Robert Solow
“I have a chronic trade deficit with my barber, who doesn’t buy a darned thing from me.”
As I write this blog, in the spring of 2025, the United States and global markets are experiencing high volatility. On April 6, the DOW and S&P 500 lost nearly 6% in one day, the most significant daily loss I have witnessed so far. Many observers attribute the high market swings -- up and down -- that we currently experience to the Trump administration's approach to tariffs. In early April, the Trump Administration imposed very high new tariffs on many other countries, thus making their products more expensive to US consumers.
One key argument the current administration makes about tariffs is that we are running large trade deficits with countries like China, which the administration is not happy with. While I am still learning how exactly the economy works and the role tariffs can play, I know enough to feel that governments meddling in the free capitalist exchange of goods and services is also not in the national interest. It strikes me that a perfect trade balance with each of our trading partners may be an unattainable goal.
Robert Solow was awarded the 1987 Nobel Prize in Economic Sciences for his important contributions to theories of economic growth. His work demonstrated that the key to economic growth is technological innovations.
My Dad shared a quote from the Nobel Laureate American economist Robert Solow, who observes that he is running a perpetual trade deficit with his barber – and that’s OK (to have a trade imbalance). Much like individuals, countries can specialize in the provision of certain goods and services, and end up having trade surpluses or deficits with certain other countries. Wanting each country to have a perfect trade balance would be like all people buying the exact same from each other, which seems weird, or even a little bit like communism.
In any event, this spring of 2025 is opening my eyes to how massive the impact of government decision-making and macroeconomic considerations can be on markets and company valuations. Economics matter, and an understanding of economics makes for a better investor.
Links to Further Reading:
Image from Wall Street Journal
Robert Solow – Wikipedia https://en.wikipedia.org/wiki/Robert_Solow
Trade as Foreign Policy, a 5-minute video from the Council on Foreign Relations on Tariffs
