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Have economists and economics journalists sold out?

This image originally appeared in the Guardian online: https://www.theguardian.com/media/2016/jul/21/brexit-paper-new-european-new-day-profit

The UK has a trade deficit with the EU (Jan 2018) of  £82bn pa – about 4% of GDP (larger than the UK bank bailout in 2008 annually see note 1).  Trade deficits directly reduce GDP, the trade deficit with the EU reduces UK GDP by about 4%.  It makes us poorer.

Balance of Trade in Goods and Services EU 28,  
Balance of Trade in Goods and Services NON-EU 28

This trade deficit with the EU is disastrous for the UK as all economists know.  The deficit affects the economy according to the “Sectoral Balances Equation”. The Sectoral Balances Equation is one of the simplest in economics (bal is short for balance):

Private Sector bal + Government Sector bal + Foreign Sector bal = 0 

In other words all the money flowing between sectors in the economy flows between the government and private sectors or is lent to or borrowed from overseas and these flows must balance.  It is simple, as are the consequences:

Responsible governments must avoid large trade deficits because these will either increase private debt or result in Austerity as the government tries to reduce its deficit.  If the government shifts the burden of supporting a Trade Deficit onto the private sector there is a high risk of the private sector simply not being able to take on more debt to finance tax payments so that decreased investment will occur and there will be decreased government revenues.

UK Sectoral Balance (Note 2)

As can be seen from the graph above, in 2009 it was corporate debt that caused Austerity.  In 2017 it is the foreign deficit.The graph above also shows that sectoral balance is simply true, its bookkeeping, no sophistry is possible.

In developed economies trade deficits are the result of government policy.  Governments can impose tariffs, hinder exchange, purchase foreign currency etc. etc. to modulate the Foreign Deficit or Surplus. The huge UK trade imbalance with the Eurozone is a result of the political decision to be in the Single Market which has removed these various methods of dealing with deficits and also resulted in Eurozone companies acquiring UK companies as importers of Eurozone goods – see The Eurozone Trojan Horse. The cost of the Trade Deficit is now comparable with the cost of the bailouts during the banking crisis.

We have 3 choices: Austerity, High Taxes or Leave the Single Market.  Austerity is indeed awful and raising taxes above about 40 to 45% of GDP always causes private industry to falter.  The third option is obviously the best.  Having left the Single Market Eurozone owned UK companies will be unable to avoid UK taxes, will be forced to have a minimum proportion of UK produced components in their products (like other foreign countries that own UK companies) and, hopefully, will have tariffs charged on their imports into the UK.

Why don’t we hear more about the Foreign Deficits?  Those who follow economics now know that the economic “experts” were wrong about their predictions for the period between the Referendum and today (click on link above for details).  This has scarcely been covered by broadcasters and this lack of coverage has left many Remain voters believing that an economic disaster is imminent.  The absence of any coverage of the “experts” being wrong has seriously divided our society, with Remain voters feeling they were robbed rather than wrong.  In the same way the broadcast media are now suppressing all coverage of the Foreign Deficits.  Its not fake news, its suppressed news.

Economists should have learnt the Sectoral Balances Equation at school, let alone at university!  That they are not telling everyone about this problem suggests that they have sold out.  It is easy to imagine the economists at the LSE, OECD etc producing reports that suppress coverage of the UK-EU Trade Deficit because these economists are paid for their research by organisations that are opposed to Brexit.  After the dreadful austerity caused by the Greek Trade Deficit you might have thought the journalists would at least have mentioned the UK Trade Deficit. Why economics journalists refuse to cover the Trade Deficit is a mystery, surely they have not been bribed or nobbled by management at the BBC etc?

The trade deficit is largely due to EU owned UK companies buying from their EU parents. Once the original money spent by the EU companies on acquiring UK Companies is exhausted (around £500bn) the trade deficit will begin to cause unemployment as well as austerity.

George Orwell, whilst at the BBC, was racked with guilt about suppressing news. Are modern journalists of so little integrity that they are using this weapon against their country to further their own agenda?

Note 1:

GDP = C + I + G + (X – M)

Where C is consumption spending, I is private investment spending, G is government spending, X is exports and M is imports (X – M = trade deficit or surplus).

The UK paid £50bn to bail out the banks in 2008.

Why does the GDP calculation use eXports minus iMports to include the value of international trade to the economy? A French car company like PSA Vauxhall might produce a car worth £10,000 at Ellesmere Port.  It acquires perhaps 8,000 euros of the parts from its Parent company in France and exports the car to Germany using the PSA dealership network.  The Parent company takes, say £1000 of the profit and only about £3,000 of the money for the £10,000 car ever gets to the UK, the 8000 euros for parts being extracted by the parent company in France.  Despite this PSA and journalists will declare what a wonderful benefit it is to the UK economy, exporting thousands of cars at “£10,000” each. They miss the fact that value of the imported parts never come into account in the UK economy. See The Damaging Effect of EU Ownership of UK Industry.

Beware of Remain economists who will make out that the money spent on imports (in this case the parts) will eventually find its way back into the UK economy, this is probably seldom the case with EU owned UK companies operating in the Single Market. They can use EU sales to remove the value of parts etc. in Euros without returning any of their value to the UK.  Often the only money that finds its way back to the UK is the UK component of the production costs.

Note 2:  The Sectoral Balances Graph was nicely plotted by Hereticus Economicus

This post was originally published by the author on his personal blog: http://pol-check.blogspot.com/2018/01/have-economists-and-economics.html

About John Sydenham

Profile photo of John Sydenham
Dr John Sydenham has worked in International Pharmaceuticals and for one of the "big four" International Consultancies. He ran a successful company for 15 years and after selling the company devotes his time to travel, science, black labradors and freedom.

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2 comments

  1. It should be stressed that a trade deficit due to a fall in exports affects GDP in the year that it occurs and a trade deficit due to a rise in imports affects GDP in succeeding years as the loans required are repaid. It is this “get out” of loans being used to purchase imports that allows Remain economists to declare that trade deficits do not affect GDP. This is why sectoral balances are used to underline the true effect of a trade deficit.

  2. Thank you You write in a language that I understand I’ve never been good at maths Just know how to keep my own house in order But found your article so interesting

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