Had I as many souls as there be stars,
I’d give them all for Mephistophilis.
~ Doctor Faustus
Spectators claim that Satan himself appeared on stage during the opening performance of Christopher Marlowe’s play Doctor Faustus (1588)—the grizzly specter drove men mad with fear. Some wanted to demolish the theater, others to hang Marlowe for his occult summoning. In spite of this controversy, or perhaps because of it, the play was a hit. Today Faustus remains one of the greatest works of literature. Why?
Exquisite language?—lines like “the face that launch’d a thousand ships” have haunted readers for centuries. Perhaps. But time rarely preserves art for art’s sake: what survives is useful, it serves a purpose. Doctor Faustus is no exception.
The plot is simple: Faustus sells his soul to Satan in exchange for the demon Mephisophilis’ service for twenty-four years. Faustus dreams of wealth: I will “wall all Germany with brass. . .fill the public schools with silk” and “live a life of all voluptuousness.” In the end, Faustus wastes his power and Satan takes his soul. The tragedy of Doctor Faustus contains an important lesson worth heeding: never trade tomorrow for today.
Unfortunately, that is exactly what America is doing. America has run a trade deficit every year for the last forty years. Last year the trade deficit was approximately $1,000,000,000. How do we pay for deficits? Rather than selling our own current output, things that we make, we sell our past output, assets, and the promise of future production, debt. And why is America selling her very soul? Because, like Doctor Faustus, our appetite for imported “voluptuousness” exceeds are rational expectations, and our love of today overshadows our fear of tomorrow.
America is Faustus—and we are running out of soul to sell.
For love of thee, I cut mine arm…
We will begin by answering the most basic question: what is a trade deficit? Simply put, a trade deficit occurs when one country imports (buys) more than it exports (sells) to another country during a specific time period. Usually, we look at the numbers over a yearly basis, because different countries buy and sell different things depending on the seasons.
For example, if America bought $100 worth of oranges from Japan in November, but only sold Japan $50 worth of apples in July, we could say that America ran a trade deficit of $50 with Japan during the year. Conversely, we could say that Japan ran a $50 trade surplus with America. The overall difference, whether a surplus or a deficit, is known as the balance of trade.
Of course, in real life America buys more than oranges and sells more than apples. We buy and sell all kinds of goods, that is, physical products from apples to iPhones to cars. Therefore, when media personalities talk about the trade deficit, they usually refer to the overall trade deficit in goods—the deficit between all physical products bought and sold by America from all other countries in a given year.
In 2019, America’s trade deficit was $845,759,200,000. That is, we bought over $845 billion more goods than we sold in 2019. This works out to $5,443 for every working American. To put this into perspective, this is roughly equivalent to having imported the entire annual GDP of a country like Indonesia, Turkey, or the Netherlands.
Not only is America’s trade deficit objectively large, but America has run a trade deficit in goods every year since 1974—and this trade deficit grows almost every year. The cumulative effects of this chronic trade deficit cannot be overstated. Consider that since 2001, when China joined the World Trade Organization, America has racked-up a cumulative trade deficit of $13.2 trillion. This works out to some $84,019 for every working American citizen. This number grows continues to grow.
America runs a large, chronic trade deficit. However, this does not mean that we run a trade deficit with every country. A closer inspection of the numbers reveals that America generally has a balanced trade relationship with economically developed countries. Meanwhile, America typically runs trade deficits with developing countries.
Si peccasse negamus, fallimur, et nulla est in nobis veritas
The next logical question is how does America pay for the trade deficit? There are four—and only four—ways for a country to acquire foreign goods. First, they could obtain them by way of tribute, either through of gifts or coercion. Second, they could obtain them by trading goods for goods. Third, they can do so by selling assets. Fourth, they can obtain goods by promising to pay in the future. Although each of these options have been historically important, America’s current predicament places us squarely within options three and four. Let us explore each of the ways for countries to obtain foreign goods in more detail.
The first way that a country may obtain foreign goods is through tribute. Tribute simply refers to products received by one country from another country without a reciprocal exchange of products, either now or in the future. Essentially, tribute is a free lunch.
Although tribute is fairly rare today, it has historically been the most common way that countries have enriched themselves, and it explains most of the vast differences in wealth between historical societies. Tribute may take the form of gifts given from one country to another for the purposes of strengthening relationships. For example, the United States received the Statue of Liberty from France as tribute, due to the two countries’ historical friendship.
More commonly, tribute takes the form of coercion wherein one country provides products to another because of an asymmetrical political relationship. Often, weak countries would pay tribute to strong countries to prevent an invasion, and just as frequently weak countries would be looted by strong countries. In both cases the transfer of products can be characterized as tribute.
Tribute was exceedingly common in history. For example, client states of the Persian Empire were required to provide tribute to the Great King as diverse as horses from Cilicia, eunuchs from Assyria, or gold from India. Likewise, the Spanish Empire obtained fabulous quantities of gold, silver, and exotic plants and animals from their conquest of the Aztec and Inca civilizations.
Although the prospect of obtaining products by way of tribute is fascinating, it is irrelevant for our discussion of America’s trade deficit. China is not giving us our semiconductors because they like us, nor has America invaded Guatemala for the purposes of securing an unlimited supply of bananas—at least not recently.
The second way that countries can acquire foreign goods is by trading. That is, countries may exchange currently-produced output for currently-produced output. For example, Argentina sells steaks to America in exchange for automobiles. If the value of steaks and automobiles is equal, then trade is balanced, and no further payment is required.
Of course, a country’s output is not limited to goods, and therefore our discussion of the trade deficit has until this point been somewhat misleading. America exports both goods and services. As we have discussed, a good is a physical commodity—something that you can touch, taste, or smell, like a brick, an apple, or a bottle of perfume. Goods can be owned, stored, and consumed by the buyer after they are produced.
A service, on the other hand, is not a physical product that can be owned, stored, or consumed later. Instead, a service is something that is intangible which is usually produced and consumed simultaneously. Typically, services deal in convenience and information. A helpful example that highlights the distinction between goods and services can be found in the music industry.
Our grandparents used to buy music on vinal records. The vinal record was a good which they bought: it was a physical product which transferred ownership from the seller to the buyer, and could be stored on the shelf until someone wanted to listen. Presently, many people listen to music on Spotify: they sign into their account and stream music from the application. Spotify does not sell any physical products, the listener does not own anything new, and the music cannot be stored because it is only available so long as the listener has a Spotify account. Spotify is a classic example of a service. Other examples include massages, legal representation in court, or business consulting.
Selling services is tremendously lucrative—services underpin the entire business model of Silicon Valley—and they form a large portion of America’s exports. In fact, America had a trade surplus in services worth $288.9 billion in 2019. This means that a portion of America’s trade deficit in goods was offset by America’s trade surplus in services.
Overall, America’s goods and services trade deficit is worth $557 billion—this remains an enormous amount. Given that America runs a deficit in total current output, our initial question remains unanswered: how does America pay for the trade deficit?
Homo fuge: yet shall not Faustus fly
The third way that countries acquire foreign products is by selling past output, something that was made in the past but retains value today. That is, the country must sell its assets. A good example of an asset is a house. The production of a house made in 1973 would contribute towards America’s GDP in 1973, but not today.
However, the house—or perhaps more accurately, the land upon which it is built—retains value and can be sold in the current year to buy foreign products. This sale would not count towards America’s GDP, nor would it factor into the trade deficit, however, it is an integral component of the balance of payments.
When discussing international trade, many economists contend that trade deficits do not exist because they are only one half of the balance of payments—they are simply a part of a larger equation. For example, Professor Steve Hanke of Johns Hopkins University writes that “the U.S. trade deficit… is just the mirror image of what is happening in the U.S. domestic economy. If expenditures in the U.S. exceed the incomes produced in the U.S., which they do, the excess expenditures will be met by an excess of imports over exports (read: a trade deficit).”
What Hanke, and other liberal economists fail to recognize, are the practical consequences of running a trade deficit. Although the books are balanced on paper, reality shows us that it matters how they are balanced—there are two sides to every coin, but heads is not tails.
Every year, America sells billions worth of assets to pay for the trade deficit. To be clear, selling assets is not always a bad deal. For example, my law firm recently sold some old (ugly) furniture and used the proceeds to buy desktop scanners for our support staff. In this case we turned assets which did little more than take up space into assets that increase worker productivity. This was a good deal.
On the other hand, if I had sold my life-sized marble bust of Julius Caesar and used the proceeds to buy pizza, this would have been a bad deal. Not only would I lose out on any profits from the statue’s appreciation, but I would have nothing to show of the proceeds after I ate the pizza. There is an important economic difference between fine art and pizza—between the permanent and the impermanent—between investing and consuming. Context matters, and this is a lesson which is lost on liberal economists.
Unfortunately, this lesson is also lost on America’s leaders. America is selling hundreds of billions worth of assets—everything from shares in New York’s largest companies to Iowa’s best farmland—every year to pay for our trade deficit. For example, foreign investors now own some 40% of all U.S. equities. This has skyrocketed up from just 12% in 2007.
Likewise, Americans are selling enormous amounts of real estate to pay for foreign production. In 2019 alone, foreigners purchased $183 billion in American real estate/ America is selling its heritage and its economic lifeblood for cheap Chinese trinkets. We are selling our soul for convenience.
The fourth, and final, way that countries can acquire foreign production is by promising to pay for it in the future. In other words, by buying it on credit with debt. This last option is how America funds the bulk of its trade deficit. Consider that foreigners now own 33% of America’s national public debt, worth $7.7 trillion. Likewise, America’s household debt has climbed to unprecedented levels.
Debt is especially dangerous because not only does the borrower need to repay the principle, but will also need to repay the interest owed. This inflates the cost of buying foreign products in a way that most economists fail to appreciate. Consider that America became a debtor nation in 2006—for the first time since the Great Depression.
This means that America paid more money in interest to foreign holders than it received from abroad. Currently, America pays $132 billion to foreigners each year in interest on our national public debt. This is about one quarter the value of our trade deficit, and it too is increasing every year.
Lente, lente currite, noctis equi!
When Doctor Faustus sacrificed his immortal soul for temporal delights, he did so not because he was stupid, but because he was smart. Faustus believed that he was exceptional. That he was brilliant. That he could surmise a way to evade his fate.
America’s best and brightest have likewise deluded themselves into thinking that they can tame the offshoring vicious cycle. Our politicians ignore the problem, while our economists twist logic to justify our greed. However, like Faustus, America cannot obtain an infinite supply of imported voluptuousness for free. We must trade something, be it our past or our future, our sovereignty or our soul. Unless we change our course, we will be forced to accept our fate like the lamentable doctor:
Curs’d be the parents that engender’d me!
No, Faustus, curse thyself…
[for thou hast] depriv’d thee of the joys of heaven.
