March 24, 2005,
Last week’s news that the 2004 U.S. current-account deficit had hit an all-time high was met with the expected negative commentary. Lehman Brothers chief economist Ethan Harris called the ’04 number “abysmal”; the Wall Street Journal’s Justin Lahart pondered whether “the rest of the world will tire of writing IOUs”; and USA Today cited Warren Buffett’s recent quip that the U.S. could become “a sharecropper society” if its transfer of assets to foreigners continued.
Buffett’s comments merit special attention in that it is precisely because the U.S. is moving away from low-value sharecropper jobs that the current-account deficit is so high. In truth, the impressive performance of Buffett’s Berkshire Hathaway is directly related to the fact that the current-account deficit has been rising almost continuously over the last 25 years.
The explanation for this is very simple. When Americans send dollars overseas to import low-margin products such as paper clips, t-shirts, and CD players, the current-account deficit rises.
What the Buffetts of the world apparently miss is the great economic success story that allows us to be such prolific consumers to begin with. That story has to do with the dynamism of U.S. companies and their focus on what they do best, and how these companies send overseas the low-value work that hogs limited resources and crowds out innovation at home.
The above is the flipside of the outsourcing controversy. It has to do with the messianic devotion of U.S. companies to wringing as much efficiency as possible out of their limited resources. Importantly as evidenced by the fact that foreign purchases of U.S. stocks more than doubled in January to $16.5 billion this drive for profits attracts capital.
As for the current-account deficit, our export of shares in U.S. innovators such as Google, prominent “outsourcers” like Eastman Kodak, and low-margin product importers such as Wal-Mart does not factor into current-account/trade-deficit calculations. On the other hand, our imports of goods that are decidedly not in our economic self-interest to make does factor into the number. This explains why the current-account deficit continues to rise.
This is a very positive development. The willingness of others to make $37 DVD players for U.S. consumers means that U.S. consumers can continue to move up the economic ladder in terms of the work they do. All trade must in the end balance. We’re trading shares of Apple and Google for goods we could surely make but only if we’re willing to see our wages drop and capital inflows to companies like Apple grind to a halt.
Those who disagree need only look to Germany a country that protects low-value jobs and runs a current-account surplus. Labor laws there repulse worldwide capital, thus cultivating a 12.4 percent rate of unemployment. The latter insures a continued trade surplus for Germany, but only because a capital deficit makes German citizens weak consumers.
Warren Buffett wrings his hands over asset transfers to foreigners and the fact that Americans are the recipients of so many foreign goods. But his discomfort is a certain sign that the transfers he speaks of are moving both ways; that shares in U.S. assets are moving out (and funding our companies) while goods we’re too evolved economically to make move in. We could reverse the accounting abstraction that is the current-account “deficit,” but doing so would only serve to impoverish us, all while making the world’s second-richest man much less wealthy.
John Tamny is a writer in Washington, D.C. He can be contacted at firstname.lastname@example.org.