I feel slighted.\u00a0 For years I’ve been going to my dentist, and not once has he come over to my house to buy anything.\u00a0\u00a0 Likewise, my supermarket has never offered to purchase produce from my backyard garden.\u00a0\u00a0 And the mechanic at the place where I get my car repaired has never had me repair one of his on my driveway.<\/p>\n
I think I’m running a “trade deficit” with each of them.\u00a0\u00a0 At least that’s what I’m led to believe by listening to people who claim we have large trade deficits with certain countries, like China.<\/p>\n
“You nimwit!”, says the ghost of my tenth grade accounting teacher.\u00a0 “You’ve forgotten your T-Accounts<\/a>!\u00a0 All year long we drew those things on the board, and this is the thanks I get?!”<\/p>\n Oh, yeah, the T-Accounts…\u00a0\u00a0 What would the T-Accounts say about my “trade” with my dentist?<\/p>\n <\/p>\n In my “services received (expensed)” account, I’d place a debit for say, $100.\u00a0 I’d have an offsetting $100 credit to my cash account.\u00a0\u00a0\u00a0 I’m in balance with myself.\u00a0 Likewise, my dentist would credit his “services rendered” account for $100 and debit his cash account for $100.\u00a0\u00a0 He’s in balance.\u00a0 In simple terms, I got a checkup from the dentist, and he got $100 from me.\u00a0\u00a0\u00a0 We’re in balance with each other.\u00a0 If we weren’t, he’d either sick a collection agency on me, or I’d tell all of my friends not to visit his practice.<\/p>\n Yet the chorus of people who believe we have a trade deficit with China, or elsewhere, see things differently, by attempting to perform an economic sleight-of-hand:\u00a0 They aggregate the goods and services that exchange hands between trading partners, yet ignore the cash<\/em>.\u00a0\u00a0 Worse still, they attempt to substitute other debts and deficits into the conversation, such as our operating budget deficit, as if they are all one in the same.\u00a0\u00a0\u00a0 It often goes something like this:\u00a0 “Our international trade deficit in April was $40 billion, and we’re borrowing all sorts of money from China to pay for it!”<\/p>\n None of this would matter, if their wished-for remedies<\/a> weren’t so potentially harmful.<\/p>\n Remember that money and credit came along simply because bartering for stuff can get physically difficult.\u00a0\u00a0 I mean, if I want to exchange my corn for your wheat, on a small scale, we could probably work something out.\u00a0\u00a0 But if I’m in the market for your wheat, and all I have to trade are bricks, and your new brick house doesn’t need another floor or a new chimney, I’m out of luck.\u00a0\u00a0 However, if we can agree that some piece of paper <\/em>can act as a stand-in for the wheat and the bricks, it can become a kind of Rosetta Stone for us, allowing us to translate each other’s language into something common.<\/p>\n So in the aggregate, when one totals up the value of all the stuff that we’ve purchased from China, and compares it to what they’ve purchased from us, and one finds that we have a deficit of “stuff sold”, remember the dentist:\u00a0 Every transaction was balanced with paper.<\/p>\n “I guess that must mean that we have a lot of their stuff, and they have a lot of our paper.”<\/em><\/p>\n Exactly.<\/p>\n Now the only reason they’d be willing to take paper with dead presidents on it in exchange for their stuff, is that they believe the paper is worth something, that it can be converted to other stuff somewhere down the road.\u00a0 And in fact, considering the paper itself isn’t too useful (it’s small, you can’t write much on it, wallpapering with it would be tedious, etc.), if we ever want to buy anything again from them with our paper, we have every incentive to make sure it’s worth something, which is a good check on what might otherwise be even more profligate tendencies. \u00a0 Furthermore, one could say that the paper they now hold from us represents future spending somewhere else, back in our country if the value proposition is good for them<\/em>, or elsewhere.<\/p>\n And therein lies the reason we buy a lot of stuff from China:\u00a0 the value proposition is good for us.<\/em> Indeed, amidst all of the creeping tax increases and inflationary pressures within our society, low prices on goods from China and elsewhere help to keep things affordable.<\/p>\n “All fine and good, but you sound like a free-trader, and China doesn’t practice free trade.” <\/em><\/p>\n In many respects, that’s probably true.\u00a0\u00a0 But what should we do instead?\u00a0\u00a0 Should we limit the amount of imports we take in from China?\u00a0\u00a0\u00a0 Should we force people to use their second or third-choice supplier because they are within our borders?\u00a0 Most importantly, if we go down those roads, who will decide how such a system will run, and manage the consequences<\/em>?\u00a0 Who will explain to the WalMart shopper why their sales receipt is now significantly larger? \u00a0\u00a0 Wherever we do this type of thing already, (like our crazy sugar tariffs<\/a>), the first people we hurt are our own citizens.<\/p>\n Perhaps it would be more instructive to examine why we need China to create a value proposition for us. <\/strong> What is it about our society that causes it to be un-economic for so many products to be manufactured here?\u00a0\u00a0 Why is our economic soil becoming steadily less fertile?\u00a0\u00a0 Rather than mandate that things purchased here must be manufactured here, perhaps we should ask manufacturers why they’re considering leaving.\u00a0\u00a0 Perhaps we should be figuring out ways to entice them to stay.\u00a0\u00a0 The Berlin Wall was built for a reason, and something tells me the typical North Korean citizen doesn’t relish their own version.<\/p>\n Last time I checked, I wasn’t personally borrowing any money from China to finance my own spending.\u00a0 But the federal government borrows tons of money, via Federal Reserve auctions, to pay for things that voters demand.\u00a0 Now although I vote, yet if given a choice would vote for a balanced budget, must I, too, be included in that group of demanders?<\/em> In 2009, our “trade deficit” was nearly $380 billion<\/a>.\u00a0 But our operating budget deficit, representing our government’s non-borrowing revenue sources minus the cost of all of the things that we ask it to do, was over $1 trillion more<\/em> than that (approximately $1.4 trillion in total<\/a>).\u00a0\u00a0 So when Warren Buffet or others<\/a> talk about China buying up our bonds<\/a> so we can finance our trade deficit, is that really what’s going on?\u00a0 If our private sector exported more to China, and imported less, would those changes finance runaway entitlement programs like Social Security, Medicare or Obamacare? <\/em><\/p>\n Maybe rather than concocting elaborate schemes to manage our global trade, if we’re concerned with debt (and we should be), perhaps we should start by getting our internal affairs in order, over which we have complete control. \u00a0 At the same time, we can quit fretting about the economic preferences of other governments, control over which we have next to none.<\/p>\n