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… is from page 296 of Deirdre McCloskey’s marvelous 2019 book, Why Liberalism Works: How True Liberal Values Produce a Freer, More Equal, Prosperous World for All [2]:
Notice that if government statisticians did not collect the numbers on the balance of payments, you would not feel them. It’s not true of high inflation or mass unemployment or rising real income. In fact, many economists regard the collecting of the national balance of payments as a silly nuisance, serving merely to encourage bad economics, such as protectionism – better called favoritism combined with defective accounting. The great economist Arnold Harberger (1924- ) is fond of pointing out that the salaries of all the academic economists worldwide would be covered many times over by the economic gain from their repeated showing that protectionism is bad. We are told that embargoes on Iran and North Korea will hurt such evil people. [U.S.] Tariffs are self-imposed embargoes, hurting … uh … Americans. Whoops.
DBx: And yet many people on the political left and – today mostly – on the political right never tire of warning of the dangers of so-called “trade deficits.” Trump believes that U.S. trade deficits are both a sign that we Americans are “losing” at trade and a further burden on the American economy.
Nearly all such people who warn of the alleged dangers of trade deficits reveal by the substance of their arguments that they don’t actually know what trade deficits are. (And I do not here mean the usually harmless confusion of the “deficit” in goods-and-services trade with the more general current-account deficit.) Nearly all such people make no connection between this “deficit” and its corresponding net inflow from abroad of capital into the domestic economy.
Language matters. I wonder how many American conservatives (and others) would rise up against U.S. trade “deficits” if this accounting artifact were instead called by the equally accurate name of “U.S. stuff surplus”: during the current accounting period a U.S. trade “deficit” means that we Americans receive for the stuff – the real goods and services, measured in monetary value – that we send to foreigners a greater amount of the stuff – the real goods and services, measured in monetary value – that foreigners send to us in exchange. A U.S. trade “deficit” is a U.S. “stuff surplus. [3]” (It’s also – as noted above and in the past pointed out here [4] countless times – a U.S. capital-account surplus.)
Only if you believe yourself to be made poorer when, in exchange for a given amount of goods and services that you pay, you receive from your grocer or your dentist or your plumber or your yoga instructor more than you received in the past or more than you expected to receive should you, as as a practical matter, worry about any so-called “trade deficit” that your country is “running.” Ditto if you believe yourself to be enriched if the amount of goods and services that you must give up to get any given amount of goods and services in exchange from others rises.
“Deficit” suggests “bad” and “losing.” “Surplus” suggests “good” and “winning” and “gaining.” The world today would be a better, richer, and freer orb if the mercantilist notion of balance of payments had died in 1683 with Jean-Baptiste Colbert. (Even better would have been that this notion had never been conceived.) Alas, this absurd [5] and misleading artifact still lives. Given this lamentable reality, let us at least work to change its name from “trade deficit” to “stuff surplus.”