Dear Libertarians: Trade deficits matter

01 Feb, 2019 - 00:02 0 Views

eBusiness Weekly

Steve Hanke recently set out to prove “why President Trump’s trade message and protectionist policies are rubbish” in a Forbes article. Instead, the Johns Hopkins University economist exposed himself as a word-mincing, logic-twisting sophist — just like every other intellectual mercenary associated with the faux-libertarian propaganda mill that is the Cato Institute.

Hanke’s argument: Trade deficits don’t exist, China is not short changing America, and President Trump is jousting windmills. The real problem is lazy Americans who shop-till-they-drop and demand welfare “gimmies” from Uncle Sam.

Hanke begins his argument by explaining that trade deficits don’t really exist. Instead, the goods trade deficit is simply one half of the equation:

In economics, identities play an important role. These identities are obtained by equating two different breakdowns of a single aggregate. Identities are interesting, and usually important, by definition. In national income accounting, the following identity can be derived. It is the key to understanding the trade deficit.

Given this identity, which must hold, the trade deficit is equal to the excess of private sector investment over savings, plus the excess of government spending over tax revenue. So, the counterpart of the trade deficit is the sum of the private sector deficit and the government deficit (federal + state and local).

The US trade deficit, therefore, is just the mirror image of what is happening in the US domestic economy. If expenditures in the US exceed the incomes produced in the US, which they do, the excess expenditures will be met by an excess of imports over exports (read: a trade deficit).

This is true. In his esoteric discussion of “identities”, however, Hanke neglects to mention the practical consequences of running a goods trade deficit. Although the books are balanced, reality shows us that it matters how they are balanced — there are two sides to every coin, but heads is not the same as tails.

I’ve explained previously how America sold its soul for Chinese trinkets. You should read the full article — it is my personal favourite. If you don’t have time, here’s a quick summary.

When a nation imports (buys) more than it exports (sells) it runs a trade deficit. America’s goods trade deficit was $796 billion in 2017.

Sadly, there are no free lunches. To pay for these goods America sells more services than it buys (think banking and tourism). This helps, but still leaves us $566 billion in the red. To balance the books, America also sells assets and debt.

Assets include real estate, artifacts, shares in corporations —anything of value that was produced in the past. Selling assets is not always bad.

For example, selling your mothballed Harley to buy a home gym might be wise.

However, pawning your great-grandma’s wedding ring to buy groceries is not. Context matters.

On the whole, America’s asset sales resemble pawning great-grandma’s wedding ring. Consider that foreigners bought $153 billion worth of American real estate in the 2016-2017 fiscal year — everything from New York penthouses to Nebraskan ranches. This has the negative downstream effect of increasing housing prices and rents, in addition to the social problems associated with absentee landlords. — American Greatness.

Share This:

Sponsored Links