Deficit Nonsense

I'm passionately committed to free trade--it brings American consumers innovative products at reduced prices. So I'm always distressed when the usual suspects start worrying their trade-deficit rosary beads. Lately, the bead volocity has been approaching the speed of light.

So I was grateful for John Tamny's comment on NRO today. He calmly shows the weakness of the worrier's arguments:

In a November 30 editorial, “Dollar slides, alarms ring,” USA Today’s editorialists noted that “foreign investors now own an estimated 48% of U.S. Treasury bills,” and that they could become “majority owners of federal debt in coming years.” In another example of the schizophrenia that characterizes trade-deficit worriers, the very same editorial said dollar weakness could be a signal of the “world’s increasing impatience with the United States’ habit of living beyond its means.”

Which is it? Indeed, if the world is increasingly impatient with the U.S., it has a funny way of showing it. Logic suggests that if investors were impatient, they would be dumping U.S. debt. Yet the same editorial said the opposite is occurring. In addition, U.S. Treasuries pay a dollar-denominated coupon: Is it remotely realistic to assume that foreign owners of an increasingly large share of U.S. debt would want to see the value of their payments (and bond holdings) reduced?

Tamny's conclusion couldn't be clearer:

[There's a] glaring flaw in the arguments made by trade-deficit worriers. Since it’s an empirical fact that our trade deficits are driven by massive inflows of foreign capital, it must from there be deduced that money doesn’t flow here because the world loves us (the Left says they hate us), but because the worldwide investment community still sees U.S. economic policies that embrace low taxation and low regulation as ones that will yield the best returns.

In short, we can reduce the trade deficit, but only if we pursue the kinds of high-tax, tariff, and regulatory policies that would impoverish us. Because of that, Americans should beware of those offering solutions to our supposed balance-of-trade problem. The cure is much worse than the unambiguously positive symptom.

Or more generally, "Everything is 'compared to what?'"

More:

Another good Tammy article on trade deficits, particularly regarding China.