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Trade Deficit Is Most Meaningless Economic Indicator Of All

The trade deficit doesn’t matter. There shouldn’t be anything controversial about this fact. As Adam Smith, the father of modern economics, wrote in “An Inquiry into the Nature and Causes of the Wealth of Nations,” “Nothing … can be more absurd than this whole doctrine of the balance of trade.”

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More meaningful economic indicators are the unemployment rate, wages and gross domestic product. Well, the unemployment rate is 4.1% and wages are growing. Although Barack Obama was the first president since Herbert Hoover not to see annual economic growth at 3% or higher during his presidency, the Congressional Budget Office has projected 3.3% economic growth in 2018.

Does the American economy face challenges? Absolutely. Budget deficits do matter, and the recent budget agreement that spends nearly $300 billion above the previously established spending caps is a serious problem. The budget deal accelerates the time frame in which Americans will see $1 trillion deficits, which may now come as soon as 2020. The rapid growth of entitlements like Medicare and Social Security threaten our long-term fiscal security.

Trade deficits, however, simply are not a concern. Well, at least not in the way politicians who preach fear would have you believe.

A trade deficit is a sign that Americans have purchasing power and are creating demand for products. When the economy is in a downturn, the trade deficit shrinks. In 2006, for example, the trade deficit was $762 billion and the unemployment rate was 4.9%. By the end of 2009, the trade deficit declined to $384 billion, and the unemployment rate peaked at 10%.

Trade Deficit And Jobs

As the economy slowed during the Great Recession, manufacturing output also declined. But as the economy has improved, real manufacturing output has increased, reaching near pre-recession levels and record highs.

Citing data from the Bureau of Labor Statistics, the Pew Research Center noted, “After adjusting for inflation, manufacturing output in the first quarter of (2017) was more than 80% above its level 30 years ago.” It’s true that the manufacturing sector has experienced job losses, but increased worker productivity and automation have created the need for fewer workers in this sector, not trade.

Many politicians wrongly view the trade deficit as a sign that Americans are being taken advantage of by other countries. Correcting this notion, Rep. Justin Amash, R-Mich., recently put the trade deficit in the context of something as mundane as basic consumer transactions with a business:

“Trade deficits do not mean that anyone is taking advantage of anyone else. The grocery store will have a trade deficit with a farmer or supplier, just as you have a trade deficit with the grocery store,” Amash tweeted. “This basic economic concept applies to international transactions just as it applies to neighborhood transactions.”

Whether you purchase groceries from a Kroger in Chattanooga, Tenn., a new television from a Best Buy in Cleveland, Ohio, or an Echo Dot from Amazon.com, you have created a trade deficit with that company. You probably don’t view these transactions this way, and you shouldn’t. After all, these transactions are mutually beneficial exchanges of goods or services. In a mostly free economy, it isn’t a zero-sum game.

What’s more, the concept of the United States running a trade deficit with other countries is faulty. As economist Mark J. Perry explains, “It might be a subtle point, but it’s important to realize that countries don’t trade with each other as countries — rather it’s individual consumers and individual companies that are doing the buying and selling.”

Certainly, some politicians want to appeal to core constituencies, such as labor unions or companies that rely on antiquated business models, by espousing fear about the trade deficit. Such absurd rhetoric leads to policies that harm American workers and consumers, but it also ignores that we have a capital account surplus and a services surplus.

What policymakers in the Trump administration and lawmakers in Congress should focus on are policies that promote economic growth. The administration has successfully rolled back regulations that hurt businesses, hinder job creation and lead to higher prices for consumers. Similarly, Congress has used the Congressional Review Act to cancel several midnight regulations finalized under President Obama and has passed a tax cut that has boosted businesses and the middle class alike.

Unfortunately, the budget deficit is still spiraling out of control because Republicans and Democrats are addicted to spending. And both parties are obsessed with weaponizing entitlement programs that will lead to a fiscal crisis if left unaddressed. If Americans want to see prosperity in the long term, Congress must address the drivers of budget deficits and debt.

But the trade deficit is a sign of a healthy economy. Americans have more money to spend, which means more jobs created by businesses and more investment in the economy. This is what creates prosperity, which benefits all Americans, and that is not a zero-sum game.

  • Brandon is president of FreedomWorks.

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