Before I get into the meat of the post, if, after reading this, you end up obsessing over trade deficits too, then I’ve failed (just wanted to make that clear). But imagining what the possible consequences of placing the trade deficit über alles would be demonstrates why the current budget deficit fetish is absurd. Because, currently, even erstwhile progressives like Ezra Klein, have turned the budget deficit into a shibboleth (I might have more to say about that silly numerically illiterate post, but the tone and tenor are what matters for now).

If you’re not familiar with the trade deficit, and since it’s rarely discussed, that’s no fault of your own, it’s simply the dollar value of exports minus the value of imported goods and services. Before we get to the thought experiment, it’s worth noting that, on average, about half of our trade deficit is due to energy consumption, although that fluctuates, depending on commodity prices and other things.

OK, so suppose we wanted to reduce the trade deficit. How could we do that? Well, there are a lot of ways to do it–and just to clear the decks, I’m not interested in arguing about whether these would be particularly effective or fair or ‘good’, since that’s not the point of the post.

Some obvious ways come to mind. We could order local, state and federal agencies to only purchase U.S. made goods whenever possible–this would decrease imports. We could reduce the value of the dollar, and make U.S. goods cheaper (and foreign goods more expensive).

But there are other things we could do: let’s look at energy use. We could lower the trade deficit by reducing energy consumption (oil derivatives and natural gas). One way to that could be to institute energy conservation measures (e.g., improving energy efficiency of buildings). Another might be to substitute, when feasible, renewable energy sources. But there are other ways too.

We could slash fuel subsidies for the poor, the elderly, and the disabled. After all, that will cut down on fuel imports. Of course, people will freeze to death. Or we could fire eighty percent of the federal work force: unemployed people drive less, and are less likely to purchase goods, including imports. We could massively slash Social Security, as taking money out of the hands of lower income people (and most people who are dependent on Social Security are buying lower-end items) would also reduce imports: Attention Wal-Mart Shoppers!! Of course, the U.S. military is a huge purchaser of fuel imports, so there are a lot of savings with cuts in defense too.

The point isn’t that we should let the elderly die, but that how we cut trade deficits matters. Likewise, some beneficial policies could potentially increase trade deficits (increased Social Security payouts might do that). But rather than obsessing over the number–is it large? Is it negative? Positive?–we should view trade deficits in the context of their effects. Energy conservation? Good. Letting the elderly to freeze to death. Evil.

Obviously, there is a reducto ad absurdum argument: what if we had no exports, and imported everything? Yes, that would be bad, but that’s not close to the reality we’re experiencing: we still export a lot of stuff. Yet we readily indulge these doomsday arguments when approaching the budget deficit. If we were to shut down all tax collection, give everyone ten million dollars, and massively increase government spending, the legitimacy of the dollar as a fiat currency could be called into question. But no one is arguing for that either. Instead of worrying about the size of the budget deficit–especially budgets decades from now, when forecasting, to be generous, is imprecise–we should worry about the effects of budget deficits and reduction. In other words, what are the effects, both in terms of policy and macroeconomics, of deficit reduction or increases?

Unfortunately, we have turned budget deficits into a morality play or the Mark of the Beast. Lord, for the sins which we have committed before thee… The consequences of that idiotic belief will be tragic. Marshal Auberback notes (italics mine):

Let’s be clear: the government creates ‘money’ whenever it spends; it destroys ‘money’ whenever it taxes. The issue, which the President should be out and front explaining, is whether or not its spending too much or taxing too little. With a rising unemployment rate, and a huge reserve of underemployed and disadvantaged workers, it is the height of insanity to cut spending overall which is what the US President is claiming is an important and urgent policy goal when there is so much idle productive capacity. Yet both the President and his Republican negotiators on the other side of this issue take it as a given that public debt per se is an unalloyed evil that should be eliminated as a long term policy goal. That is only possible if the external surplus is large enough. Otherwise, if you attempt to achieve that stage via fiscal cutbacks the policy strategy will undermine employment and growth. The upshot is that the budget deficit is likely to rise because of the slowing economy will undermine tax revenue.

Yes, it’s true that government deficits are not always good, or that the bigger the deficit, the better. The point the President and his equally misinformed economic advisors continue to ignore is that we have to recognize the macro relations among the sectors, much as a surgeon has to consider the impact of removing an organ from the patient in the overall context of how it will affect the rest of the body’s functioning. Blaming the deficit for our economic woes is akin to blaming the thermometer when it records a temperature from a patient suffering from the flu. They are both forms of quackery.

And that quackery is entirely avoidable.