I have a dirty little secret that I want to share with
readers of The Freeman. It's about a nagging problem I have had for a
long time. It just never seems to go away. Heretofore, I have not wanted
to admit to this problem in public because the newspaper headlines
remind me monthly that this sort of thing is bad and it's embarrassing.
But I'm going to come clean, hoping that maybe someone out there can
help me.
My problem is this: I have a trade deficit with J.C.
Penney. That's right. Month after month, I buy more from J.C. Penney
than J.C. Penney buys from me.
In fact, J.C. Penney has never yet bought anything at
all from me. It's been a one-way street right from the day I got my
credit card in the mail. And I don't expect that this is going to change
any time soon because the retail chain shows no interest in buying my
chief export, which is columns like this one. It just doesn't seem fair.
I've actually considered several options. Each one
would probably reduce or eliminate my trade deficit with J.C. Penney,
but some wise guy always points out new problems each of these scenarios
might create:
* I could get Congress to force the company to buy
enough of my columns to offset what I spend in its stores. But the more
J.C. Penney buys from me, the less it will be able to buy from others,
which will only increase their trade deficits.
* I could get Congress to force J.C. Penney to cut its
prices so that I won't have to spend as much to get what I want. I
thought that might at least reduce my deficit, but at lower prices I
might actually be tempted to buy more. Or J.C. Penney might come under
fire from the antitrust people for dumping its goods below cost.
* I could simply quit buying from J.C. Penney. That
would really teach them a lesson. But then, doggone it, I like what I've
been buying from them. If I boycott them, wouldn't that be like cutting
off my nose to spite my face?
Of course, I don't really mean any of this. As a
free-market economist, I know that there's a fourth option here and it's
the only one that makes any sense: I should ignore this "problem" and
never pay any attention again to whatever the trade situation is between
J.C. Penney and me, except to pay my bills on time. America as a whole
should do essentially the same thing. We should fire the people in
Washington, D.C., who compile the numbers, and the problem will go away.
Every month, the U.S. Commerce Department releases the
official "balance of trade" figures showing the difference between the
value of merchandise that enters the country and the value of
merchandise that leaves the country. If imports exceed exports, America
has a trade deficit, which sets off alarm bells in Washington. If
exports are greater than imports, we're all supposed to celebrate
because that's a trade surplus.
By this logic, draining the country of all goods and
accepting none from abroad would be the best possible trade news. We
wouldn't be able to celebrate, however, because we'd all starve. But at
least the government's books would register one heck of a trade surplus.
This trade-deficit silliness is a throwback to the less
enlightened times of sixteenth-century mercantilists. They argued that a
nation must never buy more from foreigners than it sells to them because
that would produce an "unfavorable balance of trade" that would have to
be settled by an outflow of gold or silver. The mercantilists wrongly
assumed that gold and silver were the real wealth of a nation, not goods
and services. They were also wrong to render value judgments about other
people's trading activities. The fact is that there can be nothing
"unfavorable" about voluntary trade from the point of view of the
individuals actually doing the trading, otherwise they would not have
engaged in it in the first place.
The principle that both sides benefit from trade is
readily visible when it involves two parties within a country; it
somehow becomes confused when an invisible political barrier separates
the parties. Neither the mercantilists of yesteryear nor those who fuss
about the trade deficit today have ever satisfactorily answered this
fundamental question: Since each and every trade is "favorable" to the
individual traders, how is it possible that these transactions can be
totaled up to produce something "unfavorable"?
To return to my initial example, I benefit when I buy
from J.C. Penney or I wouldn't keep doing it. The folks at J.C. Penney
benefit as well because they would rather have my money than the stuff
they sell me. We're both better off because we have a trade
relationship, which is why neither party ever complains about it. This
would be no less true if J.C. Penney happened to be a company from Japan
or Uganda.
America's trade deficit with the rest of the world made
headlines regularly in 1998 because it broke at least one quarterly
record. The Asian depression was one reason. Plagued by weak economies,
Asians purchased fewer American goods. The fall in the value of many
Asian currencies made goods from places like Japan and Indonesia cheaper
here, where a relatively strong economy had already boosted American
demand for foreign goods. No one who actually engaged in the
transactions that produced the trade flows between the United States and
Asian countries did so because they wanted to hurt themselves, yet the
trade deficit alarmists say that those traders somehow hurt this
country.
Ultimately, the dollars that went abroad to pay for
imports will come back to buy American exports. But even if they didn't
- in other words, even if goods come here and dollars go there to simply
stuff foreign mattresses - Americans with their supposedly harmful trade
deficit would have the better end of the deal. We would get goods like
VCRs and automobiles, and foreigners would be stuck with slips of paper
decorated by pictures of dead American politicians.
Forget the trade deficit. We should occupy ourselves
with more important things, like the next sale at J.C. Penney's.
At the time of the original publication, Lawrence Reed
was president of the Mackinac Center for Public Policy, a free-market
research and educational organization in Midland, Michigan, and
chairman of FEE's Board of Trustees.
Reprinted with permission from The
Freeman, a publication of The Foundation for Economic Education, Inc.,
December 1998, Vol. 48, No. 12.
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