This is the human action podcast where we debunk the economic political and even cultural myths of the days
Here's your host dr. Bob Murphy
Hello and trumpet Austrian fans
Back for another episode of the human action podcast. I'm going solo this episode and I think in light of all of the discussion about
Trump's tariff proposals
that it will
Serve you folks if I just do an episode here on
Some elements of international trade theory and accounting that I think often
Austrians don't encounter. All right, and so I want to be clear
everything on the topic of international trade and
Computing with you know, what's the trade deficit? And is that a good concept and all that kind of stuff that you'll see in human action
Or man economy and state that's all correct
But when I worked for Arthur Laffer briefly
In his writings, he talked about things in terms of the accounting and the current account
Devacit the capital account surplus and this and that what does that do with currency strengths and so on and I just saw some more
About the accounting and came up with other ways to explain
Via analogies to like a personal household or a corporation how to think about international trade
So I want to be clear in this episode. I'm not
Here to
Tell you that Trump's ideas are good or bad. I
Will link if you missed it. I earlier did an episode of this podcast on
The difference between or how economists should evaluate
tariffs versus income taxes and so there again
I was trying to be neutral my personal thought would be if you could cut government spending enough such that
Tariffs alone could raise the revenue necessary to fund
Typical government operations at the federal level that that would be vastly preferable to having an income tax
But that alone is not enough to say, okay
So let's go ahead and do it because in practice what happens if is I think probably would have in any time in the near future
They enact
new tariffs or raise the rates on existing tariffs a lot and even if they do
Allow some cuts in the income tax rate
But if they still have the IRS or they still have the personal income tax and corporate income tax
So they're still all in your business and it's just they lower the rate somewhat
That it's not obvious at all that that's better than the current approach. All right, so I just want to be clear on that point
But that's not what I'm trying to do in this episode. I'm not here trying to say tariffs are good or bad
All I'm trying to do is clear up
Some of the confusion that I've seen on social media when people who are armed with
Some true statements about international trade or accounting
Intaxation and then they go in and argue with each other and a lot of times
I just saw it this morning for example did John Potter it's and John Carney were arguing with each other about
Could a tariff make things become more expensive at Walmart and they were both relying on
True
Principles from economics and yet they each thought the other guy was nuts, right?
So it was just kind of funny that so that's what I'm trying to clear up in this
So I think regardless of your stance
This episode should help you and at the very least will give you ammunition
With which to go into battle whatever your side may be on this topic
Okay, so one thing that you'll often see coming from
Free market oriented non-Austrians is they will say that
The conventional discussion about tariffs gets things backwards, right? So if you listen to a typical
Proponent of protective tariffs, they might say something along the lines of and I don't know if Trump has literally said this
But certainly many of his fans arguing on social media have said things like this that hey
we're all for open trade and you know competition on a level level playing field and
We're happy to buy imports from some other country
But they should be willing to buy our exports and if they're not willing to buy our stuff
Then we shouldn't buy their stuff and it makes it sound like the point of international trade is
To get other people to take your goods and they're like doing you a favor and then out of reciprocity
Okay, yeah, we'll scratch your back to and we'll buy your stuff
When actually so this particular argument goes if anything, it's the other way around that our nation
Let's throw out this example of this episode. I'm an American so I'll just speak from the perspective of the United States
The the benefit to Americans in one sense from international trade
Just in a certain crude level is all of the goods that we get from abroad, right?
If if Japan sends us a bunch of Toyotas that were manufactured over there
Then you know, how does that help Americans? Well because Americans now can drive around in Toyotas
And we don't have to use our scarce resources
To build vehicles for Americans to drive in right that frees up those resources to do other stuff with
They're just like in general at the household level if somebody comes over for dinner and brings you a bottle of wine
That's not hurting you this you're getting something right so that on one level
You can look at it that way and so you say from that perspective
Goods from abroad flowing into the United States makes Americans poorer and if
As a regrettable necessity in order to keep those goods coming we have to ship
Goods that we make
Outside of our border so that foreigners can get their hands on those goodies. There's a sense in which that's a cost to us
okay, so again
There's one perspective that you'll often see
Like like if a Steve Lansberg or a Greg Mankiw is talking about international trade
And they're just talking very basic just to get people warmed up
They might open with something like that and say hey, hey, you're getting things backwards in general
Imports our benefits and exports our costs
All right that and then they'll follow it up with say that doesn't mean
We should just try to always import everything an export nothing because in the long run
Foreigners would stop sending us stuff. Why are they gonna keep sending us cars if we never send them anything in return
What's in it for the Japanese?
right, and so then you'll that leads into
The next principle you will often see from like a Steve Lansberg or a Greg Mankiw to say hey in the long run
Imports must equal exports
And the reason for that they would argue is to say again
What's the point of international trade you want to get stuff from other countries? The only reason you send them things is
Because that's the way you keep their stuff coming into your borders now with this stuff, too
I should mention there's a complication
None of this stuff even on their terms the people who espouse these principles has to be true on a
pair-wise country by country
Level right we're talking more like the US versus the world at large just like
That the household level
To keep this analogy and float
The consumption you get is like the benefit of of the market, right?
You get stuff you get goodies, you know, whether goods or services that other people make and you get to enjoy and
It's only a regrettable necessity that you have to sell stuff for most people like their labor
Like that's how you earn an income
So the only reason you're allowed to go around town and buy things from
Merchants you want to go see a movie you want to buy some clothes you want to buy a fancy car
Is that you have income and how do you get the income? Well?
You have to sell goods and services
Yourself to other people right so if you are allowed to just go around town getting cars and watching movies and getting clothes and
Sushi meals and so forth and no one expected you to work
That would be great
Right that wouldn't be lamentable that'd be awesome
It's all we have to work in order to generate the income so that we get to buy all those things, right?
So that's where these people are coming from
when they espouse principles like this and
And so now that I've tried to just get you to see where they're coming from
Let me now do the flip side of that just to show
Yes, there's a sense in which that's true and people need to understand that if the
If you're talking to somebody and they think the whole point of international trade is to get foreigners to buy our stuff
And that it's only a regrettable necessity like a okay a quid pro quo. I guess we'll buy your stuff
To be fair about it then that's backwards, right?
I so I agree if you're talking to someone who's thinking of things at that level
Then it helps to hit them up with we'll know if you think about it right the benefit of trade is we get
Cars from Japan so we don't have to build them ourselves and and so on
But you can't stop there. That's my point that that alone is not the end of the story
because again just continue with
the analogy of an individual household and
Yes, it is true that if you could
Go around town and just buy stuff and merchants would keep selling it to you and you didn't need to generate an income yourself
That would be great. That's clearly not gonna happen
So you do need to work but now
You wouldn't conclude therefore
That it was being irresponsible of there was some fallacy involved if someone said hey in general I
Would like to have an income higher than my
Consumption in a given period. I want to live below my means
Right that wouldn't be a crazy thing for somebody to say
We would think that'd be very responsible generally speaking right and so that is the analog in international trade of
having a
Current account surplus I'll come back to these concepts more in the future of this episode
I don't mean down the road. Okay, so but I'm just telling you like the term of the accounting
right, so
the
sort of Trump fan Maga fan who's big on
tariffs and wants to promote
exports
They're actually not saying something crazy
For thinking that yeah as a general rule
It would be good if we had net exports if the if foreigners bought more of our stuff than vice versa
Just like with a given household if you said in general when I talked to my CPA at the end of the year
I would like to I'd like to see
That what I sold of my stuff like my labor services to my employer
Had a higher market value than what I spent on other people's stuff
Particularly if we're just talking about consumption
All right because the difference there is savings
Okay, so
Now let's just let it get more nuanced
When the mainstream guys like a Steve Landsberg or Greg Mankiw if they heard me say that I think what they would say is something like
Well, yeah, we're talking about the long run
That's what we said in the long run exports must equal imports in the long run at any given time period
There can be discrepancies. That's fine. And they say like for a household. Yeah, you yours
In your prime working years you want to live below your means and build up assets
But then that's because in your retirement you draw them down
Right and they say what's what's the point of saving if not to have future consumption, right?
They might say that like that's the whole point of saving
It's just do you earn income?
Do you want to consume it now or do you want to consume it in the future?
And if you want to consume it in the future you save it now
And then it you know it earns interest or dividends or capital gains
You know whatever vehicle you're using to save it and defer it
But ultimately the whole point of that the rationale of saving and investing is to increase future income
And why do you want to increase future income ultimately because you want to increase future consumption?
If you never got to consume what would be the point of earning an income they might say
right
So again with this focus, I'm sorry
But I just got to keep saying oh
But then the next element is because you can take these arguments and you it's like you can never stop
Or at least there's always or
There is often on
The other hand or let's take it one step further though, and that's what I'm doing here
I will do one more of these then I'll stop don't worry on this particular train of argument
I'm just showing you the back and forth
Even there though. Yes, you want to in general you're doing you know
You're sitting down with your financial planner and you say here's my income and okay
We're gonna save and then we're gonna send the kids to college and we're gonna do this and I'm gonna assume
I'm gonna live to be this many years old and blah blah blah and I got to have my
Long-term long-term care rider and my insurance policy or whatever I'm doing to fund in case I got to go
It's into hospice and blah blah, but right you're doing all this stuff, but still
Most people especially if they're like upper middle class or wealthier
Assume that when they die
The value of their estate is going to be positive and that's a big part of what they do with their financial planner
Is to try to minimize like the inheritance tags and all let's set up a trust and let's do this and then oh if we do that
We can blah blah blah and the kids can claim up to this amount
Right. You're not assuming
That your lifetime income equals your lifetime consumption
As of right now in present discounted value terms, right?
So it's not true that for you as an individual in the long run your income equals your consumption
That's not true. It's typically
Right, and then you could say oh
Sure, but still you're gonna be queasy like what's the point of giving?
wealth and inheritance to your heirs
Except to fuel their consumption
And yeah, you that's true, but even with them
You know if you
Hand over if you accumulate when and when you die you give your kids in a state that's valued at three million dollars
You wouldn't want them to then on that consume
Three million dollars more than they earn in their lifetimes and hence squander the family
Fortune
Right, you would expect that when they die they give to your grandkids more than three million dollars
If they've conducted themselves properly with all this stuff. I'm not worried about inflation. Obviously folks
Just trying to keep the number of moving parts to a minimum here in the analysis
right so notice
All of this is perfectly
Coherent it is still the case that yes the point of
earning an income is
to be able to fuel consumption
That's what that's why you sell your goods or services in the marketplace for money is so that you can go buy things in the marketplace
but you don't
Merely spend on consumption. You also invest the money in
Order to enhance your income down the road and say why well, yeah, there's a sense in which that's ultimately about consumption
But do you see what I'm saying? It's not the case that any particular decision maker
Given his or her time horizon has to think oh, I want to just
Consume exactly my total income during my lifetime again with you know present discounted value and all that stuff
That's not the case and there's nothing weird about thinking if possible I should conduct my affairs as a good steward of
the resources that were handed to me from my
Ancestors to add to that and so that in general
Every generation should be handing over more wealth to the next generation and that kind of dovetails with
Society at large that we expect the standard of living of humanity to rise over time
Not merely because of technological discoveries and you know scientific breakthroughs, but also from the steady accumulation of capital
that even if
We didn't come up with a better way to make stuff. We could just rely on existing knowledge and
That over time through saving and accumulation of physical investment
Our productivity would be higher right that our great-grandkids are
Gonna work with better tools and equipment
Then we are and that's why for an hour of their labor they're gonna be able to make more stuff
Even if between now and when our grandkids are working
There's no new technological innovations. There will be in practice
But even if there weren't it would still be the case that our grandkids for an hour of their labor on average
Are gonna be more physically productive than we are today
Okay, so I'm just saying these things are all consistent and so I'm showing I think the limitations of
The framework when like a Greg man Q or Steve Landsberg says oh the long-run exports must equal imports
That that doesn't need to be the case
And that there's nothing illogical or incoherent about
People thinking yeah in general I would like my country to have net exports
Because that's in the sense like building up our assets
For down the road like it just puts us in a better position economically
But you could think that plausibly if the analog to of that in the in your household example or
Framework is the household that lives below its means and you know accumulates net financial assets
That they then bequeath to or designed to be financial assets could be physical assets too
Like you could own a factory or something that you invested in right that there's nothing weird about that. Okay
Let me just mention as an aside
part of the
Rhetorical bang for the buck that
Landsburg or man Q gets from espousing that principle to say in the long-run
Exports equal imports for a given country so to be clear for planet Earth as a whole of course exports have to equal imports
One nation's export is another nation's import right so clearly
For the system as a whole exports always equal imports. We're here just talking about from an individual country's
Perspective do exports have to equal imports and in any given time period. No, that doesn't need to be the case
What is true is if some countries on planet Earth are running net exports, then it has to be the accounting flipside
There must be some countries that are running that imports. That's got to be true
All right, so it can't be the case that every country is
Not exporting in a given time period
Okay, but back to what I was trying to say is
Partly the reason a landsburg or a man Q will espouse that principle to say
Hey in the long run the whole point of
Exporting is to generate the income with which we buy foreign imports and that the the goal is to get
Imported goods that we you know on better terms than we could produce domestically
Just like with the household
There's a reason you don't grow your own food make your own clothes make your own car
No, instead you specialize in what you're really good at and you go to your job and you do that
That's to focus on and that's how you generate the income with which you then go in from other people who are specializing in you know
Being farmers or making cars or making clothes and you spend your money
With those people and that's how we all end up with a higher standard of living by specializing in what's called our comparative advantages
Making more than we need personally and then go into the marketplace and swapping
Those goods and services for each other and we all walk away with a much higher standard of living
Then if we each narrowly were self-sufficient, okay, so
That's kind of the background and now again, thank you or a landsburg when they say so in the long run exports equal imports and
Part of what they get from that is to say so if you're
Ironically if you enact measures like high punitive tariffs that discourage
imports
Thinking ah, we want to get a favorable trade balance
You know we want to right now all the u.s. Is running a trade deficit. We don't like that
So here's what we're going to do. Let's jack up tariff rates to discourage Americans from importing foreign goods
and so then
Given that we're exporting a certain amount if our imports fall
maybe the the
Negative will flip to a positive and our exports will be higher than our imports and we can start running that exports for a while and
So the man cues and landsburgs of the world will say that's very short-sighted
because there's a feedback mechanism if
They're thinking since in the long run exports equal imports that's not gonna work
What's gonna end up happening is if because of high tariff rates, for example
Americans now ours are importing less
Then intuitively that means foreigners are getting fewer dollars now like leaving the country metaphorically
And so now they have fewer dollars with which to buy us exports
So just to pick illustrative examples if the u.s. All of a sudden
Puts really high tariffs on Japanese cars your cars that were like literally produced in Japan and put on a ship and cross the
Ocean to come into
Beyond us roads
So if they stopped buying those cars from Japan
Well now the Japanese don't have as many u.s. Dollars with which to buy us exports of wheat
and so by clamping down and reducing
The amount of us imports the argument goes
That's necessarily going to reduce
Perhaps with a lag
The ability of us exporters to keep up their exports and so you're not gonna improve the trade balance all you're gonna do is
Restrict the two-way flow of trade if you just narrowly clamp down on one
Vector of it
Okay, so I think that's true
But again, it's my concern is the way they get there is by espousing this principle
Oh, yeah in the long run exports equal imports and that I think is is more dubious because again in the household analogy I
Don't think you'd want to say in the long run
Income equals consumption that that you know, you could say well, okay
If the long run means out to seven generations, okay, but isn't that kind of silly?
likewise with a country a
Country could have exports higher than imports
For 300 years, there's nothing in the accounting that prevents that from happening
And so what does it mean to say in the long run? You know what I mean? So that's kind of what I'm getting at
but I do think
putting aside
The question of you know, oh should we be going around holding up this principle
That in the long run exports equal imports
I don't think we should because it's liable to confusion and it's arguably incorrect depending on you know
Your assumptions and how you define the terms
But I do think forget that just in general
Yes, other things equal
Whatever the current status is of the US trade balance
If all of a sudden there is a crackdown
Making it harder for Americans to import foreign goods
Then that will make foreigners have a harder time buying our stuff
And so an aggressive crackdown on US imports
will also lead to
Difficulty for US exporters. It doesn't have to be dollar for dollar
But those pressures are still going to be there. And so let me just take a moment
to walk through some of the
realistic complications there
that
You might think what we talking about if you sell dollars to Japanese
The Japanese people use yen
will write and so there is that
Complication and so what what would happen is if
Americans because of high tariff rates placed on Japanese goods
Now switch their demand away and they don't try to spend as much buying
Japanese made vehicles as they do
You know making American vehicles wherever
Then what happens in the foreign exchange markets that means now
There are fewer dollars chasing yen and so that makes
The dollars strengthen against the end
and
Then that makes it harder for
Japanese
Importers to buy us wheat because now wheat has become more expensive because it's priced in dollars originally
And so then is the dollar strengthens against the yen
From the Japanese importers perspective. Oh American wheat all of a sudden just got more expensive
So they're not gonna buy as much of it
In terms of like physical but bushels
Okay, so that's how it works. All right
All right, I got a lot of stuff to cover so I'll move on I could with all these things
It's like an onion you could keep healing back the layers of subtlety and nuance and realism
But I'll stop with this train of thought on that level of difficulty. All right, but again
So the principle is just so that I get mixed up. I
Think it is correct to say
It's short-sighted if what your goal is is to promote net US exports
You want to have a favorable trade balance
To just crack down and make it harder for Americans to import foreign goods that that's going to be largely self-defeating
Because there's a countervailing force that to the extent that that's successful
That will make the dollars strengthen other things equal and then that makes us goods more expensive to foreign importers
and so by restricting the flow of
Imports going into the US
You're also going to restrict the flow of exports leaving the US again. It's not necessarily going to be dollar for dollar
You can come up with scenarios
Where it's you know
The effect is there, but it's just not completely awash
But i'm just saying that effect is going to be there and so you have to just keep that kind of stuff in mind
and again
To go back to the landsburg mancube perspective the intuition behind that is
To a first approximation why are the japanese selling us cars?
Well, it's because
They want to get stuff from us. They're just going to give us cars for free. Why would they do that? What's in it for them?
But if among other things, oh, because they're getting a bunch of wheat from us. Well, then that makes sense
And so now all of a sudden if we're not buying their cars
Then how are they going to get our wheat? So it's actually the other way around that why would we be continued to send them wheat if they're not sending us cars in exchange
Or you can think of it that way
Okay, now let's move on to a different topic
If all countries did we're engaging in barter transactions for the actual goods
Then yeah, it would it would totally make sense
And trade would always be balanced and it would just be a matter of
You know, we would send a certain amount of wheat to japan and they would send us cars and that would be it
and there'd be no
Consequences of those transactions beyond the immediate effect
There'd be no long-term impact
But in practice with international trade
You can have more sophisticated exchanges that involve
Entities or or quantities over time
Right. So specifically
A country is allowed to run a trade deficit, right a country can import more than it exports in a given period
There's nothing stopping that from happening
And one so how does it do that why
For in a given period it is possible the us could import cars from japan even though it doesn't export anything
Why would the japanese do that?
Well, they would do that if they get financial assets if they get claims on future flows from the us
Then they might do that again going back to the household analogy just like
Why would I go to my employer and sell all my labor hours week after week to get income?
If I didn't in that same year go and spend all of it on consumption
What's in it for me?
And the obvious answer as well because if you live below your means
You're accumulating assets that can help you down the road
That's why you would do it
Okay, so
In the international trade context
One truism that is very useful is to say
Um the current what's called the current account is the flip side of the capital account
So look if there's a current account deficit, then there's a capital account surplus
Or the other way around if there's a capital account deficit, then there's a current account surplus
So for example just to give you an illustration
Suppose
The u.s. Government runs a 300 billion dollar trade deficit or sorry 300 billion dollar budget deficit
And it finances that by selling the treasury bonds to japanese investors
Okay, so the u.s. Government wants to spend 300 billion more than it takes into tax revenue
It needs to come up with that money somehow so the treasury issues bonds
Somebody has to pay for those bonds so the government can go spend the money on whatever buying tanks or
Social security payments or whatever
And suppose they get the money from japanese investors who now add
300 billion dollars in present market value of treasury bonds to their portfolios
That is called a capital account surplus from the perspective of the united states
There's more capital flowing into the u.s.
Then vice versa japanese investors are investing 300 billion dollars in u.s.
Dollar denominated assets namely the treasury bonds
Whereas in this example we're assuming assuming u.s. Investors aren't
Buying japanese shares of corporate stock or bonds from the japanese government, okay
So now the question is okay
The japanese investors got an asset now they own now claims on future cash flows from the u.s
So what does the u.s. Have to show for it? How do we benefit?
From issuing liabilities on us
That now foreign people namely japanese own
Oh, well, what if they send us 300 billion dollars worth of cars right now?
Then that makes sense
Okay, these things again. I'm I'm being simplistic and there's always this
Issue when you talk about international trade to think in terms of national aggregates
Obviously
There's not like one person who's just the usa
Doing this stuff. It's different people
But the way you do the accounting if you're gonna do it that if you're gonna go down this path
You know, these are the kind of statements that pop out
Okay
And so
That's one way of understanding, you know, why is there a a trade deficit in this particular example
It was because we supposed there was no other trade going on
the u.s. Government
needed
To borrow money and it borrowed it from these japanese investors
And so in terms of the you know, the physical flow of goods
There's a sense in which the japanese sent over a bunch of cars
Today in exchange for our legally binding promises that oh down the road
We will send you wheat for example
Right, so that's what can happen that the japanese investors now
Are going to get a flow of dollars over time in terms of interest income
And if they want
You know, they could take those dollars and you know the dollars could trade for yet
And then they could take the end and turn them back into dollars and buy us exports of wheat
And so if you want to think in terms of the inter temporal flows
It could be the japanese sent a bunch of cars today
To get a flow of bushels of wheat
indefinitely
You could think of it like that
Okay
Just like at the household level
If you live below your means and came up with
An extra three thousand dollars and then you put it
Into
You know banks see these rolling over that would generate you
A perpetual yield and you could take that and go
Buy
steak dinners with that or something
All right, and as long as you kept your principal at three thousand
And just consumed only the interest that that kicked off year after year
Then
You could do that
And so there would be a sense in which you took your present income
And saved and invested it and then it gave you a flow
Of you know one steak dinner per year forever
And that wouldn't be living above your means
Right
So whatever you were still spending based on the income from your employer
That one time decision up front to set aside three thousand dollars and start rolling it over in bank CDs
And then living off the interest on that that then kicked off
Now your consumption would be permanently higher
All right, and and there you wouldn't be impairing
Your ability to generate income down the road
And so that's what the what's called the current account is when we're doing international trade, right?
So if one country accumulates a bunch of assets
Entitling it to income from foreign sources
The country can run a trade deficit with those other countries even if the current account is balanced
Right
So um
That's that's partly what's going on. So when people speak of
Like oh a trade deficit means we're living below our means
Or sorry above our means in a trade surplus means we're living below our me. That's not quite right
It would be right if you were just starting at time zero and there was no prior history of trading and financial assets
Then it would be true
But in general no the the statement that you had want to use is the current account
Right that again because if you have past accumulation of assets
Your country can run a trade deficit if that's just what you know
What you're reaping from having lived below your means in the past just like again at the household level
If you save a bunch
Then you can consume more than your income your your like paycheck income
And that doesn't mean you're actually reducing
Your total assets because those other financial assets are generating income themselves. That's the way to think about in terms of the accounting
Okay, so that now leads into
another train of thought
When people are opposed to
Trade deficits
they will often
think of
The financing of them is like running up the credit card
And they'll say yeah when the us for example is running a trade deficit with the rest of the world
What's financing that because again, it's not that the rest of the world's just gonna send us goodies for nothing
It'll say the us is issuing net
Financial assets to the rest of the world the us liabilities to a bunch of foreigners are rising
And so foreigners might be accumulating treasury bonds
foreigners might be acquiring
You know conventional corporate bonds, but they also might be buying
stock in us companies or
What alarms people even more is foreigners might be investing in us real estate
And that's the sense, right? So jeez. Why would japan send us a bunch of cars?
Well, if they bought some houses in florida and manhattan
And that's what they were getting in exchange for sending us a bunch of cars today
That could make sense from their point of view
right and so the people who
are
Alarmed
At the us quote living above its means and running trade deficits would say this is unsustainable
We need to stop this is only because the us government is so profligate
And you know americans in general just need to
To stop selling their birthright in order for a massive potage today, you know, you can use metaphors like that
So that's correct as far as it goes that it is true
If one country has a large trade deficit, it's possible
That what's generating that and making it happen
is that
the people in that country are
living above their means and
basically, you know putting consumption on the credit card just like in a household level
If you wanted to go take a trip to vegas
Or take a you know trip to some caribbean island
And you didn't have any
Savings, you know from your job and you couldn't your the income from your employer wouldn't find when you couldn't fit that in your budget
You could just put out a credit card
So yep, you enjoyed the trip it happened
But now
You owe a bunch of money to visa or whoever and it starts rolling over at high finance charge rates
And that's going to permanently impact
You know your your future consumption possibilities because now you got to take some of your future income flows
And use it to at least service the interests if not to knock down the principal that that
Okay, so that's true
But that's not the only possibility and this is what the
Guys like steve landsburg or greg mancue or arser laffer might point out
Is that to the extent
That foreigners view the united states is a great place to invest
Well, then that would also generate this outcome
All right, so instead of viewing it as oh, yeah, americans are profligate and living above their means
You could do the accounting flip side and say well, no, what if it's just that
The us, you know has a fairly stable for all its flaws still has a very attractive regulatory climate tax structure
The rule of law is much better in the us than it is a lot of places around the world
And so wealthy individuals from around the world
What do they where do they want to park their money they want to put it into the us
It's a very safe dependable return blah blah blah. Okay. And so then
How is that going to happen?
Why would the united states allow foreigners to get to acquire all of these claims?
And future us output. Well, the foreigners got to send us stuff right now
And so they send us goodies and that's that's the trade
Okay, it's if that sounds ominous to you
We can come up with examples at the household or the um
Corporate level where it's not ominous, right? So you're a
Just a young person you have an aptitude for the medical sciences and you want to go to medical school. You want to become a doctor
And oh geez a lot medical school is very expensive
How what do we do?
Well, you can take out student loans
And as long as your forecasts are correct and you ended becoming a heart surgeon and making tons of money
Once you're up and running you can afford to knock out your debts
your student loans
Okay, there's nothing wrong with it in the current environment with all the regulations and government
shenanigans
Yeah, I don't like the higher educational market and so on in the student loan market, but I'm just saying
Even in Rothbardia land you could imagine some student
From a very modest background but yet who is going to make a great heart surgeon
Should be able to get financing to go to medical school, right?
And so there
It it would be somewhat misleading
To point to that medical student, you know, who's like in their second year
And who is borrowing from outsiders and accumulating and having this growing
debt owed to outside lenders
And say oh this person's being irresponsible and living above his means
He should he should you know, that's no you're kind of misunderstanding the situation there
For a corporate example suppose a company
Is doing great
And but its current factories are running it at capacity and they think that oh, yeah our ad
Campaigns our marketing is doing really well and we think
Next year our sales if we can keep up with the demand
Are going to increase 30 percent
But right now we just can't we're running everything full tilt
We got you know full shifts fully man. What are we let's build a new factory
Oh, but you know what we don't have the cash on hand to be able to do it internally to finance it internally
Okay, so let's issue some bonds
To then build this new factory so we can increase our capacity
To increase our revenue down the road
All right, there's nothing
Profligate or irresponsible
About a company doing that and yet in terms of the accounting what happens for that period
They are spending more than what their
Income was right. They're incurring
extra liabilities of money they owe to outsiders
But that's not unsustainable assuming that their forecasts are correct. That's a very sensible thing to do
Okay, and so now at the country level
let's say
That a bunch of people read Rothbard
And hoppa and murphy throw that in there
And they say oh we get
Anarchal capitalism is the wave of the future. This is just amazing. We had a society based on free market
principles and full respect for property rights and they go and they
Somehow buy some island in the pacific and they turn it into Rothbard land
What would happen?
no
Presumably there would be a bunch of investors around the world who understood. Oh, yeah this place
Has a promising future and they would want to invest in it
Like they would try to buy real estate in it or the companies that were founded there
They would want to buy stock in those companies
Or if the companies there were issuing bonds, they would want to buy those bonds and so forth
and so the physical reality what would happen is
barrels of crude oil and all kinds of steel
And cement and blah blah blah from around the world would all flow to this little island in the pacific
So they could start building all their factories and bridges and whatnot and
Missile defense systems, you know because natives are actually going to try to say hey
These guys are uh bad
We're going to have to invade that right
And all in building all of the secure vaults for the banks
They're going to have gold bars in there because of course it's going to be 100% reserve because you know
They're going to really respect Joe Salerno there
Okay, so what would you see in terms of the trade accounting? I imagine Rothbard land
When it first forms if it's an island in the pacific is going to have huge trade deficits because on that
To get that place up and running a bunch of real resources from around the world are going to have to flow into there
So they can build up their infrastructure and get up and running
And there's nothing irresponsible or profligate about that
Okay
so
My I guess how do I sum up this last round of consideration of a country running
Perpetual trade deficits
And again strictly speaking its current account deficits
That
Yes, that could be the symptom
Of a fundamental profligacy that there's a century
Are just being very uh, short-sighted
and uh
hedonistic and they're
They're just spending above they're living above their means
And they can finance that for a while by issuing ever more liabilities to foreigners who are only too happy to say
Okay, sure. Yep. Yep. We have now more and more claims on your future income
And eventually those chickens are going to come home to roost and there's going to be a very painful correction
That could be what's going on
or
It's also possible a given country could have a long string of
trade deficits
And that could be explained by the fact that this is such a great place to invest in in as long as
The um
The assets
Of this country
Are growing more than the external claims on them
On net that people in the country could still themselves grow. It's not that
You know a bigger and bigger share of their GDP is now earmarked to flow out to pay off the interest they owe to foreigners
That doesn't need to be the case
Okay, so in practice, I do think
There well, I think there's a little bit of both going on
So I do think that yes, certainly and by profligacy we can include the u.s. government
If the u.s. Government all of a sudden cuts spending next week
or let's say
February early february once elan and uh
The fake can start having their ideas implemented if the u.s. Government drastically slash spending
So that u.s. Government borrowing dropped
Then alone
Other things equal would do a lot to reduce the u.s. trade deficit
Again other things equal
And in terms of the mechanism just to walk through that in case you're curious you can say well
Other things equal the u.s. Government's not borrowing as much
That means the yield on treasuries can fall
And so now foreigners don't find us bonds as attractive
And so that makes the dollar weaken
And so now that makes foreign imports more expensive to americans and it makes us exports cheaper for foreigners and so that
You know that string of consequences would
Cause the u.s. Trade deficit to fall other things equal so notice with this stuff
It might be counterintuitive you might have thought if the u.s. Government's slash is spending
That they would make the dollar strengthen because now america is stronger economic
No, it's actually the other way around in these particular examples again other things equal
All right, I will stop there
There's more stuff I could cover but we'll say that for future episodes again big picture here
I'm not trying to get you to be for against tariffs to think trump is a great guy or a monster
I'm just trying to clarify
I see people arguing on social media about these topics and his stuff is pretty complex and nuanced
And partisans on both camps will grab onto a principle or two
And then think that's the whole story when a lot of times no it's yeah
What you're saying is is true in so far as it goes
But there's a lot more going on and that maybe even the person on the other side of the argument
Is also clinging to a true principle and the two of you are
You know one guy saying no no the elephant really does have a big trunk and the other one's saying no no
I'm telling you this tail is very skinny and you're both right
All right folks watch out for those elephants. See you next time
Check back next week for a new episode of the human action podcast in the meantime
You can find more content like this on nieces.org