“We have plowed the sea!” With those bitter dying words, Simon Bolivar expressed his frustrated conclusion that his life’s work had come to naught. El Libertador helped much of South America achieve independence from Spain. But instead of enjoying liberty, democracy and justice, the new nations were plagued with strife and tyranny.
Old and dying, Bolivar could distinguish no lasting effects from all his pain and effort. If Adam Smith, the great Scottish philosopher whose work gave birth to modern economics, were to hear contemporary U.S. debate about trade policies, he might feel the same level of frustration as Bolivar.
Smith’s central insight, that society acting through decentralized markets can usually satisfy more of people’s needs and wants than under alternative systems, remains powerful. Indeed, following the collapse of communism in all but a few countries, Smith’s core message enjoys wider respect than it did 20 years ago.
But the media, most politicians, and a large part of the general public still cling to a set of ideas that Smith rebutted most resolutely: mercantilism. Mercantilism, the prevailing economic philosophy of the 1700s, argued for a strong government role in managing economies. It also held that a country could only become wealthy by exporting as much and importing as little as possible.
The very title Smith chose for his great work “The Wealth of Nations,” was intended to draw attention to his assertion that a nation’s wealth was not determined by how much gold and silver it could pile up by running trade surpluses.
Fast forward from 1776 to 2000. Ted Koppel, one of the more intelligent TV news stars, earnestly interrogates one of his guests: “How can we give permanent trade status to China when we already have a big deficit in our trade with them?” In another news clip, California Congresswoman Nancy Pelosi shakes her finger angrily and says, “I warn you, if we pass this bill our trade deficit with China will get bigger and bigger.”
On a more local level, speakers at the Minnesota Democratic party’s convention try to whip up support by pointing to record U.S. trade deficits.
Adam, where are you when we need you? What have we economists done wrong all these years?
There is nothing that economists agree on more than the unimportance of bilateral trade deficits or surpluses. And there are few ideas that have a more powerful grip on the mind of the U.S. public than the idea that such deficits are very important, very bad, and always some other country’s fault.
Economists know that trade balances have little intrinsic importance. They may indicate something about more fundamental factors, such as a nation’s preferences for consumption versus saving or the effects of its economic policies on its exchange rate. But the fact that balances are “positive” or “negative,” “in surplus” or “in deficit,” to use common but terribly misleading terms, really is unimportant.
An analogy would be the hair on my toes. The fact that I have wisps of hair on the tops of my toes does nothing to affect my happiness, my health, or the length of my life. But if that hair disappeared, a good clinician might wonder if blood circulation in my extremities was declining and would test me for diabetes, a disease that has plagued my family.
Loss of toe hair can be an indication of a more fundamental underlying problem, but it is not the problem itself, just as a country persistently importing more than it exports is an indicator rather than a problem. Trying to reduce a trade imbalance by restricting imports is as sensible as my doctor reacting to loss of hair on my toes by prescribing Rogaine rather than checking my blood and urine for diabetes.
Economists also find it odd that people who are quick to see both malice and disaster when another country sells more to us than we do to them, but seems unaware of cases where the shoe is on the other foot.
For example, over the past few years, the United States has sold about twice as much to Argentina as it has bought from that country. Compared with Argentina’s economy that “deficit” is several times larger than the U.S. “deficit” with China.
But I have never heard any U.S. news anchor or politician evince regret about how we are treating our poor neighbor to the south. AFL-CIO head John Sweeney and other labor leaders have not expressed any solidarity with the poor Argentine laborers who are being exploited by our cavalier and unrestrained exporting. Where is our conscience?
We ought to disregard all bilateral trade deficits as we always disregard bilateral surpluses. And if we pay attention to our net overall trade balance with the rest of the world, it should be as a search for diagnostic information on our own society, our own policies and institutions—not a witch hunt for foreign malfeasance.
© 2000 Edward Lotterman
Chanarambie Consulting, Inc.