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.
READER COMMENTS
Scott Sumner
Oct 7 2019 at 12:20pm
Great post. No need to even invent the term “current stuff surplus”. Just call it a trade surplus. After all, we get more traded goods than we give up.
Daniel Klein
Oct 7 2019 at 2:52pm
Point taken, Scott, but there is a sense in which we’ve been beaten to the punch and now we have to build around the terminology that’s been inculcated.
Scott Sumner
Oct 8 2019 at 1:49pm
Yes, you are correct.
Rob Rawlings
Oct 7 2019 at 12:20pm
So I suppose next time I buy a lot of stuff that I pay for with my credit card, I can reassure myself when the statement arrives that its not so much I have spent more than I earned but rather that I have run a ‘stuff surplus’ !
Jon Murphy
Oct 7 2019 at 1:21pm
This is actually a great demonstration of Dr. Klein’s point. Partly because of the convention, it is easy to misunderstand a trade deficit as implying debt. But a trade deficit does not imply debt at all.
Rob Rawlings
Oct 7 2019 at 1:38pm
@Jon,
It doesn’t imply debt but it doesn’t exclude it either. Its fine to point out that ‘trade deficit’ and ‘stuff surplus’ are two ways for describing the same thing. But to many people ‘trade deficit’ sounds bad and ‘stuff surplus’ sounds good so we need to remember that neither is good or bad as long as they reflect underlying preferences (and at the back of my mind there is a concern that for people with high time preference subsidized cheap credit may be a bad thing).
Jon Murphy
Oct 7 2019 at 2:01pm
Sure it doesn’t exclude debt, but that is irrelevant here. Klein’s point is true with or without debt: if you are getting more than what you are giving up, then you are getting a stuff surplus.
If you borrow $100 and get $100 worth of stuff, there is no stuff surplus: what you have to give up is equal to what you get (for the sake of ease, assume no interest rates. Interest rates do not change this point; they just obscure it). If you borrow $100 and get $200 worth of stuff, you have a stuff surplus.
Rob Rawlings
Oct 7 2019 at 2:40pm
Based on the definition in the post ‘If you borrow $100 and get $100 worth of stuff, there is no stuff surplus’ wouldn’t you still have a $100 trade deficit and a $100 stuff surplus ?
And of course in general if you borrow $100 to buy a good that costs $100 then the good must be worth more to you than the things you anticipate having to give up in the future to pay off the debt plus interest or you wouldn’t have bought it. But this still doesn’t preclude some people from regretting having run the stuff surplus when it actually does come time to pay off the credit card bill,
Jon Murphy
Oct 7 2019 at 2:47pm
No. It’d be balanced.
True, but that has nothing to do with a trade deficit/surplus. Sunk costs are sunk.
Rob Rawlings
Oct 7 2019 at 3:12pm
Are you saying that if in a given period there was a single trade between the US and China consisting of a US resident buying a good for $100 from China there would be no “trade deficit” or “stuff surplus” ?
Jon Murphy
Oct 7 2019 at 3:48pm
No, there would be.
But I see the confusion. I worded my hypothetical poorly. My fault.
To go back to that: a person borrows $100. They use that $100 to buy from China. That Chinese person uses that $100 to buy from US. There is debt, but there is no trade deficit/surplus.
“Stuff” surpluses are stuff surpluses because they deal with stuff, not money, to go back to Klein’s point
Thaomas
Oct 8 2019 at 6:52am
Could you explain. A stuff surplus does imply that economic actors in the aggregated have incurred some sort of future obligation to incur a stuff deficit. This is good or bad depending on how the stuff is used over time (which is why the I-stuff/S-stuff identity is relevant). Any judgement that a stuff deficit is bad implies a judgement that there are bad savings and investment decisions being made.
Daniel Klein
Oct 7 2019 at 1:52pm
Rob, in addition to what Jon says, I’d say a few things:
Notice the end of what Don and I say: We are saying that “deficit” and “surplus” are misleading in the context of national income accounting. When properly used, the idea of a deficit/surplus refers to some desirable level of X (whether dollars or stuff). Perhaps the desirable level of cans of tomato soup in my kitchen cabinet is three. If I less, I have a deficit, more a surplus. It is people’s responsibility to define their desirable levels and manage their own stocks. See Adam Smith on “pots and pans” in a household, in WN. But in the system of national income accounting, what are the desirable-level referents? How are they even defined? There are none! The “deficit”/”surplus” talk is a fraud!
If you run up your credit card and blow all your money on booze and crap gadgets, and now find yourself broke and miserable, you cannot reassure yourself with your supplies of gadgets and memories of drunken stupor, because you exceeded your desirable levels of those things, and ran short of your desirable level of dollars held. Your reassurance tale does not make a pertinent analogy for the national income accounts precisely because, there, there are no desirable-level referents.
Don and I are saying: Well, if you insist on introducing “deficit” and “surplus” talk into language of national income accounting, two can play at that game. What you call a “deficit” can be called, under an equally apt convention (Schelling says so!), a “surplus.” Don and I show this to show that “deficit” talk is bogus–a category mistake, philosophers might say.
Rob Rawlings
Oct 8 2019 at 10:39am
Thanks Daniel for these additional notes, which are excellent.
I was actually being a bit tongue-in-cheek with my credit card analogy and am more-or-less on board with the essence of your and Don’s original post.
Daniel Klein
Oct 8 2019 at 11:02am
Roger that, thanks Rob. Sorry if I sounded too excited!
Thaomas
Oct 9 2019 at 10:53am
You are trying to redefine “deficit” to make it mean “sub (or super) optimal deficit.” Yes it is unfortunate that President Trump and some other people think that a current account “deficit” is ipso facto bad (just as some people think a fiscal deficit is ipso facto bad) but I don’t think the mistake arises from a poor word choice. The mercantilism fallacy is older than the use of “deficit” in that sense.
Jon Murphy
Oct 7 2019 at 1:19pm
Good stuff. Related to the accounting convention problem highlighted is the subsequent association of the NIPA accounts with economic theory. NIPA do not imply economic theory and vice versa.
nobody.really
Oct 7 2019 at 1:49pm
This is inspired. And I love the introduction of a new econ term “stuff.” (I’m reminded of Anathem, wherein we are introduced to the academic term “bulshytt.”)
That said, as Rawlings hints, this discussion seems to require a discussion of inter-temperal dynamics and fungibility. The trading value of certain things–especially services, once rendered–may drop to zero, while the debt may not. This suggests an asymmetry between dollars and stuff.
However, those who can transcend the needless moralizing about debt can achieve advantages over those who do. Firms seem accustomed to shedding debt in bankruptcy when they find it advantageous to do so (see Donald Trump), yet many homeowners seemed reluctant to do likewise during the housing crash.
I occasionally hear anxiety that China owns so much US debt, and this makes the US vulnerable. And sure, I guess China could depress the value of US debt by dumping their holdings onto the market–but China would have to take a huge economic loss to exercise this strategy. In contrast, I think of the adage, “If you borrow $1 million from the bank, the bank owns you; if you borrow $1 billion from the bank, you own the bank.” Due to our long history of trade, we already have gobs of cellphones from the Chinese. What practical mechanism would China have to try to get them back if we defaulted? It is rather the Chinese, rather than the Americans, who face greater exposure under this arrangement.
Jon Murphy
Oct 7 2019 at 2:02pm
No. You need to convert everything into NPV at the time of the purchase. Remember: real vs. nominal matters. Time doesn’t change the lesson, just makes things more obscure.
nobody.really
Oct 8 2019 at 11:16pm
I’m been mulling whether you’ve missed my point. But after re-reading the original post, I think this sums things up well.
Jon Murphy
Oct 9 2019 at 8:03am
Well, let’s not rule anything out. I may have missed your point.
When you say “this sums up things very well” what is “this”?
Thaomas
Oct 7 2019 at 4:33pm
I still think it’s better to try to get across that a current account “deficit” is no more “good” or “bad” than a fiscal “deficit.”
Mark Z
Oct 8 2019 at 10:53am
Well, no, these truly are apples and oranges. Running a chronic, real fiscal deficit is bad. The point is that a trade deficit isn’t actually a debt (or an increase in debt) despite the what terminology implies. Fiscal deficits actually are debt though.
And the same goes for fiscal surpluses. We shouldn’t want the government managing the intertemporal allocation of resources in general. To my knowledge serious arguments for fiscal deficits and surpluses are pretty much always for temporary imbalances that relate to the business cycle and are supposed to net out in the long run.
Daniel Klein
Oct 9 2019 at 9:28am
I agree with Mark Z.
I think my comment above about referent desirable levels pertains.
The concept of debt employs a focal referent level of zero, and for good reason, even though that level (zero debt) is not anyone’s final determination of a desirable level. It is one benchmark used for organizing our language.
In national income accounting, however, there is no referent level behind the language of “deficit” and “surplus.” There is absolutely no normative focality to the idea that current-stuff inflows (imports) should equal current-stuff outflows (exports). None!
“Trade deficit” is a fraud.
I modestly suggest that we shout it from the rooftops.
Yaakov
Oct 9 2019 at 5:06pm
I read the post and the comments and ask “why?”
Why is selling China assets and Dollars not accumulating debt?
Why is “Trade deficit” a fraud?
Jon Murphy
Oct 10 2019 at 9:25am
Why is it accumulating debt? You sell dollars to your grocer all the time whenever you get food for them (you sell the dollars for food). Are you in debt to your grocer?
See your first question. “Trade deficit” neither correctly conveys the meaning of what it is measuring nor allows for proper interpretation of the goal of trade.
Stewart Bovi
Oct 10 2019 at 12:11pm
The difference in terminology for trade deficit versus current-stuff surplus seems like a simple pessimist versus optimist situation, but can be much more. Trade deficit looks at imports and exports solely by money and the monetary value of stuff. While this works for imports and exports it doesn’t work quite as well in the actual market due to supply and demand, meaning that stuff won’t always sell for the same price that it was imported for, rather the price that the citizens in the country are willing to pay for it.
It is also folly to elevate dollars above stuff because the point of dollars is to purchase stuff, simply having dollars for the sake of having more dollars is not good. It’s also not inherently a bad thing to be receiving more stuff than exporting more stuff as the value of stuff fluctuates. Husbanding stuff is better because we can place a personal value on stuff based on what we want or need, but cannot change the value of a dollar.
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