Here’s a note to a new correspondent.
Mr. P__:
Thanks for your feedback on Phil Gramm’s and my piece, in yesterday Wall Street Journal, on trade deficits. You believe that I “and Sen. Gramm omit that every US trade deficit means Americans are consuming more than they are producing, a habit that is unsustainable.”
With respect, U.S. trade deficit mean no such thing, as evidenced by the fact that the U.S. has run annual trade deficits every year since 1976, the year I graduated from high school. In 2023 I reached the conventional retirement age of 65. During those years – from 1976 through 2023 – the real net worth of American households and nonprofit organizations rose by 537%.* (I’m unable to find pre-1987 data on household net worth alone.) It’s practically impossible to square this fact with the claim that U.S. trade deficits mean that “Americans are consuming more than they are producing.”
Consider a simple example. Suppose that Americans this year produce $1,000 worth of bricks and other outputs. Americans spend $100 of their income – income earned from this production – buying wine from France. The French vintner immediately turns around and uses the $100 that he earned on his exports to America to buy bricks from America, bricks that uses to expand his facility in Bordeaux. In this case, American exports equal American imports; there is no U.S. trade deficit.
Now tweak the example. As before, Americans produce $1,000 worth of bricks and other outputs. But now they buy from France, not wine, but $100 worth of machine tools for use in U.S. factories. And the French machine-tool seller buys $100 of American-made bricks, but not for shipment to France but instead to build a new factory in Alabama. In this case, the U.S. has a $100 trade deficit: Americans imported $100 worth of stuff (specifically, machine tools) and exported nothing.
I challenge you to tell me how, while in the former example we Americans are living within our means, in the latter example we are, as you insist is implied by trade deficits, “living beyond our means.”
Balance-of-trade accounting is accounting, not economics. Unfortunately, because most people misunderstand both the accounting conventions and the economic forces that generate the monetary figures, balance-of-trade accounting is a never-ending source of confusion – confusion that fuels sympathies for self-destructive protectionism.
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
* I used this site to find net worth then converted 1976 dollars into 2023 dollars using this Personal Consumption Price Index deflator.
