Forget the Trade Deficit Essay

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Memo to newspaper editors: Stop publishing stories about the trade deficit. You are needlessly worrying people about something that means absolutely nothing. Forget the trade deficit. Except in the most trivial sense, there’s no such thing. Adam Smith, that Scotsman who knew a fair bit about political economy, which for him was a branch of moral philosophy, said: “Nothing is more absurd than this doctrine of the balance of trade.” That was correct in 1776. It is correct today. Economists have demonstrated this point a million times. Let’s try once more, shall we? In trade matters, as in so much else, no two words are more misleading — even dangerous — than “we” and “they.” We do not trade with them. The United States does not trade with Japan, or Mexico, or any other group. I trade with you. You trade with me. (That’s the song Barney should sing.) Smith trades with Jones. And so on. Individuals trade with individuals. Even when individuals trade with or as a group, such as a corporation, it is a meaningful grouping that itself is the result of trade. (We will see below that the groups counted in the trade statistics are arbitrary.) When two people trade with each other, there are facts that we can be absolutely sure of. First fact: each wants what the other gives up. Second fact: each places a higher value on the thing obtained than on the thing surrendered. Third fact: each comes out ahead; that is, each garners a trade surplus. Actually, these are but one fact stated three ways. We know these facts to be absolutely true because were they not true, the exchange would not have taken place. Everyone knows this at the “micro,” one-on-one, level. My 10-year-old son, Ben, knows it perfectly well. (Okay, he is exceptionally bright, but he would know it even if he weren’t.) No kid who exchanges a candy bar for a Ken Griffy Jr. baseball card thinks he
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