Op-Ed: Trade Deficit Political Red Herring
Following was submitted to the Wichita Eagle today for publishing as an Op-Ed piece:
There are many issues we face in the coming new year but the trade deficit is not one of them. The trade deficit is a fantasy used to deflect attention from the real issue of a budget deficit.
The trade deficit refers to the balance of the "current account," which is simply the difference between the total dollar amount of exports from the U.S. and imports to the U.S. If that number is negative, it is called a "deficit," and if it is positive it is called a "surplus." Unfortunately, the current account is only one half of the picture and terms like surplus or deficit are meaningless when applied to it.
I recently bought a TV at our local Sam's Club -- a Sony as it happens. Think of this transaction as Mr. Sony selling me a TV from Japan. I got a TV that was worth more to me than the $500 I gave Mr. Sony. Mr. Sony got $500 US Dollars that was worth more to him than his TV. We are both better off. Now Mr. Sony has some choices on what he can do with that $500. He can keep it in a bank as cash (used by others as capital in bank loans), he can buy stocks, bonds, real estate or any other number of things -- including US Government debt like Savings Bonds or T-Bills.
What Mr. Sony and others like him do with that money is tracked through the "Capital Account." This is the other half of the picture. The Capital Account is the sum of all cash accounts, private bonds, equity, real estate and other purchases including government bonds and treasuries.
In our example, if Mr. Sony turns around and immediately buys $500 of US products (from Mr. Microsoft, for example) that transaction ends up in the Current Account and my buying his TV and his buying a Microsoft product cancel each other out. If he choses to hold, invest or lend that money, it ends up in the Capital Account.
By definition, the Current Account minus the Capital Account equals zero. That's right -- a big fat zero. Always. When people (foreigners included) buy equity, private bonds, and other items listed in the Captital Account we call it investment. That is a good thing. If someone shows up at your door wanting to loan you money or buy equity in your business, it means they want to invest in you, that they have faith in your long term ability to add value and contribute to economic growth.
Whether you should take that money is quite another issue. Individuals and businesses are generally quite sensitive to living beyond their means. Those that aren't end up paying some direct consequences. The same cannot be said for governments. And that is where we get away from the red herring of trade "deficits" and to the root issue of budget deficits.
Foreigners can't purchase debt from the US governement if it isn't for sale. The fact that they can brings up at least two points: first, their wanting to buy the debt must mean that they feel pretty good about the long term viability of our country. Second, why is our government selling debt? They are borrowing to cover the costs of government programs not already covered by current and projected tax revenue.
There are many political and economic positions regarding issues like taxes and government spending. But consider this: these are the real issues -- and they have nothing at all to do with the trade "deficit." Free trade creates wealth by definition -- nobody voluntarily exchanges for anything unless they expect to be better off. What is done with that wealth is the issue.
Resolving a large budget deficit isn't a fun process -- it's complex and often painful because it requires hard choices. In this sense it's no different for governments than it is for families and businesses -- just easier to ignore or avoid discussing. But grappling with budget deficits is dealing with reality. We need to stop worrying about the fantasy of trade "deficits" and focus on the real problem.
