It’s [the U.S. trade deficit] small. US wealth is about $95 trillion. So we could run a 500 billion trade deficit for 190 years before we sold the country. Except even that’s not true:
The total net worth of U.S. households climbed by $2.3 trillion in the first quarter of 2017, reaching a record $94.8 trillion as the stock market soared and home prices climbed in many parts of the country.
We’ve a $2 trillion rise – and recall this isn’t the wealth of the US, this is just households, without government holdings of anything – in a quarter, or perhaps $8 trillion in a year. We’ll have noted that 8 is larger than 0.5. That is, even with the trade deficit we’re creating wealth faster than foreigners are buying it. So, we’re running a trade deficit, the foreigners are buying the country, and even at that rate of half a trillion dollars a year the foreigners are ending up with an ever smaller percentage of ownership of the US.
It is conventional wisdom that low saving rates and government deficits are major contributors to the U.S. trade deficit. No doubt greater personal thrift and a balanced federal budget would make America less reliant on foreign capital. But the U.S. ran trade deficits and budget surpluses in the decade after the Civil War in an era of high saving rates. The trade deficit grew rapidly during the Clinton years even as the U.S. ran budget surpluses, as strong economic growth attracted foreign capital. It appears to be almost a given that when the American economy is performing near its potential, it becomes an irresistible magnet for the world’s talent and capital.
If it seems counterintuitive that the trade deficit should be so unrelated to America’s historical success, it is only because by focusing only on the trade balance we are engaged in single entry bookkeeping that misses half the picture. In every year the U.S. ran a trade deficit, it also ran a capital surplus. The iron law of global trade accounting is that a country’s trade-account deficit must equal its capital-account surplus, and vice versa. This law follows from the logic of double-entry bookkeeping—and also from the simple truth that when people trade freely with buyers and sellers abroad, the total value of goods, services, assets and currency exchanged by all parties must equal out. Only those who use coercion—governments and criminals—can take more than they give.
The editors at the New York Times correctly understand and explain the inaccuracy – indeed, today the silliness – of judging any product by the “Made in” badge that it wears. Most goods – and services – today are “Made on Earth” (to steal Dan Ikenson’s apt term).