Monday, June 15, 2009

Taintedness in Economics

Press and politicians have helped maverick economists to taint some terms in economics.

When people hear surplus, it is often associated to a positive stance of policy. Oppositely, a deficit is attached to a miss-management or to policy mistakes. What if there is no right and wrong? We have witnessed how China has build upon a huge trade surplus and is hard to defend the hypothesis that Chinese live considerably better now that when their international reserves were a third of today's. Wolf offers a chart with the current account balance to see how it has evolved.

It is also hard to argue in favor of a policy to save natural resources -such as oil- for the future. What happens if the next year a new source of energy leaves oil useless? Then a country would have had missed the chance to have an alternative revenue source, very well, with a surplus of oil.

It is a striking reality how few analysts -which you could classified as serious- do not attach an adjective after a number. They usually point at the advantages as well as the dis-advantages of some policy, or they name all positive and negative results of a policy.

One must be careful when forming an opinion and be sure that it relies in serious analysis and not just judgmental adjectives. Having said that, it is ever more worrisome that both China surplus and U.S.' deficits are still growing. This leads to the question of several students of economics: why are we economists so worried about equilibrium? It's natural answer should include an analogy: equilibrium in economics work as a compass to the captain of a ship. It tells us where we are heading, whether it is ever farther or closer to what a policy pursue.

Also, an equilibrium is a risk-free situation. We sure know all pros and cons of having a trade deficit or surplus, but we know it is riskier than having a trade balance. Let us not forget that inherently to a trade surplus build upon an overvalued exchange rate a country will face high inner prices and less improvement in productivity. Incidentally two of the necessary conditions to have long-run growth.

So an equilibrium must be pursued then, but surplus and deficits should not be tainted by positive or negative adjectives.

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