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Are U.S. Trade Deficits Evidence of Excessive U.S. Consumer Indebtedness?

Here’s a letter to the Wall Street Journal:

imagesYukon Huang helpfully corrects several myths about U.S.-China trade (“China Trade Realities for the Trump Administration,” Nov. 16).  Unfortunately, in doing so he perpetuates a myth about the U.S. trade deficit when he writes that much of the increase in the U.S. trade deficit was caused by “households consuming beyond their means … over the past several decades.”

While a rising U.S. trade deficit might reflect excessive consumption by Americans, it might on the contrary reflect – and I believe typically does reflect – the relative attractiveness of the American business climate.  This more sanguine interpretation of the U.S. trade deficit is bolstered by the fact that there is no credible evidence that American households have consumed beyond their means over the past several decades.  My George Mason University colleague Todd Zywicki has exhaustively documented that “the debt-service ratio of household consumer debt has not risen over time.  In fact the debt-service ratio is actually lower today than in 1980.”  Indeed, he finds that “the real surge in consumer debt occurred in the post-War period as consumers migrated from city apartments with hand-me-down furniture to the suburbs and adopted the accessories of the mid-20th Century American lifestyle.”  These post-War years were typically ones of U.S. trade surpluses.  Over the past four decades, while the U.S. has consistently run trade deficits, consumer indebtedness, relative to ability to pay, has not grown.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030


See also Todd’s 2014 book (with Thomas Durkin, Gregory Elliehausen, and Michael Staten), Consumer Credit and the American Economy.