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An Open Letter to AEI’s James Pethokoukis

Mr. Pethokoukis:

You are generally spot-on in your analyses. But when you write that trade deficits “should be viewed as a sign the US isn’t saving enough, especially given future obligations” you unintentionally feed one of the worst myths about trade deficits.

It’s true, as you note, that U.S. government budget deficits are a problem. It’s also true that purchases by foreigners of U.S. treasuries increase the U.S. trade deficit. But it is emphatically not true that trade deficits generally are a sign of inadequate US savings. Except for that portion that helps to fund irresponsible borrowing by Uncle Sam, the U.S. trade deficit reflects nothing more worrisome than the fact that not all of the investments made in the U.S. are funded with savings by Americans.

That is, most of the U.S. trade deficit reflects the fact that America remains such an attractive destination for global savings that many foreigners choose to invest their savings here rather than elsewhere. And clearly, the fact that our neighbors choose to invest large chunks of their savings in places such as Arkansas and Utah rather than in Argentina and Uganda in no way implies that we Americans aren’t saving enough. This fact instead means only that foreigners combine their savings with ours on our shores – which obviously is beneficial for us.

If you’re unconvinced, I recommend this excellent 2016 essay by the Cato Institute’s Dan Ikenson.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
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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