Don Boudreaux On Why The Trade Deficit Is Not Necessarily Bad For The Economy

See Bad Reporting at Cafe Hayek. This is another one of his greate letters:

"You report that “A widening [trade] deficit is bad for the U.S. economy. When imports outpace exports, more jobs go to overseas workers than to U.S. workers” (“Trade deficit widens to $40.6 billion,” Feb. 13).

Untrue. Another name for a trade deficit is a “capital-account surplus.” Save for rare instances of dollars being hoarded or used as circulating media abroad, every dollar of a U.S. trade deficit is a dollar of foreign investment in America.

Suppose that in 2011 Richmonders buy $1 billion worth of goods and services from Charlottesvillians, but Charlottevillians buy no goods and services from Richmonders. Further suppose that Charlottesvillians use this billion dollars to invest in Richmond – such as building retail outlets in Richmond; buying stock in Richmond-based corporations; buying bonds issued by Richmond’s government to fund road improvements. Richmond will have a $1 billion trade deficit with Charlottesville. But are Richmonders harmed? Do the investments made by Charlottesvillians in Richmond fail to expand Richmond’s economy, fail to increase its capital stock, and fail to increase economic opportunity in that city? Does Richmond lose jobs as a result? Of course not.

And so it goes especially at the national level. Because nearly every dollar of the U.S. trade deficit represents foreign investment in America, only economically illiterate reporters assert that a U.S. trade deficit, as such, “is bad for the U.S. economy.”"