Why Donald Trump (and just about everyone) is wrong on trade deficit

Why Donald Trump (and just about everyone) is wrong on trade deficit
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I used to half jokingly warn Donald Trump during the 2016 campaign that the only way he was going to get the merchandise trade deficit down if elected was by creating a long deep recession. So the news this week that the trade gap between how much we import and how much we export soared to a $891 billion last year was not a surprise to me, and it should come as no surprise to anyone who understands the economy. The trade deficit is up because the United States has the best economy in 20 years.

Media outlets like CNN and MSNBC have been joyfully running endless “gotcha” clips of Trump railing against our trade deficit with nations like China and Mexico. They are now bigger than ever. Trump was wrong to obsess about the trade deficit, and his critics are even more wrong to think that the record deficit in merchandise trade is an indication that his economic policies are failing. The reality is the trade deficit is widening because his economic policies are working. The trade deficit always rises when the economy improves, and it falls when the economy contracts.

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Does a big trade deficit mean we are exporting jobs? Sometimes it can. But unemployment is negatively associated with the trade deficit. How can that be? We are trained to believe that deficits are always bad. Budget deficits are bad. Account deficits are bad. Sleep deficits are bad. When the economy is flying high with the lowest unemployment rate in 50 years and wage gains for workers, families and consumers are flush with cash and they buy things. Indeed, many of the things we buy at Amazon and Walmart and Home Depot is made overseas. Therefore, the trade deficit widens when consumers have more money in their pockets.

The other reason the trade deficit rises when economic policies favor business, as they do now thanks to tax and regulatory relief, is that the United States is the prime place in the world to invest. Americans buy more from foreigners than we sell to them, and the foreigners use those surplus dollars to invest here. That in turn creates more jobs here at home. As my colleague Arthur Laffer explains it nicely, the merchandise trade deficit is the mirror image of a capital investment surplus of a country.

Perhaps the economist who put it best was Larry Summers, who served as an adviser to President Clinton and President Obama, and someone whom I do not often agree with. Summers told the New York Times that everyone should just relax about the trade deficit. He said simply, “The stronger trade deficit in the short run is telling you we’re importing more, so it’s not a particular alarming development. The president notwithstanding, I’d rather live in a country that capital is trying to get into, rather than get out of. The reason we have a trade deficit is, people are investing in America.”

If you do not believe me or Summers, perhaps a quick history lesson can help. From 1747 until 1854, which spans more than 100 years of colonial and United States history, America ran a trade deficit in 95 years of those years. By importing net capital, our country grew enormously, employed workers at high wages, and developed a job and wealth creation machine that was rarely seen before. The United States was built on trade deficits.

During the Great Depression, the volume of global trade plummeted after the passage of the infamous Smoot Hawley Tariff Act, and the dreaded trade deficits disappeared. So did jobs, however, and the unemployment rate surged to 20 percent. During the 1960s under President Kennedy, the 1980s under President Reagan, and the 1990s under President Clinton, trade tariffs fell, the trade deficit rose, and the economy boomed. In the late 1990s, the country had budget surpluses, and the trade deficit was as high as ever. The budget deficit has nothing to do with the trade deficit.

Finally, during the Great Recession of 2009 and beyond, the trade deficit fell by more than half as the economy collapsed and $7 trillion of wealth evaporated. Would you rather have a big trade deficit with record low unemployment and surging economic growth, or a falling trade deficit with Americans standing in unemployment lines and living on welfare?

President TrumpDonald John TrumpTrump calls for Republicans to be 'united' on abortion Tlaib calls on Amash to join impeachment resolution Facebook temporarily suspended conservative commentator Candace Owens MORE was wrong about the evils of trade deficits. So are his critics who laughed while the economy created seven million more jobs than there are people to fill them, even with a record trade imbalance.

Stephen Moore is a distinguished visiting fellow at the Heritage Foundation and an economic consultant with FreedomWorks. He served as an adviser to the 2016 Donald Trump campaign. His latest book out with Arthur Laffer is “Trumponomics: Inside the America First Plan to Revive Our Economy.”