The Twin Deficit Phantoms

2008.01.28   prev     next

Throughout the 1980s, and still to some degree today, there was a lot of clamor about two deficits that allegedly were going to do us in: the trade deficit, and deficit spending. I never bought either one. Here’s why:

The Trade Deficit

The purported calamity of the trade deficit was that Japan was selling more to us than we were to them, so we were losing jobs (or something??).

First of all, Japan wasn’t selling us the same things that we were selling them. They were selling us TVs and VCRs and we were selling them beef and timber. How do you measure who’s selling “more” to whom when they’re not even selling the same things? By weight? By volume? No, that would be silly. So how?

Well, by letting free trade run its course, that’s how.

Now let’s suppose that Japan was selling us large quantities of VCRs — for which we pay American dollars. What can those Japanese companies do with those dollars? Well, they can convert them to Japanese yen. But you can’t just take some dollars to a bank and say, “Please transform these into yen.” The bank can’t do that. Nobody can. What the bank can do is “convert” them to yen, which is actually just a fancy way of saying that they take your dollars and give you some yen in exchange. So the dollars didn’t change into yen, they just moved from a Japanese VCR company to a Japanese bank.

How do those dollars get back to the U.S.? Simple — somebody in Japan uses them to buy something from America. Like maybe beef or timber.

But wait — what if they just hold onto those dollars and don’t spend them any time soon? Well, all the better for us. Dollars are just a medium of exchange, slips of paper, numbers in a bank’s computer. If they want to make TVs and VCRs for us, and expect nothing in return, that makes us better off, not worse.

But realistically, they’re not hoarding dollars any more than we’re hoarding yen. They’re buying our stuff and we’re buying theirs. There’s no “trade deficit.”

Deficit Spending

The other big, bad “deficit” that was going to kill us was deficit spending — when the federal government spends above and beyond its tax revenue. OK, this deficit is real. But is it really bad?

Answer: Yes, it can be. It all depends on how much the government is spending, and on what. If it’s spending enormous amounts of money on programs of dubious value to the nation, then indeed that’s very bad for our economy. But whether they’re doing it via deficit spending or via spending covered by tax revenue is irrelevant. Just as with the trade deficit, simply follow the real goods, services, and other physical resources. If large quantities of tangible resources are being wasted by government spending programs, it doesn’t matter whether it’s deficit spending or not; it hurts the economy, because those tangible resources could have been used for something people actually wanted or needed.

A popular way to portray deficit spending at that time was to say, “We’re living off the work of future generations. We’re eating food off the table of our grandchildren.” Sounds awful.

But remember, you can’t eat money. You can’t drive it, or drive on it. The cars people drove in the 1980s were built by people of the 1980s (or before) — not by future generations. The roads they drove on were built and maintained by the people of the 1980s or before — not by their grandchildren. (How can your grandchildren maintain a highway while crawling around in daipers?) The food they ate was prepared that very day by — you guessed it — people working in the 1980s. Not by young workers today in the year 2008. It’s impossible. You’d literally need a time machine to do it. And our government can’t buy one of those with any kind of spending.

Everything our government spends, deficit or no, is stuff made by the workers of today.

Update 2008.05.26 — Apparently, some phantoms take a long time to die. Jesse Ventura is now going around saying that every person born today starts life owing $30,000! Here he is on “Larry King Live”:

Sounds scary (of course). But what does it really mean? Nothing! If I’m born today, I grow up, and I decide to be a care-free bum, like Kato Kaelin hanging out at O.J.’s house all the time, is the government going to come after me for not paying my $30,000? Or worse, my interest-grown $80,000, or whatever it continues to grow to while I continue to not pay it? No. They’re not coming after me at all. I don’t owe anything.

The $9 trillion debt is just wacky government accounting. Like I said above, everything the government spends today is something provided by working people today. Not by anyone just breathing their first breath today.

If Ventura wants to protest some specific wasteful spending programs, then he may have my support on this issue. Otherwise I can’t describe his national debt diatribes as anything but a bunch of hot air.