Trade Deficits: People Still Being Told They Are "Draining the Wealth of the Country"

The Washington Times takes us back to the glorious mercantilist days of yestercentury in its piece the other day crowing about shrinking "trade deficit" numbers (which they credit to weakening dollar, increased domestic energy production):

Trade deficits act like a dead weight on the economy by draining the wealth of the country and bleeding domestic industries. 

As Milton Friedman told me in 1995, and we weren't even talking about Adam Smith, Bastiat, and the basic notion that more trade, at least if it represents the sought-out free choices of individuals trying to better their perceived cirumstances, the same fallacies about economics recur eternally and will never be defeated.

Or to put it more baldly, I don't feel "drained" by my grotesque trade deficit with the Von's supermarket on the corner. I'm pretty sure they haven't bought a single book or article from me.

Murray Rothbard with the Austrian/free-market perspective on the non-issue of "trade deficits" writ large (which is not the same as saying that the specific numbers associated with "trade deficits" at any given time might or might not be caused by some government policy that is ill-advised for some other reason):

Comments

[Romulus Augustus]

"the same fallacies about economics recur eternally and will never be defeated."

Why do intelligent people continue to believe rot? Eventually, they gave up on medical theories that pre-dated understanding of germs?
They gave up believing the sun revolved around the earth? They gave up on burning witches and that certain dances would make the rain fall?

[Caleb Turberville]

I continue to see it as a failure of the standard high school curriculum when it comes to economics.

I don't really know what has led to the relatively better understanding of germ theory or astronomy among the general public, but I suspect it has to do with the fact that these subjects are taught to teenagers so well that they go into adulthood with a nice grasp of the concepts, even if they don't pursue it in college.

Meanwhile, teenagers continue to receive a very poor economics education; therefore, their grasp of the material remains very weak going into adulthood, especially if they don't continue studying it in college.

[Surly Chef]

If germ theory could be manipulated to keep those in power in power, then it wouldn't be taught in schools either.

[Caleb Turberville]

I mean, I had a class called "Economics/Government" my senior year of high school. The "economics" portion of the class was just the first test, and it was so poorly taught that it was basically a vocabulary/matching test:

Question: Who was the founder of communism?
Answer: a) Adam Smith b) Karl Marx c) Vladimir Lenin d) Mickey Mouse

I suspect that the ineptitude was mostly the result of teaching economics from a historical perspective and not from the more analytical perspective, which would be more like a math course.

[robc]

D?

[Tulpa (LAOL-PA)]

Marx wrote the Communist Manifesto so I'm assuming he's looking for C.

Though communism in practice was different from communism in theory so you have an arguably correct answer.

[darius404]

Marx is b), Lenin is c). The format's a little confusing.

[sarcasmic]

In a way germ theory has been manipulated. They teach it as if pasteurization was invented to preserve milk. It was not. It was invented to preserve beer.

[flye]

"Very poor economics education" is a matter of perspective. Teenagers learning that profit is a (perhaps necessary) evil and that government or non-profit careers are the highest calling -- this is having the intended effect.

[Caleb Turberville]

I just find it odd that you can ask my classmates "What causes infectious disease", and they can readily answer "germs." If they can remember even the slightest bit from biology, they might give you some keywords like "organelles", "DNA", or "cytoplasm." If they were really paying attention, they might give you a factoid like "Antibiotics are ineffective against viral infections." All of this while never deeply pursuing it in college.

But if all they know about economics is "capitalism=good" and "communism=bad", how exactly can you expect the adult population of the United States to make informed decisions about who they elect to run the government?

[Caleb Turberville]

Oops, I said "factoid" but I meant "factlet".

[Brandon]

"capitalism=good" and "communism=bad"

This is not exactly what I was taught in high school...

[Caleb Turberville]

It was just a simplification of the truth without any rigorous discussion of the underlying concept. It allowed people who took the class to come away thinking that capitalism is good without understanding why crony capitalism would be bad. Likewise, simply testing kids on the wrongness of communism/socialism/any other statist economics doesn't give them the intellectual ammunition to defend against politicians who want state intervention into the economy.

[flye]

Part of the problem is that the basic facts of economics are still being debated, e.g. Keynesian stimulus. Very few factlets to memorize.

Here's one I'd propose for the final exam, PJ O'Rourke's summation of The Wealth Of Nations:

How is wealth created? Through division of labor.
How is wealth distributed? None of your damn business.

[Caleb Turberville]

You don't have to go too far down the logical path to see how silly this is when you consider that the neo-mercantilist would prefer that the rest of the world had trade deficits when the U.S.

[anon]

Come oh Doherty, you didn't even approach monetary theory.

Nevermind, now I see why; it'd be more of an essay than a blog post. I thought about how to toss the comparative value of the dollar in there and then realized this.

[PapayaSF]

I've read that if you add up all the trade deficits and surpluses reported by all countries on Earth, it still shows a net deficit and not a zero as it should, so there's something wrong with the figures.

[anon]

The deficit you see is savings and investments by individuals.

Yeah, I know, it's hard to believe people might want to save money.

[robc]

While there is a time lag, trade surpluses and deficits always balance.

The problem is, sometimes they dont count stuff properly.

For example, back in the 80s, Japan shipped us lots of goods and we shipped them NYC skyscrapers and Hawaiian golf courses.

It balanced, but for some reason some of that stuff didnt count as an export.

[sarcasmic]

"The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics."
-Thomas Sowell

Keynesian "economics", trade deficit "economics", are not economics at all. They are politics masquerading as economics.

What else would you expect from government run schools?

[Francisco d Anconia]

Keynesian Economics - An economic theory invented to support a political perspective.

[Proprietist]

I still think many libertarians (and Keynesians) misunderstand Keynes and it does them a disservice. Keynesianism in execution is (very much like free markets) vastly different than in concept. Keynes did not want a blank check for infinite spending, he merely rejected the notion that government spending needs to rise or shrink in perfectly correlation with the business cycle and debt needs to always be fixed at zero. It has a longer term approach to balance where spending drops, taxes rise and surpluses accumulate in good years, and this surplus can be used to increase spending, cut taxes and minimize the impact of new debt in bad years.

This is in contrast to the balanced budget approach that gives government a blank check to spend and cut taxes in good years for political profit and then forces them into austerity in the bad years, worsening the business cycle.

Assuming the government was already spending the bare minimum to maintain a functioning miniarchy or constitutional republic, Keynes' approach actually makes more sense. In bad years "stimulus" can be returned in the form of unpaid-for tax cuts, and taxes can be raised to pay off the deficits created in good years. This requires debt flexibility that the balanced budget approach lacks.

The fact that statists and libertarians have both distorted Keynesianism is to me the same thing as corporatists and socialists distorting free markets.

[Proprietist]

For one further analogy - many anti-Keynesians like to point out that as real humans make painful cuts to their personal spending during recessions, why shouldn't governments do the same?

Yet somehow they forget that even responsible people may have to pull out the credit cards to stay alive and make expensive investments during a recession. For instance, many people go back to school when they can't find work. They don't have money to do this outright, so they take out student loans. But for those of us who saved up a nest egg during the golden years instead of spending it on overheated mortgages and SUVs, we have a lot more flexibility in the interim.

[sarcasmic]

You're missing the knowledge problem. Knowledge is diffused. I Pencil and all that.

Market cycles sort themselves out when through spontaneous order malinvested capital is distributed throughout the economy.

No central planner has the knowledge to use government funds to fix the economy. Aggregates may be useful for observations, but not for "fixing" anything. You can't simply spend yourself out of a recession.

Google "fatal conceit".

[Proprietist]

The same problem is applicable to balanced budget advocates - they are calling for setting government size and spending in correlation with the estimated future status of the market, tax revenues, etc.

I see Keynesianism not as a "fix" for the economy but a way to flatten the extremes of the market cycle. If in a recession our libertarian miniarchy cut taxes to zero in an attempt to "stimulate" the economy but maintain the minimal government, that would technically be Keynsianism, provided they agreed to raise taxes to more than the cost of government and rebuild the nest egg when the market rebounds. It would also remove the distortions of malinvestment that have riddled statist Keynsianism-in-practice.

My point is that we should stop seeing Keynesianism as an alternative to capitalism and socialism, when it is really an alternative to the philosophy of perpetually balanced budgets, which has many flaws in its own right. If the government is doing the few things government is supposed to do, like protecting rights, I don't see how cuts to government are particularly libertarian in that circumstance.

[sarcasmic]

Looks like you have given lots of thought to 'Balanced budgets vs Keynesian economics'.

I wasn't aware that it was an either-or argument.

My only point is that Top. Men. cannot flatten out business cycles using massive amounts of OPM because they do not have the knowledge necessary to perform the task.

"Fear the Boom and Bust" (a rap video made by economists. seriously)

[Proprietist]

I guess the difference between my concept and Keynesianism is that the flattening of the business cycle is a secondary effect and not the primary purpose. My purpose is maintaining the legitimate functions of government in an recession while building a nest egg in a surplus.

Post-libertarianization, I would prefer overall tax rates to be based on a formula that is proportional with economic growth or decline and averages out at the cost to pay for legitimate government. All surpluses beyond paying for the legitimate functions of government go into a lockbox that can be opened to fund government only when the economy and tax rates decline and when tax revenues do not cover the cost of the government. With any hope, we could live on past surpluses during the recession and not have to add new debt, but that's going to depend on the severity of the downturn and the strength of the previous upturn. Once the lockbox is exhausted, we have to keep tax rates artificially low to zero and pay for government out of debt. I'm ok with that, and the hope is that the stimulus of the low tax rates would help soften the severity and length of the downturn.

My point is that there are legitimate aspects of Keynesianism that libertarians should consider or embrace instead of writing it off as another form of statism.

[Ptah-Hotep]

Assuming the government was already spending the bare minimum to maintain a functioning miniarchy or constitutional republic, Keynes' approach actually makes more sense.

Now show me a government that does this. And Keynes was smart enough to know that no government would do so. That is the fatal flaw in his argument.

[Proprietist]

Of course, someone could say the same thing about Adam Smith and truly free markets. Just because it is unlikely in practice doesn't discount the point that tying goverment strictly to revenue is not always logical.

[Corning]

someone could say the same thing about Adam Smith

The division of labor provides astonishing benefits no matter the size of government.

[OldMexican]

Re: Proprietist,

I still think many libertarians (and Keynesians) misunderstand Keynes

That's because Keynes' economics were not coherent. Henry Hazlitt wrote a devastating refutation of Keyne's General Theory almost on a paragraph-by-paragraph basis, in such a way that the defense of Keynes has sunk into the realm of ideological stubborness.

It has a longer term approach to balance where spending drops,

Like Dennis Kim told Sheldon Cooper: "You don't see your mistake." The notion of aggregate demand is economically flawed: it ignores the heterogeneous nature of capital and opportunity costs. Spending for spending sake is not necessarily productive; only the market can determine that.

[Proprietist]

Spending for spending sake is not necessarily productive; only the market can determine that.

I didn't say it was. In fact, my vision of "stimulus" comes entirely through raising and lowering tax rates (ideally on land value instead of income/cap gains/etc) or raising the citizen's dividend from the land value taxes. Since this means any spending to maintain the existing minimal government will be unpaid for, we may have to go into debt temporarily. This puts more money into the hands of taxpayers instead of the government in order to stimulate the economy as they see fit.

If the government were doing only what it was legitimately and constitutionally supposed to do, I see no benefit to cutting spending based on market cycles and tax revenues. Of course, in current reality, there is zero logic for maintaining at least 40% of current spending, and another 50% can be scaled back (entitlements). Until we've got government minimized, there is no excuse for Keynesian logic or debt when there is so much damn waste to begin with.

[sarcasmic]

What does it take to teach people that money is not wealth.

I could sell everything I own except for a bag and a set of clothes, put all the cash in the bag, and whoopee I'd be rich!

Then I'd be like one of those homeless people you read about every now and then who dies next to their shopping cart with a million dollars in the bank.

[American Is Back]

"Or to put it more baldly, I don't feel "drained" by my grotesque trade deficit with the Von's supermarket on the corner. I'm pretty sure they haven't bought a single book or article from me."
If you were experiencing a total trade deficit in terms of spending more than you take in, your net wealth would go down and it would be bad. I'm not supporting socialism or anything but that is crap and I have to call you on it.

[flye]

In an even trade, net wealth does not decrease. "Spending more than you take in" just means you are bad at shopping.

[Fluffy]

If you were experiencing a total trade deficit in terms of spending more than you take in, your net wealth would go down and it would be bad.

That depends.

If there was a store (call it The China Store) that would give me all sorts of valuable and useful goods in exchange for Monopoly money or fallen Maple tree leaves, the best course of action I could pursue for wealth maximization would be to gather fallen leaves until I had bought out the entire store.

Because at the end of that process, I'd have a warehouse full of valuable and useful goods, and the owners of The China Store would have a pile of leaves.

[American Is Back]

I suppose if your idea is to give them debt we'll default on or money we'll inflate until it's worthless, then it is not necessarily bad. However it certainly isn't ethical from a libertarian perspective, and when we run out of fallen leaves we'll be screwed as our people think the products of China are their birthright.

[sarcasmic]

What is unethical about voluntary transactions?

It's not like we're talking about pointing a gun at the China Store clerk and demanding he takes our leaves in exchange for his goods.

[flye]

So your argument is that trade deficits are bad because our monetary policy sucks? Kind of a non sequitur, but even still... If you are going to devalue your currency, might as well buy tangible goods first.

[Tulpa (LAOL-PA)]

No, Fluffy's argument assumes that our monetary policy sucks, and will suck worse in the future. AIB is engaging him on those terms.

[darius404]

Are you really suggesting that American people and companies that buy from China are getting less for their money than they could get here?

[Tulpa (LAOL-PA)]

I think what he's saying is that the fact that Usonanoj, and the rest of the world, prefer to buy non-US products for whatever reason, indicates a problem for the US. You can criticize the usual proposed "solutions" to the trade deficit (subsidies, tariffs, etc) without denying it's evidence of a problem.

[darius404]

That's not an issue of a "trade deficit", it's an issue of product quality or price. He's asserting that simply buying more things from China is a bad thing in itself, rather than saying it's a symptom of something bad.

[Tulpa (LAOL-PA)]

The trade deficit is bad in itself, just like coughing up blood is bad in itself despite usually being only a symptom of a deeper malady.

We're not just buying more things from them. The trade deficit is in dollars, not product quantity. We're spending more money on their (cheap) products than they're spending on our (expensive) products.

[R C Dean]

Try this:

The trade deficit is bullshit because value is subjective. We obviously value what we gave them in exchange less than what we got for it, while they obviously value what we gave them in exchange more than what they gave us. Both sides wound up with more value (in their opinion, and who else's opinion counts?) than they started with.

See, also, why trade is not a zero sum game and increases everybody's wealth in the long run.

[Tulpa (LAOL-PA)]

So if I buy a broken down Pinto with a seized engine for $100,000, it's impossible to say that I got the short end of the deal because "value is subjective"?

It's also impossible to say that a person with no savings who spends $50,000 a year more than they make, much of it on hookers and booze, is in a bad financial situation, right? Value is subjective, right?

[Caleb Turberville]

If your intention was to buy "a broken down Pinto with a seized engine" and you thought $100,000 was a fair price, then you came out of the transaction with exactly what you entered it for. Namely, a broken down Pinto with a seized engine for a price you deemed suitable for your personal finances.

However, if you intended to buy a working Pinto for $100,000, but when you attained it, you found that it wouldn't start, you would be at a loss because the car has no value to you, despite what the owner had told you.

[Tulpa (LAOL-PA)]

If your intention was to buy "a broken down Pinto with a seized engine" and you thought $100,000 was a fair price, then you came out of the transaction with exactly what you entered it for.

Really? If one of your friends did this, this would be your reaction in real life?

[Caleb Turberville]

I'd be curious, no doubt. I'd think they were in the market for a Pinto to put on display in their car collection, or perhaps they were looking to sell the parts to make back the $100,000.

[np]

You're coming from it a utilitarian argument. But in your example, whoever made the voluntary exchange must have valued that particular Pinto more than $100,000 in order for it to happen.

You can ask the same for any number of things. People pay huge amounts of money for art. You could ask why are you paying a million bucks for some obscure painting by some obscure artist where there could be no resale value/opportunity in the future (maybe the buyer is the last fan alive, etc)

[Corning]

And so once again Tulpa goes off the deep end into his weird fantasy land of unicorns and $100,000 Pintos.

[The Late P Brooks]

Trade deficits act like a dead weight on the economy by draining the wealth of the country and bleeding domestic industries.

WTF?

You know what really IS a deadweight loss and a drain on the wealth of "society"? Fucking foreign aid. We give away money and get "nothing" in return.

TRADE is an exchange of value; you know, we give them money, and they give us valuable stuff. Debit equals credit.

[Francisco d Anconia]

The rebuttal to the trade deficit argument truly is simple isn't it?

Yet it persists. Quite probably because it is such an easy political ruse for stealing votes.

[Tulpa (LAOL-PA)]

Rebutting outsiders is super easy when you live in an echo chamber.

[darius404]

chamber....chamber...chamber....

[The Late P Brooks]

And, of course, by "we" I mean "various and sundry individuals and corporate entities acting on behalf of indidual investor/owners".

[Kroneborge]

Persistent trade deficits do cause problems, in fact a country can't increase it's savings rate and pay down it's debt while running a trade deficit.

This is basic economics here, how can reason not get this (especially when the Cato institute does?)

http://www.cato.org/sites/cato.....8n2-12.pdf

Moreover, much of what we have isn't even free trade at all, trade gets distorted by countries like China through manipulated exchange rates etc.

[Corning]

Persistent trade deficits do cause problems, in fact a country can't increase it's savings rate and pay down it's debt while running a trade deficit.

You are calling a headache the disease and brain cancer the symptom.

[Kroneborge]

No, because you can't fix one without the other. Increasing our savings rate MUST reduce our trade deficit.

And not fixing our deficit makes it impossible to fix our savings rate.

[Libertarian]

Along with "Vacation Bible School", "Trade Deficit" is one of my favorite oxymorons.

[The Late P Brooks]

The bogusness of this trade deficit "model" jumped out at me in the '80s when the "Evil Korean store owners are bleeding our (black) communities dry!" story was in vogue. You couldn't open a paper without reading some sob story about the "net outflow of cash" from those oppressed neighborhoods; it was as if gangs of Korean merchants were brazenly robbing people on every streetcorner.

Unfortunately for the narrative, those merchants were providing products for which individuals willingly handed over their cash. Everybody was satisfied except the collectivist busybodies.

[np]

I think people's perception filters out the monetary portion in the exchange of goods.

I think people don't see the net gain resulting from the point RC Dean mentioned above because they tend to think of "trade" and "trade deficit" as a form of barter, where they want to see either an equivalent exchange of non-monetary goods.

It's ironic the same people end up reversing and taking a mercantalist viewpoint if they were on the other side, with an outflow of goods in exchange for money.

[Tulpa (LAOL-PA)]

That doesn't show any bogusness of the trade deficit's significance, it just shows that people's reaction to a trade deficit is often incorrect.

Demonizing the people with which you have the trade deficit is not the right response... questioning why none of your own people can or will produce the products you're buying is.

[Tulpa (LAOL-PA)]

Or to put it more baldly, I don't feel "drained" by my grotesque trade deficit with the Von's supermarket on the corner. I'm pretty sure they haven't bought a single book or article from me.

Inapposite analogy, as you're talking about a trade deficit with one economic actor. You also trade with other actors, and hopefully have enough trade surpluses with the others to make up for your deficit with the supermarket.

The US doesn't just have a trade deficit with one country, it has a trade deficit with the entire world.

If you personally have a trade deficit with the entire world, you're either blowing through savings or going into debt. Neither of which is a good thing to do for long.

That said, the trade deficit is a symptom rather than the disease. Tariffs, subsidies, etc are treating the symptom...the reality is the US simply doesn't produce enough stuff that the world wants to balance our appetite for stuff that they produce, and we're blowing through our wealth as a consequence.

[np]

You'd only have a point if the government were forcibly buying up all the goods via deficit spending (borrowing). But that is not what happens when Walmart (or Intel or Sony) exchanges goods from China for dollars.

You're conflating voluntary private spending that comprises the so-called trade deficit with government deficit spending.

[Tulpa (LAOL-PA)]

I'm not talking about govt spending. Where did you get that idea from? The word government doesn't even appear in my comment.

[np]

Ok I misunderstood then. I took that as your meaning from:

If you personally have a trade deficit with the entire world, you're either blowing through savings or going into debt.

But if you're not talking about gov spending, then as the article or video states, what's there to worry about? The term "trade deficit" is really a misnomer since it discounts the dollars that is exchanged from the transaction. Some of it eventually or continuously makes it way back to the US to buy goods and services, including equity anyways.

[Tulpa (LAOL-PA)]

If they make their way back into the US economy then that would reduce the trade deficit in later years. But that doesn't happen, or doesn't happen enough. We've had trade deficits every year for decades.

If those dollars are used to buy US real estate and debt, then we have to count interest payments, rent, and other ensuing payments to the foreigners on the negative side of the ledger, which will increase the trade deficit even more.

[Tulpa (LAOL-PA)]

And before someone namedrops Adam Smith and Milt Friedman, nothing I've said contradicts them. Smith argued that if it was cheaper for Portugal to produce something of equal quality, than for Britain to produce it, then Britain was better off buying it from Portugal than trying to produce it itself. I agree with that analysis for the most part, though it is a bit simplistic.

However, if everything is cheaper to produce in Portugal, with equal quality, than in Britain...then Britain has a serious problem. Adam Smith would agree with me, I think.

[Corning]

Adam Smith was wrong:

http://en.wikipedia.org/wiki/Comparative_advantage

Which was odd because the division of labor leads pretty directly to the law of comparative advantage.

Smith simply missed that truth. Weird but true.

[Kroneborge]

But this still requires trade, when one party is doing most of the buying, and the other most of the selling this creates long term problems. Eventually the party doing all the selling owns the one doing all the buying

[Corning]

As Milton Friedman told me in 1995, and we weren't even talking about Adam Smith, Bastiat, and the basic notion that more trade, at least if it represents the sought-out free choices of individuals trying to better their perceived cirumstances, the same fallacies about economics recur eternally and will never be defeated.

And so once again Adam smith gets credit where he was actually wrong (absolute advantage is bullshit) and David Ricardo is forgotten and dismissed.

[The Late P Brooks]

So if I buy a broken down Pinto with a seized engine for $100,000, it's impossible to say that I got the short end of the deal because "value is subjective"?

Wow. A mng-grade hypothetical.

[Tulpa (LAOL-PA)]

If you don't want to deal with hypotheticals, don't make broad statements like "value is subjective".

[darius404]

Thinking your hypothetical is stupid is a totally appropriate response. If the pinto is more valuable to you than the $100,000, that's your business. If I think the pinto is worth less than the $100 k, that's less valuable from my perspective. If you value the pinto more, it's certainly more valuable. To you. I would suggest that you can get a pinto for less than $100 k though.

[Tulpa (LAOL-PA)]

The problem is, by that standard it's literally impossible to "lose" on a deal so long as it's voluntary. Which is absurd.

You don't have to be a central planner to recognize that it's possible for a third party with knowledge of both parties' situations, to figure out if a trade is fair or unfair. Thus unfair trades ARE possible and not subjective at all. The problem with central planning, as opposed to markets, is that it's impossible for a planner to accumulate this knowledge fast enough to set prices. Whereas people in general have incentive to figure it out, but they do not always do so correctly.

[sarcasmic]

The problem is, by that standard it's literally impossible to "lose" on a deal so long as it's voluntary.

That is correct. Say you are a fabulously rich car collector, and a Pinto of a certain year is missing from your collection. You might gladly pay a hundred grand to round out your collection, even though some magical central planner named Tulpa would think paying such a price is absurd.

Oh, and go fuck yourself. I'm just saying that as a matter of principle because you need to be told that at least once a day.

[The Late P Brooks]

You and your Pinto will just have to figure it out.