There is nothing special about international trade and finance provided governments concentrate on managing their affairs properly without nationalising, socialising and collectivising private transactions, argues Leon Louw.
The column Econobabble revisited: ‘hard data’ only guesses by Leon Louw, executive director of the Free Market Foundation, follows on his last column and was first published in Business Day on 20 November and here are some extracts.
LAST week’s anti-econobabble column generated predictable passion, for and against: calls, comments and e-mails from experts and conventional-wisdom junkies. “What have you been smoking?” chirped a junkie. “Fascinating, please elaborate?” asked an eminent jurist. “How can you deny the impact of current account deficits?” demanded an economic luminary. “Bravo!” and “Jislaaik!” exclaimed two others.
A bank economist castigated me: “You’ll see how serious it is when foreigners divest and interest and dividends drain all our forex. Whether or not trade deficits and national debts exist, numbers matter because downgrading a country implies downgraded banks, costly credit and capital, capital flight, currency debasement and forex diverted from imports.” Rushing to my defence, a respected economist said: “They’ll criticise you but find no errors because you’re right: national accounts are hypothetical, not actual amounts, and merely indicators of how things are on average.” A lawyer said: “We know there’s no ‘national debt’ because no one can sue or be sued for it.”
It is difficult to think clearly about international trade and finance when it is characterised by such misleading terms as “we”, “our”, “national” and “the country”. Because of the illusion that macroeconomic estimates measure something real, governments are seduced into treating them as if they do. They collectivise, socialise and nationalise major aspects of international trade and finance. Here, as in many countries, there’s a dominant debtor — the government. However big it might be, the government isn’t “the country”, it is an entity in it.
None of this changes the fact that “we” don’t have imbalances. Instead of worrying about aggregated deficits as if they’re causes, not symptoms, governments should adopt proven investor-friendly, free trade, balanced budget and stable money policies. Mainstream economists accept current account deficits (consumption) if financed by capital account surpluses. Capital inflows imply optimism, which is undermined by anti-employer policies and lawlessness, nationalisation, spiralling taxes and overregulation. The goal of economic activity is consumption; importing capital goods is desirable only to the extent that it promotes long-run consumption.
Some readers raised legitimate questions. “In the absence of capital inflows,” wrote one, “the government (has) to fund the deficit.” It doesn’t. It should manage its finances without making everyone responsible for everyone else. Another wrote: “Fluctuating exchange and interest rates affect investor confidence and price levels, which affect everyone.” That’s a virtue, not a problem. My favourite was: “Louw has been having tea with Alice in Wonderland.” The reader could have added “… looking through the looking glass in the right direction.”
The bottom line is that there is nothing special about international trade and finance provided governments concentrate on managing their affairs properly without nationalising, socialising and collectivising private transactions.