In the latest EconTalk, “The Economics of Tariffs and Trade (with Doug Irwin)“, May 5, 2025, Russ Roberts interviews one of the top trade economists in the world, Doug Irwin. Doug recently completed an entry titled “Tariffs” for my Concise Encyclopedia of Economics.
Early in the interview, he and Russ talk about trade deficits. Like almost all economists, Russ and Doug don’t see those as a problem. But Doug had a refreshing way of putting it. He stated:
And so, the way I put it is–sometimes when I’m telling my students–you know, let’s say the government didn’t produce statistics, economic statistics. If we had inflation, would you know it? Absolutely you’d know it. Every time you go to the grocery store or someplace, you’d see it. If we’re in a recession, would you know it? Absolutely. You’d see people around you losing their jobs, maybe you yourself. If we’re running a trade surplus or a deficit, would you know it? No, it is to an abstraction. It’s not something that personally affects you directly.
Nicely done.
Also, Doug pointed out how Adam Smith nailed the issue almost 250 years ago. Doug said:
Every time I pull the book down from my shelf, The Wealth of Nations, I learn something again. I’ve read it, but I find there’s some sentence I missed or insight. And, it’s just a true book of wisdom. Here’s a guy–he didn’t have the Internet; limited to Britain and a little bit of time in France, but he knew so much and he interpreted things so well. And, it’s so relevant for today in so many dimensions.
I have the same experience. I confess, though, that I haven’t read the whole thing cover to cover. I’ve especially jumped over Smith’s discussion of taxes.
READER COMMENTS
Jon Murphy
May 5 2025 at 6:42pm
I love Doug’s way of putting the trade deficit/surplus. I am going to use that in class.
Really? It can get a little dry, but I think he actually does an excellent job discussing an optimal tax system (I have a blog post discussing that coming actually).
David Henderson
May 6 2025 at 10:02am
Thanks, Jon. I’ll try it again. I’ll wait until your blog post because that would help guide my reading.
Mactoul
May 6 2025 at 2:09am
Federal deficits are abstract too, in this sense, that only the data that government provides, tells us anything about them.
Though I have often remarked here that its is the careful calculation of trade figures that leads to panic about trade deficits. But how many economists would be rendered unemployed if the government decided not to calculate trade figures!
Jon Murphy
May 6 2025 at 5:45am
No they absolutely are not. They show up in tax rates, interest rates, resource prices, etc.
Knut P. Heen
May 6 2025 at 8:25am
I guess you do not notice credit card debt either (at least for a while).
Remember, there is no such thing as a free lunch. Foreigners do not send goods to the US for fun. We want something back. If you do not send us goods now (or in the future), we will take your corporations and real estate instead.
It may very well be the case that the US has a comparative advantage in creating new corporations for the world. If that is the case, no need to worry.
Jon Murphy
May 6 2025 at 8:44am
I notice mine every month when the bill comes in.
Awesome! More opportunities for wealth to grow (and new corporations to come about).
Knut P. Heen
May 7 2025 at 7:38am
That is a normative claim, not a positive claim. Selling your house or selling your stocks to finance consumption may be a good idea or it may be a bad idea. It depends on the situation. The fiscally conservative in me will raise my eyebrows when I hear someone selling assets to consume (at least until I discover that it was part of a retirement plan). Sometimes, however, you discover that people are selling assets or borrowing to finance reckless consumption (there is a TV-show called the Luxury Trap). I think there are reasons to worry that the US trade deficit with the world is a symptom of some underlying problem. If it is just Bezos and Musk selling their stocks to China in exchange for yachts then there is no underlying problem. It is a different story if it is welfare money going to China in exchange for opium.
Jon Murphy
May 7 2025 at 8:06am
Actually it’s pretty positive. If a person engages in a transaction, they are doing so to improve their position. If a person buys an asset, they are doing so because the rate of return is better than their alternatives. Same with the person selling. So, a foreigner investing in the US provides more funds for America to grow while the person selling gets funds to do with as they wish.
Markets are made of win.
Knut P. Heen
May 12 2025 at 11:06am
We would not be having this discussion if everyone including Donald Trump were homo economicuses. Real people make mistakes. Some people may even recall drinking too much on certain occasions in the past. There is nothing wrong in reminding people of the hangover tomorrow and reminding them that some trades are better forgone. How do you know that the Trump-Stormy-deal was win-win? It does not seem to be a falsifiable proposition.
nobody.really
May 6 2025 at 11:37am
“Happiness” researchers Timothy Wilson and Daniel Gilbert coined the term “affective forecasting” to refer to the idea that our ambitions are driven in part by our anticipation of how we might feel in the future if this or that happens—if our hopes or fears are realized. Their work was based in part on work in the 1990s by Kahneman and Snell. Yet back in 1759 we could read Adam Smith saying this:
Adam Smith, The Theory of Moral Sentiments (1759).
(When I mentioned this to Gilbert in 2016, he replied “I have used this quote often. It turns out that Adam Smith discovered everything, and affective forecasting was the least of it!”)
Kevin Corcoran
May 6 2025 at 2:35pm
I often have that same thought about Adam Smith discovering everything. Alfred Whitehead once quipped that all of Western philosophy reduced down to a series of footnotes to Plato. My version of that quip is that virtually all modern wisdom can be reduced to footnotes to Adam Smith.
Warren Platts
May 10 2025 at 5:22pm
That is a fascinating an trenchant quote from Adam Smith. I must admit that I am finally in that “he begins at last to find that wealth and greatness are mere trinkets of frivolous utility….” stage. But what do you all think Smith means by ‘assessions’? The dictionaries are not much help. (I see the econlib spell-checker doesn’t like it either.) Do you think the intended meaning is the same as ‘assessments’?
Warren Platts
May 10 2025 at 6:33am
I beg to differ. A displaced worker in Youngstown or Schenectady or Flint who goes to Walmart because it’s cheaper than Ziggy’s Hardware that’s a block away on 52nd Street and they see that everything for sale is marked “Designed in USA; Made in China” — they not only see the trade deficit, they feel it in their bones…
Doing history is a lot like reading the Bible. If there is something you want to find, you will find it.