and they just don't make any sense. I mean it, they don't make any
sense, and people keep repeating them as if they do.
Take this argument about the trade deficit. It is based on economic
nationalism, an incorrect conception of the nation. The nation is not
an integrated economic unit. The idea that the nation acts as an
economic unit is an incoherent concept. Yet we hear that we are a
debtor nation, and our indebtedness is tied to our so-called current
account, or balance of payments. And the balance of payments is tied
to the balance of trade.
Well let me tell you, these numbers and these concepts are
meaningless in our global economy. A government can be in debt. A
family can be in debt. A business can be in debt. A nation can't be
in debt. What is a nation, from an economic point of view? A nation
doesn't make purchasing decisions. Individuals, families, businesses,
and governments make purchasing decisions. Nations don't decide to
borrow money. Individuals, families, businesses, and governments do.
It makes no sense at all to track balances of payments or balances of
trade, unless you think the nation is an important economic unit. But
it's not. From a global perspective, it doesn't matter if I buy a
Toyota or a Ford. I just want a reliable, safe car - one that gives
me good value for the purchase price. I don't care whether a company
in Japan or a company in Detroit benefits from the purchase. Why
should anyone else care? The companies want to make money and the
purchasers want a good car. How is the nation a relevant actor in
this transaction? Why do we care at all whether the money I pay for
the car stays in the United States or not?
Here is a telling instance where we don't bother to track current
accounts. No one knows the balance of trade between Massachusetts and
North Dakota. No one cares. No one knows the balance of trade between
any two states. There's a good reason for that. The states aren't
economic units. They're taxation units and regulatory units, but
they're not economic units that make purchasing and borrowing
decisions. We don't bother to track their balance of payments,
because to track those numbers for units that don't make such
decisions is meaningless. We're only interested in those numbers for
units that have revenues, expenditures, and debts. Households,
businesses, and governments have revenues, expenditures, and debts.
States don't. Neither do nations.
In the latest economic crisis, we're told by sober experts that we've
been living beyond our means. Economic decision making units can live
beyond their means because they decide to do so. Nation are not
economic decision making units, and they cannot live beyond their
means. National governments can decide to borrow money or inflate the
money supply if public expenditures exceed tax revenues, but nations
as a whole can't live beyond their means. It's just not a coherent
way to think.
Let's say you took the Johnsons in Minneapolis, the Harrisons in
Seattle, the Olsons in Miami, and the Sullivans in Boston. Throw in
the Andersons in Albuquerque and the Dawsons in Denver to increase
the number of households to six. With an average household size of
four, we have twenty-four people in our group. Now suppose we
calculate the balance of payments for these six households. Their
annual income averages $60,000, each household carries so much debt
and pays so much interest, and so on. Why should we care about those
figures? We don't, and there's a reason we don't. These four families
have no economic relationship except that they happen to live in the
United States. Their money-making, purchasing, and borrowing
decisions have nothing to do with each other. In no way do they act
as an economic unit.
Now suppose we throw in a few more families: one from Osaka, another
from Bangalore, a third from Venice, and a fourth from Cairo. Now we
have ten families. This group of ten families is no more or less
coherent as an economic group than the original six. They're just ten
economic units that have nothing in common except that they share the
same planet. That's the point. We want to understand the economic
decisions of actors that actually make decisions. Why would we care
about numbers that aggregate the economic behavior of groups that
have no decision making power whatever?
What's the conclusion here? What's the summarizing point? Let's look
at numbers that affect real decisions. People who cite the trade
deficit have a reason. They say that when we buy more than we sell
overseas, that's bad for the nation. They say that it's bad for the
nation because we're shipping dollars overseas, which makes us
poorer. It's especially bad because they lend the dollars back to us
to cover our profligate spending, so now we're in debt to the people
we've been buying from. It's all balderdash. First of all, it's not
bad to ship dollars overseeas if we're getting so many good things in
return. We buy those goods because we get good value from the
purchases. We'd rather have the reliable car than the money. Thank
heavens, we say, that the Japanese make such good cars.
Now about the borrowing: we don't necessarily go into debt to buy the
Japanese car. If we do borrow to pay for the car, the loan isn't
necessarily held by a foreign bank. If the loan is held by a foreign
bank, who cares if the interest rate is fair? Yes, shipping dollars
overseas makes it easier to loan large amounts of money to the United
States government and United States banks. You can't blame the trade
deficit for those loans, though. If U. S. institutions want to borrow
money and foreign banks have cash because exporters have deposited
their profits with them, why shouldn't they loan it to us. Now we've
benefited twice: we have all those high quality cars on good terms,
and we have access to relatively cheap credit as well. Moreover, not
one decision maker in this chain has been coerced or tricked into
making a choice contrary to his or her interests.
Economists and politicians worry about this chain because we don't
want people and institutions here to be in debt to foreign banks. But
why? Why do we care who holds our loans? I just want the bank that
holds my home mortgage to treat me fairly and honestly. Whether the
bank's owners live in the United States or elsewhere doesn't affect
me at all.
The worriers have one big ace up their sleeves. What if we go to war,
they say? Then economic nationalism makes sense. We have to have
energy independence because our enemies could cut off our oil supply.
We have to cut down our foreign debt because our enemies could cut
off our credit. We have to become self-sufficient in every way,
because if we go to war that's the only way we can survive. If you
want to base all of your economic policies on the possibility that
you'll go to war, without even knowing who your enemies are, go
ahead. It doesn't look like a wise path to me.
The fact is, these ideas about economic nationalism go so far back
it's hard to trace them. We all know about mercantilism, the first
organized form of economic nationalism. People took a lot of pride in
their nation - they saw their nation as their extended family as it
supplanted the tribe and the clan. No wonder they wanted it to do
well economically. No wonder they took notice if other countries did
better. No wonder they wanted their current account to show a
positive balance at the end of the year. Let the gold pile up in the
treasury, for gold is good. We are a rich nation.
Things don't work that way anymore, Dorothy. The gold in our treasury
is an economic throwback, that's for sure. Who's to say that the
Japanese are better off than we are, when they have a lot of money in
the bank and we have millions of Toyotas to transport us all around?
By people's decisions, we have the cars we want and they have the
money they want. If General Motors can't make a profit, that's not
your neighbor's fault, it's not Toyota's fault, and it's certainly
not the United States' fault. It's not a sign of weakness, either, or
a sign of living beyond our means. No one has made a bad decision
here, except for the managers at General Motors, of course. But for
their poor stewardship, they might have competed successfully with
their brothers in Tokyo.
I'd say that's enough for now, wouldn't you? Someday you might draw a
diagram to illustrate the chain you describe above. If people can see
the diagram, they'll understand your analysis and criticism better.
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