Living within our means
Economist Peter Morici — like many others — insists “the trade deficit means Americans are living beyond their means.” If he is correct, we would indeed have cause for concern.
We run trade deficits whenever we import more than we export — that is, buy more from foreigners than we sell to them. Superficially, we appear to live beyond our means. And indeed, Morici and others convey the impression that we are on a reckless consumption binge that spells future doom. But closer investigation reveals this to be wildly inaccurate.
More than half of our imports are raw materials and intermediate goods used by U.S. firms as production inputs. That is, most of our imports do not directly increase our consumption; instead, they increase our production. Were Uncle Sam to obstruct U.S. producers' access to these lower-priced imported inputs, their production costs would rise and they would produce less. This lowered production would truly be evidence of irresponsible behavior.
Responsible adults understand that people who really do live beyond their means subject themselves to long-term pain merely to enjoy short-term pleasure. Over time, they make themselves less productive and poorer. This impoverishment, alas, is the inevitable effect of tariffs. Because higher tariffs artificially bloat U.S. firms' production costs, these and other trade barriers make U.S. firms less productive over time. While tariffs provide short-term pleasure by protecting a handful of highly visible jobs, by undermining America's productive efficiency they also condemn the great majority of us to greater economic pain in the long run.
Still, isn't Morici correct that we're nevertheless living beyond our means when we import more than we export? No.
America offers foreigners more than just goods and services to buy. The U.S. economy, despite many imperfections, remains a vibrant, highly productive arena that also offers foreign investors and entrepreneurs an unusually rich array of promising investment opportunities.
To take advantage, foreigners need U.S. dollars. So when citizens of Germany, China, Australia and other countries want to invest in America, they cannot spend on U.S. exports all the dollars they earn when Americans import their goods and services. Foreigners accumulate dollars they invest in America by reducing their purchases of U.S. exports.
The dollars that foreigners don't spend on U.S. exports are instead invested in America, which offers a vast open market, rule of law, honest courts and secure property and contract rights — attractive and durable institutions that are major elements of what America offers to foreigners.
So when foreigners invest their dollars in America (rather than spending those dollars buying our exports), we aren't living beyond our means. Far from it. We are reaping the fruits of our relatively secure, entrepreneurial and free economy. The best part is that these foreign investments, by adding to U.S. capital stock, make our economy even more productive.
Donald J. Boudreaux is a professor of economics and Getchell Chair at George Mason University in Fairfax, Va. His column appears twice monthly.