Increased Opportunities Do Not Indicate a Shortfall

Trade deficits are often pointed to as a sign that there is a “savings shortfall” or “savings imbalance” within a nation (see, for example, this article).  This description, as Scott Sumner reminds us, is an implication of the GDP accounting model.  In this lens, there is no objection to classifying as trade deficit as a savings imbalance.  But does it make economic sense to view it in such way?

Let’s go back to a main question of economics: why do people trade?  Specialization of labor allows people to focus on the things they are comparatively better at and trade with others to get the rest of their needs.  In other words, people trade because their time is best spent doing what they are best at.

As David Ricardo showed us, when people specialize, they increase production; that is to say, new consumption opportunities emerge when people specialize and trade.  At no point is this development considered a “production imbalance.”  So, why then is the identical situation considered a savings imbalance when viewed at a macroeconomic level?  Other than the mathematical wrangling of the GDP accounting formula, I have no good explanation.  As people specalize and trade, new opportunities, both for consumption and investment emerge, which indicates a new balance developing.  The economy has gotten larger; there is no imbalance.

2 thoughts on “Increased Opportunities Do Not Indicate a Shortfall

  1. Think about the micro model of imports and exports. At the world price, there is a domestic imbalance. What would be a surplus is exported and what would be a shortage is imported. At the world interest rate, what would be an excess of investment over saving results in a net capital inflow and what would be a excess of saving over investment results in a net capital outflow. Treating a net capital inflow as being due to “too little saving” makes about as much sense as treating imports of cars as being due to “too much” demand for cars. Or maybe worrying that exports of wheat are due to inadequate domestic demand for bread comes closer to matching the absurdity. (Kansas exports too much wheat because the people of Kansas are just not eating enough bread!). Still, I think that those of us who think people in the U.S. save too little (particularly, the negative contribution of the Federal government and pay as you go social security,) find it easy to describe a trade deficit as being a consequence of too little saving. I am not contesting your general observations about specialization and trade, but just that the “imbalance” notion is helpful as long as you don’t think of “imbalance” as bad.

    Like

Comments are closed.