Raymond Richman       -       Jesse Richman       -       Howard Richman

 Richmans' Trade and Taxes Blog

Wall Street Journal Suggests Not to Think About the Trade Deficits
Raymond Richman, 3/11/2017

The editorial writers of the Wall Street Journal, 3/10/2017, wrote an editorial entitled “How to Think About the Trade Deficit”, which they considered an answer to Prof. Peter Navarro’s piece on 3/6/2017, “Why the White House Worries About Trade Deficits.”

Were I still a Prof. of Economics, I would give the WSJ an “F” in the economics of international trade.  In the second  paragraph, one reads “a trade deficit isn’t a debt that must be repaid. It is often a sign of economic prosperity.”  A trade deficit results in the accumulation abroad of U.S. currency, every dollar of which recites that “This note is legal tender tor all debt, public and private.” The U.S. does not have to pay it back but it can be used to buy U.S. government bonds, to purchase Rockefeller Center as the Japanese did, buy real estate as many Germans have done, buy U.S. companies, or keep our IOUs as reserves for future use. The consequence of the trade deficit wherein our trading partners do any one of the above is to create jobs in the trade surplus country and none in the U.S.

In the third paragraph, the WSJ equates balance of payments with balance of trade, capital flows vs. trade in goods. The former is exchanging a $20 bill for two 10s. When we experience a trade deficit, our trading partners gives us goods in exchange for our $20 bill. It takes labor and capital in the exporting country to produce the goods we import while all it takes is paper and ink to produce our evidence of debt. Why would anyone want to exchange goods for a printed piece of paper – are they stupid? No they are buying our promise to let them gain ownership of productive assets in our country in exchange for the paper we used to pay for their goods.

In the 7^th paragraph WSJ writes  that if trade surpluses were a sign of success, the 1930s might been different, quoting Prof. Don Boudreax  of George Mason U, “For only 18 of the 120 months of that dreary decade did the United States run a trade deficit. For each of the remaining 102 months of the decade of the 1930s the  U.S. ran a trade surplus.” No one claims that trade deficits have much if anything to do with cyclical fluctuations. That the U.S. ran trade deficits during periods of prosperity has nothing to do with the argument that trade deficits have caused the loss of millions of good-paying jobs in manufacturing.

WSJ follows with the statement that money earned from export surpluses, returns to the U.S. to “finance an investment shortfall in the U.S., especially government borrowing.” And, “to finance mortgages and consumer loans, which help the U.S. standard of living.” We guess is the WSJ believes that like the trade deficits, they do not need to be paid back.

As for foreigners buying U.S. property, the WSJ writes, “The U.S. capital  stock isn’t a fixed amount and adding to what is here doesn’t diminish U.S. ownership. It does, however, allow current owners to cash out of their property and put that money to other uses.” Including spending it in foreign travel and investing abroad? The possibilities are endless.

WSJ continues, “Perhaps the best way to think about the U.S. trade deficits is not think about it.” It’s true; they’re not.”

Here is how to think about it? Pres. Trump was elected because so many of our leaders ignored the chronic trade deficits and in fact were stimulating them. The General Agreement on Tariffs and Trade, which culminated in a multi-lateral agreement and creation of the World Trade Organization had the following effects on the U.S.:

1.     We lost millions of good-paying manufacturing jobs with the result that the lower middle class declined, and wage levels stagnated or sank, with millions leaving the labor force.

2.     The U.S. went from being the world’s leading creditor to the world’s leading debtor.

3.     The trade agreements were a stimulus to the flight of factories from the U.S. to our trading partners, secure in the knowledge that there would be no tariffs when they exported the products formerly made in the U.S. to the U.S.

If the political elites, like the WSJ, succeed in preventing the restoration of a reasonable balance of trade, there will be as Prof. Navarro wrote in the opinion piece in the WSJ slow economic growth, weaker national power including military, and greater difficulty in managing the national debt. It may be only a slight  exaggeration to say that failure to bring the enormous trade deficit under control means the end of democracy in the U.S. Judging by the nonsensical protests in the streets and on campuses, it is already under way.