Worry Not About So-Called “Trade Deficits”

Don Boudreaux. 

"This piece by Rapoza also features a discussion of the U.S. trade deficit in “goods” – any mention of which is a sure sign that the writer is a poor economist. A trade deficit in tangible things is no more economically meaningful than is a trade deficit in yellow things or things that start with the letter “V.”

…………..

Contents Editor
Center for a Prosperous America (CPA)

Editor:

Kenneth Rapoza concludes his recent piece on the U.S. trade deficit by quoting CPA president Jeff Ferry’s worry that “it is hard if not impossible to see how we can generate significant economic growth in this country while the trade deficit continues at close to a trillion dollars, or 3 percent of GDP” (“Annual Goods Trade Deficit Has Fallen, But Still Beats $1 Trillion. China Deficit Shrinks By Billions.” February 7).

Let me help clear Mr. Ferry’s vision. The annual U.S. trade deficit has hovered near three percent of GDP for the past quarter-century – and when, during this time, it wasn’t close to the three-percent figure it was well above (as in larger) and never much below it. And yet the trend of real per-capita GDP growth during these years shows no sign of deviating from its long-term trend dating back to 1947. Real per-capita GDP is trending upward today along the same path that marked its growth for decades earlier, including the years 1947-1976 when the U.S. generally ran annual current-account surpluses.

Rather than fret about U.S. trade deficits, we should recognize that these “deficits” represent net inflows of capital into our country – and net inflows of capital stimulate, rather than stymie, economic growth."