that foreigners will
grow tired of financing these ever larger trade deficits, and so far
there hasn’t been much sign of that," said Jeffrey A. Frankel, a
Harvard University economist who served on President Bill Clinton’s
Council of Economic Advisers.

But then Frankel goes on (and alas, Blustein quotes him):

"But there are plenty of reasons to be concerned," Frankel said. "We
know [the trade deficit] means we’re borrowing against the future, and
that our children will have lower standards of living than they would
otherwise. And just because a ‘hard landing’ hasn’t happened yet
doesn’t mean it won’t."

The brackets in the quote suggest some ambiguity.  But if Frankel was really talking about the trade deficit he ought to be ashamed of himself.  He knows that it doesn’t mean we’re borrowing against the future.  And he knows that it doesn’t mean our children will have lower standards of living.  Even the qualifying phrase "than they would otherwise" is wrong.  I think what he really meant was the budget deficit.  But even that is silly.  The budget deficit isn’t what burdens our children.  It’s the spending that is or isn’t worthwhile that’s important, not how it’s financed.

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