Ever wonder why economic doomsday hasn’t arrived yet? I’ve been hearing that economic calamity or collapse is only a decade away—for at least the forty years I’ve been paying attention, anyway. Fifteen years ago was when I started looking at the other, more optimistic side of the argument (...the side that still never gets any airtime), and started finding the growth and prosperity arguments that predicted economic outcomes far better than the doomsday folks had.
Specifically, why hasn’t the trade deficit cratered our economy and standard of living yet? Is all that survival gear, canned food, and bottled water we were supposed to sock away going to rot, while doomsday keeps us waiting, waiting, waiting?
Well, I hate to break the news, but I think we wasted our money; the survival gear is a good bet to rot away underneath all those cobwebs. Reason: It appears that there's a plausible, and very surprising explanation for our trade deficit—an explanation that turns twenty years of trade deficits into trade surpluses. (It’s the “Dark Matter” theory you may have heard about; the paper I’m talking about today was published late last year. It is excellent, mostly because it is a concise, easily understandable, myth-busting explanation of why doomsday keeps eluding us. I wish I had come across it earlier. Many thanks to Tim Lundeen for alerting me to Bryan Caplan’s article about it.)
Be sure to read the paper; here I’ll just attempt a very short summary of the idea. Sometimes, accounting for assets and liabilities “by the book” does not yield a practical result; that’s why the market value of a stock is almost always very different from its book value. The same thing appears to be happening with the calculation of our current account “deficit.” (Remember, “Accountants count what’s easy to count...”, as I’ve said ad nauseam.) In short, the knowledge content of the assets we hold abroad has to be yielding a much higher return to us than we pay on foreign-owned assets in the US, in order to explain the fact that we are still earning $30 billion (net) as we were in 1980. In other words, our assets abroad must be worth a lot more than “the books” would indicate, because there aren’t many other ways to explain why we are earning (net) $30 billion today on foreign direct investment, instead of paying out (net) $210 billion that the “books” would suggest should be the case. For a good illustration of that key point, read the Euro Disney example in the paper.
We’re running a trade surplus? Hmm, how long do you think it will take the mainstream media to catch on to that new point of view? (My guess: Not until after the next presidential election. If ever.)