Savings Are a Lousy Excuse for America’s Trade Deficit

Everyone who’s been paying attention knows by now that Americans consume too much and save too little. This is statistically true, but it has unfortunately become the basis of a mischievous lie about the cause of America’s monstrous trade deficits. That is, many orthodox economists have been claiming that our trade deficit is really a savings problem in disguise.

Sometimes, it is admitted that America saves too little; sometimes, it is claimed that the real problem is a savings glut abroad, mainly in East Asia. Either way, this implies that trade policy is irrelevant to our massive and ongoing trade deficits, and, thus, that it is futile to try to bring them down through changes in trade policy, as only changes in savings rates can alter anything. For example, the China Business Forum, an American group, claimed in a 2006 report, “The China Effect,” that:

The United States as a whole wants to borrow at a time when the rest of the world … wants to save. The result is a current account deficit in the United Sates with all countries, including China.

This analysis is dubious on its face, as it implies that whether American cars and computers are junk or works of genius has no impact on our trade balance. (Nor, apparently, does it matter whether foreign nations erect barriers against our exports.) Nevertheless, this story is stubbornly repeated in some very high places, largely because it excuses inaction.

But this analysis depends upon misunderstanding the mathematical relationship between trade deficits and savings rates as a causal relationship. In national income accounting, our savings are simply the excess of our production over our consumption – because if we don’t consume what we produce, saving it is the only other thing we can do with it. (If we export it, we’ll get something of equivalent value in return, which we must then also consume or save, so exporting doesn’t change this equation.) And a trade deficit is simply the opposite, as if we wish to consume more than we produce; there are only two ways to get the goods: either import them, or draw down supplies (aka savings) saved up in the past.

As a result, trade deficits do not “cause” a low savings rate or vice versa; they are simply the same numbers showing up on the other side of the ledger. (The decision to eat one’s cake does not cause the decision not to save one’s cake; it is that decision.) So, neither our trade deficit nor our savings rate is intrinsically a lever that moves the other – or a valid excuse for the other.

Sometimes, it is even argued that foreign borrowing is good for the United States, on the grounds that it enables us to have lower interest rates and higher investment than we would otherwise have. But this argument is a baseline trick. It is indeed true that if we take our low savings rate as a given, and ask whether we would be better off with foreign-financed investment or no investment at all, then foreign-financed investment is better. But our savings rate isn’t a given; it’s a choice, which means that the real choice is between foreign- and domestically-financed investment. Once one frames the problem this way, domestically-financed investment is obviously better, because then Americans, rather than foreigners, will own the investments and receive the returns they generate.

A related false analysis holds that our trade deficit is due to our trading partners’ failure to run sufficiently expansive monetary policies. This basically means their central banks haven’t been printing money as fast as the Fed. Some American officials, like Clinton’s Trade Representative Charlene Barshefsky and Commerce Secretary William M. Daley, have even verged on suggesting this is a form of unfair trade. Now, it is indeed true that our major trading partners have not been expanding their money supplies as fast as we have. But as we have been doing so largely in order to blow up asset bubbles in order to have more assets to sell abroad to keep financing our deficit, it is not a policy sane rivals would imitate. We can hardly ask the rest of the world to join us in a race of competitive decadence. (If they did, the result would almost certainly just be global inflation anyway.)

Another dubious theory holds that America’s deficit is nothing to be ashamed of because it is due to the failure of foreign nations to grow their economies as fast as ours. Thus. George W. Bush’s Treasury Secretary Henry Paulson Jr. said in 2007:

We run a trade deficit because our vibrant and growing economy creates a strong demand for imports, including imports of manufacturing inputs and capital goods as well as consumer goods – while our major trading partners do not have the same growth and/or have economies with relatively low levels of consumption.

This analysis appeals to American pride because it carries the implication that we are merely victims of our own success and that our trade deficit is caused by the failure of foreign nations to be as vibrant as we are. It implies that somebody else ought to get his house in order. Unfortunately, it is obviously false that our deficit is caused by slow growth abroad when some of our worst deficits are with fast-growing nations such as China. As for “relatively low levels of consumption” abroad, this is true enough, but it also implies that balancing our trade will remain impossible as long as we have trading partners with low consumption levels. And, indeed we do, simply because so much of the world’s population is still impoverished and not consumers in our sense of the word.

It is time for America’s ruling circles to stop their endless game of seeking ever more sophisticated ways of pretending that America’s trade crisis is something other than what it is: a trade crisis, which will eventually have to be dealt with by actual trade policies like retaliatory tariffs against foreign mercantilism. The desperate attempts of the political and economic elite to frame the crisis as anything other than what it actually is merely produces policy paralysis while the clock ticks away on our unsustainable trade deficit, risking a bigger economic debacle the longer we wait.