Kevin Drum wonders what operational steps could reduce the U.S. trade deficit. I have some half-baked answers to this, but something that I think is worthy of more discussion is Australia’s trade deficit. Below is a chart I poached from their treasury, which goes back further than anything else I saw online. But the interesting thing is that according to assentially all sources, Australia has always run a large balance of payments deficit except for one flukey year in the early ‘70s. At various times different politicians and investors have proclaimed this unsustainable, but it’s always been sustained. And it keeps on being sustained even though Australia is currently undergoing a boom of primary commodities exports to China. What’s more, despite this never ending trade deficit Australia decided about 20 years ago to stop having recessions which is pretty enviable.
So what’s going on?
Two things, I think. One is that Australia is a very respectable country with a stable liberal democracy just like the United States or Germany or Japan. But the other is that Australia has a very fast-growing population. It’s growing substantially faster than the American population, to say nothing of Japan or the major European countries. And if you’re thinking about savings and investment in the broadest and most generic sense, that’s exactly where you want to invest. A country where you can say with confidence that 20 years in the future the same political framework will be in place and there will be much more overall demand for land and goods and services due to the growing population. So because Australia is such a fundamentally sound investment opportunity, it gets to run a trade deficit. And it will always get to run a trade deficit until either it decides to sharply curtail immigration and population growth, or until India’s political system strikes rich foreigners as more credible and stable. There’s simply a shortage of countries that combine a strong international brand with population growth, so those places that have it get to basically “export” safe haven investment status and import actual material goods.
Now the United States is no Australia. We’re a lot bigger and we’re not growing our population as rapidly. But we’re closer to Australia than to being Germany or Japan. Which means I think we can get away with open-ended current account deficits if we want to, and that appropriate policy would get us full employment without closing the trade deficit.
But I’d rate my degree of confidence in this conclusion as relatively low. Certainly I’m not an expert on the Australian economy. But I do think the Australian example of twenty recession-free years and many many decades of current account deficits ought to be dealt with when thinking about the relationship of the balance of trade to America’s employment issues.