Monday, April 24, 2006

I've been looking for a better understanding of what a trade deficit is, and why it's supposed to be bad, and whether it really is bad. The conventional wisdom as I've always heard it, is that the US has a large ongoing trade deficit causing job loss, debt servicing costs, and possibly currency instabilities if the foreign owners of American dollars suddenly get uneasy. Wikipedia has a discussion of the points of view of those who believe it's harmful, those who believe it's not, and those who believe it's meaningless. Whether the Wikipedia article is balanced, I can't tell. But clearly, just because a "skyrocketing trade deficit" is a great scare news article headline, and fun to accuse Republicans of, or perversely blame China for, doesn't naturally make it a bad thing. .

I can see two possible sources of gut-level unease, the kind of feelings which make people assume a trade deficit must be bad, bad, bad: fear of debt (guilt over not saving), and guilt over consumerism. The debt question comes up if the trade deficit consists of goods for debt: foreign countries exchange their goods for a promise to pay later, including interest. A trade deficit is associated with low rates of saving, again obviously bad. The consumerism guilt comes up because it makes Americans seem greedy that they import so much oil from the Middle East and so many consumer goods from Asia: it's probably felt to be evidence that Americans must be greedier than others if Americans consume so much that they have this nasty trade deficit as a result. Take these bad feelings together, and you have the question of whether it's wise to be going into so much debt just to consume more than anybody else does. When you put it that way most people are going to think it's a bad idea of course.

But it's not that simple. Japan was troubled for years by maintaining a trade surplus, where it sold desirable goods to the US but had little to use those US dollars for. The dollars fueled some purchasing of US investment properties (companies and real estate) at excessive prices. It may also be possible to maintain a trade deficit without going into debt but it's not clear to me whether a debt-free trade deficit would really make people who oppose trade deficits that much happier.

Today Colby Cosh pointed to an article in which, ironically, a Chinese economist may explain why the US trade deficit, in particular, may be calculated as much larger than it actually is. Products that are less than tangible are the problem when tallying up the numbers, of course. It makes me start to fall on the side of those who think it's meaningless. Maybe it's mostly a fictional problem, an arbitrary equation wherein we put one kind of desirable things on the left side of the equation, and another kind of desirable things on the right side, but leave a few terms out because they're too hard to add up, and finish by trying to make the numbers come out even so that it seems tidier.

1 comment:

G. Roper said...

One of my economics professors put it this way: "If Japan or China wants to collect U.S. dollars, I have no problem with that. I don't care if they burn the dollars! We will accept their durable goods and send them printed pieces of paper (dollars) forever. But at some point it only makes sense that they would want to purchase something with those dollars which, in the end, can only be spent in the United States."

IOW holding dollars (or any currency long-term) is usually a fool's errand. Those dollars should be spent. And spending them will drive up the cost of U.S.-produced goods.

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