President Trump has long claimed we are being ripped off by our trading partners because we buy more from them than they buy from us. If that’s a wound, it’s self-inflicted.
Keep in mind that we are able to consume a much larger, more diverse, higher quality, less expensive bundle of goods than we could produce domestically because we trade with others. I wouldn’t call that a wound.
We are not getting ripped off. To see why we’ll have to get into about a calf-high patch of economic weeds. It’s a matter of how GDP is tabulated.
Consider a completely self-sufficient country. Such a country’s citizens can consume only what they produce limited by available resources and technology. Therefore, every year total spending must exactly equal total income so GDP equals national income. Those familiar with principles of economics will recognize this as the circular flow model. The carousel goes round and round.
But consumers don’t spend all of their incomes, they save some. If saving was all that happened, the circle would collapse because saving leaks off money into deposits in banks and other financial institutions. But they are not cash storage facilities. They use customers’ saving deposits to make loans to other consumers to make purchases and businesses to invest in plants, equipment and technology.
Businesses investing and consumers spending the proceeds of loans inject back into the spending stream money leaked off by saving. Saving and investment must be equal because businesses invest or disinvest in inventories when sales either fall short of or exceed planned investment.
The same logic applies when allowing for government and international trade. Spending power leaked off by taxes and paying for imports is injected by government spending and other countries’ paying for our exports. Therefore, total leakages and total injections of purchasing power must be equal every year.
Here's the self-inflicted wound. We spend most of our incomes on consumption and save little and the federal government runs enormous annual deficits. Hence, saving is less than investment and government spending is greater than tax revenue. Alone that would mean total injections would be greater than total leakages. Since leakages and injections of purchasing power must be equal, a low saving rate and government deficits must be balanced by imports that exceed exports. That means we have a balance of trade deficit which is what Trump refers to as being ripped off.
We aren’t being ripped off. Our trade deficit is an unavoidable consequence mostly of huge federal budget deficits. Even if there were no tariffs, we’d still have a trade deficit. That’s not the fault of other nations; it’s self-inflicted. Therefore, the premise upon which Trump bases his trade war is false.
Patrick Taylor lives in Ridgeland.
