I.O.U.S.A. (19 page)

C h a p t e r 4

THE TRADE DEFICIT

In the last six or eight years, the United States
has been consuming considerably more then it
produces. It has relied on the labor of others to
provide things that are used every day. Because the
country is so rich, this can continue for a long time,
and on a large scale — but not forever.

— Warren Buffett

Although still seen as the world ’ s economic superpower, the United States has found itself with a myriad of problems: a skyrocketing federal debt, growing annual budget defi cits, an almost nonexistent personal savings rate, and the dubious honor of being the country with the largest
current account defi cit,
of which trade makes up the largest part.

A trade defi cit occurs when you are importing more than you are exporting — in other words, you are consuming more than you are producing. So the next time you are at Wal - Mart 59

c04.indd 59

8/26/08 8:59:43 PM

60 The

Mission

or Target, take a look around. Just about everything you can purchase there comes from another country.

Economists are generally split over what the economic impact of a trade defi cit is on a country. Those who defend running a trade defi cit argue that when the United States sends money to another country for its goods or services, that country will take that money and invest it back into the United States, in one way or another. In economist Milton Friedman ’ s opinion, having a large trade defi cit meant that your country ’ s currency is desirable. He believed that a trade defi cit simply meant that consumers had an opportunity to purchase and enjoy more goods at lower prices; on the fl ip side, a trade surplus implied that a country was exporting goods its own citizens did not get to consume or enjoy, while paying high prices for the goods they actually received.

However, as those on the other side of the argument point out, countries with large and long - term trade imbalances also maintain a low national savings rate. Conversely, those countries with trade surpluses (such as Germany, Canada, and Japan) have a high national savings rate. Those arguing against trade defi cits believe that GDP and employment will be pulled down by a large trade defi cit over the long run. As goods fl ow into the United States from other countries, the country is los-

Trade Defi cit:

ing opportunities to produce these goods domestically, which
When imports

exceed exports. In

subsequently has an adverse effect on U.S. jobs.

other words, when

Somewhere in the middle of these two sides is the world ’ s
you are buying

richest man, Warren Buffett. Mr. Buffett believes that, on a
more from other

whole, trade is a good thing for America, but that over the
countries than you

long term, running “ large and persistent ” trade imbalances
are producing.

will be problematic for the United States.

The Road to Squanderville

Mr. Buffett realizes the importance of having the average American understand big economic issues, like the trade defi cit.

As a result, he wrote an article in 2003 for
Fortune
magazine, c04.indd 60

8/26/08 8:59:52 PM

Chapter 4 The Trade Defi cit
61

called “ Squanderville vs. Thriftville. ” This parable of sorts was designed to simplify for the readers the problems inherent in trade imbalances.

“ Economics tends to put people to sleep, ” Mr. Buffett told us when we sat down with him in his offi ce at Berkshire Hathaway, where he is CEO and largest shareholder. “ And I thought by creating a couple islands with inhabitants of quite widely different activities that it might get across a point that otherwise they get lost on. ”

In Buffett

’ s story, he outlined two side

- by - side islands:

Thriftville and Squanderville. On these islands, land is the capital asset, and these primitive people only need food and produce only food. At fi rst, the citizens of both islands work eight hours a day and produce enough to sustain themselves. However, as time passes, the Thrifts realize that if they work harder and put in longer hours, they can produce a surplus of goods and then trade what they produce with the Squanders. The people of Squanderville like the idea of working less — and all the Thrifts want in exchange for these goods are “ Squanderbonds, ” which are denominated in “ Squanderbucks. ”

As time goes on, these Squanderbonds begin to pile up and it is clear that the Squanders will have to put in double time to eat and pay off their growing debt.

“ Meanwhile, ”

writes Buffett, “ the citizens of Thriftville begin to get nervous.

Just how good, they ask, are the IOUs of a shiftless island?

So the Thrifts change strategy: Though they continue to hold some bonds, they sell most of them to Squanderville residents for Squanderbucks and use the proceeds to buy Squanderville land. And eventually the Thrifts own all of Squanderville. ”

“ At that point, the Squanders are forced to deal with an ugly equation: They must now not only return to working eight hours a day in order to eat — they have nothing left to trade — but they must also work additional hours to service their debt and pay Thriftville rent on the land that they so imprudently sold. In effect, Squanderville has been colonized by purchase rather than conquest. ”

c04.indd 61

8/26/08 8:59:52 PM

62 The

Mission

In a nutshell: Buffett ’ s story illustrates that any short - term actions have long - term consequences that sometimes people don ’ t think about in the short run. This is true of the United States.

“ Our country ’ s ‘ net worth, ’ ” Buffett writes in the introduction of his
Fortune
article, “ is now being transferred abroad at an alarming rate. A perpetuation of this transfer will lead to major trouble. ” And it may be more than just economic trouble. History shows that countries with similar trade and debt problems are fertile ground for political movements we ’ re not accustomed to in a democratic society.

In 2007, the total U.S. trade defi cit was $ 738.6 billion, which is down 9 percent from 2006. Much of the decline could be attributed to a decline in the value of the U.S. dollar. The popular argument suggests that a lower dollar makes production of goods in the United States cheaper and therefore more attractive to buyers of U.S. goods overseas. Exports would go up. And in fact they are, each year.