All Else Equal: Making Better Decisions Ep60 “A Trade Deficit? More Like a Capital Surplus” with John Cochrane
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Apr 23, 2025 
John Cochrane, a renowned economist from Stanford University and the Hoover Institution, joins the discussion on the often-misunderstood concept of trade deficits. He reveals that these deficits might actually indicate a capital surplus rather than economic weakness. The conversation dives into the historical myths surrounding trade policies and the detrimental effects of tariffs. Cochrane critiques current protectionist strategies while highlighting how open trade can foster growth and international cooperation, especially in comparison to China’s role in Africa.
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Trade Deficit as Capital Surplus
- A U.S. trade deficit is fundamentally a capital surplus because it means others hold claims on U.S. future income.
- Trade deficits reflect the balance between goods delivered and money or asset claims flowing back.
Why Policymakers Fixate on Trade Deficit
- Fixation on trade deficits stems from economic fallacies like mercantilism and the fallacy of composition.
- Free trade is ultimately beneficial despite desires to protect domestic industries with tariffs.
Trade Deficit Must Match Capital Account
- Trade deficits must be matched by capital account surpluses where foreign investors hold U.S. assets.
- Countries like China export goods and invest back in U.S. securities, creating a complex financial ecosystem.