Kevin Drum suggested I write a blog post about my slightly unorthodox view of the U.S. trade deficit, which is that while I think there are some downsides associated with it there’s no reason we can’t keep running one forever and indeed we ought to expect that we will keep running it for the foreseeable future. Start with the baseline case of Australia. It’s common these days to attribute Australia’s low unemployment rate and lack of recessions to its strong commodities exports to China but Australia runs a trade deficit and has run one as far back as records go.
And why shouldn’t Australia run a trade deficit? It’s a well-governed country with an established democracy and the rule of law. It also has an unusually rapid population growth rate for a developed country thanks to a high level of immigration. Consequently, acquiring land and buildings in Australia seems like a desirable investment proposition. And because Australia attracts net investment inflows, it runs a trade deficit to balance it out. Basically The Queen’s Australian subjects get to reap a little “bonus” consumption out of Australia’s relatively strong growth outlook.
The United States of America is, in this regard, just a mini-Australia. We’re not quite as well-governed and politically stable as Australia, but we’re close. We’ve got the rule of law. We’re open to immigrants, have a low population density and an above-average population growth rate. Residents of third world countries want to invest in America because we’re stable and safe, and residents of demographically stagnant rich countries want to invest in America because our growth outlook is strong. So since the United States is a net attractor of investment flows, our citizens get to reap a little bonus consumption out of our relatively strong growth outlook. This isn’t a law of nature, and it could change but I wouldn’t expect it to change any time soon. Depreciation of the dollar would only have a superficial and short-term impact. A cheaper dollar could make US consumption goods more attractive to foreigners to buy, but it could also make US assets more attractive to foreigners to buy. In the longer term, money is neutral anyway. Places that are above-average investment destinations are going to be net importers and that’s just life. That doesn’t mean we can’t export stuff—Australia, as I said, exports lots of stuff—but however much we export, I’d expect us to import that much plus a bunch more.