#96 / What That Trade Deficit Really Means

On Monday, March 28, 2016, The New York Times ran a story on trade deficits. Neil Irwin, who wrote the story, is a senior economics correspondent for The Times, and he is obviously quite knowledgeable. Click the link on Irwin's name to get his credentials. Click this link to read the story. 

I thought Irwin explained trade (and trade deficits) with unusual lucidity, and he argued quite convincingly that trade deficits are not necessarily bad. Though the main purpose of the article was to educate people who might be misled by the economic dogmas being espoused by Donald Trump, I think you can read the article as a thoughtful (and blessedly brief) primer on international trade. I recommend it.

Here is one of Irwin's observations that I found particularly compelling: 

So does a trade deficit mean fewer jobs? It depends on which force is more economically powerful: fewer jobs creating exports or investment dollars flowing into the country.

So which is it? 

It depends on what the country does with the investment that comes in. 

In theory, that money could go toward long-lasting investments with positive economic returns: new factories and equipment; education for the work force; and new roads and bridges, or repairs and improvements to existing ones.

Irwin notes that in the United States, a lot of the new money that has flowed into the country because of our persistent trade deficits has not gone to long-lasting improvements. Irwin mentions that "the influx of foreign capital in the mid-2000s went in large part to fuel an unsustainable housing and mortgage bubble." It certainly didn't go to education and new and renovated infrastructure.

What Irwin doesn't mention, but what strikes me as the real waste of the capital that could have supported public education, or that might have built "new roads and bridges, or repairs and improvements to existing ones," is that huge sums of money have been spent, and are still being spent, on increasing our military capacity. These expenditures are, by their very definition, intended to increase the ability of the United States military to bomb and destroy people, places, and things. They are literally investments in destruction, and are the opposite of "productive." 

Here's where Irwin may have faulty vision. In his discussion of the burdens and benefits of the dollar being the world's "reserve currency," a topic he also illuminates, Irwin opines that the dollar's prominence in global finance is important because of what it "does for America's place in the world."

According to Irwin, having the U.S. dollar serve as the world's "reserve currency," does mean that we will have "a less competitive export industry," but  it "also creates," according to Irwin, "a lot of advantages."

And what's the number one advantage mentioned by Irwin? 

It helps ensure that the United States can afford to finance [its] wars....

Read the article. See what you think. Maybe Trump, as well as Bernie, is a kind of "peace candidate." Running a trade deficit so we can finance more wars is another good reason to "bring the jobs back home." 

Right along with the soldiers!

Image Credit:

http://www.gltaac.org/blog/