We would be better off if the government simply stopped releasing trade-balance information. These monthly numbers are so widely misinterpreted that society is harmed rather than helped by the exercise.
There are no better examples than last Friday’s release of trade numbers for December and 2005 and the Bush administration’s subsequent announcement Tuesday of a new campaign to force China to import more from us. Both generated much ado about nothing and diverted attention from the underlying fundamentals affecting our economy: low household savings and a high federal budget deficit.
Unfortunately, doing away with trade flow announcements is not likely to happen. Trade numbers are like the atomic bomb. Once invented, the bomb could not be un-invented, regardless of how many physicists and philosophers regretted its existence. Balance-of-trade numbers are similar.
They have been published for centuries. Elected officials, the general public and the media have all come to accept that each month the U.S. Department of Commerce will issue a voluminous report on “U.S. International Trade in Goods and Services.” Ending this effort would bring immediate protests and charges that the government was trying to hide something or dupe the citizenry. Abolishing the publication of trade data is impossible in practical terms.
Nevertheless, the monthly releases cause more harm than good because most elected officials and the general public misunderstand and misinterpret the information. They then call for mistaken policies that would harm rather than help our economy.
Moaning and groaning about a symptom — trade flows — keeps us from addressing the more pressing problems of low household savings and a high federal budget deficit.
Harmful misunderstandings of trade flow statistics stem from the continued influence of a flawed economic theory — mercantilism. Popular in the 17th century, mercantilism held that exports are inherently good and imports intrinsically bad.
Economists have been fighting this erroneous idea for 230 years, but it remains powerfully influential, particularly among elected officials and journalists. There is no greater failure of the discipline of economics than the continued sway of this self-destructive belief.
There is nothing inherently good or bad about exports. There is nothing inherently good or bad about imports. The fact that imports exceed exports or vice versa has no intrinsic significance. Using the term “deficit” to describe a situation where imports exceed exports and “surplus” to describe the opposite is purely arbitrary. Virtually all economists agree on this.
But just read news stories about the trade numbers released last Friday to see how economists have failed. Virtually all portrayed a trade “deficit” on the part of the U.S. as a problem, a major failing. One TV network news anchor asserted “the U.S. economy took a pounding in international markets.”
Many stories focused on how U.S. imports from China exceeded U.S. exports to that country and painted it in apocalyptic terms. Few noted that while China showed a “surplus” relative to the United States, it had a “deficit” with other Asian countries that was nearly as large.
Many implied that any Chinese “surplus” resulted from dishonest policies on the part of that nation. None listed the numerous countries that import more from the United States than export to it. None identified U.S. malfeasance as a cause of such surpluses.
None pointed out that there were times in the past when our country ran a large trade “surplus” as it did from World War II to the 1960s. None reported that U.S. exports greatly exceeded imports in many years when our economy grew little and unemployment was high. Journalists are as ignorant of history as the rest of our society.
I do not suggest that trade numbers have no meaning. They are an important component of a more meaningful tabulation of all financial flows into and out of a country. These quarterly “balance of payment” accounts are much more important than monthly “balance of trade” figures that get so much attention.
Even though such balance-of-payment figures give a more comprehensive view of our nation’s international economic position, they also are only symptoms of underlying economic fundamentals. We import more than we export because U.S. households consume a great deal and save little. Foreign malfeasance has nothing to do with it.
These underlying fundamentals can be changed with higher interest rates, a balanced federal budget and an end to tax subsidies for household borrowing. None of these measures is popular, however, and no politician dares to champion them. It is much easier to focus on peripheral issues and beat up on the Chinese.
© 2006 Edward Lotterman
Chanarambie Consulting, Inc.