Originally written on 4/11/2025

Our last column reported that the US has run a current account deficit, or in popular parlance, a trade deficit with the rest of the world since 1975. A trade deficit means the US has run a capital account surplus over the same time frame. A US capital account surplus indicates investment is flowing into the US from the rest of the world to buy dollar-denominated assets. America’s erratic trade policy is based on the notion that this persistent current/capital account imbalance is the source of all kinds of economic problems for the US, and tariffs are the best remedy. 

So, has fifty years of trade imbalances generated economic harm to the US? At the plenary session of the Association of Private Enterprise Education meeting earlier this month, George Mason University Professor Don Boudreaux argued, in our opinion, quite convincingly that they have not. A common claim is that trade deficits have “hollowed out” US manufacturing capacity and reduced US manufacturing output and employment, weakening our ability to respond to national security crises.  

That US manufacturing capacity and output have declined is fake news. US manufacturing capacity and output have increased since 1975, though manufacturing employment has decreased as workers become more productive. According to the Federal Reserve, US Industrial Capacity is 2.44 times larger in 2025 than in 1975. Adjusted for population, US industrial capacity is 1.54 times larger. Similarly, US Industrial Production is 2.46 times larger in 2025 than in 1975. Adjusted for population, it is 1.56 times larger. It is a myth that our overall productive capacity has been shrinking and that we no longer produce industrial output.  

Another common claim is that the persistent US capital account surplus has led to foreigners buying up most of the assets in our country. In other words, a generation of bad trade policies and profligate American consumers have sold off the farm to foreigners, to whom we are increasingly beholden. Professor Boudreaux argued that if that were true, American households’ inflation-adjusted net worth would be less today than in 1975. The inflation-adjusted net worth of USA households and non-profits is 2.32 times more than in 1975 and 1.47 times more per capita.  

Politicians claim that US industrial capacity and output have declined and that US consumers’ net worth is declining are false. US industrial capacity and production have been increasing, and US consumers are, on average, more prosperous than in 1975. If it ain’t broke, don’t fix it.