Economist keep telling everyone that trade deficits don’t matter. The only person with an economics PhD who disagrees is Peter Navarro – our problem being that Navarro’s in the White House advising Trump. Still, it’s good to have Gary Cohn speaking out on this:
Former Trump advisor Gary Cohn could care less about trade deficits.
“Look, I have always said a trade deficit doesn’t matter,” the ex-White House chief economic advisor said during a Washington Post interview Thursday. “In many respects, it’s helpful to our economy.”
A trade deficit doesn’t matter. For, as a matter of definition, if there’s a trade deficit then there must be a capital account surplus. That is, foreigners must be investing in the US by exactly the same amount as that deficit. And seriously, it’s not a problem when people come invest in your economy.
Sure, Warren Buffett likes to speculate about what happens when the foreigners own the entire economy but that’s just not something to worry about. The US creates, anew, wealth at a rate of some $5 to $8 trillion a year. The trade deficit is some $500 billion (no, the goods only trade deficit of $800 billion matters even less than nothing). Foreigners can continue to invest in the US at this rate forever and they’ll en up owning an ever smaller potion of the economy. Yes, smaller.
There are also those who seem to think that this investment is some debt that has to be repaid – nope, it ain’t. They can buy stuff as well as lend money. And buy a lot of stuff they do.
“If you end up with a tariff battle, you will end up with price inflation, and you could end up with consumer debt,” Cohn, the former chief operating officer of Goldman Sachs, said in an interview with The Washington Post. “Those are all historic ingredients for an economic slowdown.”
And as Cohn points out the supposed remedies for that problem that doesn’t exist, that trade deficit, are harmful in themselves. So, not a problem, the things people recommend to solve the not a problem make the economy worse, we’d better go back to treating it as not a problem and therefore doing nothing about it, shouldn’t we?