In an event that many pundits hail as a silver lining of America's still-dark economic cloud, the U.S. current-account deficit fell during the first quarter of 2009 by 34.5 percent from its level in the fourth quarter of 2008.
Is this news really all that good? Of course, many people think so. After all, anything called a "deficit" must be bad. So a shrinkage of such a bad thing must be good. Right?
Wrong.
The U.S. runs a trade deficit whenever we Americans import more, value-wise, than we export. But an excess of imports over exports is hardly a calamity. Indeed, it's much more likely to be a blessing.
To see why, ask what explains foreigners' choice not to spend all of their dollars on American exports. The reason is the same one that explains your choice not to spend all of your dollars at the supermarket, the mall and the liquor store: You choose to save and invest part of your earnings because such savings and investment will likely enhance your wealth over time.
If you save and invest wisely, though, not only are you made better off, but workers and consumers are also made better off. Saving is necessary for investment; market-driven investment increases worker productivity; and higher worker productivity means higher wages over time and a larger economic pie.
Fortunately, since 1975 -- the last year that America ran a trade surplus -- foreigners have been annual net investors in the U.S. Rather than spend every last one of their dollars buying American exports, foreigners invest some of their dollars in the U.S. economy. These investments raise America's trade deficit, but they also raise America's capital-account surplus. In other words, they make America a net recipient of world savings.
It's absurd for Americans to complain about foreigners' eagerness to invest in dollar-denominated assets -- which is what complaints about the U.S. trade deficit amount to. In addition to directly raising the values of many assets held by Americans, increased investment in America by foreigners adds to our capital stock every bit as much as does increased investment in America by Floridians.
Also bear in mind that today about one-third of America's imports are not consumer goods but, instead, are inputs to American output -- Brazilian steel for American-made airplanes, Japanese power tools for American workers to use to construct houses in America, Chinese laptop-computer assembly for Apple and Dell.
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