The Hazlitt Series
This latest stewardship post is a continuation of our monthly exploration and modern application of the economic writer Henry Hazlitt, and his seminal work, Economics in One Lesson. This work draws heavily upon the insights of the great French economist Frederic Bastiat. His key insight was to look at that which is not seen. So, for example, do not simply look at the benefits of a trade restriction of say wool, but also look at the costs to the rest of the economy. Hazlitt updates this insight with a more modern take to look not just at the short-run effects on a small group, but also the long-term effects for the whole economy. Hazlitt then applies this lesson to a variety of topics. Each installment will pay homage to this superbly clear economic thinker and writer by applying each of his applications to our world today.
The Fallacy
This month’s entry into the Hazlitt series concerns one closely related to last month’s entry regarding tariffs. Those who advocate tariffs usually fall prey to the idea that the nation must export more than it imports. It is seen as a sign of “winning” if a nation exports more than it imports. It is a superficially appealing idea. It is akin to a household saving more than it spends, or so it would seem.
The First Reality
The first, most basic reality of this situation is that exports must equal imports. Exports pay for imports and vice versa. It is true that a “merchandise trade” deficit can occur but that must be offset by the capital accounts. Let me explain. A US importer pays a Japanese company for products they import in US dollars. Those US dollars cannot be used in Japan as they trade in Yen. So, the Japanese exporter has two choices. They can use the newly acquired dollars to buy US goods for export, or they can use the dollars to invest in US capital goods. This would be things like real estate, factories or other productive assets. Briefly, there is a third option. The Japanese exporter can trade those newly acquired dollars for another currency, but then the new holder of the dollars has the same two choices before them. In this way these accounts must balance.
All of this ignores the one way that the game can be rigged, and that is via a central bank conducting an inflationary policy. I will analyze this phenomenon when we deal with Hazlitt’s chapter on inflation. The point here is that imports and exports will balance each other, either directly or indirectly via capital investment.
This, in fact, matches what goes on in a household. If you “import” goods and services such as groceries, furniture, etc., then you will export (that is pay for all this) via your labor. If you have a surplus, then you hold it as a cash balance, or you invest it in productive assets, such as stock, bonds or real estate. Seen in this way what was superficially attractive about the fallacy is seen as wrong at both the household and national level.
Another Fallacy, Another Reality
There is another related fallacy that comes up surrounding this topic. This is the idea that the government can, or should, make loans or in some other way subsidize exports from the country to foreign buyers.
As we have seen repeatedly throughout the Hazlitt series, this only looks at what is seen and ignores what is unseen. Yes, an exporter will benefit from the extra sales, that is very visible. Yet, what about that which is not seen? First, if the loans are repaid, there is the real issue of those resources being diverted from what consumers wanted most. There is also the reality that by definition those getting subsidies are not the most efficient producers. If they were efficient, they would not need subsidized loans. Therefore, resources are being forced into less efficient areas and enterprises, thus reducing the amount of goods and services produced, thus making us less wealthy.
If the loans are not repaid, and this is a distinct possibility considering the nature of the foreign entities (usually governments) getting these loans, then the whole thing has come a cropper. The taxpayers would be mulcted, and effectively giving away the exports for free. Yes, the exporter gains, but everyone, except the freeloading foreign entity, loses. This too would be money that the taxpayers/consumers could and would have spent somewhere else. The whole scheme becomes a something for nothing scam. Always remember that if someone is getting something for nothing, then someone else is getting nothing for something.
As stewards of scarce resources, we can and must do better than to fall for these snake oil scams, that only benefit politically connected “businesses” at the expense of the rest of the economy.
Praise Be to God
