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Archive for April 21st, 2020

One year ago, I shared this video to explain why a “trade deficit” doesn’t matter, in large part because it is simply a result of foreigners wanting to invest in America’s economy with some of the dollars they earn.

We also have a trade deficit, I pointed out, because we’re richer than most other nations. Simply stated, we can afford to buy more from people in other nations than they can afford to buy from us.

Indeed, I pointed out that the trade deficit increased in Trump’s first few years in office because better tax policy and better regulatory policy increased America’s economic performance relative to other countries.

This is why, as a general rule, it’s actually a sign of economic strength to have a so-called trade deficit.

The flip side of this observation is that trade deficits will decline if the economy is weak.

And that seems to be happening today. Christine McDaniel of the Mercatus Center, writing for the Hill, notes that the trade deficit is now falling for that unfortunate reason.

The Trump administration’s dream of reducing the trade deficit is finally coming true. …for the first two months of 2020, the U.S. trade deficit dropped to $113.5 billion. That’s down from $130.4 billion over the same period last year, a 13 percent decrease. …Needless to say, …we import less. Today, we are importing less because Americans are consuming less during an economic shut down. …We are probably on track to shrink the trade deficit even more this year. …Consumer confidence declined sharply in March, which reflects consumer sentiment — that is, their overall desire to go out and buy things, including imports. …The irony is that the pandemic is fulfilling one of his campaign promises. Nobody is treating it like good news — but this dream coming true just highlights why the metric is so flawed.

To emphasize Ms. McDaniel’s point, let’s look at the long-run data on America’s trade balance.

Here are the annual numbers from the Bureau of Economic Analysis, measured as a share of economic output.

As you can see, our last trade surplus was during the 1970s, when America was suffering from stagflation, and the trade deficit since then has always declined when there’s been a recession.

By the way, you can also see how the trade deficit increased during the Reagan years and the Clinton years. The obvious lesson is that pro-market policies make us richer, and that means we buy more and attract more investment.

That’s good outcome, even if the so-called trade deficit climbs.

The bottom line is that if we want to reduce our trade deficit (and also, by definition, reduce our capital surplus), we should adopt the Bernie Sanders agenda. We won’t be rich enough to buy much from foreigners, and people in other nations won’t be so willing to invest in America’s economy.

Maybe I’m crazy, but that seems like a bad outcome.

P.S. Trade balances also can be affected by other factors, such as shifts in monetary policy and the economic performance of major trading partners.

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