America's growing trade deficit is one of President Trump's main arguments for imposing tariffs on China. And yet most economists would agree instead with the doctrine of trade deficits and its benefits for consumers. Economics correspondent Paul Solman reports.
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Now, America's growing trade deficit.
It's one of President Trump's main arguments for imposing tariffs on China. But what about the argument the trade deficit benefits our economy?
Our correspondent Paul Solman explains. It's part of his series, Making Sense, which airs every Thursday on the "NewsHour."
So, all we're doing is imposing tariffs to recover the $50 billion a year in damages they inflict upon this country by engaging in these practices.
That was Peter Navarro, President Trump's economic adviser, insisting to Judy Woodruff recently that the threat of tariffs, taxes on Chinese imports, is meant to discourage China from cheating on trade by subsidizing their companies, for example, stealing our intellectual property.
The point is, if they were to knuckle under and stop cheating, China's products should be pricier and our economy should grow, says Navarro.
All right, Paul, the growth of any nation is simply four things.
It's been more than a year-and-a-half since Navarro first tried to walk you and me through the economic logic. But economists keep berating us for never giving the mainstream rebuttal.
So here's a reprise, hoping Navarro won't mind my stealing what you might call his intellectual property.
GDP is the total size of the economy in a given year. By definition, that has to equal C for that year's consumption, what we citizens spent here in the U.S., G for what our government spent here, I for total investment in America, and finally X minus M, X for what foreigners pay us for our exports, minus M, what we pay them for what we import from them.
The bigger the total, the bigger the annual economy, or GDP.
But the economy will shrink if there is a trade deficit, more imports than exports, more M than X.
So, here's the big idea. Tax the imports with tariffs, and they will become more expensive compared to homegrown products. Then, more of us should buy American. That would mean more U.S. jobs, the trade deficit would shrivel, the economy would thrive.
Doesn't sound crazy. And yet many economists, if not most, would agree instead with the doctrine of trade deficits argued so forcibly by, for example, conservative economist Milton Friedman.
He once jabbed his finger at me, decrying the "NewsHour"'s penchant for pitting just one free trade economist against one protectionist, when, he said, within the discipline, the ratio was 10-1 in favor of free trade. Of course, in his view, politicians were no better, thinking a favorable balance meant a trade surplus, not a deficit.
But a surplus is unfavorable, Friedman argued, in this old, grainy video.
That means we're sending out more goods and getting fewer in. Each of you in your private household would know better than that. You don't regard it as a favorable balance when you have to send out more goods to get less coming in.
So, by trading dollars for goods, we, as consumers, benefit from a trade deficit. And there's another way we benefit.
The Chinese and others lend us money to help buy Chinese stuff. Remember, we don't just run a trade deficit, but also a budget deficit, Uncle Sam spending more than he takes in year after year. The latest projection is that, by 2020, it will top a trillion dollars a year.
Now, to cover the budget deficit, Sam borrows, giving investors treasuries, IOUs, in exchange for cash. But since American investors don't save enough to buy all the treasuries, or don't want to buy them, foreigners do much of the lending, to the point that they now own about a third of our $21 trillion cumulative debt.
China has been the main buyer of late. So, when we run a trade deficit with China, they accumulate dollars. They don't just stuff them under the mattress. They lend them back to us, in exchange for our treasuries.
And that's the second reason a trade deficit benefits us. Chinese dollars help keep our taxes down, so we can keep consuming on credit, consuming, among other things, Chinese goods.
For the "PBS NewsHour," Making Sense correspondent Paul Solman.