Here’s a letter to National Review‘s ‘The Corner’:
Reihan Salam is right both to bemoan Uncle Sam’s fiscal profligacy and to counsel trade hawks to change their feathers into those of deficit hawks (“A Trump Trade and Economic Doctrine,” April 18). But the strength of his argument is compromised by flaws in his assessment of trade deficits and surpluses.
Salam’s flaws are rooted in his acceptance of the administration’s presumption that so-called trade “imbalances” are a problem that can and should be solved by wise government policies. Yet contrary to the administration’s belief, U.S. trade deficits are not necessarily evidence of bad policies, either here or abroad, or drags on U.S. economic growth. Indeed, such trade is not even “imbalanced,” given that each cent in the U.S. current-account deficit is a cent in the U.S. capital-account surplus.
U.S. trade (or current-account) deficits arise, ultimately, because non-Americans find the U.S. to be a relatively attractive place to invest. And because the amount of productive capital in the world and in the U.S. can and does grow, there’s absolutely nothing wrong with U.S. trade deficits. While the U.S. trade deficit today does reflect in part Uncle Sam’s lamentable budget deficits, Salam errs in treating the trade deficit as a problem that is in addition to that of the budget deficit. The problem is the budget deficit. Period. The size of the U.S. trade deficit is merely a reflection of this problem.
In fact, insofar as Uncle Sam’s fiscal profligacy is caused by the irresponsibility of American ‘leaders’ – and such irresponsibility is surely the main cause of U.S. government budget deficits – foreign lending to Uncle Sam is a blessing. The reason is that the more foreigners lend to Uncle Sam the less is the amount of domestic capital that is diverted away from productive private investments into wasteful government spending.
Salam also assumes that U.S. economic growth is promoted more by foreign purchases of American exports than by foreign investments that result in U.S. trade deficits. This assumption is unjustified. There is simply no reason to believe that the capital that comes to our shores (and which, in turn, raises the our trade deficit) promotes U.S. economic growth less than would more foreign purchases of American exports. That Salam simply accepts without question the administration’s uninformed superstition that trade deficits are necessarily a drag on U.S. economic growth is disappointing.
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