Conservative economist Art Laffer has been preaching the benefits of free trade and understanding what the numbers behind the economy really mean for most of his life. He’s taken many progressives to school on how to truly boost the economy and has always been a harsh opponent to the leftist’s favorite trade tool, the tariff.
Unfortunately, he’s having a harder time reaching so-called conservative who have abandoned basic economics in favor of Trumponomics. The concept of free trade has been replaced in the eyes of many conservatives and most Republicans with Trump’s idea of fair trade. The result: a trade war with China that is going nowhere fast and costing American businesses and consumers billions of dollars.
As Laffer correctly points out in this quote, running up a trade deficit is an unavoidable side effect of having a capital surplus. In other words, as American consumers spend more money, American businesses make more money. As American businesses make more money, they buy more products from foreign companies. This fact seems to have slipped over President Trump’s head.
“The trade deficit is the capital surplus and don’t ever think of having a capital surplus as being a bad thing for our country.”
Tariffs on China were considered a far-left progressive notion less than four years ago when Senators Chuck Schumer and Bernie Sanders proposed them. Now that President Trump has adopted their plans down to the letter, tariffs are suddenly the GOP way.
For a better explanation, please refer to this article by Benjamin Powell from 2006. Over a dozen years later, the truths still apply.
As long as our country remains a good place to invest and we have a low saving rate, foreigners are going to invest in the U.S. more on net than we invest overseas. That will generate a capital account surplus and the resulting trade deficit. This is a good thing.
But whether the payment is to a foreigner or to a fellow citizen, the customer’s purchase still indicates that he deems himself better off from the transaction.