Here’s a letter to a Cafe Hayek reader and sometime correspondent:
Mr. Jack Woods
Thanks for your e-mail.
I understand that it is “a familiar proposition” that trade deficits reflect “a savings short fall” in countries that run such deficits. But I believe this proposition, although familiar, to be faulty.
This proposition springs from the simple accounting definition of a trade (or current-account) deficit – namely, during some period, the amount invested within a country is greater than the amount saved by the people of that country. Those who accept what you correctly call this “familiar proposition” err by assuming not only that the investment opportunities in countries that run trade deficits are simply ‘out there,’ waiting to be exploited by those who saved enough to exploit them, but also that these opportunities would be exploited by citizens of the home country if only they saved more.
Neither of these assumptions is justified. Investment opportunities are often creative ideas that would not exist were it not for the inspiration of the entrepreneurs who have them. Further, entrepreneurial judgment is required to decide which among the many possible investment opportunities that are known are ones that warrant an actual commitment of investable funds. Because there is no reason to believe that Americans have a monopoly either on creative ideas or on sound business judgment (or, also, on willingness to take certain financial risks), there is no reason to believe that the particular investments that foreigners make in the United States are ones that we Americans would have made but for the fact that we saved too little. It follows that there is no reason to believe that the U.S. would stop running trade deficits if we Americans increased our savings by the amount of these deficits.
Put differently, many of the investments made in America by non-Americans are investment opportunities created in America by non-Americans. And therefore it makes no more sense to argue that, had we Americans saved more, we would own all the dollar-denominated assets that are now owned by foreigners, than it does to argue, say, that I, had I saved more, would own all the dollar-denominated assets that are now owned by Jeff Bezos. Jeff Bezos created Amazon and chose early on to invest in his idea. Had Bezos not done so, there would be no Amazon laying in wait for me or some other people to invest in. And just as Bezos’s entrepreneurial vision and investment increased the amount of capital in America, so, too, do successful investments in America by non-Americans increase the amount of capital in America.
U.S. trade deficits are not a “problem of inadequate American savings”; rather they are an accounting artifact brought about by the blessing of an abundance of global savings and entrepreneurial creativity mixing on our shores with relatively sound U.S. policy and market-friendly institutions.
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