Newspaper Economics Reporting: What a Joke

Is it asking too much for economics writers at newspapers to understand economics? Ignorance of international trade issues is astounding. That would be bad enough. Passing along outright falsehoods to readers is outrageous. Paul Blustein in today's Washington Post reports that Arabs are investing in the United States at a high volume, not all of which is getting the bad reviews of the Dubai Ports World deal. He then says,

Behind such transactions are two powerful forces. One, of course, is the high price of energy, which has left several oil-producing Arab countries swimming in cash. The other is the burgeoning U.S. trade deficit -- $726 billion last year -- which means that the United States needs foreign capital; a country that imports more than it exports must cover the gap with money from abroad.

This is astoundingly wrong and idiotic. He makes it sound as though the difference between what Americans buy from foreigners and what foreigners buy from Americans has to be made up by foreign investment. That of course makes no sense whatsoever. It's like saying that since I buy groceries from Kroger, but Kroger buys nothing from me, I need to have Kroger invest in my property to close the trade gap. Pure gobbledygook.

As a matter of fact, Blustein has the whole thing backward. The so-called trade deficit doesn't create the inflow of foreign capital or the need for such. On the contrary, it's the inflow of foreign capital that creates the so-called trade deficit. When foreigners sell products to Americans and, instead of spending their dollars on Americans' products, invest their dollars in productive endeavors here, a deficit in the current account results -- which is mirrored precisely by a surplus in the capital account. In other words, Arabs and other foreigners are choosing to invest their capital in the American economy rather take goods back to their home countries. This is bad? When a full accounting is done, everything balances. It has to!

I guess it is too much to expect an educated newspaperman to understand that.