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Pittsburgh Tribune-Review: “A good kind of deficit”

In the July 30th, 2009, edition of the Pittsburgh Tribune-Review, I yet again attempted to calm irrational fears about the so-called “trade deficit.” You can read my column beneath the fold.

A good kind of deficit

In an event that many pundits hail as a silver lining of America’s still-dark economic cloud, the U.S. current-account deficit fell during the first quarter of 2009 by 34.5 percent from its level in the fourth quarter of 2008.

Is this news really all that good? Of course, many people think so. After all, anything called a “deficit” must be bad. So a shrinkage of such a bad thing must be good. Right?


The U.S. runs a trade deficit whenever we Americans import more, value-wise, than we export. But an excess of imports over exports is hardly a calamity. Indeed, it’s much more likely to be a blessing.

To see why, ask what explains foreigners’ choice not to spend all of their dollars on American exports. The reason is the same one that explains your choice not to spend all of your dollars at the supermarket, the mall and the liquor store: You choose to save and invest part of your earnings because such savings and investment will likely enhance your wealth over time.

If you save and invest wisely, though, not only are you made better off, workers and consumers are also made better off. Saving is necessary for investment; market-driven investment increases worker productivity; and higher worker productivity means higher wages over time and a larger economic pie.

Fortunately, since 1975 — the last year that America ran a trade surplus — foreigners have been annual net investors in the U.S. Rather than spend every last one of their dollars buying American exports, foreigners invest some of their dollars in the U.S. economy. These investments raise America’s trade deficit, but they also raise America’s capital-account surplus. In other words, they make America a net recipient of world savings.

It’s absurd for Americans to complain about foreigners’ eagerness to invest in dollar-denominated assets — which is what complaints about the U.S. trade deficit amount to. In addition to directly raising the values of many assets held by Americans, increased investment in America by foreigners adds to our capital stock every bit as much as does increased investment in America by Floridians.

Also bear in mind that today about one-third of America’s imports are not consumer goods but, instead, are inputs to American output — Brazilian steel for American-made airplanes, Japanese power tools for American workers to use to construct houses in America, Chinese laptop-computer assembly for Apple and Dell.

Although these imports contribute to the U.S. trade deficit, they are evidence against the myth that America’s “appetite” for imports reflects American consumerism gone wild. The Americans buying these imports do so not to gratify immediate consumption desires but, rather, to produce for the market.

To restrict these imports would inevitably put a tight pinch on many American producers — in some cases, perhaps the pinch of bankruptcy.

Beyond contributing to American economic vitality, foreign investment here signals global confidence in that vitality. Investors go long only in assets or places that promise a reasonable prospect of future profits.

These facts are why the recent decline in America’s trade deficit is just another piece of bad news: Foreign investors, like their American counterparts, are less willing now to take risks in this economy. As foreigners grow more reluctant to invest here, they become less eager to earn dollars by selling goods and services to Americans. So foreigners export less to America.

History reflects the validity of this analysis. During the Greatly Depressed 1930s, America ran a trade deficit for only 18 of the 120 months of that decade. In each of the other 102 months, Americans exported more than they imported — that is, ran trade surpluses. The only calendar year of that decade that saw America’s trade in deficit was 1936 — and then only slightly. All of the other nine years were ones of trade surpluses.

For the decade as a whole, America ran a trade surplus of $4.92 billion, which was 19 percent of the value of America’s total exports during the 1930s.

These data from the Great Depression suggest that trade surpluses neither help an economy nor are evidence that an economy’s fundamentals are sound. Quite the opposite, in fact. As long as the U.S. economy remains in turmoil, foreign investors will be scared away, as they were during the Great Depression — causing our trade deficit to shrink and possibly even to disappear. Americans will be all the poorer.

Let’s hope for the rapid restoration of U.S. economic vitality. When that time comes, wise Americans will celebrate what will surely be a return to the days of high and growing U.S. trade deficits.