Why Do We Fetishize Budget Deficits and Not Trade Deficits?

Before I get into the meat of the post, if, after reading this, you end up obsessing over trade deficits too, then I've failed (just wanted to make that clear). But imagining what the possible consequences of placing the trade deficit über alles would be demonstrates why the current budget deficit fetish is absurd. Because, currently, even erstwhile progressives like Ezra Klein, have turned the budget deficit into a shibboleth (I might have more to say about that silly numerically illiterate post, but the tone and tenor are what matters for now).

If you're not familiar with the trade deficit, and since it's rarely discussed, that's no fault of your own, it's simply the dollar value of exports minus the value of imported goods and services. Before we get to the thought experiment, it's worth noting that, on average, about half of our trade deficit is due to energy consumption, although that fluctuates, depending on commodity prices and other things.

OK, so suppose we wanted to reduce the trade deficit. How could we do that? Well, there are a lot of ways to do it--and just to clear the decks, I'm not interested in arguing about whether these would be particularly effective or fair or 'good', since that's not the point of the post.

Some obvious ways come to mind. We could order local, state and federal agencies to only purchase U.S. made goods whenever possible--this would decrease imports. We could reduce the value of the dollar, and make U.S. goods cheaper (and foreign goods more expensive).

But there are other things we could do: let's look at energy use. We could lower the trade deficit by reducing energy consumption (oil derivatives and natural gas). One way to that could be to institute energy conservation measures (e.g., improving energy efficiency of buildings). Another might be to substitute, when feasible, renewable energy sources. But there are other ways too.

We could slash fuel subsidies for the poor, the elderly, and the disabled. After all, that will cut down on fuel imports. Of course, people will freeze to death. Or we could fire eighty percent of the federal work force: unemployed people drive less, and are less likely to purchase goods, including imports. We could massively slash Social Security, as taking money out of the hands of lower income people (and most people who are dependent on Social Security are buying lower-end items) would also reduce imports: Attention Wal-Mart Shoppers!! Of course, the U.S. military is a huge purchaser of fuel imports, so there are a lot of savings with cuts in defense too.

The point isn't that we should let the elderly die, but that how we cut trade deficits matters. Likewise, some beneficial policies could potentially increase trade deficits (increased Social Security payouts might do that). But rather than obsessing over the number--is it large? Is it negative? Positive?--we should view trade deficits in the context of their effects. Energy conservation? Good. Letting the elderly to freeze to death. Evil.

Obviously, there is a reducto ad absurdum argument: what if we had no exports, and imported everything? Yes, that would be bad, but that's not close to the reality we're experiencing: we still export a lot of stuff. Yet we readily indulge these doomsday arguments when approaching the budget deficit. If we were to shut down all tax collection, give everyone ten million dollars, and massively increase government spending, the legitimacy of the dollar as a fiat currency could be called into question. But no one is arguing for that either. Instead of worrying about the size of the budget deficit--especially budgets decades from now, when forecasting, to be generous, is imprecise--we should worry about the effects of budget deficits and reduction. In other words, what are the effects, both in terms of policy and macroeconomics, of deficit reduction or increases?

Unfortunately, we have turned budget deficits into a morality play or the Mark of the Beast. Lord, for the sins which we have committed before thee... The consequences of that idiotic belief will be tragic. Marshal Auberback notes (italics mine):

Let's be clear: the government creates 'money' whenever it spends; it destroys 'money' whenever it taxes. The issue, which the President should be out and front explaining, is whether or not its spending too much or taxing too little. With a rising unemployment rate, and a huge reserve of underemployed and disadvantaged workers, it is the height of insanity to cut spending overall which is what the US President is claiming is an important and urgent policy goal when there is so much idle productive capacity. Yet both the President and his Republican negotiators on the other side of this issue take it as a given that public debt per se is an unalloyed evil that should be eliminated as a long term policy goal. That is only possible if the external surplus is large enough. Otherwise, if you attempt to achieve that stage via fiscal cutbacks the policy strategy will undermine employment and growth. The upshot is that the budget deficit is likely to rise because of the slowing economy will undermine tax revenue.

Yes, it's true that government deficits are not always good, or that the bigger the deficit, the better. The point the President and his equally misinformed economic advisors continue to ignore is that we have to recognize the macro relations among the sectors, much as a surgeon has to consider the impact of removing an organ from the patient in the overall context of how it will affect the rest of the body's functioning. Blaming the deficit for our economic woes is akin to blaming the thermometer when it records a temperature from a patient suffering from the flu. They are both forms of quackery.

And that quackery is entirely avoidable.

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Oh, but we do fetishize the trade deficit, just not as much.

I used to worry about the trade deficit, until it was pointed out to me that Great Britain, in its heyday, ran persistent trade deficits. The richest country in the world is, as a rule, going to run trade deficits, for the simple reason that it can afford to buy the stuff that other countries make, while they may not be able to do likewise. In addition, poorer countries want to sell their stuff to the richest country.

This trade is generally a win-win proposition, and nothing to worry about. OTOH, the goods and services that the richest country imports are largely consumed in the present, while the money that the poorer countries receive has uncertain value in the future. And they do save it. Look at China, for instance. In a way, the goods and services that the rich country receives are like the tribute that powerful countries received in ancient times.

These numbers are all more or less bogus. Examples: software, music, movies (some of the US' biggest exports). A company will transfer a copy of its software to an overseas subsidiary for $1, then realize lots of overseas profits. These numbers aren't even registered by the US govt. Adam Smith thought a negative balance of trade was meaningless.

Mike, I read these posts and what I see is someone who is attempting to be some kind of polymath. You just don't understand what's going on and what you do understand is at a very superficial level. The U.S. for the most part, with of course, a few exceptions has bought into free trade. Unfortunately the countries with which we have the greatest trade deficits follow a pattern of mercantilism even syndicalism e.g. S. Korea, Japan, China, and Taiwan . The government of China, not one of it's corporations, for example, is our business competitor. Oh sure they say, we would like to have more trade with the U.S., how about selling us your latest military technology. Would you please sell us one copy of something of your latest technology so that we can reverse engineer it and sell it back to you? Would you please give us some visas so our people can come into your theaters and film your latest films for later production in a pirate DVD plant in Guangdong, etc.. P.S. there already is a law that requires all products used in U.S. Government building construction to be bought in the U.S. it is the Buy American Act of 1933. This law was passed during the Roosevelt administration to ensure American worker jobs. I saw a Daily Ticker (discussion) which dealt with nothing but how much the material cost and whether it was cheaper. There was no discussion of the social costs that are involved in sending U.S. jobs overseas. These materials were not cheaper when you figure in the social costs of the not hired or laid off workers in the U.S. who could be producing these materials. I guess neither of the duopoly discussing the matter has degrees in economics. So glad the DOJ is investigating Home Depot for palming off Chinese building materials used in the construction of buildings for the military. The fine should be 10X the amount saved by screwing the American working man.

Who is this Auerback guy?:

"Let's be clear: the government creates 'money' whenever it spends; it destroys 'money' whenever it taxes."

That's totally wrong. Taxation only destroys money when the government runs a surplus. If it runs a deficit, it creates money (or rather, has the Federal Reserve create money for it). It's the same in the private sector. Savers remove money from the economy while borrowers inject it.