Why Trade Surpluses Turned into Trade Deficits in 1975 (and why that is not such a bad thing)

The last time the US ran a trade surplus was in October of 1975. This after nearly a century of mostly running trade surpluses.

What else was going on in 1975?

Personal computers were emerging. In 1975, Bill Gates and Paul Allen founded Microsoft to support the first, popular personal computer (the Altair 8800). Steve Wozniak cofounded the “Homebrew Computer Club” as he began to play with designs that would become the engine for Apple’s success.

What was different about this personal computer industry? It was far less capital intensive than was the automobile industry that had so dominated and defined the US half a century earlier or the railroad, oil and steel industries that had defined industry a century earlier. This made it possible to create even more wealth: a small amount of capital could create a huge amount of equity. Hewlett and Packard was founded with $595 in capital. Gates and Allen didn’t need any venture capital to get started but did give away 5% of the company for a million dollars just to get a venture capitalist’s expertise on the board. What did Gates trade? Financial capital for intellectual capital, for what he calls “adult advice about various things.”

“That money sat in the bank, and it’s still in the bank today, so it was not for anything to do with capital, but rather just to join the team,” Gates said. [The venture capitalist] is still on the board of Microsoft and is still extremely helpful as a lot of important decisions get made."

This new information economy was creating capital rather than consuming it. This was of great interest to folks managing pension funds and retirement accounts. Because something else had happened by the time the US began to chronically run trade deficits. 

In 1880, life expectancy in the US was 39 years. By 1980, it was 74 years. In the century up to 1980, life expectancy rose 35 years, increasing by 4 months every year.

This meant that one of the most important products people could buy was a retirement. Retirement is very different from traditional goods. It comes in the form of purchasing bonds, stocks and other equity. And as people grew more affluent and lived longer, they spent a growing portion of their income on financial instruments and not just goods.

Up to 1975, the US was exporting products and often ran a trade surplus. After 1975, the US began to be a net exporter of capital. This shows up as purchases of equity and bonds by people in other countries. The US was no longer getting richer by selling products to the rest of the world; it was getting richer by selling investments to the rest of the world. Given how we account for trade, this shows up as a chronic trade deficit, one that has been sustained for nearly half a century.

The business of the US is no longer just about mass manufacturing goods. Increasingly, it is about mass manufacturing wealth.