It is time for a new round in the current saga of “Kevin complains that economists are terrible in mentioning ideas.” Here I suggest that economists have to consider ‘the trade deficit’ to rebrand.
The reason people understand the term so badly is there in the name – short. Shortages sound bad. In most use, shortages imply something along the lines of life outside the means and collecting debts. That would certainly be true if my household budget was in a shortage. If my monthly household budget was in a shortage, it would imply that the difference was made by collecting credit card debt or borrowing money from friends and family, or something in that sense. Households can perform a budget deficit for a short time – perhaps they were hit by unusually high editions and they had to put some things on a credit card to endure the month. If they cut the expenditure in the coming months until the credit card debt has been erased, then there is no great reason for the alarm. But if that situation would repeat itself every month, there is no happy end to that story for years.
But one land Running a trade deficit is not Analogous to a household that lives past his resources and yields credit card debt. Nintendo, for example, has just announced a new videoo console, the Nintendo Switch 2, currently priced at $ 449 (I am currently saying because it is still too viewed as
Send that price when it actually comes on the market.) Suppose I decided that I wanted to buy one. I go to the Nintendo website and enter my debit card details and send them $ 449 of my check account and become the proud owner of a glossy new platform for video games. In addition, the trade deficit has increased by $ 449. But … there is no fault of this process. Nobody lives outside their means. There is no reason to alarm here. If President Trump needs to be believed, this transaction is proof that Japan “turns us off” or “benefits from us” by selling something that I want at a price I am willing to pay. But that is clearly wrong – there has been a mutually affordable exchange, nothing more or less.
So here is my proposed rebrand for ‘the trade deficit’. It relates to a previous message that I wrote about how you think about import and export. I pointed out that when a country runs a trade deficit, it will be “a country where citizens get more goods and services from foreigners than those citizens send away for foreigners to consume.” So maybe instead of calling this situation a ‘trade deficit’, the one Consumption -surplus. In 2024, the United States Ran A trade deficit of around $ 918 billion. The United States sent around $ 3.2 trillion dollars to goods and services to be consumed by foreigners, but were able to consume around $ 4.1 trillion dollars of goods and services by Foreigners. We have had the advantage of consuming $ 918 billion more in goods and services than we had to give up in exchange! As President Trump likes to say, that is a lot of winning. So much winning!
(Note: The term “consumption surplus” is itself misleading, because, as I said in a recent previous post, more than 60% of imports in the United States are input for production, instead of imports that are immediately consumed. Yet it seems fewer misleading for me than the current terminology.)
Of course there is another side of this coin. As Scott Sumner has recently noticed: “When all types of trade are taken into account (goods, services and financial assets), trade is always in balance.” That is, a trade deficit (or rather, a current account deficit) has always been balanced and everywhere brought into balance by a capital account surplus that follows savings and investments instead of goods and services. So that the United States last year had a current account of $ 918 billion means that the United States also held a capital account surplus of $ 918 billion last year. This is because the money foreigners do not spend on goods and services produced by the US instead to support savings and investments buying dollar-threaded assets, direct foreign investments in American companies, bond purchases, things like that.
(Let us actually accept an extreme case in which instead of using $ 918 billion dollars for investments in the United States, foreigners decide to turn it all in cash and then burn it. So in this case that is $ 918 billion that will never be used to buy American goods, services, services, or For investments. Even then there is no reason to alarm. The only thing that this would do bonfire is to reduce the amount of US dollars in circulation, making all the dollars of American citizens more valuable. So even in that extreme situation the value of that $ 918 billion comes back by increasing the purchasing power of the remaining dollars.)
So with this rebranding, American citizens not only get the benefits of a consumption surplus, but they also experience an equally large investment surplus. I think this is a framing that would actually endure to President Trump – but unfortunately he brought none of my phone calls. Hopefully he will read this blog!