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Home Market Research Economy

It’s Even Better Than A Consumption Surplus

by TheAdviserMagazine
6 months ago
in Economy
Reading Time: 3 mins read
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It’s Even Better Than A Consumption Surplus
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Co-blogger Kevin Corcoran has an excellent recent blog post calling for rebranding the “trade deficit” away from its misleading phrasing and toward the more accurate phrasing of “consumption surplus.”  My beloved professors Don Boudreaux and Dan Klein have a similar proposal as well.  There is much merit in their arguments.  I argue that the situation is even better than they propose.

It certainly is true that consumption is the end goal of all production.  Without consumption, production is valueless.  We work in order to achieve some desired end, not the other way around.  But what is also valuable is investment.  Investment, to the economist, is not buying of stocks and bonds (although those are valuable activities as well), but rather purchases of capital equipment, homes, and other things that go into production.  More precisely, investment is “the production or construction of capital goods that provide a ‘flow’ of future service” (Economics: Private and Public Choice by James Gwartney, Richard Stroup, Russell Sobel, and David Macpherson, 17th Ed, pg. 137).  Investment, therefore, is key to fueling economic growth well into the future.

Imports exceeding exports necessarily means that more desired goods are flowing into the country.  Likewise, it means that more investment funds are flowing into the country as well.  Foreigners want American goods (we are the second largest exporter in the world at approximately $3 trillion worth of exports in 2023 alone), but they also want to put their savings into America.  A greater supply of savings means a lower interest rate (all else held equal).  Consequently, American firms and individuals can invest more than they otherwise would as the price of money falls.  This means more business creation, more homes, more college degrees, more retrofits, more upgrades, more research, more of everything that improves production, innovation, and general welfare.  Instead of the American production possibilities frontier being limited by domestic savings alone, it can be enhanced with foreign savings.  Trade lets us both consume beyond the production possibilities frontier and advance the production possibilities frontier.  All while using fewer resources.

Political efforts to reduce the trade deficit results in killing the golden goose.  Borrowing costs will rise, investment will fall, and so will the standard of living. We have seen these results with the trillions of dollars in wealth that was annihilated by the “Liberation Day” tariffs.  Treasury Bond rates have been increasing.  In turn, slower economic growth and higher borrowing costs will actively inhibit the Administration’s supposed goal of righting the fiscal ship. 

In short, I propose enhancing Kevin’s rebranding as “consumption and investment surplus.”  Trade deficits help Americans get wealthier not just now (consumption) but in the future as well (investment). 

PS. While working on my International Trade lectures for this semester, I came across an interesting paradox: Americans earn more on their investments abroad than foreigners earn on their American investments.  Yet, the trade deficit, and net investment position, are negative (implying foreigners are investing more in the US than the US is abroad).  What accounts for this paradox?  Risk.  The US is seen as a safe haven, so foreigners put their money here.  But Americans search out a combination of risk and safety, so they chase the higher interest rates abroad while keeping some here.  Consequently, American investments abroad earn a higher return than foreign investments in the US.  This position reverses in bad times: Foreigners end up earning more on their US investments than US citizens do abroad as the US citizens bring money back to safe havens and the riskier investments do not pan out.  See Why Does U.S. Investment Abroad Earn Higher Returns Than Foreign Investment in the United States? (CBO, 2005) and New Evidence on the US Excess Return on Foreign Portfolios (Bertaut, et al, 2024).



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