Trade deficits do not mean bad economic news

Few people clamor to return to the American economic conditions of 1975.

Still reeling politically from the Watergate scandal, the country also faced an unemployment rate that peaked at 9% and inflation that topped 6%. A Jan. 1, 1975, report from the Federal Reserve Bank of Minneapolis labeled the American economy “the limping giant.”

Yet one aspect of that picture appeals to many of the loudest voices in today’s policy debates. 1975 marked the last year that the United States enjoyed a trade surplus.

Over the following five decades, whether the economy soared or sputtered, the United States registered a trade deficit every year.

The word “deficit” sounds bad.

If your household — or the federal government — runs up a spending deficit, the result is debt. Spending beyond your means carries long-term consequences.

Pairing the word “trade” with “deficit” is different.

“A trade deficit is just a bookkeeping entry, not a debt that has to be paid,” Kevin Williamson wrote for National Review in 2018.

Put simply, a “trade deficit is when people in one country buy more from another country than the other country’s people buy from them,” as the late economist Walter Williams wrote in 2016.

Exploring the “angst” surrounding the term, Williams declared: “There cannot be a trade deficit in a true economic sense.”

When I spend $100 at the grocery store, I technically create a trade deficit with the grocer. But no one expects the grocer to seek $100 worth of goods from me in return. The $100 gives the grocer flexibility in future spending.

Williams describes the transaction as my “goods account” growing while my “capital account” declines. The grocer sees his goods account decline while his capital account grows.

“Looking at only the goods account, we would see trade deficits, but if we included the capital accounts, we would see a trade balance,” Williams explained. “That is true whether we are talking about domestic trade or we are talking about foreign trade.”

Much of today’s concern about trade deficits involves China. The same was true when Williams offered his simple economics lesson nine years ago.

“Do you think the Chinese are so charmed with green slips of paper with pictures of Benjamin Franklin that they just hoard them? No way,” he wrote.  

Another economist, Don Boudreaux, turned to American history to challenge the notion that the nation should pursue trade surpluses and avoid deficits.

“If trade surpluses are so great, the 1930s should have been a booming decade,” Boudreaux wrote in 2006.

Alas, historians remember the ’30s instead as years of a Great Depression. “Turns out that for only 18 of the 120 months of that dreary decade did the United States run a trade deficit (that is, imported more, value-wise, than it exported),” Boudreaux explained. “For each of the remaining 102 months of the decade of the 1930s the US ran a trade surplus.”

What’s more, “the US trade surplus during the entirety of the 1930s was nearly 19 percent the size of the total value of US exports during that decade,” he added.

Neither Williams nor Boudreaux jumped to the conclusion that a trade surplus signals a bad economy. Yet they agreed “that all the fashionable fretting about trade deficits (which the US economy has run for most of its history) is itself simplistic and uninformed,” in Boudreaux’s words.

Good public policy outside the trade context can promote deficits. Williamson pointed to one of the signature achievements of President Donald Trump’s first term.

“Ironically, the corporate tax reform that President Trump is rightly proud of may contribute to higher trade deficits by making the United States a more attractive place to invest,” Williamson wrote. “Money invested in businesses and factories is not available for the purchase of consumer goods.”

More than 400 pages into the 11th edition of the popular textbook, “Economics: Private and Public Choice,” professors James Gwartney, Richard Stroup, Russell Sobel, and David MacPherson asked readers to ponder: “Are trade deficits bad and trade surpluses good?”

For those leaning toward answering “yes,” the academics urged “caution.”

“In essence, trade … deficits are the flip side of capital inflows,” the professors wrote. “Thus, rapid economic growth and an attractive investment environment — both of which are generally associated with a strong economy — are major causes of trade … deficits.”

Let’s avoid deficits in our own household finances. Let’s cut government spending deficits. Let’s pursue strong economic growth. Let’s make North Carolina and the United States attractive places for investment.

Let’s not worry about trade deficits.

Mitch Kokai is senior political analyst for the John Locke Foundation.