Here’s a letter to the editor of American Affairs.
Editor:
Michael Starr’s fear of U.S. current-account deficits springs from bad economics and bad history (“The Last Time We Fixed the Trade Deficit: Lessons from the Plaza Accord,” Summer 2026).
Mr. Starr’s foundational economic error is this claim: “A current account deficit means a country pays foreigners more than it earns from them, making it a net debtor.” Although more plentiful than pigeons in Central Park, the claim that the people of a country that runs a current-account deficit necessarily go further into debt to foreigners is correct only in the narrow sense of conforming to accounting definitions. It is incorrect as a matter of economics.
While a current-account deficit could signal rising indebtedness of the people of a country that runs one, it needn’t do so. Consider this simple example. The U.S. in 2026 imports $1B worth of goods and services. Foreigners purchase $750M of U.S. exports. Consequently, because we Americans imported $250M more than we exported – and assuming for simplicity no other transactions on the current account – the U.S. current-account deficit rises by $250M.
Although accountants classify this $250M as U.S. debt, accounting ain’t economics. If foreigners lend this $250M to Americans (say, by buying $250M of U.S. Treasuries), then this $250M U.S. current-account deficit does indeed represent additional American indebtedness. But foreigners can invest in the U.S. in ways other than lending money to Americans. If foreigners instead use this $250M, say, to build a factory in Florida, there is no additional American debt despite the U.S. current-account deficit rising by $250M.
If the factory fails, the losses fall on its foreign owners. If the factory succeeds, it creates economic value that would otherwise not exist, and the resulting profits belong to its foreign owners. Because the factory is located in the U.S., accountants record its owners’ claims on those profits as money owed by America to foreigners. But these profits are no such thing. These profits are ‘owed’ to foreigners by foreigners, not by Americans, despite the fact that the factory is situated in the U.S.
The U.S. last had an annual current-account surplus in 1991. The impressive performance of America’s economy over the last 35 years along with the rising real net worth of American households – including households in the bottom 50 percent of the household-wealth distribution – testify that U.S. current-account deficits have not, contrary to Mr. Starr’s implication, drained Americans of wealth.
As for Mr. Starr’s history, the Reagan administration negotiated the 1985 Plaza Accord to ward off rising protectionist sentiment in Congress.* A negotiated lowering of the value of the dollar was seen by the economically informed (and politically savvy) Reagan administration as a reasonable price to pay to quell the quest for more-destructive protectionism. And, by the way, it’s not true that U.S. manufacturing was on the ropes in 1985. When the Plaza Accord was reached in September of that year – three years after the end of the 1981-82 recession – U.S. manufacturing output over those three years was up by 19 percent. This increase was an impressive achievement compared to the previous three-year period (November 1979 through October 1982), which witnessed manufacturing output falling by 10 percent.
Bad economics and bad history do not make for sound analysis.
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* Douglas A. Irwin, Clashing Over Commerce (Chicago: University of Chicago Press, 2017), pages 605-619.
