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).
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.