Are some made-up stories hazardous to our health?
Mjöllnir on Tórshavn Coat of Arms. Source: Wikipedia
Some tall tales seem benign – like accounts of Mjöllnir, Thor’s battle hammer that always comes back to him after he throws it. In Norse mythology, Thor is kind of a dumb ox, always misplacing his things. So it’s convenient for him to have something that he won’t lose, even after he gets angry and throws it.
But some stories are dangerous. They shape the way we look at the world and give us false ideas. Such is the case with trade right now. In the long run, our national trade account has to be in balance. Imports must 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 must not be 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. The 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 politicians are confusing the measured trade deficit with the actual balance of trade, especially now, in their discussion of the proposed border adjustment tax. Recently, two prominent economists asserted that “positive net revenues today must be offset by an equal discounted value of negative net revenues in the future.”
This is a common error: to conflate a statistical measure with a theoretical concept. But just because two things have the same name doesn’t mean they’re the same. This isn’t just a matter of semantics. The real strength of the US economy is visible in our exports of services and assets, some of which are counted as manufactured goods, like Boeing airliners, and some of which aren’t, like US real estate and mortgages. China now holds over $200 billion in mortgage-backed securities. Some describe this by saying that the capital account balances the trade account, but this is just another way of describing the same thing.
This error has led some economists to confuse a theoretically neutral border adjustment tax that applies to all imports and exports with the one actually proposed, which would tax imports more than it subsidizes exports. Chinese buyers of MBS and homes wouldn’t be subsidized under any proposal. Hence, the reform to corporate taxes that the GOP is cobbling together is at least slightly protectionist.
This doesn’t necessarily mean it’s a bad idea. The proposal has a number of good features, like lower marginal rates, or equal treatment of debt and equity, or expensing investment. It’s a truism that you get more of what you subsidize and less of what you tax, and up until now we’ve been subsidizing debt and penalizing investment, which is perhaps why our debt-to-GDP ratio has gotten so big.
But let’s call things what they are. Trade, like Mjöllnir, always comes back, in one way or another. Subsidies – like persistent favoritism – make us weak, not strong. Thor should have been encouraged to find his hammer. Maybe then he wouldn’t have thrown it away so much.
Douglas R. Tengdin, CFA
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