The US has been running large current account deficits for many decades. Commenters often suggest that this means we are becoming a debtor nation, living beyond our means. This is not true.In the comments to the post Don Boudreaux writes:
The US earns more from our foreign investments overseas that foreigners earn on their investments in the US. China earns $65 billion selling goods to the US, and fritters the money away in loans to places like Venezuela. Meanwhile our multinational corporations make shrewd investments overseas, which bring lots of money back to the US economy.
The international accounts balance out perfectly, once you include trade in goods, services, and assets. The overall balance of payments deficit is precisely zero, if measured properly. Some countries, such as China, are relatively good at exporting goods. They run a positive trade balance. The US is relatively good at international investment---we run a persistent trade deficit, financed by our profits on overseas investments. Or we sell the Chinese "goods" such as houses in LA, that don't count as US exports because they are not physically moved overseas.
Our balance of payments accounting doesn't really correspond to what's going on in the real world. If we sold the Chinese mobile homes, and put them on a ship to China, they'd count as exports. It sounds crazy, and it is, but that's how the accounting is done.
This does not mean that we live beyond our means. GDP in the US is much larger than US consumption. Over time, we are becoming wealthier and wealthier. If countries like China ever became more adept at international investment, then the US would have to share a greater proportion of its GDP with the rest of the world.
Nice job - but why do you suggest that America's trade (or current-account) deficit requires that Americans consistently earn profits on their foreign investments? It seems to me that all that is required for Americans to run capital-account surpluses consistently or even indefinitely is that foreigners continue, year after year, to find America to be a relatively more attractive place to invest than Americans find non-American places. Indeed, if we Americans were so very good at investing abroad that we consistently profit on most such investments, that reality - by steadily increasing our foreign investments relative to foreigners' investments in America - would put downward pressure on our current-account deficit.Any interesting response to the Summer post comes from Phil in the comments,
A perpetuation of this transfer will lead to major trouble. To understand why, take a wildly fanciful trip with me to two isolated, side-by-side islands of equal size, Squanderville and Thriftville. Land is the only capital asset on these islands, and their communities are primitive, needing only food and producing only food. Working eight hours a day, in fact, each inhabitant can produce enough food to sustain himself or herself. And for a long time that's how things go along. On each island everybody works the prescribed eight hours a day, which means that each society is self-sufficient.In reply to this argument Don Boudreaux writes:
Eventually, though, the industrious citizens of Thriftville decide to do some serious saving and investing, and they start to work 16 hours a day. In this mode they continue to live off the food they produce in eight hours of work but begin exporting an equal amount to their one and only trading outlet, Squanderville.
The citizens of Squanderville are ecstatic about this turn of events, since they can now live their lives free from toil but eat as well as ever. Oh, yes, there's a quid pro quo--but to the Squanders, it seems harmless: All that the Thrifts want in exchange for their food is Squanderbonds (which are denominated, naturally, in Squanderbucks).
Over time Thriftville accumulates an enormous amount of these bonds, which at their core represent claim checks on the future output of Squanderville. A few pundits in Squanderville smell trouble coming. They foresee that for the Squanders both to eat and to pay off--or simply service--the debt they're piling up will eventually require them to work more than eight hours a day. But the residents of Squanderville are in no mood to listen to such doomsaying.
Meanwhile, the citizens of Thriftville begin to get nervous. Just how good, they ask, are the IOUs of a shiftless island? So the Thrifts change strategy: Though they continue to hold some bonds, they sell most of them to Squanderville residents for Squanderbucks and use the proceeds to buy Squanderville land. And eventually the Thrifts own all of Squanderville.
At that point, the Squanders are forced to deal with an ugly equation: They must now not only return to working eight hours a day in order to eat--they have nothing left to trade--but must also work additional hours to service their debt and pay Thriftville rent on the land so imprudently sold. In effect, Squanderville has been colonized by purchase rather than conquest.
The scenario you describe is possible. But it does not undermine the larger point made by Scott. The reason is that you implicitly assume throughout your tale that all of Squanderville's trade deficit becomes Squanderville's debt and that none, or too little, of that debt is used to finance the production of capital that will increase future output in Squanderville. Given the name of that mythical country, that is not a bad assumption.Much of the issue here is just a misunderstanding of an accounting convention, what gets recorded where in the national accounts. The so-called "trade deficit" or current-account deficit may be a symptom of something being wrong somewhere in the economy, but it is not in and of itself a problem.
But in reality any real country can run a trade (or current-account) deficit without incurring a smidgen of debt - such as, for example, when producers in country F simply hold some of the currency they earn by selling goods to denizens of country D, or when producers in country F use some of these earnings to buy shares of stock in businesses headquartered in country D, or when producers in country F use some of these earnings to build factories or retail outlets in country D.
When Ikea, for example, builds a store in Newark, New Jersey, the stock of capital in America increases as the U.S. trade 'deficit' thereby rises. It's true that some higher proportion of capital in the U.S. is now owned by people whose passports are issued by a foreign government, but so what? From my perspective as an American I am no poorer because of this Swedish investment in NJ, and I am likely wealthier: I can now get more furniture at lower prices and, perhaps, I might even get a better job working at that Ikea store (or, alternatively, my wage in my current job at Acme Furniture Retailer in Hackensack, NJ, might be bid up due to the resulting additional competition for workers such as myself)
There are other reasons why your tale fails to capture the full range of reasons why country D's consistent trade deficits are not necessarily a problem for the people of country D, but I'll not list them here.
In reality, country D's consistent trade deficits in fact do not imply that country D is mortgaging its future to foreigners. Country D's trade deficit might very well be both a signal that the people and economy of country D are growing stronger and more prosperous over the long run and fuel for that stronger growth, for stronger growth in country D is what more capital investment in country D's private economy causes regardless of the nationalities of the investors. (The trade deficits that the U.S. has run for most of its history are almost certainly generally of this happy sort. Witness, for example, the British investments that helped in the 19th century to finance the building of railways in America.)
Further, the fact that country D's trade deficit, in any particular circumstance, might in fact be the result of such mortgaging as you describe in your tale is a reflection not of trade policy but of the high time preferences (or, if you prefer, the economic myopia) of citizens of country D. High-time-preferences (or myopia) among the citizens of D - whether expressed purely privately or through the agency of government borrowing - might indeed be a problem, but it is neither one that will be solved by trade restrictions nor one that even requires that the citizens of D trade with foreigners at all. Such profligacy as you rightly suggest is damaging over the long run is perfectly possible to play out exclusively within the borders of country D, without D running a trade deficit.