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  • Don’t Believe What You Read: Bigger Trade Deficit = More Economic Growth

    The latest trade deficit figures are out, and like always, most reporters fail to accurately explain what these numbers mean.

    During the past 10 years, there has been a clear relationship between trade deficits and U.S. economic growth. Most news coverage got the relationship backwards. Consider the following reports:

    • “The U.S. trade deficit unexpectedly grew in November, a drag on economic growth.”
    • “Net imports suck cash out of the economy, subtracting from gross domestic product.”
    • “The jump [in the trade deficit] may mean that trade subtracted from growth last quarter.”
    • “The widening gap will likely drag on 2012 economic growth.”

    In fact, when trade deficits increase, our economy grows faster than when trade deficits decline.

    For example, Heritage Foundation calculations based on Bureau of Economic Analysis data show that in 2009 the trade deficit (measured in inflation-adjusted dollars) increased by 18 percent. If the trade deficit is a drag on economic growth, then our economy should have tanked. Instead, real gross domestic product (GDP) increased by 2.4 percent.

    In contrast, in 2008 the trade deficit declined by 24 percent. Based on the “trade deficits are a drag on the economy” theory, our economy should have taken off. Instead, real GDP shrank by 3.1 percent.

    During the past 10 years, whenever the trade deficit increased, real GDP always increased—on average by 2.7 percent. But when the trade deficit decreased, real GDP did not boom–in fact, it increased on average by less than one-tenth of 1 percent.

    To be fair, many reporters rely on economic “experts” who claim that trade deficits are bad for the economy. But the numbers don’t back them up. And the recently released 2013 Index of Economic Freedom, published by The Heritage Foundation and The Wall Street Journal, shows that countries with low trade barriers are much more prosperous than those that restrict imports. That’s the type of news reporters should share when discussing the impact of trade.

    Posted in Economics [slideshow_deploy]

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