In the June 2004 Freeman I follow-up on my previous Freeman column on the widespread deficiency of understanding of that most pernicious of all accounting artifacts, the so-called “trade deficit.”  My column is below the fold.

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Quotation of the Day…

by Don Boudreaux on February 24, 2018

in Crony Capitalism, Virginia Political Economy

… is from page 402 of the late University of Washington economist Paul Heyne‘s 1982 lecture “What Is the Responsibility of Business Under Democratic Capitalism?” as this lecture appears in the 2008 collection of Heyne’s writings, “Are Economists Basically Immoral?” and Other Essays on Economics, Ethics, and Religion (Geoffrey Brennan and A.M.C. Waterman, eds.):

The basic problem with democracy is that special interests have an enormous advantage in this competition.  People know and care about their own interests.  But they usually don’t pursue them successfully through the political process, because the cost to any one person of exerting influence will typically exceed by a large amount the expected benefit from acting.  Each of us is just one voice and one vote.  So why bother?  Why bear the cost?  Since my action will have an insignificant impact, while imposing considerable costs on me in time and money, it is in my interest to behave like a free rider in the political arena: to do nothing and hope that someone else will defend my interests.

The people for whom the expected benefits exceed the costs are people who form part of a relatively small group with a relatively substantial interest.  The laws that emerge from operation of democratic processes are consequently laws that cater to an endless succession of narrow, special interests.  We are not governed by the will of the majority but by the wills of innumerable minorities.  Special preferences and restrictions multiply, and collectively make all of us ultimately worse off.  Competition in the political arena subverts competition in the economic arena, and thereby subverts the invisible hand that extracts the public advantage from the pursuit of private advantages.

DBx: Combining the above problem with voters’ rational ignorance and rational irrationality reveals beyond any doubt that government is the last institution to be entrusted with the task of correcting market imperfections.

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… if technology were a country – say, Technologia – would warn his fellow citizens that unless they erect barriers against the goods and services that routinely are exported from Technologia, they will eventually be impoverished by the bounty that would otherwise “unfairly” and surely “flood” into their country.

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Scott Sumner thinks that trade deficits have eventually to be repaid.  I think he’s mistaken – at least on any meaningful definition of the word “repaid.”

In practice some portion of a trade – or, current-account – deficit must be repaid.  For example, the $1,000,000 that Mr. Nonamerican lends to Uncle Sam when Mr. Nonamerican buys U.S. Treasury notes instead of buying American exports must be repaid – and when it is repaid Mr. Nonamerican will use the proceeds to buy American exports (or he’ll push the transaction forward one more ‘period’ by reinvesting the proceeds in dollar-denominated assets).

But suppose instead that Mr. Nonamerican uses the $1,000,000 that he earned on sales of goods to Americans, not to buy U.S. Treasury notes, but to open a restaurant in Fairfax, Virginia.  What is there here to repay?  Repay to whom?  And repay for what?

It’s true that Mr. Nonamerican opened this restaurant in Fairfax with the hope and expectation of earning a profit on it.  If his hope and expectation turn out to be true, then the net present value of his investment rises to some figure greater than $1,000,000.  Let’s assume that it rises after one year to $1,500,000.  And let’s further assume that Mr. Nonamerican then sells his Fairfax restaurant to Ms. American for $1,500,000 and that Mr. Nonamerican then immediately spends all of his sales proceeds on American exports.  I suspect that Scott might call this sale (and purchase of American exports) a repayment of that part of trade deficit that was created one year earlier when Mr. Nonamerican chose not to buy American exports with his $1M but instead to use all of these funds to open a restaurant in America.  (Note that I do not deny, in this example, that Mr. Nonamerican’s investment in the U.S. in year one leads to an increase in American exports in year two.)

I believe, though, that to label as “repayment” either the dollars paid to Mr. Nonamerican for his restaurant, or the American exports that he buys with these proceeds, is misleading.  First, to call it “repayment” implies that it satisfies some debt obligation.  But in this example – which is highly realistic – there is no debt involved.  No one loaned any funds to, or borrowed any funds from, anyone.

Second, the $1.5M that Mr. Nonamerican receives when he sells his Fairfax restaurant is value that he – Mr. Nonamerican – created.  He created the original $1,000,000 of value by successfully offering to American buyers the goods that he produced, exported to America, and sold here for that sum.  He created the remaining $500,000 of value by launching a restaurant in Fairfax and operating it so successfully that its value increased.  Had he operated the restaurant in a way that did not create value, the Fairfax restaurant would be worth one year later no more than, and quite possibly less than, $1,000,000 (in real terms).

Suppose that Mr. Nonamerican operated the restaurant so poorly that its value one year after he opened it is only $600,000.  He sells the restaurant to Ms. American for that sum, and Ms. American then transforms that restaurant into some other business – perhaps another restaurant or perhaps some other, entirely different business.  As in the case of Mr. Nonamerican’s successful operation and then sale of the restaurant, in the case of his unsuccessful operation of the restaurant there is no transfer of funds either made or destined to be made that is appropriately classified as a “repayment” of the original set of transactions that one year earlier raised the U.S. trade deficit by $1M.

Let’s look at third possibility: Mr. Nonamerican retains ownership indefinitely into the future of his Fairfax USA restaurant.  Presumably he keeps this restaurant open as long as he earns profits from doing so.  Again, it was the prospect of earning these profits that prompted Mr. Nonamerican to open the restaurant to begin with.  Some people – perhaps Scott – might call this stream of profits (or the American-made goods purchased with them) “repayment” of that $1M portion of the U.S. trade deficit that was created when Mr. Nonamerican chose to open the restaurant in Fairfax.  But again, in what way are these profits repayments?  They are the monetized value that Mr. Nonamerican himself created.  These profits would not exist were it not for his entrepreneurship, risk-taking, and efforts.  So anyone who insists on classifying these profits as American (re)payments to Mr. Nonamerican should recognize that Americans were able to make these “(re)payments” only because Americans were thereby enriched, at least to the tune of the value of these repayments, by Mr. Nonamerican’s operation of his Fairfax restaurant.  (Furthermore, there’s something more than passing strange about calling “repayment” that portion that becomes profit out of the voluntarily payments that American consumers pay for the food and drinks that they voluntarily order in that restaurant.)

Of course it’s true that all commercial transactions are made in the expectation of some gain, be it in money or purely in form of subjective utility.  In this sense everyone expects “repayment” for his or her participation in any commercial transaction.  The American who opens a restaurant in Fairfax expects such “repayment” no less and no more than does the non-American who opens a restaurant in Fairfax.  Likewise, the American who lends $1M to Uncle Sam expects repayment of her loan no less and no more than does the non-American who lends $1M to Uncle Sam.  The fact that accounting conventions cause some such transactions to be classified as ones that cause “deficits” or “surpluses” in artifactual accounts (here, the current account), while other identical transactions cause no such changes in any measured accounts, is economically irrelevant.


I fully agree with and endorse what I take to be Scott’s essential point – namely, that foreigners, like domestic citizens, typically do not go about with the intention of bestowing economic gifts on strangers.  Every commercial transaction is done in the expectation of some gain, where the gain ultimately comes in, or is expected to come in, the form of the receipt of real goods and services.  What I object to is labeling as “repayments” all of the expected receipts from one subset of commercial transactions, when the receipts from economically identical other commercial transactions are not labeled “repayments.”

Language matters, and in no area of economics or economic policy is the language so geared to create false impressions as it is in the area of trade and trade policy.  Foreigners want to gain from their trades with us.  We want to gain from our trades with them.  But because the term “repayment” suggests – or is taken to imply – a debt, it is simply too misleading to call the expected gains from trade “repayments.”

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… believes that if a man refuses to perform an unpleasant, arduous, and pointless task – say, using a small hand-held shovel to move a mountain of manure from point A to point B and then back again to point A – unless he is paid a great deal of money to do so, then the society of which that man is a member is enriched if other members of that society are forced to pay this man a sum of money sufficient to entice him to perform that task.

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The debut episode of Mark Levin’s show “Life, Liberty, & Levin” – which will air this Sunday evening – features an interview with my great colleague Walter Williams.

My Mercatus Center colleague Christine McDaniel describes ten things that you should know about tariffs.  A slice:

Tariffs Slow Economic Growth

– Average American tariffs fell from almost 60 percent in 1932 to under five percent in 2018.

– The International Monetary Fund has found that these types of reductions in trade barriers can “boost productivity and output,” which can, in turn, mean faster rates of economic growth.

– Economic growth in the late 19th century, while sometimes attributed to high trade barriers, actually resulted from significant population growth and accumulated capital. Tariffs during that time may have hurt growth by raising prices on capital imports.

Tim Worstall has joined in the productive fun of describing the essence of protectionists.  A slice:

A protectionist is someone who argues that you should be poorer so they can be richer.

John Cochrane writes sensibly about the prospect of truck-driving jobs being automated.

My GMU Econ colleague Larry White trusts Bitcoin more than he trusts some of its academic critics.

Mark Perry has good news about the state of forests in the U.S. and globally.

Jim Otteson discusses intellectual diversity.

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Here’s a letter to a new correspondent:

Ms. Elaine Dorman

Ms. Dorman:

You’re correct that my arguments about the increasing wealth of ordinary people – and about the disappearing observable differences between the super-rich and the rest of us – are chiefly arguments about material possessions and not about “our emotional well being and satisfaction.”  You’re correct also that these latter things matter and, indeed, that ultimately they matter much more than do material possessions.

Yet I believe that you’re incorrect to declare my argument to be “thus irrelevant and beside the point.”

First, unless increased access to material goods and services (above, say, that which is necessary for bare subsistence) never contributes to improved “emotional well being and satisfaction,” then documenting the increasing access of ordinary people to material goods and services is to document the reality that we ordinary people have improved access to an important means of achieving greater life satisfaction.

Second, my argument is aimed at those who deny that we ordinary people enjoy greater access to material goods and services than we did 40 years ago; it is not aimed at those who deny that we human beings today in modern societies are happier or more satisfied than we would be were we today no more materially prosperous than we were 40 years ago (or, worse, were we still mired in the muck of pre-industrial poverty).  And so if you criticize me for documenting ordinary people’s still-improving access to material goods and services, you should also criticize the many people who continue to complain about what they believe to be ordinary people’s lack of improved access, over the past few decades, to material goods and services.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

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… believes that Castro’s Cuba would have been even poorer had the United States government not done the people of that island the great good favor of enforcing an embargo against it.

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The April 2004 Freeman contains one of my many attempts to bust the myth that a trade deficit – or a current-account deficit – necessarily is something to lament.  In reality, such a “deficit” (It’s a deficit only by accounting definition, not in economic reality) is typically, in a market economy, evidence of relatively sound economic policies and of a relatively promising future.  And such a “deficit” is itself never a cause of any economic damage; it is almost always a cause of economic improvement relative to what the situation would be absent the “deficit.”  My column is below the fold.

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Quotation of the Day…

by Don Boudreaux on February 23, 2018

in Competition, Crony Capitalism, Trade

… is from page 151-152 of the 1992 Liberty Fund edition of John Taylor‘s 1822 tract, Tyranny Unmasked:

Monopoly is a word sufficiently indefinite, to enable ingenuity to obscure its malignity, by extending it to property acquired by industry and free exchanges; and though private property begets civilization, society, and happiness, it is made, by calling it monopoly, to supply arguments for its own invasion.  If monopoly, like money, does really reach every species of acquisition, yet it may also possess good and evil qualities; and a discrimination between them is necessary, to reap the good and avoid the evil.  The monopolies obtained by industry, admitting the phrase to be correct, are, like earning money, beneficial to society; those obtained by exclusive privileges, like stealing money, are pernicious.

DBx: If a firm grows to be unusually large in a free market, it does so only because it is unusually good at satisfying consumer demands.  But count on it: pundits, professors, and politicians will nevertheless complain bitterly of the “monopoly” harms that this firm is imagined to impose on the good people of the country.  Yet if a firm is failing, or is not doing quite as well as its owners and workers desire it to do, many of these very same pundits, professors, and politicians insist that the good people of the country will be well-served only if the government arranges for this firm to grow larger by bestowing upon it artificial monopoly power in the form of penalties extracted from the good people of the country who purchase foreign-produced products instead of the products produced by this privileged firm.

It’s utterly bizarre to fear and complain about the genuine successes of firms achieved through what Deirdre McCloskey calls “market-tested competition” while simultaneously welcoming and celebrating the artificial ‘successes’ of firms achieved through the application of state privilege and force.

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