Right before our eyes, Commerce Secretary and billionaire investor Wilbur Ross is proving something economists have been trying to tell Americans for years.
That lesson: Business and economics are very different disciplines — running a business and running a country are not the same.
And, in fact, there are a bunch of skills and modes of thought you learn in business that could easily make you really bad at governing.
One of those is the administration’s obsession with trade deficits.
“We [The United States of America] have the biggest [trade] deficits in the world,” Ross complained at Bloomberg’s Breakaway conference in New York City on Wednesday, “while protectionist countries have [trade] surpluses.”
That is why, he explained, the President has “superimposed” handling trade and turning deficits into surpluses “onto the normal duties of his department.” That means aggressively enforcing trade deals and slapping countries that “seem” to be violating trade rules with tariffs and investigations.
The problem is that trade deficits and surpluses have very little to do with the health of our economy.
Ross is making a fairly common mistake. He’s acting like the US government operates like one of the businesses in his vast network of holdings. It does not, and treating it like it does will ultimately do more harm than good.
Think big. No, bigger. No, even bigger.
It’s not hard to see how this happens. Washington is full of inane comparisons meant to sell Americans on this or that policy. There’s the nonsensical comparison between the federal government’s budget and a regular American family balancing their checkbook over the kitchen table and so forth.
The Wall Street version of this is acting as if a $US19 trillion economy could be run like a business (and Ross is nothing if not a creature of Wall Street). Thus the obsession, over-simplification, and misunderstanding of trade deficits and surpluses.
If you were a business and you were buying more than you were selling you’d be in big trouble. But the US isn’t a business.
In fact, during the Great Depression the US was running a trade surplus. Mexico, during an economic rough patch in the 1980s, also ran a trade surplus. Why? In part, because in both scenarios foreign investors were not interested in sending capital to the US or to Mexico respectively because their economies weren’t healthy.
Now, a businessperson will tell you that when your business gets a bunch of investment, you’ll run a surplus. That’s good, but a country doesn’t work the same way. That’s because of the interaction between trade and foreign investment in a country’s balance of payments.
The balance of payments is made up of a capital account, which shows you the net change in physical or financial asset ownership — net foreign investment — for a nation, and the current account, which is where trade lives — exports less the value of imports, and any income we get from abroad or payouts for anything we purchase. And in theory, the capital account has to balance out the current account (although in practice there are usually some discrepancies.)
That is, when you’re talking about a country, foreign investment doesn’t create a surplus, it actually creates a trade deficit. That’s because the balance of payments must always be zero, so a net positive foreign investment needs to be balanced out by a net negative trade balance.
Paul Krugman explained this back in the Harvard Business Review in 1996:
“Of course, a country can run a trade deficit or surplus. That is, it can buy more goods from foreigners than it sells or vice versa. But that imbalance must always be matched by a corresponding imbalance in the capital account.
“A country that runs a trade deficit must be selling foreigners more assets than it buys; a country that runs a surplus must be a net investor abroad. When the United States buys Japanese automobiles, it must be selling something in return; it might be Boeing jets, but it could also be Rockefeller Center or, for that matter, Treasury bills. That is not just an opinion that economists hold; it is an unavoidable accounting truism.”
So ok, we may be running a trade deficit with China, but that’s because our economy is healthy enough to purchase goods from them. And it’s also attractive for them to invest in — which they have to do to get to zero in their balance of payments.
Which is to say trade deficits do not matter in the grand scheme of the US economy and its participation in the broader global economy.
“At the root of the businessperson’s scepticism is the failure to understand the force of the accounting,” Krugman wrote, “which says that an inflow of capital must — not might — be accompanied by a trade deficit.”
This isn’t simple, so our leaders can’t be simple
The confusion around trade deficits illustrates a broader problem with the idea of “running the country like a business.”
In the same essay, Krugman tried to explain why businesspeople might fall into the trap of oversimplifying the US’s incredibly vast economy. Ultimately, he came to the conclusion that it comes down to the basic principles of the job. Businesses are constantly trying to innovate. You can micromanage. At the end of the day, after all, you’re trying to make a product as efficiently as possible.
But the government isn’t like that. Instead of going in and fixing this or that, you have to work on a set of guiding principles and create policy around those principles. The US is, as Krugman said, “a nightmare conglomerate” of hundreds of thousands of interconnected but unrelated enterprises. That means drilling into one industry will have consequences for others the government may not even see.
Let’s use an example Ross himself mentioned at Bloomberg. He said that when he was running his business he thought tariffs were more often than not a “nuisance.” That was, of course, until he got into the steel business and President George W. Bush slapped tariffs on steel from other countries in 2002. Those tariffs, said Ross, saved 100,000 jobs.
OK. But according to a report by The Consuming Industries Trade Action Coalition a year later, those tariffs also did a lot of damage.
“200,000 Americans lost their jobs to higher steel prices during 2002. These lost jobs represent approximately $US4 billion in lost wages from February to November 2002,” said the report. “More American workers lost their jobs in 2002 to higher steel prices than the total number employed by the US steel industry itself (187,500 Americans were employed by US steel producers in December 2002).”
That’s what happens when you micromanage the US economy. Ross said that the Trump administration would go after “big numbers, big products, big countries,” while at the same time admitting that its policies would mostly be bringing back 500 jobs here and there.
Trump’s entire trade policy is too hands on, picking individual pieces to fix rather than adhering to general principles. Dare we say it, this is the worst kind of big government interference and over-regulation one can imagine.
In fact, the entire “America First” executive order — forcing businesses to micromanage what they’re buying and who they’re hiring — is an overreach tantamount to the most onerous regulation.
Growing the number of people working good paying jobs is what really causes GDP growth by adding to labour force participation and increasing productivity. To do that, you have to educate your population for the jobs of the future, not grab onto jobs of the past. When it comes to manufacturing, those jobs are getting more and more advanced — the people in factories are being trained to work with increasingly complex machinery.
The US’s actual jobs of the future are in services — things like education and healthcare (especially with our ageing population). Building a workforce for this is a long game — way longer than the quarterly earnings game most CEOs play.
This shows something weird about Ross — you’d think that a businessman would probably move in the direction of growth. You’d think that a businessman would try to innovate and adapt rather than try to save a dying arm of his company. But when it comes to America, Ross is not doing that. In this sense, he and his fellows are behaving not like businessmen or economists or policy wonks, but rather more like rabid ideologues. It’s a shame and waste of time.
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