The bigger the trade deficit, the better!

Tell me, do you grow or gather your own food? Do you make your own clothes? Did you build the home that you live in or generate the electricity that runs it? Do you proide your own medical care or legal services? Do you make the movies that you watch for entertainment?

Well if you don't do some or all of these things then you probably run a deficit of trade with the many vendors, producers and service providers that provide you with the stuff you need to live your life.

Yet, you don't call it a "defiict." You call it the normal course of doing business and the normal course of living your life. On the other hand, if the United States, as a country does this with its trading partners, we call it a deficit and it's seen as bad.

On the micro level it's probably very easy for you to understand. The reason why you don't grow your own food or make your own clothes or build your own home or provide the myriad other goods and services you need to live your life is because it is far more efficient to have someone else do it. That allows you to do what you do best: work at your chosen profession and earn an income.

If we still made and produced all of those things ourselves, we'd be living as the cavemen did tens of thousands of years ago. I'd venture to say that no matter how bad you think things are, you would agree that your standard of living beats that of a caveman. (No offense to those loveable Neanderthals from the Geico commercial.)

We run a deficit of trade with the rest of the world for the very same reason that you run a deficit of trade with your local grocery store. It is far more efficient for us to buy the goods and services produced by nations like China, Japan, Korea, Taiwan and elsewhere than it is to make it here. It saves us time and money and allows us to go about what we do best: build the world's largest economy based upon technology, information, service and finance. They build the cars and make the textiles, while we write the software programs that run their modern factories. We also find them the capital that allows their economies to grow.

In the micro example no one complains that running a deficit of trade with the local grocery store is a bad thing. Moreover, the wealthier a person is, the bigger that person's deficit of trade probably is. He or she is buying far more food, clothing and shelter along with health care, leisure, education and other things than the average person. In fact, one could look at the size of an individual's monthly deficit and surmise just how wealthy that person was.

On a macro level, however, that perspective is somehow lost. As a nation we believe that it would be better for us to toil away producing basic necessities, so as to not give that "advantage" to someone else in a foreign country. That's crazy.

Adam Smith said that a nations wealth was not merely measured by the gold or silver (money) that it held, but also by the abundance and affordability of its consumables.

Smith argued that imports were a benefit and exports were a cost: "The man who buys, does not always mean to sell again, but frequently to use or to consume; whereas he who sells, always means to buy again."

In countries that rely on exports, land, labor and capital are used to provide finished goods, which are then sent out of the country to foreigners, for them to consume. But the exporter will then have to buy these items for himself. The importer (or buyer, in Smith's example) gets the benefit of owning and using these items the first time around.

Adam Smith knew that a nation's trade deficit was a not a reflection of how poor it was, but how rich it was. We seem to have forgotten that important lesson and in our zeal to "reduce the deficit" we will make ourselves poorer and lower our standard of living compared to the rest of the world.