with Donald Boudreaux

In the cartoon above we see that a negative, under one accounting convention, is a positive under another.

When a dollar trades for food, should we do the accounting as though we are husbanding dollars, or as though we are husbanding food?

When I happened upon the cartoon, I saw that it fits something my colleague Don Boudreaux and I wrote, the (now revised) 2017 EconLib essay on “trade deficit” and accounting conventions.

“Trade deficit” is terminology under a money-husbanding accounting convention. But under a stuff-husbanding accounting convention, it is a current-stuff surplus.

Since publishing the piece in 2017, we have perfected the terminology. It now reads:

In this article, we divide all things into two groups: (1) dollars and (2) all non-dollar things that dollars are traded for. Let’s call the second kind of things “stuff.”

Some economic terminology implicitly elevates dollars above what dollars buy. When speaking of international trade, or the current account (which is made up principally of exports and imports of goods and services), the terminology calls it a “deficit” if the value of imports exceeds the value of exports, with both imports and exports valued at the prices at which they are transacted.

Notice that if imports exceed exports, as they have done for decades in the United States, then, on net, more dollars leave the United States by Americans’ purchases of imports than come in by Americans’ sales of exports. Such a situation is termed a current-account deficit, or “trade deficit.” But the terminology could just as well be formulated the other way around, in a framework of husbanding stuff. Then, under the same condition of imports exceeding exports, the focus is on the stuff that, on net, is flowing into the United States. Now we view the exact same world but see a surplus. Instead of looking at matters as the conventional language does, we might call this new view the stuff view. What in the conventional view is a “trade deficit” is in the stuff view a “current-stuff surplus”…

Our point here is not to repeat the important truth that the trade deficit corresponds to the capital-account surplus. Rather, our point is that the whole conventional framework is one of husbanding money rather than the goods and services bought. Maybe that framework stems from the government’s basic instinct and natural interest in finding the dollars and taking a portion of them. Taxes are paid in dollars, not in stuff.

Our point is that we can use an inverse, stuff-husbanding framework to create parallel terminology that transposes deficits and surpluses.

We quote the Nobel economist Thomas Schelling saying that there is “no significance, other than custom, in the choice of sign.” Had convention developed differently, what is now called a “trade deficit” could have been called a “current-stuff surplus.”

The following table shows that the two terminologies line-up according to the two conventions:

The next time you hear President Trump inveigh about our $375 billion “trade deficit” with China, think about the cartoon above, and say to yourself: We have a $375 billion current-stuff surplus with China.

But it would have been better if economists in the 20th century had avoided altogether the language of “deficit” and “surplus.” Better language could have avoided the misleading and dangerous connotations of “deficit,” connotations that cripple economic understanding and that are exploited to advance bad policies.

Daniel Klein is economics professor and JIN Chair at the Mercatus Center, at George Mason University, where he leads a program in Adam Smith. He is author of Knowledge and Coordination: A Liberal Interpretation (OUP, 2012) and chief editor of Econ Journal Watch.