Oren Cass, Chief Economist
American Compass
Oren:
As chief economist at an influential think tank you commit a surprisingly large number of elementary economic mistakes (“All Who Squander Are Lost,” October 2). The worst of these errors is your presumption that U.S. trade deficits imply that we Americans are consuming beyond our means. This mistaken presumption is itself rooted in the false notion – one that you repeat incessantly – that every dollar increase in U.S. trade deficits implies that we Americans are either going one more dollar into debt to foreigners or that we are selling off on net one dollar’s worth of our assets to foreigners.
You’re wrong.
Because the stock of capital in America (and in the world) isn’t fixed – because this capital can and, under the right conditions does, grow – foreigners can continue, year after year after year, to increase their investments in the U.S. without any decline in Americans’ investment holdings or any increase in Americans’ indebtedness. Indeed, Americans’ net worth can increase even as America’s trade deficits persist and even rise.
What America uniquely offers to the world is a relatively free, a very large, and an intensely entrepreneurial market grounded in reliable protection of property and contract rights. Yet this attractive market environment – unlike, say, land or corporate shares – isn’t classified as an asset for accounting purposes. Therefore, in international accounts the convention of double-entry bookkeeping requires that when foreigners take advantage of our attractive economy by increasing their investments here the accounts show that things that are classified as assets – things owned or owed by Americans – are ‘transferred’ to foreigners.
The result is a false illusion that’s an artifact of an accounting convention – an accounting convention that has always been wholly inappropriate for measuring the performance of a spontaneous, open-ended order that is a market economy. For this reason, no less an economist than Adam Smith described balance-of-trade accounting as “absurd.”
Want evidence of the absurdity of balance-of-trade accounting? If the story you tell were true – a story of U.S. trade deficits being a sure sign of Americans going on reckless spending binges funded by selling off assets to, and borrowing funds from, foreigners – we Americans would now be destitute. After all, America has run an unbroken string of annual trade deficits every year starting 1976. That’s nearly a half-century-long run of annual trade deficits, or 20 percent of our nation’s existence. And yet —
– Inflation-adjusted net worth of nonfinancial corporate businesses in America today (June 2024) is 386 percent greater than it was in 1975, the last year America ran an annual trade surplus. (I adjusted for inflation using this Personal Consumption Price Index calculator.)
– The ratio of nonfinancial corporate business debt to the market value of corporate equities is today (June 2024) only 26 percent of what that ratio was in 1975.
– Most tellingly, the inflation-adjusted total net worth of American households is today (June 2024) 281 percent greater than it was in 1987 (the earliest date for which I can get consistent data). Because the number of households in the U.S. today (2023) is only 47 percent greater than it was in 1987, the average inflation-adjusted net worth of an American household has increased significantly over the past 37 years. This fact alone suffices to discredit your economically naïve tale of American trade deficits draining Americans of wealth.
Other errors stampede through your essay. But no more than what’s written above is necessary to reveal that your understanding of trade and of the American economy is severely wanting.
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
