Posted on 02/10/2006 5:08:24 AM PST by LowCountryJoe
America's trade deficit -- in December reaching a near-record $64.7 billion -- is unfortunate, right?
Wrong. Contrary to popular opinion, this so-called "deficit" is a blessing.
Consider that if Americans export lumber, sheetrock, and architectural blueprints to China so that people build a factory there, we're gleeful. "Wonderful!" we proclaim. "Exports are up and our trade deficit is down!"
But if those very same building materials are assembled by Americans into a factory situated and operated in, say, Utah and then bought by Chinese investors, we complain -- led today by the likes of Senators Charles Schumer and Lindsey Graham -- that "Something's wrong! Our trade deficit is higher!"
Truth is, though, that nothing economically important separates the first scenario from the second. In each case the world's stock of productive capital grows as Americans produce things for sale to foreigners. Those cases appear different from each other only because of the conventions of international commercial accounting, which records investments separately from imports and exports.
This accounting convention creates the false impression that an excess of imports over exports -- called a "trade deficit" -- is an ominous imbalance requiring corrective action. In fact, America's trade deficit is evidence, not of any imbalance, but of the happy fact that our economy is so strong and stable that foreigners invest here eagerly.
When foreigners sell things to Americans they earn dollars. If foreigners then spend all of those dollars on American exports, trade is "balanced." There's no trade deficit or surplus. But if foreigners instead invest some of those dollars in dollar-denominated assets -- say, by purchasing that factory in Utah, houses in Hawaii, or shares of Google -- they obviously must buy fewer American exports. So the trade deficit grows as investment in the U.S. rises.
Although dollars spent by foreigners on investments are not spent on items classified as U.S. exports, these dollars nevertheless are spent in the U.S. They raise the value of American corporations and real-estate, and improve American workers' productivity. In turn, those increases in asset values and productivity enhance Americans' current ability to buy goods and services -- perhaps the same goods and services that foreigners would have bought had they not invested their dollars here.
Isn't it better, though, if Americans do the investing and foreigners the consuming? No. What's important is to have lots of investment to increase worker productivity, which ultimately is the only way to raise our living standards. The nationality of investors is insignificant.
Because savings and investment are indeed so beneficial, we should welcome rather than regret foreign savings invested in our country. If we applaud the guy across the street who forgoes that vacation in Las Vegas in order to save and invest more in the U.S. economy, we should applaud also the guy across the ocean who does the same.
But doesn't a higher trade deficit mean that Americans are sinking more deeply into debt? Not at all. A trade deficit isn't debt. My young son, for example, received for Christmas several Chinese-made toys. These were bought with cash. If the Chinese toymakers invest their newly earned dollars in, say, that factory in Utah, the U.S. trade deficit rises but no debt is created. Neither I nor any other American owes any foreigner anything as a result of my purchase of toys from China and the corresponding Chinese purchase of equity in a company located in America.
More generally, whenever foreigners buy American real-estate or equity, or when they simply hold dollars in their portfolios, our trade deficit rises without creating debt.
Nor is it true that a higher trade deficit means that Americans are selling off assets. Whenever, for example, IKEA builds a new store in the U.S., a new asset is created. No Americans had to part with assets as a pre-condition for this Swedish investment in America.
Of course, part or all of the trade deficit can become debt. This happens whenever Americans borrow dollars from foreigners. As it happens, the most prodigious borrower today is Uncle Sam. But despite self-righteous accusations leveled at foreigners by the likes of Senators Schumer and Graham, the fact remains that U.S. government indebtedness is not caused by foreigners buying Uncle Sam's bonds, but by Congress spending beyond its means. If government debt is a problem, then Congress should stop borrowing. Complaints about the trade deficit are a red herring.
We Americans have many real problems confronting us. The trade deficit isn't one of them.
These aren't the droids we're looking for.
Move along.
VADER: I find your lack of faiths disturbing.
Who's worried?
We send them paper with pictures on it, and they send us useful stuff!What a deal!
Of course, they probably do NOT use that paper for toilets or burning, so, sometime in the future, that paper will come back to us and we'll send THEM useful stuff!
Neat how that works; eh?!
What kind of baloney hypothetical scenario is THAT???
Our Trade Deficit isn't increasing because Chinese investors are purchasing factories that we're building in Utah.
Donald Boudreaux is a double-talking shyster.
No doubt (it's "Tonelson," btw). As soon as those three stooges exclaim that things are good, it'll be a sure sign that the end times are upon us.
LOL! "rotated money"!!!
Is that what you money-laundering con-artists call it when it comes out of your spin cycle?
"I am one of those who do not believe that a national debt is a national blessing, but rather a curse to a republic; inasmuch as it is calculated to raise around the administration a moneyed aristocracy dangerous to the liberties of the country."-- President Andrew Jackson - (1824)
Tell me again how the average American benefits from getting priced out of the housing market?
Sheesh.
Any number of ways, the most obvious being that folks shouldn't buy something they cannot afford. /mild sarcasm
Oh, and were you not the same guy who was celebrating the book about Hamilton last year or was that one of your like-minded 'unspun' FRiend here? If it was you (although it could have been Fulluja Nuker or some other Economics genius), how do you reconcile Hamilton's views with those of Jackson's? And, for the record, I'd rather be in the 'spin cycle' than have terminal pretzel logic.
Is that why home ownership is at a record high?
"Sheesh!" is right.
They're buying our debt floated to fund entitlements and military protection of American investors abroad (a massive subsidy). Holding vast amounts of our debt gives those investors political leverage over our government. Not a good thing.
Gross Domestic Product (GDP), the measure of the USA's output of goods and services, is calculated by the Commerce Department's Bureau of Economic Analysis using the following items:
Gross domestic product (GDP)............................. $12,735.3 billion
Personal consumption expenditures.......................... 8,926.9 (70.10% of GDP)
Gross private domestic investment.......................... 2,185.7 (17.16% of GDP)
Net exports of goods and services........................... -784.1 (-6.16% of GDP)
Government consumption expenditures and gross investment... 2,406.8 (18.90% of GDP)
The current BALANCE OF TRADE is in deficit, which is considered unfavorable.
That is why it is SUBTRACTED from the other factors used to calculate GDP.
And at historic highs, it diminishes our domestic economy by over 6% - more than twice the normal variation. This is NOT insignificant.
Willie looking at half of the equation
The above shows why Willie is always wrong. He looks at net exports of goods and services and sees a negative number. In his one dimensional thinking that means that imports are bad. With Willie there's no Thinking Beyond Stage One.
If he did, he'd realize that those pesky foreigners take their new dollars and either add to our private domestic investment (Which adds to our GDP Willie), buy Treasuries which funds Government consumption expenditures and gross investment (Which adds to our GDP Willie) and allows Americans to use their dollars to consume (Which adds to our GDP Willie) or invest (Which adds to our GDP Willie).
It's not Willie's fault, even educated men like Paul Craig Roberts and Alan Tonelson don't understand.
Bears frequent repetition.
Gladly...
Rather than promoting domestic investment and development of our own productive infrastructure, the Bush Administration is utilizing Deficit Spending to prop-up consumption and the Trade Deficit. Instead of "trickling down" to benefit our own citizenry, trade deficit dollars finance the closure of our domestic industries and their offshore migration. A portion of these funds are then "loaned" back to the Bush Administration to continue the deficit spending and plunge American taxpayers deeper in debt.
It's a trade war that the Bush Administration is waging against the peaceful prosperity of the American Middle Class.
Of all the misconceptions by the economic illiterates, and other assorted protectionists here at FR, this is one of the most common and most frustrating. Boudreaux does a good job of explaining it simply so even the most dense reader can understand. We'll see.
Thanks for posting this. It will be a good reference when this story gets posted later and the forces of doom gather to blame the deficit, transnational corporations, China and Bush for all that ails them.
Not in my area, average housing prices have jumped from 150k for a 3 bed 1 bath to 550+k for same. Not to mention rental costs.
And there are plenty of working people (including college professors, teachers, policeman, fireman) who can't afford these prices.
I was fortunate enough to own, but there are lots of people who weren't.
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