Address Other Issues and the Trade Deficit Will Take of Itself

LA Times, 10-9-94

ROBERT EISNER is William R.Kenan professor of economics at Northwestern University in Evanston, Ill. He is the author of "The Misunderstood Economy: What Counts and How to Count it."

Wall Street shuddered as the Dow plunged, and we heard new cries of disaster and calls for action. Why? The U.S. trade balance was reported in deficit by almost $11 billion in July, the second- "worst" month in history. There was renewed talk of action against Japan, the nation that accounted for half of that deficit.

But what sense did it all make?

The figures themselves are at best of doubtful accuracy and at worst misleading. By definition. Because the deficit is the excess of imports over exports-and because one country's imports are another country's exports-total deficits for the world must come to zero. Yet, taking the statistics of each country, we would conclude that total world imports very considerably exceed total exports!

What clearly is happening is that most countries keep better track of imports. which are subject to tariffs, quotas and inspections of various kinds, while exports flow out freely and often unnoted-in trucks across the Canadian border, through purchases by foreign tourists at bargain U.S. prices, or however. Correct figures would still show a substantial U.S. trade deficit, but it would almost surely be less than the numbers so alarming to some.

What we should be looking at is the total "balance on current account," which is not reported monthly. In addition to payments we receive for exports and make for imports, it includes net investment income and unilateral transfers. The net investment income is-now reported at about zero; foreigners seem to be earning something over $100 billion a year on their investments in the United States, while Americans are earning almost exactly the same amount on their investments in the rest of the world. Adding in our negative net "transfers," though-gifts to relatives in the old country, Social Security benefits paid to Americans who have retired abroad and military grants-brings our 1993 balance on current account to minus $104 billion.

But so what?

Doomsayers tell us that means, if the numbers are right, that we are giving more than $100 billion a year to foreigners- money they invest in U.S. banks, bonds, stocks, motels, hotels and factories. The investment may be helping us, but each year it continues, foreigners are adding $100 billion to their net "claims" on the United States-a sum currently put, again with uncertain accuracy, at about $500 billion. If claims kept on accumulating at that rate for 10 years, which would be most unlikely, the additional $1 trillion would bring the total to $1.5 trillion dollars!

But U.S. tangible assets or wealth come to about $40 trillion. What's more, those foreign claims are almost all in dollars (which we can print), not foreign currency, Foreigners hoping to cash in would find that unless they want more paper, they would have to accept U.S. goods-thus reversing the very current account deficits that gave them their claims to begin with.

Another way of seeing the limits of the "problem" is to note that at a real rate of interest of 4%, for example, that additional $1 trillion of net claims in 10 years would earn foreigners $40 billion more per year at our expense. But that would be less than 0.5% of our national income or gross national product.

In fact, our trade deficit-far from indicating anything bad-is largely a measure of our prosperity relative to that of our major trading partners. In 1991. with the United States in recession, the total trade deficit was only $28.5 billion- a third of what we may be headed for in 1994. But since then our economy has had a recovery -substantial if still incomplete, in my view -while Europe and Japan have remained mired. When we are prosperous we can buy more and hence import more. When foreigners are not prosperous, they do not buy as much from us. We export less; hence the increased deficit.

So the trade deficit is not telling us that we have fewer jobs, but rather more jobs, giving us the income to buy Toyotas (those made in Japan as well as in California and Kentucky) and travel to Gay Paree.

For those concerned, as am I, that we still do not have enough jobs-and enough good jobs-the remedy is not in restricting trade. Rather, the solution lies in seeing to it that the government, in its fiscal and monetary policy, offers enough purchasing power for us to buy all we can produce. It also lies in supporting education and training our work force, and in investment in research and new technology, to make sure we can produce more and that all of our people can be productively employed.

The trade deficit then will take care of itself, as long as we allow foreign exchange rates to seek free-market levels. That means discouraging the Japanese and others from keeping their currencies too cheap-and ours too expensive -thereby making their goods artificially cheap for us to import and our exports artificially expensive. And it means seeing to it that our own Federal Reserve Board abandons its misguided efforts to fight an invisible inflation demon by keeping the economy from "overheating." It is these efforts-which raise interest rates and keep the dollar expensive-that really are spooking Wall Street and endangering our economy.