No Subject Generates More Ignorance Than The Trade Deficit
/A few months ago I had a post titled "No Subject Generates More Ignorance Than Poverty." And I must say I had a good point, since almost everybody gets duped by the intentionally deceptive statistics on poverty put out by the government. Look around at what people who ought to know what they are talking about say about poverty (you can start by reading that linked post), and you will find an endless series of self-important know-it-alls making fools of themselves.
But I'm sad to report that I have found another subject that makes self-important know-it-alls look even stupider, and that is the so-called "trade deficit." I started getting into this subject back in September in a post titled "Donald Trump And The Trade Deficit Fallacy", after first watching a clip of Donald Trump talking about it. In the clip (found at the link), Trump equated a trade deficit to "losing" to the counterparty country that runs the corresponding surplus. Here is a quote:
What is the United States trade deficit with Mexico, Japan and China? Let's start with China. Almost $400 billion per year. If you have a company when you're losing $400 billion you've got to do something very fast. We don't. We've been losing hundreds of billions of dollars per year, frankly for decades. It's not going to happen any more.
Somehow I naively thought that if Trump kept saying things this uninformed he would quickly be laughed out of the race, or alternatively maybe he would take ten minutes to learn about the subject and stop talking nonsense. But then there he was last night, celebrating after a new string of primary victories, and basically saying the exact same thing over and over again. It's not just that he has fallen for the "trade deficit" fallacy; he has decided to make it a, if not the, central theme of his campaign. We're "losing" to China and Mexico, and if I become President I'm going to turn that around.
Well, fortunately, I was watching this on the Fox Business channel, where surely they would have some savvy business types to call Trump on this and point out why what he was saying doesn't make any sense. The hosts were Lou Dobbs, Charles Gasparino and Kennedy. And, after listening to Trump's speech, Dobbs promptly launched into a monologue about how absolutely right Trump was! Our trade deficit is "enormous," it's been going on for decades, these kinds of "imbalances" just can't last, we're racking up huge "debts" to other countries that can't be repaid, it's "unsustainable," etc., etc., etc. Gasparino and Kennedy? Who are they to disagree with the great Lou Dobbs? Basically, they didn't say anything.
I can't even figure out where the idea that a trade deficit is so terrible comes from. Essentially, a trade deficit is the result of summing up millions of private transactions, reflecting the preferences of millions of private actors, and it's unclear to me why anyone should even care that after a year of all of that the Chinese or Mexicans ended up holding more dollars or dollar-denominated bonds and we ended up with more consumption goods. The right way to look at that is that we provide some combination of a reserve currency that they think they can trust (at least more than the other terrible currencies) and a perceived relatively-safe place to invest, and in return they are willing to pay for that by allowing us to consume more than we produce of current goods and services.
Particularly wrong-headed is Dobbs's contention that a trade deficit represents racking up unsustainable debts. Consider the (large) piece of the trade deficit that is simply accounted for by foreigners accumulating dollars. Yes, in a sense, that represents a "debt" of the United States. But it's a debt that is not a claim against the taxpayers, and can only be collected on by spending the dollars to buy something in the United States. Suppose the foreigners try to "collect" on the debt. They spend the dollars in the U.S. If they actually spend more dollars in a year than they accumulate by selling stuff to us, then they have collected on part of the debt. How does that appear in the books? As a trade surplus. By the logic of Trump, Dobbs, et al., isn't that a good thing? So then, why is this "debt" a problem, and why is it supposedly "unsustainable"?
Another part of the trade deficit gets invested in the U.S. by buying U.S. corporate bonds and other securities. Again, can anyone explain why that is a problem, particularly a problem that the U.S. government needs to worry about? This is not debt that the taxpayers are on the hook for. Apple, for example, is a big corporate borrower. It is very profitable, and has more than sufficient profits to sustain its debts. If it wants to, it can maintain and even increase its level of debt indefinitely. Why should it be a matter of public concern whether this debt ever gets repaid? And if the profits go away and the debt can't be sustained, then the (foreign) lenders will lose some or all of their investment. Again, who cares?
OK, some of the trade deficit money gets invested into U.S. government bonds. These bonds are a claim on the taxpayers, and they are a problem. But they are a problem because the U.S. government is overspending and putting too much burden on future taxpayers. That burden has nothing to do with whether there is a trade deficit, and would be just as much a problem if we had nothing but trade surpluses and all the bonds had to be sold domestically.
Anyway, for today's final entertainment, I point you to the op-ed in today's Wall Street Journal by Anne Stevenson-Yang and Kevin Dougherty titled "China's Looming Currency Crisis." If you had been listening to Trump and Dobbs you could be forgiven for having thought that China was "winning" and it was the U.S. that was in crisis because of the huge trade deficit. But then what exactly is this "crisis" for China, as described by Stevenson-Yang and Dougherty? You guessed it: It's that the darned Chinese, instead of using their savings (accumulated in dollars via the U.S. trade deficit) to buy yuan (and thence to buy goods or make investments in China), are either holding the dollars or making investments in the U.S. and Europe.
[I]n China getting money out of the country is now the major preoccupation of both families and corporations. Risk-averse individuals are trading out of the wealth-management products they used to buy for 10% yields and moving their money to safety in the U.S., Australia, Canada and Europe.
To put it another way, their supposed "crisis" is no more than the other side of the accounting entry of our trade deficit. And Stevenson-Yang and Dougherty certainly discuss this as if it is a crisis for China. Hey, the yuan might depreciate! Stuff might cost more in China! Well, I guess then we both have a crisis. If so, the only solution would be to make the trade accounts of every country with every other country balance to exactly zero every year. Good luck with that! Maybe we can do it by hiring another few million bureaucrats for the U.N.
For myself, I agree that China has maybe not a crisis, but a problem. The problem is loss of faith in competent stewardship of the economy by the government, leading to capital outflow and likely a recession, which may be a long one. The people react to the climate of fear at home by accumulating a more trusted currency (dollars) and putting their investments in the U.S. and other Western countries. On our books, this shows up as a "trade deficit." How could anyone not regard this as advantage U.S.?