The Trade Deficit Is a Boon to Our Net Worth

Homer sometimes nods—and so, too, does John Cochrane toward the end of his op-ed.

Letter to The WSJ.

"John Cochrane is always worth reading, and his op-ed “Trump’s Monetary Policy Desires Aren’t Crazy” (Oct. 22) is no exception. But as even Homer sometimes nods, so, too, does Mr. Cochrane.

He is correct that “countries that run perpetual trade deficits to finance consumption, borrowing abroad to do so, eventually must pay back the debt. Saving and investing rather than borrowing and consuming is good for an economy as it is for a family.” But he’s mistaken that “the central problem in our case . . . is the bounty was consumed rather than invested.”

The U.S. has run annual trade deficits for the past 50 years. If Americans used the bulk of this inward flow of foreign capital overwhelmingly to finance consumption, our real net worth would have fallen. In fact, the average American household’s real net worth is today 236% higher than it was in 1975. It is 142% higher than in 1994 when the North American Free Trade Agreement took effect, and 80% higher than in 2001 when China joined the World Trade Organization.

Some of this foreign capital financed the wasteful consumption that results from deficit spending. But the bulk of it clearly was used to increase our capital stock—and, therefore, to raise the productivity of our economy.

Prof. Donald J. Boudreaux

George Mason University"