Free Traders Might Want to Be More Careful With the Household Analogy
I am friends with Don Boudreaux and I love that he is hammering away on free trade. (Check out this cool post showing how much more knowledgeable Reagan was compared to Trump.) But I also get bored and like to make nitpicky remarks. So take this post in that light.
Don favorably links to a FEE article by T. Norman Van Cott. Here’s an excerpt from the opening and conclusion, and readers of this blog can easily fill in the gaps:
Among economics data watchers, a country’s exports enjoy a hallowed status. The ability of producers in country A to sell goods and services to people in other countries is taken as a sign of A’s economic strength, although the underlying metric for economic strength goes unmentioned. In addition, job counters across the spectrum constantly count the number of jobs associated with exports. The more export-related jobs, the better. In a nutshell, exports are intrinsically beneficial—no questions asked.
The problem is that virtually no one, except perhaps for a workaholic, runs their personal economic affairs like this…
That the gains associated with exports ultimately trace to imports is no doubt a bitter pill for many to swallow! Nevertheless, virtually all of us organize our own economic lives consistent with this idea. In the marketplace we produce goods and services which we sell (export) to buyers. This is the source of our incomes which we use to buy goods and services from others—that is, import. The more imports, the better.
People who choose to export while importing as little as possible will find themselves ill-clad, ill-housed, ill-fed, and possibly dead in short order. How can it be that what is economic wisdom for the individual not apply to a nation? Hint: it can’t!
I understand what van Cott / Don are trying to get across with this line of argument. But strictly speaking, if they really want the layperson to think of the country as a household where “exports” is the income and “imports” is the consumption, then you end up with Trump’s worldview.
Don’t believe me? Consider the following conversation.
DAD: Jimmy, it alarms me that you’re living beyond your means. I’m looking over your Excel budget, and last year your income was $40,000 but you spent $60,000.
JIMMY: Right, I did a great job. The whole point of working is to consume. Imagine someone who worked and worked and worked his whole life, but never consumed. What an idiot! That would be confusing costs and benefits.
DAD: Okay Jimmy, it’s not the amount of spending per se that bothers me. It’s that you’re spending more than your income.
JIMMY: Dad, you need to take an accounting class. The reason I was able to spend more than my income is that the credit card companies invested more in me, than I did in them. I ran a capital account surplus last year of $20,000. Far from demonstrating my profligacy, it showed what a great investment opportunity I am.
See what I mean? I think Don should be a little more careful before telling people to think of trade like a household, where exports are income and imports are consumption. In fact it’s precisely that mentality that is tripping Trump up–he’s thinking of the USA as a giant corporation, where a trade deficit signifies unprofitability.
Murphy, what do you think of the new regulatory reform bills recently passed by House Republicans?
govtrack.us/congress/votes/115-2017/h126
govtrack.us/congress/votes/115-2017/h120
govtrack.us/congress/votes/115-2017/h114
Landsburg discusses trade in a similar manner in “More Sex”. He says something along the lines that other people’s deficit is none of your business. He does however also say that trade deficits are self limiting as they end in bankruptcy. He does not link the two and say if your country is bankrupt through every one else’s deficit it might have an effect on you.
Try listening to the last few Peter Schiff episodes, this is exactly the analogy he is using.
Infrastructure investment is like getting a new roof for your house, which does produce long term benefits (less leakage means all the things in your house stay dry and last longer) but when you have to pay the contractor $30k upfront that’s a major cost item in your budget (i.e. major household balance of trade deficit)
I dunno, lots of people define themselves by their work, especially around age 25 to 35 give or take a bit. Ask them about money and pretty soon they talk about their job. Ask about jobs and the main factor is what sort of income they are getting. If there’s overtime going at reasonable money they often take it, because they want the money… and that’s broadly seen as a perfectly reasonable thing to do even without any specific desire for any upcoming purchase. Once you have the money, something generally comes along.
I’ve worked extra jobs on the side that I didn’t need to, sometimes worked out, sometimes not so much. Really though, what were you doing to do anyhow? Drink beer, watch TV. If I had been able to invent the next amazing invention and been an instant millionaire I would have done, I certainly thought about it often enough.
Again, I’d strongly disagree. All my adult life I have spent the time to polish my boots (real boot polish was a bit expensive for me but at the horse shop they sold saddle oil an you could buy a good sized bottle pretty cheap), and I’d keep wearing those boots until they fall apart. Generally repair them multiple times, new heels, stick on soles, couple of extra stitches. Every week is one more week I can delay purchase. If you buy modern microfiber trousers but you get the cheap ones, generally the cloth lasts pretty well and the manufacturer saves money with low grade thread. That’s OK, just sit in the evening and stitch up the seams again, use the braided fishing nylon bought on special. I buy anything and everything at discount, always checking prices in supermarkets, online, wherever.
I used to do the same thing with T-Shirts, wear them until they had holes… after that keep them for winter and wear them under a different T-Shirt that doesn’t have holes. I was good looking back then so holes just helped me show off. These days teenagers pay extra cash for clothing with ready made holes right out of the shop but my holes were earned the slow way, dang it. Eventually I ended up in jobs that require a business shirt but you can still wear an old T-Shirt underneath to keep warm.
I lived near the fish market and you could buy salmon spines (fish heads plus backbone and tail) pretty cheap, about a buck per US pound, and when gently boiled they provided a lot of fish oil and plausible amounts of meat and collagen. Do you know I’ve seen the same salmon spines recently selling in shopping centers for about five times as much? People are paying real money now to eat fish heads… I was so ahead of my time (or just inflation, you decide).
I’ve rented very crap housing, sometimes just rented one room, lived with weird students and tourists. Try to rent in an area that’s close to work (save transport costs). There’s a whole frugal living subculture, and it’s right there on the Internet, seems to work for many… search it out, it’s cool. I’ve lived in houses where we drilled a hook into the roof beams and hung a mosquito net to sleep under because there was no possible way to keep insects out. People in Africa see that as very advanced accommodation.
When it came to buying a house I bought into what was considered a “bad area” and yes we do get the occasional murder (someone found with his head blown clean off Dirty Harry style in the local park) but that’s unusual and could happen in any area. Anyhow, the market price of the house has more than doubled in less than 10 years… buyers have stopped being choosy in Sydney I can tell you they buy anything these days, and that’s unlikely to turn around soon. The whole “bad area” stigma has pretty much been forgotten.
I don’t feel nearly as dead as Don and Norman think I should. In fact, I’ve probably lived a more indulgent life than 99% of the Earth’s population, drank more booze (some of it brewed at home to avoid the tax on beer), done more things, learned a lot. If anything I’ve become soft and flabby from not living a hard enough life. If I had to give lifestyle advice to my younger self with the wisdom of hindsight it would be: never watch TV; take more vitamins; look for a good Osteopath; an occasional cigar is better than getting stuck into a pack of cigarettes and always get a good night’s sleep… and most of all don’t get stressed out over other people’s B.S. when they tell you it’s the most important thing in the world it really isn’t you know. Just let them freak out, give them a pat or a hug, but don’t get sucked into it. Talk about a major cost… the biggest cost an individual can pay is believing garbage and carrying that around. I used to believe in socialism, Global Warming, envy, government spending and equality, worse than that I really cared about them too. Those things did me a lot more damage than working overtime or watching the rain leak in though a broken roof that the landlord was too cheap to fix up.
Here’s an infrastructure spending story: We had a landlord who was coming to look over the house for inspection and my wife complained that the front wall of the house needed repair. This landlord was an old guy, very tight, bit of a smart ass. He looks the wall up and down and declares there’s nothing wrong with it. So my wife reaches over and hauls a brick out of the wall with her hand and presents it to our landlord. The old guy bends down a bit and peers in through the hole in the wall and exclaims, “Wonderful! There’s another full wall behind the first… this must be a double brick house.” So he carefully replaces the brick and says, “Kids, this house is going to outlive me, and that’s the main thing.”
I guess there’s one fellow who takes Don’s advice.
To be fair to the old man, that house was under some stupid government heritage protection order which means you can’t fix it up unless it’s “in character” or some other rubbish (all repairs end up costing a lot and delivering not much). If not for the protection order, would have been long ago turned into an apartment block, given the location… that’s why we could rent it so cheap, because it was junk and no one else wanted it. Government policy has some winners and some losers.
I knew a guy who lived a year sleeping in a tree to save rent (Sydney gets too cold it was a little further North) and then spent time living in an attic of some public building (entry by climbing up via the toilets), and then he moved back in with his mum (who was crazy as a 20c wristwatch but a nice old lady). I knew a different guy who lived in an abandoned warehouse for a while, there was some minimal rent changing hands I think. As far as I know neither are dead, seen at least one of them around recently (carefully avoided letting him know where I live at the moment).
Bob:
Thanks. Your example is valid, but I believe that it doesn’t cast any suspicion on the household analogy (which, of course, was used also by Adam Smith). The argument for free trade – and the use of the household analogy – isn’t that trade is guaranteed to produce only happy outcomes. Just as individuals and households can be irresponsible and profligate, so, too, can larger groups of people (for example, citizens of a country). Just as a household can overspend, so too can the people of a country. Just as a household can take on excessive amounts of consumer debt, so too can the people of a country. Just as a household can responsibly take on debt used to create capital but discover later that its capital-building project is a failure in the market, so too can the people of a country.
There’s no denying that excessive consumption and excessive debt (or other economically self-destructive decisions) are possible with free trade. And, per the point of your example, there’s no denying that economically self-destructive decisions can be made also at the level of the household. Yet at both levels – individuals (or households) and the country – the economic decisions are made by flesh-and-blood people, the outcomes will be tied to the prudence and wisdom of the decisions, and the ultimate goal is to increase each individual’s ability to acquire real goods and services.
One additional, small point before signing off: I would remind your readers in light of your example that, while a country-level trade deficit might become all debt for the citizens of that country – and while such debt might be incurred exclusively and irresponsibly to increase consumption today – a country-level trade deficit is not necessarily debt, and in practice much of it is in fact not debt. (I know that you are aware of this fact. Yet because it is a common error to equate trade deficits with increased indebtedness to foreigners, I think it good to make explicit here that trade deficits can rise without anyone’s indebtedness rising.)
” (I know that you are aware of this fact. Yet because it is a common error to equate trade deficits with increased indebtedness to foreigners, I think it good to make explicit here that trade deficits can rise without anyone’s indebtedness rising.)”
Like spending already accumulated savings from the past I guess? Any other possibilities?
“But I also get bored and like to make nitpicky remarks.” haha!
If general wisdom is right then the devil is in the details, therefore being nitpicky might turn out to actually be not so nitpicky afterall.
😉
‘. I ran a capital account surplus last year of $20,000. Far from demonstrating my profligacy, it showed what a great investment opportunity I am.’
For all we know this could be true. If he was running up debt to pay for college, or knew he would inherit some money in a few years time then spending more than his income would potentially be a smart thing to do.
Perhaps you are actually arguing that sometimes paternalism is a good thing. The father is “protecting” his son from bad financial planning ? That could lead to some interesting conclusions from a libertarian perspective.