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Some Deficits are Good! March 11, 2017 10:00 AM | Tagged as Navarro

WSJ 10 March 2017 “How to Think About Trade Deficits” (editorial)

President Trump’s cabinet is pretty strong, but The Biz Bucks Guy differs with the President on his selection for Chief Trade Advisor, Peter Navarro. Mr. Navarro is advocating the elimination of our national trade deficit. Trump ran on making the growing deficit turn around and “keeping money in the US.” To put it bluntly, that’s a crock in the view of many economists. The WSJ editorial board took on this issue directly. See the reference above.

To quote the editorial board, “Americans may be alarmed when they hear that the U.S. buys more from the rest of the world than it sells because they can’t run a household deficit. But national accounting isn’t the same as household accounting, and a trade deficit isn’t a debt that must be repaid. It is often a sign of economic prosperity…

“If trade surpluses were a sign of success, the 1930s might have been different in the U.S. As George Mason economist Don Boudreaux points out on his Cafe Hayek blog, “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…

“On the other hand, the U.S. ran a trade deficit in nearly every year of its rapidly growing first century and all through the prosperous 1980s and 1990s.”

This issue is about the US balance of payments which is an accounting scheme for nations to keep their books. In that scheme is an accounting identity, meaning an equality that must be kept true regardless of transactions booked to the equality. Picking up the editorial again,

“Start by keeping in mind the basic formula embedded into the national balance of payments: A trade deficit equals a capital surplus. The trade deficit is part of the “current account” and it means that Americans are importing more merchandise and services than they export. On the other side of the ledger is the “capital account,” which records capital inflows. When the U.S. has a current-account deficit it has to have a capital-account surplus of the same amount.”

So do you want the US to have a rising capital account or a rising current account? While all this is complicated to us novices, the answer to the question is often “it’s neutral.”

The best advice for us mere economic mortals on this subject is this, again from the WSJ editorial.  “Perhaps the best way to think about the U.S. trade deficit is not to think about it.”

The Biz Bucks Guy agrees. If you want more depth, start reading CafeHayek and FEE (The Foundation for Economic Education). The Biz Bucks Guy does regularly. Both are amazing sources of free market economic principles. I hope Mr. Trump begins reading these web sites.

[Although opinion is included, The Biz Bucks Blog is primarily written to former students of Biz Bucks training courses to encourage their daily reading of the three opinion pages of the WSJ. This refreshes principles of Biz Bucks courses and improves business acumen on topics not discussed in Biz Bucks training.]

Posted By The Biz Bucks Guy
Posted in MacroEconomics, National Debt | 0 Replies

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