Saturday, December 17, 2005

Thinkin' About Your Deficit

I've often mentioned that the only times I trackback to CF is when I disagree with her and today is no expection. She wrote yesterday that there's no such thing as a "trade deficit." This is wrong. The trade deficit exists; it's just a dumb name.

I'll agree that when people talk of the trade deficit, they're speaking of a vacuous concept. The trade deficit is an arbitary distinction between net exports and capital flow. It exists, however, because people make that very real distinction.

It would be (slightly) more accurate to say that there is no trade "deficit" because a deficit implies we have to pay it back. We aren't running up a debt because we import more than we export. CF is correct that we should ignore the media scares. At the same time, remember the English language is clunkly and silly and people call things stuff that doesn't make sense. I drive in a parkway but I park in a driveway and so on. Sementics. Technically true, but there are bigger battles to fight.

While the trade deficit exists, the real lesson is that it doesn't matter. Two reasons for this: CF's point (we can afford these imports; isn't that a good sign?) and the accounting identity. Dollars that go abroad have to end up in the US (okay they could end up in Palau or East Timor or whatever but they're too small to really mean anything). Now you could say that net exporters (like China) are putting those dollars back in the US buy purchasing government bonds, thus funding inefficient spending. That's true; that's a problem. But that's really a problem with the budget deficit, not the trade deficit, because that's something we really do have to pay back.

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