BOHANON & STYRING: Impacts of trade deficits poorly understood

We hear a lot these days about trade deficits. “Deficit” is one of those words that generate negative vibes. A deficit connotes a shortfall or a deficiency of some kind. Our brains are wired: Deficits bad.

The United States runs trade deficits with Mexico, Japan and a titanic one with China. Those countries sell more to us than we sell to them. It’s natural to think it’s bad to buy more from foreigners than they buy from us. Foreigners “make money on us” when, on net, money flows from us to them. We must, it is therefore argued, strike better trade deals so we “stop losing” to them.

But let’s look at it a little differently. By the above deficit logic, you’re screwing your employer big time. The things being sold (your time and talent) flow all one way, from you to her. But the cash flows one way: from her to you. You buy nothing from her. You have a 100 percent trade surplus. You must be a tremendous deal maker because you get all the money.

Suppose you turn around and use that money to shop at Walmart. The flow of goods is all one way, from Walmart to you. You walk out with food, diapers and toothpaste. You leave behind a portion of the cash money you just trade “surplused” from your employer. You have a 100 percent trade deficit with Walmart. By the “we’re-losing-to-China-logic” you’re a stupid fool and should be locked up as mentally incompetent. A court will appoint a conservator as your trade negotiator.

Of course, we don’t really think you’re nuts if you shop at Walmart. Adam Smith blew up the “trade deficit” argument 240 years ago by pointing out that the gains from trade are in what you receive, not what you give up. The point of economic activity is not to gain a pile of cash you never use, but to attain a living standard to which you aspire.

Here’s a deal we offer to any reader. Bohanon and Styring will send you pieces of paper with our pictures on them. We’ll even write on them, “This is Money.” In exchange, all you need do is sign over title to your automobile. You will have achieved a perfect trade surplus with us. To make sure you are never tempted to run one of those horrible trade deficits, you then burn the paper.

Any takers?•

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Bohanon is a professor of economics at Ball State University. Styring is an economist and independent researcher. Both also blog at INforefront.com. Send comments to ibjedit@ibj.com.