Trade Deficit? Don't Panic!

I have never been bothered by the trade deficit.  Concern over the trade deficit always seems to be a holdover of 18th century mercantile thinking.  The key failure seems to be thinking of wealth as static or zero sum.  In a zero sum world, running a consistent trade deficit might indeed pour all of a countries wealth overseas like a tank springing a leak.

Wealth, of course, is not zero sum.  New ideas, productivity, technology create wealth.  Ever year, the US creates tremendous amounts of new wealth.  If we spend some of it overseas, so what?   

Often, problems like the deficit that seem problematic at a macro level fall apart when studied as part of individual behavior.  Cafe Hayek takes this approach in a nice post on why not to panic about the deficit:

If my paying my Virginia neighbor $10 to mow my lawn creates neither
debt nor other economic problems, how would my paying a Canadian $10US
to mow my lawn create debt or other economic problems? What conceivable
economic difference can the latitude or longitude of the seller's
residence make?

UPDATE: I always felt this same way, from Steve Landsburg:

I hold this truth
to be self-evident: It is just plain ugly to care more about total
strangers in Detroit than about total strangers in Juarez. Of course we
care most about the people closest to us-our families more than our
friends and our friends more than our acquaintances. But once you start
talking about total strangers, they all ought to be on pretty much the
same footing. You could say you care more about white strangers than
black strangers because you've got more in common with whites. Does
that make it okay to punish firms for hiring blacks?....

Stealing assets is wrong, and so is stealing the right to earn a living, no matter where the victim was born.

  • Fiona

    In the example your Canadian neighbor gets $10 and you get services. Fine. But the way it's explained to me, this isn't what's happening. The unique nature of the US$ as a global currency has encouraged complacency in taking advantage of what are essentially loans with no expectation of payback, not trade. When the numbers go up too high, foreign central banks can be expected to use the threat to sell their massive holdings as leverage to influence US domestic and foreign policy. Or they could actually sell, with all the attendant difficulties that would ensue.

  • Navin

    If you give canadian fellow 10$ to mow when you dont even have a job then aren't you gonna screw yourself to death soon ?

    Also, if you give canadian guy 10$ when there are lots your country fellows jobless aren't you being insane ?

  • Max Lybbert

    Fiona, are you familiar with money market accounts, commercial paper, or corporate bonds? I'm not trying to be sarcastic or mean, I'm simply pointing out that problems with bad loans don't have to involve foreign trade, and blaming the problem of foreign trade instead of bad loan-making policies isn't nuanced enough.

    There is an issue about a weak dollar on foreign markets, or other foreign trade risks, but those issues are separate from the trade deficit.

    Navin, I think you overlooked the rest of the article. Once upon a time, the US economy barely supported 30 million people, who were mainly subsitence farmers scratching a living out of the ground. Today the economy supports nearly ten times that number in relative royalty -- with sewer hookups, running water (hot *and* cold), electriciy, washing machines, dishwashers, etc. What about the poor? I'm no expert on pverty, but I know several people in Fortaleza Brazil living in mud houses with no electricity or running water who think they wer in heaven if they actually earned half the US's "poverty level." The *truly* *poor* are statistical noise in modern-day US ( http://esr.ibiblio.org/index.php?p=164 ).

    Where did all the money come from? In a static world, it could only come from being on the right side of trade defecits, but we don't live in a static world. In our world that wealth has come from entirely new industries -- computers, cars, aviation, etc. In fact, many industries have gone bankrupt over the years (ice harvesting, horse carriages, etc.), but today's economy dwarfs 19th-century America's.

  • touche

    People are worried silly about the trade deficit. Yes it keeps growing, yes foreigners lend us back the deficit, yes we borrow home equity and drive up home prices. But so what? It's not like its a Ponzi scheme. They want to lend us money, so why not? We like to shop and they like to lend. If worse comes to worse, we can always print a bunch of dollars, have a little inflation and pay them back. Don't miss out!

  • dearieme

    Touche: I do hope that it is only a little inflation.

  • touche

    The more the merrier.

  • ReformerRay

    Yes, I am one of those who believe the large trade deficit is a huge mistake that we must correct. Working against me is the fact that people like me have been crying wolf for many years and the wolf continues to stay away. Do we know why? Why does disaster keep receding?

    Because our economy has been stimulated by 8 years of fantastic economic growth (1992 - 2000) and by 5 years of monetary stimulation since 2000.

    All such stimulations are gradually disappearing. Now the only question is how soon will our 3% yearly economic growth also disappear? To what degree is the confidence in America the psychological component of growth in our stock market and in the stability of the dollar? As confidence in George Bush declines, will confidence in America also decline?

    The timing is uncertain, but the direction is clear.

    The financial component is widely discussed and somewhat important, but the really important issue is the inability of U. S. firms to compete on the global market. Our trade deficit documents that failure, but it also guarantees its continuation and expansion. The money sent overseas to pay for our excessive imports is used to increase the efficiency level of our competitors and to expand their productive capacity.

    The website that documents this aspect of the problem most effectively is "Economy in Crisis". Check it out.

  • aasdf

    poopshoot

  • Dick

    What does the US have to worry about? not trade deficits. we're the most powerful nation in the world. it's not like the other nations are gonna stop being our friends unless we pay them back. i say bring on the imports, bring on the some more negative net exports. it's the trade deficit that has allowed many americans to live the way they want to. the deficit allows domestic living standards to exceed domestic output, meaning we are getting much more than we are working for... a record 725billion dollars more.

  • W. Raymond Mills

    Dick - The U. S. citizens do not have to pay back 725 billion to anyone. We have already sent them valuable assets to pay for our trade deficit. We have exchanged assets for a higher living standard today. Other countries have effective export industries today because of the assets we sent them. Some day the U. S. will have to sell exports in order to buy imports. With weak domestic export industries, our imports must shrink.

    It is true that U. S. financial assets have been growing very rapidly since early 2003 and we are net gainers in wealth during the last 3 years.

    However, past experience is no guarantee of the future, as the stock market demonstrated in 2001 and 2002 and 2003.

    Apparently, a great many people in the U. S. want to live beyond their means, both in U. S. government financing, international trade and in their personal life. Unfortunately, the majority is going to create a country that my 10 year old granddaughter will have to rebuild if she wants a life like mine.

  • Ames Tiedeman

    The trade deficit is a national tragedy. The dollar is soon to collapse..

  • ReformerRay

    To Ames Tiedeman -

    Yes, the trade deficit is a national tragedy. The collapse of the dollar has been postponed far too long. Unfortunately, so long as the U. S. stock market continues to be a place to earn a good return on investment in a short period of time, the flow of money into the U. S. prevents the decline in the value of the dollar that the trade deficit would trigger, if those investors would just stop investing in our stock market.

    Every month, every year the combination of good economic growth and trade deficit growth continues in the U.S., the less manufacturing capacity and the less financial assets retained in the U.S. I am ready to recommend a rapid increase in the Federal Funds Rate to cause a recession, if that is the only way to end the current pattern.