ON TRADE DEFICITS, CAPITAL SURPLUSES, AND WORSHIPPING AT THE ALTAR OF “FREE TRADE”

3/27/17

Yours truly is a free trade enthusiast, not a free trade dogmatist.   The editors of the Wall Street Journal and most of the Republican Party, however, are largely defined by their blind devotion to the latter, scrupulously adhering to the jots and tittles that they have somehow decided are the essence of a sound free trade policy.  As the incense burning on the altars of the free trade gods began to smolder in the face of the cold winds of reality, the Journal, in a 3/10/17 lead editorial, tried to reignite the flames by trotting out an argument in favor of free trade that is technically true but flawed not far beneath the surface.  I attempted to call out the Journal on this argument in a letter, but, alas, the missive was never published.  I thought I’d share it with my readers.   While this might not be the most entertaining of my pieces, those of you who share my enthusiasm for economics should enjoy it:

3/10/17

The Journal is right (“How to Think About the Trade Deficit,” 3/10/17) when it states that the national payments must “balance” and hence that a trade deficit must be accompanied by a capital surplus of the same size.   However, the Journal makes it sound as if the capital surplus arises because our trading partners are falling all over themselves to invest in U.S. businesses, real estate, and other hard assets.   The Journal gives short shrift to the reality that the bulk of the capital surplus is invested in treasury securities and mortgage and other asset backed securities.  It’s no accident that the era of huge trade deficits has coincided with the era of huge budget deficits; while, as the Journal says, “foreigners are not forcing Washington to borrow,” all those foreign held dollars looking for a safe place to park surely make it easier and cheaper for the politicians to borrow and spend.  The Journal is also correct when it states that “Americans are making millions of individual decisions about how much to save,” but households’ being freed from the necessity to save, and facing less incentive to save, by all those foreign held dollars looking for a home surely skews those individual decisions in favor or more spending and less saving.

To argue that a trade deficit is merely the flip side of a capital surplus does not make the trade deficit a salubrious contributor to the nation’s economic vitality.  The trade deficit and its companion capital surplus have intensified two troubling trends of the last 30 or so years:   a rapidly growing government and an alarming drop in the savings rate.   The former is expensive and detrimental to the principles of freedom on which this country was founded.  The latter is reflective of a deterioration in the national character.   Both necessitate the importation of capital.  Those who think being dependent on foreign oil is dangerous ought to contemplate the perils of being dependent on foreign capital.