Paul Bunyan and Babe. Photo: Mike Baker. Source: Wikipedia
Growing up, I read about the legendary lumberjack Paul Bunyan, and his faithful ox, “Babe.” They did amazing things, like create Minnesota’s 10,000 lakes, the St. Lawrence River’s 1,000 islands, and dig Lake Superior as a watering trough. The stories were a benign piece of folklore, a bit of boosterism about Americans settling the frontier in the 19th century.
But some stories are dangerous. They shape the way we look at the world and give us wrong ideas. Such is the case with trade. In the long run, our national trade account has to be in balance. Imports have to be paid for with exports – plus interest, if any. If we buy a billion dollars in oil from Canada, we might pay for it by exporting a billion dollars of John Deere tractors and Caterpillar bulldozers.
But this truth leads many people to falsely assert that a country can’t run measured trade deficits. That is, if we don’t measure something, it isn’t real. (In philosophical terms, they confuse accidents and essence.) For example, Australia always seems to run chronic trade deficits, continually importing cars and TVs from Japan and China. But they’re also selling condos and vacations to their Asian neighbors. The Aussie government reports a trade deficit every year, but that’s misleading. Their trade in goods and services is actually balanced; it’s just that condos and tourism aren’t measured, while cars and TVs are.
Why is this dangerous? Because pundits and pols confuse the measured trade deficit with the actual balance of trade. But trade always balances. Always.
Source: St. Louis Fed
This is a common error: to conflate statistical measurement with a theoretical concept. But just because two things have the same name doesn’t mean they’re the same thing. This isn’t just semantics. The strength of the US economy is visible in our exports of services and assets, some of which are counted as manufactured goods, like airliners, and some of which aren’t, like real estate and securities. China now holds over $200 billion in mortgage-backed bonds. Some describe this by saying that the capital account balances the trade account, but our eyes tend to glaze over when accountants discuss T-accounts and double entries.
But let’s call things what they are. Trade, like Babe, always comes back, in one way or another. Subsidies, like favoritism, make us weak, not strong. Paul Bunyan may have been big, but the real hero of the 19th century was – and is – our diversified economy.
Douglas R. Tengdin, CFA
Charter Trust Company
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