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Whoa, Dead Horsey, Whoa!

Here’s a letter to the Wall Street Journal:

Jason Furman rightly calls for reduced U.S. government budget deficits (“Worry About the Trade Deficit – a Bit,” May 2). And although he’s also right to try to calm fears about U.S. trade deficits, Mr. Furman undermines his case by committing a dangerous, if common, error. The error is in the second sentence of this passage: “The current-account deficit is the gap between total investment and total savings. If a country saves less money than it puts toward things like factories and equipment, it has to finance the difference with foreign borrowing.”

It is simply untrue that the difference between total investment in the U.S. and total savings in the U.S. must be financed with borrowed funds. When Sony opens a store in Dallas – when Ikea refurbishes a store in Denver – when BMW builds a factory in South Carolina – when Spaniards buy shares of Apple on the NYSE – when Koreans expand their dollar holdings – when Canadians purchase real estate in Michigan – they contribute to total investment in the U.S. exceeding Americans’ savings (that is, to larger U.S. current-account deficits). Yet none of these foreign investments involves American borrowing. None increases Americans’ indebtedness. Not one of these outlays puts any American on the hook to repay anything to anyone. Yet by following the common practice of labeling every cent of current-account deficits as ‘borrowed funds,’ Mr. Furman unwittingly gives ammunition to the Trump administration and others who peddle protectionism by stirring up unwarranted fears of trade deficits.

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


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