Here’s a letter to Forbes.
Editor:
Ken Roberts writes that U.S. trade deficits represent America’s “ability, willingness and desire to buy more than it produces” (“Trump’s Failing Effort To Tackle Trade Deficit Puts Him In Good Company,” December 20). Not so.
Any entity that consistently buys (spends) more than it produces (earns) must necessarily suffer reduced net worth. But over the course of the now-half-century uninterrupted run of annual U.S. trade deficits, the inflation-adjusted net worth of the average American household has risen spectacularly: The average American household’s real net worth is today (second quarter of 2025), 240 percent higher than was the average American household’s real net worth in 1975, the last year that America did not run an annual trade deficit.*
This net increase in Americans’ real wealth simply could not, and would not, have occurred if trade deficits represent America’s “ability, willingness and desire to buy more than it produces.”
Several examples can be given of how the pernicious accounting artifact “trade deficits” creates false impressions of the sort that misled Mr. Roberts. Here’s one: All purchases by foreigners of American real estate are classified as foreign investments in the U.S. (rather than as foreign purchases of American exports). So suppose that Jack is a home builder in Jacksonville. Jack builds a new house in Jacksonville that he sells for $1M as a vacation home to Juliette, a Jamaican living in Kingston. Although in this case an American profitably produced something purchased for consumption by a non-American, this transaction is not recorded as an American export; instead it’s recorded as incoming foreign investment in the U.S., thus raising the U.S. trade deficit by $1M.
But suppose that Jack had built that very same house, at the very same cost, and then loaded it onto a boat and shipped it to Juliette in Jamaica, where she bought it for $1M. In this case the sale of the house is counted as an American export, and thus doesn’t cause a rise in the U.S. trade deficit.
The economics in the second case are essentially identical to those in the first, yet in the first case the U.S. trade deficit rises while in the second case it doesn’t. Clearly, the accounting artifact called “the trade deficit” must be used with far more understanding and care than most reporters (and pundits and politicians) bring to discussions of trade and trade policy.
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* To get the latest figures, I updated the data from this March 2025 blog post.
