Canadian Politics from Canada's Centre

Friday, February 17, 2006

Trade Deficits and Surpluses are Ridiculous and Outdated

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Balance of trade, that macroeconomic idea that tells us whether we have a trade surplus or deficit, is an absolutely ridiculous, outdated idea. It's foundations are in colonial mercantilism. Mercantilist policy being a discredited idea, it is a wonder that "trade surpluses" and "trade deficits" are still considered important today. Furthermore, the philosophy behind trade surpluses and deficits is ethically bankrupt, and practically illogical. Lastly, balance of trade is a terrible indicator of the economic health of individuals within a nation, and must therefore cease to be used as a measure of economic wellbeing.

Mercantilism, which was the economic philosophy that dominated much early colonial trade, saw home countries buying natural resources from their colonies, then exporting finished products back to those colonies. The value of the exports to the colony being greater than those from the colony, the colonizing nation would have a trade surplus and grow wealthy. The result of this thinking was the bankrupting of the citizens of the colonies as their revenues were much smaller than their purchases. Mercantilism doesn't work.

Nowadays, discussions of trade still have this fixation on surpluses and deficits. Practically speaking, this should mean that for every economy in the green with a surplus, there should be one in the red with a deficit. For an economy to function at the expense of another is morally reprehensible, in a similar way to choosing who of two people gets to live, in a situation where only one of the two may live.
Practically, thinks don't even work out properly according to that neat 1 surplus = 1 deficit model. In a recently published textbook on macroeconomics - co-authored by no less a credible figure than the new chairman of the US Federal Reserve, Ben Bernanke - it is revealed that globally, there is a net deficit of over 150$ billion dollars. Developed economies have a net total deficit of a bit more than 210 billion, while developing economies like India, and former communist economies, have a net surplus of approximately 60 billion. The difference, the book explains, is due to holes in accounting.
So not only is the surplus/deficit idea ethically bankrupt, but it doesn't even work properly in the real world.

The Montreal Gazette recently published an article showing that Canadians average salaries over the last ten years had climbed a palry 10 cents. At the same time, leading economists are shouting how wonderful it is that our GDP has grown and grown. If the GDP has grown while salaries have stagnated, the logical conclusion is that the beneficiaries are businesses. Thus business is either merely reinvesting the money in itself to grow, or else paying the top employees more, and the bottom rung ones less, so that the average is stagnant and the gap between the poor and the rich keeps growing.
To see how this works, let's show some numbers. Say GDP is 100$, in year 1, and 200$ in year 2. There's a single company, and it's top employee gets 50$ a year, the bottom four get 10$ each, and 10$ is reinvested in the company. Average salary = 90$/5 people = 18$ average salary. In year 2, the boss gets 65$, and 95$ goes into the company. There's 40$ left for the four employees; they each get 10$.
The key things to note in this example is that for the regular employees to have their salaries stay the same, one or both of two things had to happen:
1) The top employees wages go up, as a percentage of the total salaries disbursed. Thus the boss's salary went from 55% of revenue to 72%.
2) Investment in businesses goes up as a share of GDP.

Now, it is also possible that employees are getting remuneration in the form of stock options and investment, and thus are seeing greater revenues, in conjunction with the greater GDP. In other words, the money is going back into the businesses, but the employees' wealth has grown, and thus the gap between the rich and everyone else hasn't increased. (That possibility will be examined in a future post, though it is likely that the overall average wealth of Canadians is also stagnating, which idea is reinforced by the fact we are spending beyond our earnings.)
The point is that seeing a trade surplus while there is stagnation in salaries proves yet again that trade surpluses/deficits aren't all they're cracked up to be. That's because on the level of average Joe Canadian, trade surpluses don't necessarily translate to greater wealth.

Let;s get rid of the concept of balance of trade. Surpluses and deficits in trade are ideological relics from colonial times, created by a discredited economic model. Ethically, this way of thinking makes the assertion that one group of people are more deserving of well being than another. Practically, the model doesn't even hold up, as accounting holes demonstrated by the global deficit show. Thus perhaps Canada has a deficit, and we just haven't been counting beans properly? Finally, balance of trade doesn't indicate how we as individuals are fairing, so calculating it is a waste of time and energy.


At 10:00 AM, Canadian Politico Blogger Ws said:

Why do you only allow bloggers to post comments?

At 10:10 AM, Canadian Politico Blogger Ws said:

Your arguments do not make sense.

1) The argument that the idea behind a calculation is "morally reprehensible" does not necessarily mean that the calculation is invalid or have no value.

2) The argument of a single company where in year two $90 goes back "into the company" also doesn't make sense. The $90 is going "somewhere". Since there is only one company, it is either going to investors, vendors from other countries, or sitting in the bank, waiting to be spent the following year.

However, your overall point that the trade defeicit is perhaps outdated does have some validity in today's world. Take a look at this article:


At 11:45 AM, Canadian Politico Blogger lecentre said:

Hi Wes
1st, thanks for commenting, it's always appreciated.
2nd, I only let bloggers comment because it prevents spam like I've had before (random used car ads and crap).
3rd, the point about it being ethically bankrupt addresses the point that basing our economic goals on something morally reprehensible is a ridiculous way to go about planning our economic affairs. It wasn't an argument addressing the validity of the calculations, which I addressed with other points
4th, the money can go back into the company as savings, or cash reserve. Thus businesses are growing at the expense of individuals. This shows the outdatedness of evaluating economic health based on trade surpluses, because individuals aren't seeing the benefits of those surpluses. On a related note, you might be interested to know that statscan just published a n item saying our revenues have stayed the same relative to last year and the year before. See the full discussion here:

Thanks again,
p.s. I'll check out your link.


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