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Worrying About the ‘Balance of Trade’ Is Like Worrying About Witches

Here’s a letter to a long-time reader of my blog:

Mr. Z__:

Responding to this post, you write that you can no longer take me seriously because of my “dogmatic refusal to acknowledge the grave dangers of trade deficits.”

Who you do and don’t take seriously is solely up to you. In the end, such decisions are personal. But do note that America last ran an annual trade surplus in the year (1975) that I began my senior year of high school. I will in three months reach the conventional retirement age of 65. You’ll forgive me, then, for being skeptical of the claim that U.S. trade deficits – which America has run every single year during the entirety of my adult life – pose grave dangers to ordinary Americans.

I simply do not understand why we Americans should fear foreigners’ eagerness, year after year after year, to invest on our shores more capital than we invest on their shores. Doesn’t the reality of this investment demand speak well, rather than poorly, of the American economy? Seems so to me.

Nor do I understand why anyone would suppose that the annual net inflows of investments to America are somehow dooming the American economy to destruction. Can you tell me precisely why you predict such doomnation?

My bottom line is this: Worrying about – or even paying a split-moment’s attention to – the balance of trade is foolish. The balance of trade is a pre-modern concept, the fretting about which is medieval. I leave you with this observation from nearly a century ago by the great British economist Edwin Cannan:

But even so we manage to carry on, and whether on or off the gold standard we certainly shall not benefit by reviving the three-hundred-year-old and long-ago exploded superstition that the balance of trade must be watched over and kept right by Parliament – a superstition which can only be ranked with the once equally widespread belief that witchcraft must be smelt out and witches burnt at the stake.*

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

* Edwin Cannan, “Balance of Trade Delusions,” Sidney Ball Lecture, November 13th, 1931, page 17.