I'm told to worry about the trade deficit.
Commentators and populist politicians are wringing their hands. The trade deficit is a "malignant tumor in the intestines of the U.S. economy," says Pat Buchanan. Lou Dobbs is very upset that "We're borrowing about $3 billion a day just to pay for our imports"!
Economists had taught me that the trade deficit is not a big deal. (The budget deficit may be a big one, but that's a different issue.) But with all the pundits and politicians alarmed, I began to wonder if I was out of touch.
Then I thought about my local supermarket. I buy stuff from the Food Emporium every week. I spend thousands of dollars a year there. But the supermarket never buys anything from me. Not one thing.
And yet that is no problem. It's better than no problem -- it's fantastic! Imagine if I could only buy from the store to the extent that it needed my services. I'd starve. That would be barter, and mankind dumped barter for the money economy eons ago precisely because it is so inconvenient.
Trade statistics obscure reality. Individuals exchange only when each expects to benefit. If they didn't expect it, they wouldn't trade. That's true even if one party is American and the other Chinese. Trade is trade.
If we don't care about trade balances at the individual level, why does it matter if in a given year Americans as a group buy more from the Chinese than they buy from us?
In fact, it's a good thing. Foreigners trade cool products (and capital goods) for paper money. They can do only three things with our dollars: buy American goods and services, save them, or invest in the United States (including buying U.S. government debt).
In other words, most of what foreigners don't spend here, they invest here. The trade deficit is mirrored by the capital-account surplus .
Should we be concerned that foreigners see the U.S. economy as a good place to invest their money? I can't see why. I think we should see it as a wonderful thing: They trust America's future enough to invest in it. Investment creates new products and better jobs.
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