New U.S. Commerce Department statistics on America’s economy highlight growth in the U.S. trade deficit of $3.2 billion dollars between October and November 2009. That’s good news for Americans. The statistics also show real GDP rising 2.2 percent in the third quarter of 2009, as well as growth in personal income and consumption in November 2009. It is no surprise that rising economic activity and a growing U.S. trade deficit go hand in hand. As the economy and incomes grow, business and consumer demand for all goods, including imports, rises. Thus, a growing trade deficit is generally a sign of a healthy, expanding economy – or in this case, a welcome sign of economic recovery. Rising economic momentum hasn’t just translated into higher imports from abroad, U.S. exports are up $1.2 billion in November from October levels too – a reflection of the recovery being felt around the world.
The attention and concern paid by many to the trade deficit reflects a fundamental misunderstanding of the U.S. economy. Some see a deficit as a harbinger of jobs lost. That’s just not true. Since the 1970s, America’s economic performance, including job growth, has been better in years where the trade deficit has grown than in years where the deficit shrank. Fundamentally, America runs a high trade deficit because the supply of domestic savings consistently falls short of the demand for domestic investment. Up until the recent financial crisis, America had a healthy, productive, and growing economy that demanded more investment than was supplied by domestic sources – the government and U.S. households. As long as that shortfall exists and the U.S. wishes to grow, America must import surplus savings from other countries – such as China – by running trade deficits. U.S. policymakers can best provide a long-term solution to the trade deficit not by introducing barriers to trade, but by addressing the tax and spending policies that keep savings too low.