America Has a Moral Obligation to Borrow and Spend

Imports make the world go ‘round.

Photo by David McNew/Getty Images

Dean Baker is concerned that America’s persistent trade deficit is a result of East Asian mercantilism, contradicting the textbook story on international capital flows. Baker’s argument is correct—demand for dollars originating from an Asian “savings glut” forced us to run a trade deficit. But where Baker worries about declining employment from an overvalued dollar, I see potential for America to provide yet another international service and profit in the process.

True, a shirt imported is a shirt an American could have made, so a trade deficit costs us jobs on the margin. On the other hand, you can think of that really cheap shirt you’re wearing as a free good: a gift to America in exchange for liquidity. You’re still getting all the utility of wearing the shirt and losing nothing in the process (unless you drive with a “Buy American” bumper sticker, in which case you were probably screwed to begin with).

A stronger point still: As an American, it’s your moral duty to consume. The odd way the international monetary structure is set up gives us the responsibility of issuing the reserve currency. If India wants to buy oil from Saudi Arabia, it has to sell us something first. This guarantees that we run a trade deficit. All the more so post-crisis, as investors hedge risk with our money instead of BRIC funds. Indeed, when there’s a shortage of dollars on the international market, it’s our obligation to grease the wheels of commerce by printing more money. And all signs are pointing to a huge shortage:

This graph depicts what economists call “money demand”—after the crisis investors around the world flew to the world’s safest asset—M2V is roughly the frequency at which a dollar is shifting hands, so when its inverse is high, it means people really love dollars—and the rate at which it’s increasing suggests that we haven’t done enough to provide liquidity in response. An excellent substitute for the United States dollar is a promise to pay a dollar later—known as federal debt. Increasing the supply of the former requires us to print money, and increasing the supply of the latter requires us to run budget deficits. OK, I lied. It’s your moral duty to provide liquidity. The really sweet side effect of doing that is more stuff. Did someone say preschool? Or solar power? In other words, the solution to the trade deficit “problem” is to allow for a larger budget deficit—U.S. government debt is one of our most important export goods.  

As Paul Krugman asks, if we don’t run a deficit, who will? Some things are zero sum. Better the issuer of the world’s most in-demand currency run a deficit than the guy who prints rupees, which nobody seems to want. We provide the public good of liquidity in return for the free good of imports.

This argument was more problematic in the 1960s when economists like Robert Triffin argued that we’d be forced to run a deficit forever, causing an inflationary spiral. But in the ‘60s, neither the domestic nor global economy was anemic, and inflation was a real problem.