Some people have e-mailed me in response to my recent criticism, at Law & Liberty, of Oren Cass’s deeply flawed case against free trade. Several of these correspondents write as if the U.S. trade deficit is akin to the U.S. government’s budget deficit. But in fact these two ‘deficits’ differ from each other categorically. Only the budget deficit represents additions to debt; only the budget deficit needs to be repaid (or can be repudiated); only the budget deficit is cause for concern. And only the budget deficit is a true deficit; the so-called “trade deficit” is no such thing.
The commonplace belief that trade deficits are akin to budget deficits springs, of course, from the shared use of the term “deficit.” But use of this term when prefixed by “trade” reflects the mercantilist origins of balance-of-trade accounting.
The mercantilists – many of whom were finance ministers of European monarchies, and many others of whom wrote as if they were advising these ministers – thought of the country as synonymous with the crown. And the crown was indeed akin to a business with a balance sheet. It was an entity that received credit and incurred debts, just as any modern government receives credit and incurs debt. The balance-of-payments notion was developed by mercantilists chiefly to keep account of the crown’s finances. Mercantilists thought of a pre-capitalist European economy as being nothing more than an entity for generating wealth for the crown. What the crown owed, the economy was thought to owe.
In contrast, a market-oriented economy is not an entity whose success is to be measured by how well it enriches the state. A market-oriented economy (to use Hayek’s important distinction) is an order rather than an organization. It is not an entity with a meaningful balance sheet. It has neither residual claimants nor anyone responsible for clearing its debts. This being so, no such economy can incur or carry debts. Many individuals and organizations within the economy have debts, but the sum of these debts is not the debt of the economy because – to repeat – the economy has no owner or owners.
But international accounting treats the economy as if it’s an entity with a balance sheet. International accounting force-fits the notion of an entity with a balance sheet onto an open-ended economy that – unlike a person, household, business, or government – in fact has no balance sheet. The economy can be (and is) spoken of as if it’s got income and incurs costs; but this way of speaking about an economy, although commonplace, is inaccurate and wholly misleading.
Of course it’s true that non-Americans who invest in America expect sometime in the future to convert their investments into American-made goods and services for their consumption or use. In this very limited sense foreign investors expect to be “repaid.” But the meaning of the term “repaid” as used here is quite different from the same term used to describe the fulfilment of a debt obligation. The latter is a legal obligation owed by the debtor to the creditor. In principle always, and in practice usually, this obligation is legally enforceable. In contrast, the “repayment” expected by investors in equity, real estate, and cash is no such thing. This “repayment” is the hoped-for, but not guaranteed or legally stipulated, returns on the investments – returns that themselves are typically generated with the help of these invested resources. Not the economy as a whole, not the U.S. government, and not any individual or group of individuals is responsible for ensuring this “repayment.”
The American economy as such has no owners, no residual claimants, and no manager. It has no genuine balance sheet or income statement. It cannot owe or be owed anything; it does not owe or is owed anything.