Boudreaux on Stiglitz

In a recent article in Vanity Fair Joe Stiglitz asserts that greater purchases of foreign oil by Americans would put upward pressure on the U.S. trade deficit and thereby "force the U.S. to continue borrowing gargantuan sums from abroad, making us even more indebted."

Don Boudreaux begs to differ. At Cafe Hayek Boudreaux writes that Stiglitz is wrong on two counts.

First, if Americans increase their imports of oil, this fact does not necessarily increase the size of the U.S. trade deficit. If the foreign suppliers of this oil spend all of their dollar earnings buying American exports, then there's no increase in the size of the U.S. trade deficit.

Second, even if we assume that foreigners who sell more oil to Americans will spend none of their resulting earnings on American export during the current period, not a single dollar earned by these foreigners need be borrowed back from these foreigners by Americans. Americans can borrow these dollars from foreigners, of course. But John Doe in Denver or Jane Roe in Roanoke (or Uncle Sam in Washington) is no more "forced" to borrow back the dollars they spend buying oil from Sheik Faisal in the middle east than they are "forced" to borrow back the dollars they spend buying mutton from shepherd Frank in the Midwest.

If foreign oil suppliers to the U.S. lend the dollars they earn to Uncle Sam or to the likes of General Electric, then Americans' oil imports do indeed cause the U.S. trade deficit and Americans' indebtedness to rise. But if these same foreign suppliers instead hold on to their dollars, or buy equity in General Electric or real-estate in Rhode Island, or if they use these dollars to fund foreign direct investments in the U.S., then even though the U.S. trade deficit rises, it does not increase Americans' indebtedness.