Here’s a letter to the Wall Street Journal.
Editor:
Desmond Lachman correctly explains that Trump’s tariffs won’t reduce U.S. trade deficits (Letters, November 8). In doing so, however, Mr. Lachman uses language that mistakenly suggests that trade deficits are necessarily a problem. He writes: “A basic economic truth is that a trade deficit is simply the result of a country spending on consumption and investment more than it produces.”
Although conventional, this language subtly misleads. A country isn’t a person or an organization, and so “it” doesn’t consume, save, invest, or produce. When we economists say, for example, that “America invests,” what we really refer to are the investments made in the geopolitical region known as “America” by individuals and organizations. Some of these individuals and organizations are American and others are foreign. Yet in discussions of the balance of trade these investment decisions are all lumped together into the phrase “America invests.” When this investment exceeds the amount that Americans save, the impression is created that we Americans are living beyond our means – that in order to make up the difference between what we save and what is invested here, we must borrow the funds from foreigners.
This impression is false because “we” don’t make all of these investments. Many of the investments in America are equity investments made by foreigners. When Ikea builds a store in Ohio the U.S trade deficit rises, but the investment is done by foreigners, not by Americans. This investment is neither a result nor a symptom of us Americans living beyond our means. It is, instead, a happy indication of the attractiveness to global investors of America’s economy.
Evidence confirms that U.S. trade deficits haven’t drained Americans of wealth. The real net worth of the average American household today is 236 percent higher than it was in 1975, the year when America last ran an annual trade surplus.
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
