The inclination to think of a country as a for-profit company is powerful. This inclination is at the root of nearly all mercantilist errors, including the myriad ones committed by Trump, Navarro, Lighthizer, and Ross. And while a mercantilist of old was partly justified to have this inclination, at least insofar as his concern was to maximize the wealth of the crown, there is absolutely no justification today to cling to the false notion that a country such as the United States is – or even is akin to – a for-profit company. And yet balance-of-payments (or balance-of-trade) accounting continues to foster this absurd and dangerous notion.
In my latest column for AIER I attempt to explain why balance-of-payments accounting misleadingly conveys the notion that a country is a company. Here’s my conclusion:
Unfortunately, the fact that accountants use arithmetic to calculate the aggregate of Americans’ earnings, spending, borrowing, and lending causes people to adopt the premise that the American economy is an economically relevant entity that earns, spends, borrows, and lends in the same way as a household and a corporation.
But this premise is false. Regrettably, as long as it continues to be the starting point of discussions of trade and trade policy, it will generate false conclusions that, in turn, spawn destructive government interventions.
