Is the Trade Deficit as We Know It an Economic Fiction?
This was written by a diamond dealer of significant note and who is also very much a computer/online commerce guy. We debate on FB and while we often disagree I like how this man approached the topic. He was a founder of Polygon, an early online diamond selling system for the jewelry trade, not the public. Like me he has spent a lifetime in his business trade.
Trade Deficits Don’t Exist—The Sequel
Jacques Voorhees· Sunday, June 17, 2018
| The president has declared war against a non-existent enemy |
How boring a person am I? It’s Father’s Day, and all I want to do is defend my earlier thesis that trade deficits don’t exist. OK, I just lost half my readers. But for those who made it past that second sentence, grab strong coffee because we’re going to study the conclusions of an obscure committee of 10 economists in 1976. Not exactly click bait, huh?
First, what was the name of this obscure committee? Best I can determine, it never had a name, that’s how obscure it was. What was its purpose? Hope the caffein’s kicking in. Its purpose was to decide if it was useful for the Commerce Department to continue publishing certain economic reports.
Considered for the chopping block were (deep breath) the trade balance on goods and services, the current account balance which measures net goods and services, cross-border investments, transfer payments, and…OK, I’m about ready to go to sleep here myself. Why are we talking about all this, on a beautiful, sunny day in June?
Because storm clouds are gathering over the Potomac, as President Trump continues his global trade war in an effort to combat the U.S. Trade Deficit. How deeply is Trump suffering from TDS (Trade-deficit Derangement Syndrome)? Consider these remarks from a few months ago, as reported in the New York Times.
“We lost, over the last number of years, $800 billion a year,” [President Trump] said in the White House on Monday, while defending his tariffs against criticism from Republican leaders in Congress. “Not a half a million dollars, not 12 cents. We lost $800 billion a year on trade.” He went on to say that the country “lost $500 billion” a year to China, though it was not clear what figure he was citing, given that America’s annual trade deficit with China has never climbed beyond $375 billion.
Actually, our trade deficit with China last year was zero. The only way you can pretend it was a number higher than zero is by torturing the English language. Which brings us back to that obscure committee. In addition to their sleep-inducing list of which economic reports the Commerce Department should deep six, the committee also focused on language. An OpEd in the Wall Street Journal four days ago, titled “The Day The Trade Deficit Almost Disappeared,” discussed one of the committees most important conclusions.
Provocative language was of particular worry: “The words ‘surplus’ and ‘deficit’ should be avoided,” the committee wrote. “These words are frequently taken to mean that the developments are ‘good’ or ‘bad’ respectively.
Unfortunately the committee’s recommendation was overturned by the Office of Management and Budget. Hence the phrase “trade deficit” didn’t disappear that day, more’s the pity. The concept of defining and measuring a so called “trade deficit” continued.
As the Journal piece correctly notes:
The 1976 committee didn’t realize how prescient its reservations with [trade] balances were. As its members predicted, Mr. Trump paints the trade “deficit” as a symbol of the failure of U.S. trade policy, and he ignores priorities outside its range, such as China’s theft of intellectual property. It’s a shame that the committee didn’t strike the [trade deficit concept] when it had the chance. Mr. Trump’s use of it as a scoreboard for the U.S. versus the rest of the world is as dangerous as any misuse the committee could have predicted.
President Trump’s preoccupation with the trade deficit is maddening to professional economists, who understand, as he apparently doesn’t, that it measures nothing useful.
I’d go further. It’s measuring nothing at all.
As discussed in the earlier blogpost, every commercial transaction, completed between consenting adults, generates zero deficit. Here’s Merriam-Webster definition of “deficit:”
(1) : deficiency in amount or quality: a deficit in rainfall
(2) : disadvantage: scored two runs to overcome a 2–1 deficit
(2 a) : an excess of expenditure over revenue : facing a deficit of $3 billion; raise taxes to help reduce the budget deficit
(2 b) : a loss in business operations: the year’s operating deficit
None of these things occur in a commercial transaction that is completed. Both sides to the trade are happy, and in fact both sides to the trade come away “richer” than they went into it.
Example: I go to Safeway and buy a gallon of milk for $4.00. I want the milk more than I want the four bucks. Safeway wants the dollars more than they want the milk. We make the trade. Both sides having achieved their goal, there is no deficit in either direction. And this is true no matter what items are being traded, who the parties to the trade are, and in what countries they may live. Multiply all such transactions that occur between parties in the United States and China—each generating zero deficit—and the total of all those zeroes is zero. It is not $500 billion as Trump says, it is not $375 billion as the Times declares. It is not even twelve cents. It is zero.
Want to know what a real trade deficit would look like? I go to Safeway to buy a gallon of milk, I pay $4.00, but accidentally walk away with only half a gallon. That’s a two dollar trade deficit in Safeway’s favor. Or I buy the full gallon, but the checkout clerk makes a mistake and only charges me $1.00. That’s a three dollar trade deficit in my favor. None of those things are happening between traders in the U.S. and China.
So how can the Commerce Department claim to see a “trade deficit” in our China trade?
They count only half the trade.
No, I’m not making this up. They count only half the trade. Using this methodology, if I bought a gallon of milk from Safeway for $4.00, the Commerce Department would score that as a $4.00 trade deficit in Safeway’s favor. Why? Because Safeway received $4.00. Yeah, but I received a gallon of milk worth $4.00! Sorry, that’s invisible to the Commerce Department. They declare that a $4.00 trade deficit now exists between the Voorhees household and Cerberus Capital (which owns Safeway.)
OK, let’s pause here for a WTF moment. (And, no, that doesn’t stand for World Trade Federation.) How can the Commerce Department count only half the trade? Because somewhere the phrase “trade deficit” was defined (insanely) by the Commerce Department to mean counting only currency received in a trade. And as the Wall Street Journal piece notes, this is “not measuring anything useful.” Yeah, ya think?
This is almost as bad, perhaps worse, than Congress declaring certain types of weapons “assault weapons” not because they are any more dangerous than other weapons of the same caliber and magazine capacity, but because they look scary. So now we have a class of scary-looking rifles, none of which have ever been—or would be—used in a military “assault,” defined as “assault weapons.” Because they look scary.
And we have a $375 billion “trade deficit” with China because we count only half of every trade.
This explains why that obscure Commerce Department committee in 1976 recommended against use of the words “surplus” or “deficit.” Of course they did. The words are blatantly incorrect, because surpluses and deficits aren’t occurring, and the committee knew that.
Yet despite graduating with an MBA from the prestigious Wharton Business School, President Donald Trump somehow never learned any of this.
So to stop the utterly non-existent problem of “trade deficits” (which don’t exist in reality), he’s now launched us into a global trade war.
Hmmm, yesterday I bought a gallon of milk from Safeway. I wonder if I should complain to the Better Business Bureau that those mean grocers are running a trade deficit with me, and maybe organize a protest, and bring in picketers with anti-Safeway signs, and begin yelling angry slogans in the parking lot. Hey, at least it would get me out of the house on Father’s Day, right?
And it would make just as much sense as what Trump is doing.