Stossel on the Trade Deficit
Greg Mankiw tells us to read John Stossel:
Economists had taught me that the trade deficit is not a big deal. (The budget deficit may be a big one, but that’s a different issue.) But with all the pundits and politicians alarmed, I began to wonder if I was out of touch. Then I thought about my local supermarket. I buy stuff from the Food Emporium every week. I spend thousands of dollars a year there. But the supermarket never buys anything from me. Not one thing … Trade statistics obscure reality. Individuals exchange only when each expects to benefit. If they didn’t expect it, they wouldn’t trade. That’s true even if one party is American and the other Chinese. Trade is trade. If we don’t care about trade balances at the individual level, why does it matter if in a given year Americans as a group buy more from the Chinese than they buy from us? It doesn’t. In fact, it’s a good thing. Foreigners trade cool products (and capital goods) for paper money. They can do only three things with our dollars: buy American goods and services, save them, or invest in the United States (including buying U.S. government debt). In other words, most of what foreigners don’t spend here, they invest here. The trade deficit is mirrored by the capital-account surplus . Should we be concerned that foreigners see the U.S. economy as a good place to invest their money? I can’t see why. I think we should see it as a wonderful thing: They trust America’s future enough to invest in it. Investment creates new products and better jobs. Especially absurd is Dobbs’s idea that the trade deficit means we are in debt to foreigners. Except for the T-bills foreigners buy, this just isn’t true.
Why would Dr. Mankiw want anyone to read this nonsense? To the degree that Stossel is saying don’t listen to trade protectionist such as Lou Dobbs and Pat Buchanan – great! And his grocery store analogy is essentially saying that bilateral trade balances are rather meaningless. If the U.S. had a trade surplus with Europe equal to its trade deficit with Asia, I’d see his point. But we seem to have a trade deficit with almost every nation.
Stossel argues we should be concerned with government deficits but we should not be concerned when the Chinese are buying investment goods from U.S. producers. But might someone inform Mr. Stossel of the facts. Investment demand in the U.S. is not high. No, we have a very low national savings rate. And the Chinese are buying U.S. government bonds. Stossel wants to pretend that we are not running up debt. He wants to pretend that the U.S. is creating all sorts of new net wealth. If Stossel really believes what he wrote, then is very ignorant of the data. Greg Mankiw is not – so why did he asked us to read Stossel?