Deficits

On this day:
1429
Joan of Arc ends the Siege of Orléans, pulling an arrow from her own shoulder and returning, wounded, to lead the final charge. The victory marks a turning point in the Hundred Years’ War
1794
French Revolution: Robespierre introduces the Cult of the Supreme Being in the National Convention as the new state religion of the French First Republic.
1915
World War I: German submarine SMU U-20 sinks RMS Lusitania, killing 1,198 people including 128 Americans. Public reaction to the sinking turns many formerly pro-Germans in the United States against the German Empire.
1942
During the Battle of the Coral Sea, United States Navy aircraft carrier aircraft attack and sink the Japanese Imperial Navy light aircraft carrier Shōhō. The battle marks the first time in the naval history that two enemy fleets fight without visual contact between warring ships.
1945
World War II: General Alfred Jodl signs unconditional surrender terms at Reims, France, ending Germany’s participation in the war. The document takes effect the next day.

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I am weary of the provocateur-in-chief.

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ESPN is reporting that Pickens has been traded

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The basic problem in the Middle East is the Nuclear Suicide Bomber, a nation willing to blow up the world because of its vision of the will of God. That risk has always been concentrated on Israel and its enemies. But this India-Pakistan fight has similar nihilistic potential. We see microcosms of it every day: morons with weapons.

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The fight between the teen gang and the police in Times Square had a very São Paulo, Brazil feel. Very diverse and international.

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Deficits

Free trade occurring without government management or interference had been a hallmark of American economics. Think of all those niggling trade bills the British used against New Englanders before the Revolution. Well, they're back.

Does Pennsylvania have a trade deficit with Alaska? California? Do you have a trade deficit with your dentist?

A nation indeed has more in play than simple numbers. But it is also true that some of the number debates are simply untrue.

There’s little obvious connection between the U.S. trade balance and economic output (gross domestic product). This chart from a recent Cato essay on the trade balance shows that the relationship between higher trade surpluses (or smaller deficits) and higher GDP growth is practically nonexistent, although I can't copy it well. (Much from Scott Lincicome)

If that hypothesis were correct, these two series would be rising and falling in concert.

One can’t judge whether a trade deficit is a problem without considering its underlying macroeconomic causes and how related foreign capital inflows are used. If those inflows are caused by a nation’s young population and its attractiveness as an investment destination—and if they’re invested productively in things like education, housing, or research—then the resulting trade deficit would be benign. If, on the other hand, the trade deficit is primarily driven by an elderly citizenry’s debt-financed consumption and by profligate government spending, then it could be more of a concern. 

In either case, however, the trade deficit remains a symptom, not a cause, of a nation’s underlying economic issues.

Aside from our government’s runaway deficit spending, none of the drivers of the U.S. trade deficit is necessarily “bad” for the U.S. economy, and many of them—portfolio investment, foreign direct investment, etc.—are objectively good and indicative of a thriving economy. (U.S. household debt is mostly home mortgages and has actually been trending down since the mid-2000s, while corporate debt has been basically flat for decades.)

This also explains why no serious economist thinks tariffs or trade deals will significantly reduce, let alone eliminate, the U.S. trade deficit. Tariffs can reduce both imports and exports, reducing a nation’s overall level of trade but leaving its trade balance unchanged in the long run”—a conclusion supported by research on dozens of different countries and the United States’ experience during the first Trump term.

Even imported consumer goods can boost U.S. output. Companies tasked with moving or selling imported items—in wholesale trade, retail trade, and transportation and warehousing —generate trillions of dollars of additional U.S. economic output. By reducing retail prices, moreover, imports can free consumer dollars for spending on American goods and services. And, as already noted, dollars spent on imports quickly return to the United States as either investment in U.S. assets or purchases of exports, both of which contribute to economic growth.

It’s similarly wrong to assert—as our president often does—that the U.S. trade deficit represents a loss of wealth for the United States or some kind of national “debt.” For starters, this ignores that dollars we send abroad to foreigners buy us real goods and services that we value (or else we wouldn’t buy them), and that—as discussed above— those same dollars eventually return to the United States as investment in the U.S. private or public sector (by mostly unrelated people). Some call the latter a “debt” we Americans must repay, but in many cases—portfolio investment, foreign direct investment, real estate, and basically anything else that isn’t actual public debt—that’s not really true. Corporate debt, for example, is owed by shareholders and employees of the company at issue, not by you and me. Foreign purchases of equity (stocks), property, or even entire U.S. companies isn’t “debt” at all—and can benefit most Americans and the nation if the investment spurs more hiring/production/innovation, causes stocks to rise, or causes similar, American-owned assets (e.g. property) to appreciate too. It’s not zero-sum. 

So Japanese investment in U.S. Steel is seen, on the accounting ledger, as a negative balance of trade and some sort of risk despite being obviously beneficial.

Another huge and common mistake is using bilateral trade balances—e.g. the U.S. trade deficit with China—as indicative of economic problems or as some sort of trade policy scorecard.  

Most basically, the world has more than two countries, so—just as my trade deficit with my grocery store tells us almost nothing about my overall financial position—a U.S. trade deficit with, say, Mexico tells us almost nothing about our own economy. 

A country's integrity might well be threatened by trade. Relying on your sworn enemy for your energy or bullets is a bad long-term plan. But historically, we have actually encouraged these imbalances. We suppress our own energy production in favor of that of Russia and the Middle East, certainly cultural unfriendlies. That is--or has been until now--purposeful. It was a hallmark of what passes as the Biden administration. 

It is certainly worth discussion, but a cynic might say that leadership does not understand the factors or doesn't think the citizenry capable of the debate. 

Both of those scenarios are a lot worse for the nation than trade deficits.