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Hornberger's Blog is a daily libertarian blog written by Jacob G. Hornberger, founder and president of FFF.
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Economic Ignorance on Deficits


Last week, the New York Times displayed customary economic ignorance about two deficits — the trade deficit and the budget deficit. In a lead editorial entitled “Return of the Killer Trade Deficit,” the Times lamented the fact that the United States had a trade deficit through June of almost $50 billion. Concerned over the size of that number, which the Times called “staggering,” the paper called on governments in rich countries like Germany to join the U.S. government in expanding their budget deficits by spending more money.

It would be difficult to come up with bigger economic nonsense than that.

For one thing, contrary to the Times’ fear-mongering, the so-called trade deficit doesn’t really signify anything bad. In fact, if the government stopped keeping track of these trade statistics, nobody would care and nothing bad would happen. There would be no gigantic sucking sound. America wouldn’t be sucked dry of money or wealth. Americans would not suddenly find themselves living in a land of poverty.

Consider the trade deficit between your state and Virginia. Do you fret about it? Do you get up in the middle of the night and pace the floors over the size of that deficit? Do you know the size of that deficit? Do you even know who’s on the negative side of the deficit and who’s on the positive side? Do you care? Do you worry that one state is impoverishing the other state?

The answer to all those questions is: No. People don’t give a second thought to the trade deficits between their state and other states. The matter is totally irrelevant, just as irrelevant as the trade deficit that exists between you and other people. I’ll bet that there is a huge trade deficit between you and the grocery store where you shop. That is, I’ll bet that you buy much more from the grocery store than it buys from you.

Who cares? Nobody!

People trade with others because they see an opportunity to better their economic condition. Both sides benefit from a trade because they both give up something they value less for something they value more. When the trade involves money, the buyer values the items more than the money, and the seller values the money more than the item. Even though there is a trade “deficit” between them after the sale, they have both improved their respective economic condition with the trade.

So, trade is good, not only between individuals and states but also between nations. When a Chinese seller sells something to an American, both sides benefit. The Chinese values the dollars more than the item and the American values the item more than the dollars. The same holds true when the Chinese ultimately uses those dollars to purchase or invest in things.

Not so, however, with the ever-growing budget deficit. It is bad and a grave financial danger. This deficit reflects the extent to which federal spending exceeds the amount being collected by the U.S. government in taxes. This is the problem that threatens to lead the U.S. government into bankruptcy. That’s what has happened in Greece and other European nations.

It doesn’t take a rocket scientist to recognize that you just cannot keep spending more than what you’re bringing in without it finally bankrupting you. Let’s assume that you earn $50,000 a year. Every year, you go out and spend $100,000, building up loans and credit cards to cover your budget deficit.

At some point, the bank is going to say, “We can’t loan you any more money and we’re not willing to renew the notes. We want our money.” At the same time, the credit card companies are going to say, “We need you to make the minimum payment on your debt.”

At that point, the gig is up. You cannot cover all your living expenses. You cannot even pay the interest on the debts, much less the principal. You’re broke. Busted. Bankrupt.

That’s what happened to Greece. It simply lacked the tax base to cover expenditures and interest on the massive debt it had accumulated as a result of its big annual deficits. If it tried to raise taxes to cover the shortfall, it would drive marginal businesses over the cliff, thereby adding to the nation’s economic woes. Greece was in the same position as you would be in if you were earning $50,000 and spending $100,000 a year.

That’s the situation the U.S. government is heading toward. It’s spending a trillion dollars more a year than what it is bringing in, and it’s borrowing to cover the difference. That’s what the national debt is all about. It’s now more than $13 trillion. You can watch it grow here:

The New York Times gets it all wrong with respect to the solution to this problem. Erroneously claiming that the trade deficit is a dangerous threat to Americans, it calls on the federal government to spend even more money, thereby adding even more to the national debt.

That’s sheer nonsense. That’s a policy prescription made in hell.

What the U.S. government should actually do is:

1. Unilaterally abolish all restraints on trade, both domestic and international.

2. Abolish all entitlements and other socialistic programs, beginning with Social Security, Medicare, Medicaid, education grants, subsidies, bailouts, and stimulus plans.

3. Abolish all regulatory schemes, beginning with the drug war.

4. Bring all the troops home from Iraq, Afghanistan, and everywhere else and discharge them.

And that’s just for starters to get our nation back on a sound economic (and moral) foundation.

This post was written by:

Jacob G. Hornberger is founder and president of The Future of Freedom Foundation. He was born and raised in Laredo, Texas, and received his B.A. in economics from Virginia Military Institute and his law degree from the University of Texas. He was a trial attorney for twelve years in Texas. He also was an adjunct professor at the University of Dallas, where he taught law and economics. In 1987, Mr. Hornberger left the practice of law to become director of programs at the Foundation for Economic Education. He has advanced freedom and free markets on talk-radio stations all across the country as well as on Fox News’ Neil Cavuto and Greta van Susteren shows and he appeared as a regular commentator on Judge Andrew Napolitano’s show Freedom Watch. View these interviews at LewRockwell.com and from Full Context. Send him email.