The Fallacy of Trade Deficits

Does trade deficits exist? Do they matter?

Introduction

Photo by Paul Teysen on Unsplash

Deficit.

The word alone creates a negative image. If you have a food deficit, you must be hungry. If you have a water deficit, you must be thirsty. If you have a financial deficit, you must be poor.

Should we worry about the national "trade deficit?"

This question contains two basic premises that require clarification. -

· Do trade deficits really exist?

· Does a national economy really exist?

Trade Deficits

A brief story should answer the first question:

If two men, Bob and Joe, in two countries, engage in direct exchange. Bob exchanges a bushel of apples for ten pounds of bacon. Which of these men has a trade deficit? Each of them got something he valued more than what he gave up. They both won. It seems that does not lead to a deficit.

In another scenario, Bob buys ten pounds of bacon from Joe for 20 dollars. Joe put this money in the bank (The apple season does not come until early next year.) Does that mean that Bob has a trade deficit? Macroeconomists believe that amounts to a trade deficit.

Although Joe accepted a medium of indirect exchange (i.e., money), he still got something he valued more than the bacon. Why (or how) does that work to Bob's detriment? What deficit does Bob have? And why does that transaction add to a national trade deficit?

Based on these two scenarios, does the deficit amount to more than an accounting concept?

National Economy

Does the national economy really exist?

Along comes a politician/interventionist. He listens to the accountants, and he believes in the" national economy." He sees scenario #2 and believes that the national economy—in which only Joe trades internationally—has a deficit. He must do what he can to fix this problem.

Before we can evaluate the politician's solution, we must examine the concept of a "national economy."

As a general rule, the U.S. Government does not, as a single entity, trade with foreign entities. Foreign trade occurs between individual entities. No collective transactions occur.

The same holds true of exchanges within the national boundaries of the U.S. What people refer to as the U.S. economy does not exist as one homogenous entity. It consists of a network of separate entities joined only by the transactions they make within the boundaries of a nation-state. The diversity of those transactions makes them impossible to aggregate.

Conclusion

Nearly all economic data reflects the number of dollars that change hands. Those figures do not provide any information about the quantity the goods and services exchanged between individuals. If you add $1 million spent on iPhone to $1 million spent on Big Macs, what do you get?

An F in mathematics.

In general, macroeconomic "calculations" only give interventionists a false justification for messing with your stuff. You do not exist as a part of a collective.