There is no point in breaking out in a sweat over trade deficits because it is an accounting illusion, according to Leon Louw.
The column Econobabble has everyone worried over nothing by Leon Louw, executive director of the Free Market Foundation, has caused quit a stir since it was first published in Business Day on 14 November and here are some extracts.
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”.
Properly understood, trade deficits and surpluses, balance of payments constraints, and national debt are econometric illusions. Here’s why.
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.