Dangerous Wish
When all the economic statistics for 2006 are toted up, it will not go unnoticed that Americans again have bought more goods and services from abroad than they've sold there. The "current account deficit," which measures this particular imbalance, will soar well above the record $791 billion of last year, quite likely to somewhere in the $860 billion range. This number will be viewed with great alarm in some quarters. Conventional wisdom, well expressed by Charles Dickens' fictional Mr. Micawber, holds that if outgo exceeds income, there's big trouble ahead.
But that's not quite the way the global economy works. The outgo from America to buy goods and services abroad is matched identically by incoming foreign investment in America. The dollars, in fact, never leave America in any physical sense — they are just handed around from bank account to bank account. A large proportion will go to purchase U.S. Treasury securities. Foreign central banks, conservative in nature, have a high regard for Treasury debt. They know as well that their investments allow Congress to finance easily federal budget deficits and thus encourage that body to keep the trade lanes open for the benefit of all.
How long can this go on? Trade warriors have been asking this question for as long as we can remember. An indirect answer is that there will never be some kind of Archimedean balance in which every nation matches exactly what it buys with what it sells. At least, we hope not, because the global economy would likely grind to a halt as every country became moored to the lowest common denominator.
A rough principle is that prosperous countries — like America — tend to run trade deficits. Because such countries are attractive places to invest, as America is today, foreigners don't mind accepting their currencies in return for goods and services. Indeed, they are eager to do so, because their investments yield a return that augments the profit made on the export itself and their dollar accounts are liquid enough to be available for purchases in America or the global marketplace, where the dollar is internationally acceptable.
But what if a big dollar holder, like China, were mischievously to decide to dump dollars? It would pay a heavy price. It would lose the trade that has made it a growth dynamo, and a massive sale would devalue its remaining holdings, resulting in a sharp loss of reserves. The reason this rarely happens is that central banks aren't normally suicidal.
America has been running trade deficits for most of the post-World War II era. Yet today, the economy is at near full employment, which suggests that fears of job losses to imports are overblown, at least in broad economic terms. Per capita family income is the highest in the world save for a few small nations such as Switzerland. Most low-income Americans can have a decent living standard, thanks in part to the inexpensive goods available to them at Wal-Mart and other stores stocked heavily with imports.
Another point to keep in mind was raised recently by George Mason University economist Donald J. Boudreaux in a Web posting responding to a Wall Street Journal oped by Bear Stearns chief economist David Malpass that made some of the points detailed above. Professor Boudreaux reminds us that America once did have an extended period of trade surpluses. It was in the 1930s, when the country was in a deep Depression. So be careful what you wish for.
