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Debunking Yet Another False Tale Told About American Trade Deficits

Here’s a letter to the Director of the Claremont Institute Center for the American Way of Life. (I thank Scott Lincicome for alerting me to the essay by David Goldman.)


David Goldman’s “Restoring American Manufacturing: A Practical Guide,” which you published on February 21st, is a stampede of economic misunderstanding and factual errors.

An especially egregious misunderstanding occurs when Mr. Goldman portrays the U.S. trade deficit as resulting from American’s selling assets to buy imports. This impoverishing practice, on Mr. Goldman’s telling, is going on now in America.

It is indeed possible for the people of a country recklessly to increase their consumption today – and thereby ensure their impoverishment tomorrow – by selling off their assets to the people of other countries in exchange for imports. And such recklessness would cause the country to run trade deficits. But contrary to Mr. Goldman’s apparent assumption, trade deficits can be caused by other, quite different economic forces – forces that are beneficial rather than malignant. Such is the case with U.S. trade deficits.

U.S. trade deficits arise because foreigners invest in the U.S. some of the dollars they earn on their export sales to Americans rather than spend all of these dollars immediately on purchases of American exports. Because the size of neither the world’s nor any country’s capital stock is fixed, such foreign investment can expand America’s capital stock (in part by offsetting its diminution by our fiscally irresponsible government). If this expansion of our capital stock is in fact occurring, we Americans are made wealthier, not poorer. Increased savings and investment in America by non-Americans makes us wealthier no less than does increased savings and investment in America by Americans.

If U.S. trade deficits are caused (as Mr. Goldman supposes) by Americans recklessly selling off assets to foreigners, rather than by foreigners prudently taking advantage of productive investment opportunities in America, we Americans would by now be desperately poor. After all, the most recent year that America ran a trade surplus saw the Oval Office occupied by Gerald Ford. But instead our net wealth has since then risen.

In 1987 (the first year for which I can find consistent data) total net worth of American households was, in 2022 dollars, $38.31 trillion. Today (2022) total net worth of American households is $139.87 trillion. Therefore, in the past 35 years the inflation-adjusted net worth of American households rose by 265 percent. On a per-household basis over these same years, inflation-adjusted household net worth rose by nearly 150 percent, from $428,143 to $1,066,053.*  Also, real median household income today is higher by at least 19 percent, which is almost certainly an underestimate. (See the Gramm, Ekelund, and Early book mentioned below).

What about American businesses? In 2022 dollars, the net worth of nonfinancial corporations in the U.S. rose from $11.049 trillion in 1987 to $30.895 trillion in 2022.** That’s an increase of 180 percent.

More generally, as detailed in the data-rich 2022 book by Phil Gramm, Robert Ekelund, and John Early (The Myth of American Inequality), Americans – and especially ordinary and poor Americans – have thrived economically in recent decades.

The data utterly debunk the tale told by Mr. Goldman about U.S. trade and 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

* Figures on household nominal net worth come from this St. Louis Fed page; these nominal figures are adjusted for inflation using the Personal Consumption Expenditure price index. Data on the number of U.S. households come from Statista.

** Figures on nominal nonfinancial corporate net worth come from this St. Louis Fed page; these nominal figures are adjusted for inflation using the Personal Consumption Expenditure price index.