Deficient Language Is Dangerous

by Don Boudreaux on April 21, 2018

in Balance of Payments, Myths and Fallacies, Trade

On Thursday, Pierre Lemieux sent to a few of his correspondents, including moi, this short 2016 post from Ana Maria Santacreu.  I’ve no objection to the main point of Ms. Santacreu’s post.  But I do object to this paragraph in her post:

If exports of a country are larger than its imports, we say that the country runs a current account surplus. In other words, the country is a net lender to the rest of the world. If a country’s exports are smaller than its imports, we say that the country runs a current account deficit, or is a net borrower from the rest of the world.

I object to this paragraph not because it misrepresents the common – even by economists’ – description of current-account surpluses and deficits.  I object to it because this very common description of current-account surpluses and deficits is incorrect.  A current-account surplus emphatically does not mean that a country that runs one is a net lender to the rest of the world; a current-account deficit emphatically does not mean that a country that runs one is a net borrower from the rest of the world.

I’m aware that I am extraordinarily repetitive on this issue.  I justify my repetitiveness by pointing to the continuing description of so-called current-account “imbalances” as necessarily reflecting borrowing and lending.  (Witness Ms. Santacreu’s blog post.)

So I again repeat: while, say, an increase in the U.S. current-account (or ‘trade’) deficit might reflect increased American indebtedness, it also might not do so.  It all depends on the terms on which foreigners invest in the U.S.

When, for example, the U.S. current-account deficit grows because Ikea builds a new retail store in Utah, there is no resulting increased American indebtedness.  Nor is there necessarily any net reduction in the real value of American-citizens’ asset holdings.  The reason is that, because the amount of capital in the world – and in any one country – isn’t fixed, American citizens can, and very well might, (for example) invest wisely the proceeds they receive from selling their plot of land in Utah to Ikea.

Language matters.  Language matters greatly.  This reality is why I harp on this point.  For it it were true that every increase in the U.S. trade deficit means increased American indebtedness to foreigners, then – while such increased indebtedness need not necessarily be evidence or cause of economic problems in America – such increased indebtedness of this magnitude would more likely be a real problem than is any actual increase in the U.S. trade deficit.

And so not only is it inaccurate to call every increase in a trade, or current-account, deficit ‘increased indebtedness,’ it is dangerously misleading because such a description creates the mistaken impression that there loom problems that in fact do not loom.

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