ECONOBABBLE is amazing. It has us in a tizz over our huge trade deficit. Yet there’s no such thing; it’s an accounting illusion. Whatever imbalance there might be isn’t "our" deficit. Someone has a deficit which is, or should be, their problem.
Econobabble has us believing we’re poorer when we’re richer, that getting more than we give is a deficit, that superstorm Sandy, wars and other nasties create jobs, and that Nobel Prize-winning economist Paul Krugman is sane when he says that "seriously" (his word) alien invasions promote growth. It has clever people going nuts when discussing international trade as opposed to interprovincial, intercity or interpersonal trade, and creates the impression that there really is a "national debt" and "balance of payments constraints".
"Shock deficit puts currency on back foot" ran last week’s headline, accompanied by much anguish over enough investment to offset the "trade gap". Even guru Warren Buffett is not immune: "The US trade deficit is a bigger threat … than either the federal budget deficit or consumer debt and could lead to political turmoil ... the rest of the world owns $3-trillion more of us than we own of them."
But since "deficit" in trade-speak means more comes in than goes out, the deficit left the US with more and the rest with less. Why is that palpitation-inducing? No one publishes the trade balance between Mpumalanga and Gauteng, so no one knows or cares. Everyone assumes correctly that all parties to cross-boundary transactions got more than what they gave, or they wouldn’t have traded.
Properly understood, trade deficits and surpluses, balance of payments constraints, and national debt are econometric illusions. Here’s why.
All parties to international trade have only surpluses — they value what they get more than what they give. Accountants aren’t that cheerful, so they turn all these plusses into zeros — perfect balances to the nearest cent. As if that’s not befuddling enough, econometricians add all the zeros and, as if by magic, turn them into deficits and surpluses.
How do they achieve this feat? Unlike accountants or traders, econometricians attach zero value to what’s traded. According to national accounts, what people do across borders is pass money around in a global parlour game with occasional snapshots (years, quarters, months) which show people in country A cumulatively paying more (or less) to people elsewhere than they receive (or pay). More paid is called a "deficit". You can’t argue with that. All you have to do is ignore what was traded.
Anyway, why call importing more than we export "deficit"? Surely that’s a surplus? What we want is to get more than we give, to maximise imports, not exports. The sole purpose of exports is imports. If we could get imports without exporting we’d be delighted. To conflate individual deals as if "the nation" did something, or call what individuals owe "national debt" gives the impression that private deals are to and from a giant pot of stew.
I have no foreign debt. Do you? If so, it’s your problem, not mine or the nation’s. What I import is mine, not yours, and so on. The government needn’t worry about "imbalances". There are no such things, only fluctuations. If less is exported, exchange rates change to make imports more expensive and exports cheaper, which drives imports down and exports up, until the trend reverses.
There’s no reason why we should all be implicated in other people’s deals except to how they affect foreign exchange rates. That wouldn’t matter in the absence of exchange control, which amounts to nationalising other people’s problems and making them yours. Nations don’t default, people and governments do. Government transactions are needlessly confusing. International government deals are the same as internal deals. Taxing us to fund "sovereign" debt is like taxing us for domestic spending.
In short, we should liberate ourselves from the illusion that what happens across borders differs from what happens domestically, and see our deficit for what it is, the concern of those who trade.
• Louw is executive director of the Free Market Foundation.