Capital Surplus Not Trade Deficit

Hand wringing: An excessive expression of distress: handwringing by some experts over the state of the economy.

Dictionary.com

There is a lot of hand wringing about the trade deficit. We are shipping people slips of paper and they are shipping us cool stuff to use. Sounds like a decent trade to me.

But even if we are worried that the celebration will end some day, here are some good reasons not to worry about the flip side of the trade deficit, the capital surplus.

We have an economy in the United States that is well capitalized. We also attract skilled workers from around the world. One estimate of world capital concludes that the human capital stock exceeds the physical capital stock.

If you take the 60% more that college educated people earn at midlife and multiply it by the number of college educated people, the 40 million college educated people in the United States are worth $1T a year to the US economy. They would cost us a lot more if we could not import them from overseas because they very much increase the returns from other assets in our economy. They are so cheap to rent because they are so common.

This puts the value of the college education portion of the human capital stock at about $20T or about twice annual GDP. This fraction of GDP is similar to the number another researcher gets for the total human capital stock in Chile.

Of the 160 million people 25 and over, about 25% have a college education up from 5% in the mid 1950s. If we continue at that 0.4% increase per year, that gives us an extra $300B/year in extra human capital stock.

If you look at another component of capital, the housing stock, there are about 72,000,000 homes in the US worth an average of $290,000 including the land or another $20T in capital stock. That average price appears to be growing at about $8,000/quarter or about $2T/year. That is just the single family housing stock, not commercial and industrial real estate, not multi-family, not equipment and not environment and infrastructure.

If you add all the human capital growth to the growth and appreciation of physical stock in the United States, you can quickly see that we can sell capital stock forever at a $666B/year rate and still continue to grow our capital stock by trillions per year. If we have $200 trillion in human and physical capital (using the envelope theorem to invert our domestic product by one over the interest rate) in the US almost all held by US citizens, selling 0.33% of it every year even as we grow it by many times more than that is no big whoop.

Whoop: Equal to the word