The Curse of an Export-Oriented Economy

Welcome to Episode 51 of Axe to the Root Podcast, part of the War Room Productions, I am Bo Marinov, and for the next 20 minutes we will cover what I call the “frugal tramp economic theory.” Have patience, you will learn why I call it this way. We will also see how it has affected our government’s policies, and how especially it has affected the philosophy of government of the current administration – although, to be fair, it has always been present in the policies of all administrations for the last 100 years . . . or at least, all the administrations since FDR.

I remember when I first encountered a “frugal tramp” story, about 30 years ago, in some British tabloid, about a homeless beggar who carefully saved every single penny he got by begging on the streets of some English city, and never paid a penny for either clothes or food, or cigarettes, being content to mine those basic necessities from the dumpsters around restaurants, supermarkets, and clothing stores. When he died, his relatives discovered that he had a bank account of several million British pounds, the result of both his thriftiness and of the compound interest the account had accumulated. I don’t know if that first story I read was real – British tabloids 30 years ago were just as an unreliable source of news as FOX News or CNN are today – but over the years, similar, and more truthful, stories have appeared. The best documented of those is the story of “Tin Can Curt,” real name Curt Degerman, a Swede who spent his whole life on the streets of the small Swedish town Skellefteå (about 30,000 population), scavenging for tin cans and glass bottles for cash. He never had anything more than an old bicycle, and he was avoided by the people in his town because of his poor hygiene habits – with the exception of one distant relative, who kept contact with Curt. Curt Degerman died the richest person in his hometown, bequeathing to his relative the amount of $1.5 million. The man hardly spent any money on anything. Or, to put it in the slang of modern theoretical economics, he had a total positive trade balance: in all his transactions, money was flowing to him, and never from him. That is, in modern economic terms – as defined by Keynesianism – Curt Degenhart was a really wealthy man.

Or was he? Was he really wealthy, having all that money in the bank while eating food from dumpsters and seldom taking a bath, while engaging in the least productive occupation one can ever have, collecting tin cans and glass bottles for cash? Did Curt Degerman’s positive balance of trade really make him a wealthy man? Granted, he left a significant amount of money when he died . . . but if we only count money as “wealth.” Could there be more to “wealth” than a simple accumulation of money?

These questions, plus Curt Degerman’s example, came to mind when I was criticized a couple of weeks ago in a personal letter for a previous Axe to the Root episode, “Economic Nationalism and the Religion of Death.” The author of that letter accused me of “economic illiteracy,” and that I didn’t really understand the concept of “balance of trade,” and how important it is to the economic wealth of a nation. The more a nation exports, the more money comes in, and therefore the wealthier it is. The more it imports, the less money it has left, the less wealthy it is. That is, less money and more goods makes you poor. More money and fewer goods makes you wealthy – like Tin Can Curt Degerman. In the final account, my critic said, President Trump’s idea of closing the borders for imports is a good idea given the “economic realities,” and even if we need to pay more for some goods – because domestic production of them is more expensive – this will be offset by the fact that more money will stay home in the US. That is, more money plus higher prices will make us wealthier. But even better if President Trump takes the steps to re-orient the US economy towards more exports. That is, more legislative and tax incentives for companies that produce for export, and more legislative and tax obstacles for imports. That’s economic reality. I just don’t understand economic reality.

Ironically, while such positions are touted in the name of conservatism and free market, in reality, this obsession with national trade balance has always been characteristic to leftist, and even Marxist economists. John Maynard Keynes was so obsessed with what he saw as the “problem of trade balances” that his proposed “Keynes Plan” in 1944 was to create a system called International Clearing Union based on an international currency, which would work to even the disbalances and flow money to the nations with negative trade balance. (To translate it in English, he wanted to make sure that when a nation keeps buying so much that it runs out of money, it will be given more money to continue buying. If you think the idea is ridiculous, remember modern Greece.) Marxists have been similarly preoccupied with the specter of trade balances. Vladimir Lenin, the founder of the Soviet Union, defined imperialistic colonialism as an economic system in which industrial nations buy cheap raw materials from third-world countries and sell them expensive industrial products. The disbalance of payments is in favor of the industrial nations, and thus wealth is being stolen from the so-called “colonies” to the industrial nations. It never occurred to him that the “colonies” profited by forfeiting cheap raw materials – which were useless to them anyway – to get valuable industrial goods. Both men, Keynes and Lenin, had zero understanding how the economy really works; in their view, it was nothing more than currency numbers. Thus, economic growth for them was simply abstract manipulation of currency numbers; it never occurred to them that economic growth has only one real basis, and that is increased productivity. And increased productivity depends only on the religious commitment of a nation, and very little else.

Meanwhile, the economists on the right side of the specter have always rejected the validity of the concept of “national balance of trade.” Adam Smith believed that it is unnecessary for a government to enact trade regulations to encourage exports and discourage imports; he even used an unusually strong expression to demonstrate his disapproval of the doctrine:

“Nothing, however, can be more absurd than this whole doctrine of the balance of trade, upon which, not only these restraints, but almost all the other regulations of commerce are founded.” [end of quote]. Frederick Bastiat, known to American readers for his book, The Law, proved that the very notion of “balance of trade” is a misnomer, for it only takes in account declared value at the customs; he concluded that a national trade deficit (as measured by the government statisticians) is actually evidence for private profit for the individual participants on the market. Which is the only possible solution to the puzzle which no economist today wishes to mention, namely, that if we take the trade surpluses and deficits of all the nations in the world and add them up with their respective signs (plus for surplus, minus for deficits), the result will be deep in the negative. That is, the global economy as a whole seems to be running a trade deficit . . . but against whom? Bastiat also ridiculed the economic nationalism and protectionism of politicians and professional guilds (trade unions) of his time in his brilliant essay, Candlemakers’ Petition, in which candlemakers lobby the Parliament to block out the sun as unfair foreign competition to their domestic supply of light and heat. Under the principles of Classical Liberalism, which are based on methodological individualism, there is no such thing as a “national balance of trade.” The very notion has no meaning at all. In a nation, we have millions of individuals. Some of them want to use their money to buy the cheapest product of the best quality, and they don’t care whether that product is made in the US or abroad. To use the government to punish these people for their choices to use imported goods is no different than any other kind of socialism where the government dictates the personal choices of individuals in favor of certain policy of the elites. (Think Obamacare.) Milton Friedman also taught that trade deficits have no significant meaning for the economic development of a nation, because all that a deficit does is lower the value of the national currency, which in turns makes the national economy more competitive, which sends the pendulum in the other direction, of more exports, which raises the value of the currency, etc., etc., forming a natural cycle which balances itself and therefore doesn’t need any government regulations.

In the final account, it is leftists – Keynesians and socialists – who worry about the trade balance and who call for government intervention. They even use the imaginary problem of the balance of trade to attack capitalism and free trade; in 2010, Ian Fletcher, a leftist economist, published a book on the issue titled (take note), Free Trade Doesn’t Work. From the perspective of the free market economists, the obsession with trade balances is absurd, because they have no bearing whatsoever on the economic growth or the prosperity of a nation. After all, keep in mind that the only two nations in the Western hemisphere that have maintained a trade surplus for the last 20 years were Cuba (about 1% of the GDP), and Venezuela (a whooping 3% of the GDP). In comparison, the US has maintained a trade deficit of more than 3% of its GDP. You make you own conclusions from these facts.

When we look at other nations, we see no pattern of correlation between trade surpluses or deficits and economic growth. Among the nations with net surpluses we find Germany and France, whose GDP however has stagnated in the last 10 years. On the other hand, the US has grown by a steady 2.5%, and the UK – another nation with high deficits – has grown by 2% a year. Russia has had surpluses, and yet, it’s growth is quite meager. Among the nations with stable trade surplus we find nations like Algeria, Nigeria, Angola, Saudi Arabia, Iran, and even Yemen. Among those with deficits are Australia and New Zealand. If anything can be said about trade deficits and economic growth, it is that there is no visible connection between the two. In the final account, Tin Can Curt Degerman had the perfect trade balance. And yet, he lived like a poor man. Because accumulated money is not a measure of wealth.

It should be obvious, of course. When we exchange money for a commodity or asset, we are not giving up wealth. To the contrary, whenever we exchange, we do it because the thing we get is more valuable to us than than the thing we give up. When a buyer in the US spends $40,000 for a BMW made in Germany, he has not only become poorer by $40,000; he has also become richer by one BMW. When people buy stuff, when they exchange, they do it only to become wealthier, to surrender a less valuable commodity for a more valuable one. In the case of the BMW, it as some quantity of Federal Reserve fake money for a real value high-quality car. How can anyone say that such exchange (fake government money for real private business high quality item) is a loss of wealth is beyond me. When we buy cheap things from foreign nations, we are giving up a “commodity” that America produces – Federal Reserve dollars – for something of high value and lower price, which someone else produces. The wealth of the nations flows to us.

The only group of people who may object to such increase of wealth are the government bureaucrats. Why? Because wealth that is converted into real commodities – assets or consumer goods – is by nature decentralized. Goods and services are always decentralized; it is very difficult to create a central bank of BMWs, or of any other asset or consumer good. Neither is it easy to tax commodities: How do you take 10% of a BMW in taxes? Throughout history, statists have tried to create centralized systems of distribution or taxation of goods, and they have always failed. More market exchange means less possibilities for the government to control marker transactions. But a government can easily control the money supply of a nation through a central bank. Thus, if the wealth of a nation is stored primarily in some currency, it would be easy for the government to control that wealth. If it is in billions market exchanges involving billions of different real items, goods, commodities, or services, centralized control of that wealth is not so easy. This is why governments of nations like Russia, Venezuela, Saudi Arabia, Uzbekistan, who have had enormous revenues from the sale of oil in times of high oil prices, have never bothered to use that money to encourage more diversified economies in their countries: a more diversified economy would mean less controllable wealth, and therefore less control for the government. Thus, such governments have preferred to use their surpluses to bribe their populations through handouts. Russia’s economy has never been anything else but an addendum to its mining industries, mainly oil and gas; something like a convenience store in a mining town, owned by the mining company itself. Every government wants to control the wealth of its people. The best way to do it is convert all wealth into currency, and then the control is easy. To do that, a government needs an export-oriented economy, an economy where goods produced using cheap labor at home (cheap, because they have to be competitive on the world market) are sold for cash outside home, and the cash is centralized in the hands of an elite of exporters, or in the hands of government bureaucrats.

This leads us to a main characteristic of government regulations on trade. For the government to keep the economy constantly oriented to export, it has to keep its people constantly underpaid. After all, labor is always the greatest expense for any business. Low-paid labor is a comparative advantage for exporters – they can keep their prices low and keep underselling their international competitors. The modern assumption is that when a nation starts exporting, more money flows into the nation, and more people become wealthier. But wait a minute? How would these people become wealthier, if not through higher wages? And what would higher wages do to the cost of the exported commodities? Thus, the government has only one way to continue a constant trade surplus: Keep the domestic workers constantly underpaid. This will, on one hand, keep the expense low, and on the other hand, will make the worker less capable of buying stuff – which means, imports will be lower. After all, no one wants to import goods into a nation where the population has no money to buy anything.

What are the government’s ways of keeping the people poor so that the exports are maintained? One way, of course, is a cap on wages. But such caps have never been popular, and they can’t easily be defended. A better way is a manipulation of the currency. Also known as “quantitative easing.” Or, we also call it “inflation.” In order to keep a nation’s economy exporting, a government can lower the value of its currency by printing more money. When this brings down the value of the currency, this change is reflected on the foreign exchange markets. The local currency becomes less valuable, and thus the prices of local goods become even more competitive on the world markets. This is what China has done with their currency in order to keep its exports going.

But who suffers from such manipulation? The workers in that economy. While foreign buyers see lower prices for the goods produced in that economy, local workers will see inflation for themselves and their families. They will get more money into their hands, but the prices for their basic necessities will jump too. In the final account, they will be impoverished to be able to afford less than before, so that the government and its exporter cronies have more business and better profit. China has done it to its workers for the last 20+ years. Thus, despite the gigantic economic growth in China, the majority of its population still remains at very low, poor levels. Because that economic growth has been achieved not through an increase in productivity, but through manipulation of the money supply with the purpose of encouraging exports. In the final account, the average Joe on the street loses. The same principle works when the government imposes tariffs on imports: In the final account, the prices rise, and the average Joe on the street loses for the benefit of a few exporting companies. Any government intervention on the market to encourage an export-oriented economy will by necessity involve impoverishing those who are expected to produce the goods. There is no way around that. Those who call for the US government to “stimulate the economy” by regulating import and export are calling for and economic disaster. They are calling for the government to turn us all into frugal tramps – and keep us so for the purposes of a government policy.

What should we do, then, with a nation which constantly scores trade deficits? Wouldn’t this mean that one day the nation will run out of money? No, it doesn’t. Deficits and surpluses are temporary conditions, and they are self-regulating. They have no significance for the economic growth; and they have no need to be controlled by the government.

Think about an individual person, or a family. I mean a normal person or a normal family, not some frugal tramp. There are periods in their life when they work hard and save money. That is, periods of trade surplus: more money is coming in than is not going out. Then, one day, they decide to buy and furnish a home with the money they have saved. Or start a business. Or just spend it on a cruise. This will be the period of trade deficits: more money is going out than is coming in. until they run out of money, and they return to their work routine again, saving and not spending, that is, trade surplus. Then the kids are grown and they need to be sent to college. That would be another period of trade deficits. Etc., etc. The trade deficits may mean many things: they may be investing, or consuming, or just throwing money away. The fact that there is trade deficit doesn’t tell us what is done with that deficit, whether something foolish or something productive. All we know is where the money flows, technically. But from that flow alone we can’t have any clear knowledge what is happening. Eventually, they will be brought back to reality.

The same with a nation. In certain periods, a nation can have a surplus. That surplus then can be used in the future for new investments, or just for squandering. But remember, both surplus and deficits affect prices. From the perspective of the domestic economy, imports have the same effect as deflation: less money supply, more goods. This will tend to lower the prices. (Deflation also means lower prices.) Low prices will then lead to the economy being more competitive, and therefore exports will rise. But from the perspective of the domestic economy, exports have the same effect as inflation: more money and fewer goods. More money and fewer goods will tend to increase the prices in the economy, which will make foreign goods more attractive. This will increase imports, and the pendulum will turn again. On and on, this process of economic calibration of the economy will continue. But again, it is self-regulated, and it has no need for government intervention. The only result of government interventions will be the further impoverishment of the poorest people in the society. Manipulation of export and import won’t produce prosperity; it will only produce more poverty.

The Bible, of course, tells us what produces prosperity: covenantal faithfulness before God, and especially faithfulness to His Dominion Mandate. A nation which stands in the covenant of God and increases its productivity will see greater prosperity. But the Bible also has a very specific instruction concerning the issues of export and import. It is found in Proverbs 31; in the chapter that tells us about the wisdom of the virtuous wife. We know that she is a woman who is constantly working to increase her economic dominion. She looks for wool and flax and works with her hands in delight; she buys a field and she plants a vineyard, etc., etc. and in the midst of all this, there is a verse that should shock us, if we read it carefully: verse 14: “she is like merchant ships; she brings her food from afar.” Huh? Why? This is the same woman who has no problem with producing food. She has her fields and her vineyard and her servants; why would she want to buy food from afar?

Because, when you can buy food cheaper than what you can produce, it is foolish to not buy it. That is what merchant ships do: they look for the lowest possible price, and take advantage of it, even if it is far away, in another land. The wise woman is like those ships: she will buy cheap, even if she herself can produce it. Because buying low is one part of increasing one’s wealth.

Thus, a wise nation won’t close its borders for cheap merchandise. To the contrary. If others can produce the same goods, cheaper, we will buy them. This will free more money for other expenses, or for investment. Government regulations that ban cheap goods from being sold in America are simply an example of socialist foolishness. Wisdom is getting the best quality for the lowest price. Always.

The book I will assign for reading this week is Ian Hodge, Baptized Inflation. It will teach you something the real origin of some of the modern economic theories and practices. You are in for a surprise.

And remember, in your prayer and your giving, Bulgarian Reformation Ministries, a mission in Eastern Europe committed to teaching the comprehensive Gospel of the Kingdom of God, and building the intellectual foundation for the future Christian civilization in Bulgaria. Visit BulgarianReformation.com, subscribe to the newsletter, and donate. And God bless you all.