One of the best decisions I made in the early 1990s was to let Herb Stein take a piece about the balance of payments for The concise encyclopedia of the economy, who was then The Fortuinencyclopedia of Economy. His first two paragraphs are still beautiful:
FEW topics in the economy have caused so much confusion – and so much unfounded fear – in the last four hundred years as the idea that a country can have a shortage in its balance of payment. This fear is unfounded for two reasons: (1) there is never a shortage, and (2) it would not necessarily hurt something if there was one.
The payment balance accounts of a country record the payments and receptions of the inhabitants of the country in their transactions with residents of other countries. Once all transactions are included, the payments and receipts of each country are the same. Every clear inequality lets one country just acquire assets in the other. For example, if Americans buy cars from Japan and have no other transactions with Japan, the Japanese eventually have to keep dollars, they can have in the form of bank deposits in the United States or in some other American investments. The payments that Americans make to Japan for cars are balanced by the payments made by the Japanese to American people and institutions, including banks, for acquiring dollar assets. In other words, Japan sold the American cars and the United States sold Japanese dollars or dollar-and-connected assets such as Treasury Bills and New York office buildings.
Herb died in 1999 and so, when I have the second edition of the Encyclopedia Earlier this century, with the help of Kevin Hoover and the late Mack Ott, I have updated songs and added the last two paragraphs:
The same worries came forward again in the late nineties and early 2000, because the current account of a $ 4 billion surplus in 1991 went to a deficit of $ 666 billion in 2004. The increase in the current account shortage, just like in the 1980s, was accompanied by an almost balanced increase in the shortage of goods. Interestingly, the surpluses in the current account of 1981 and 1991 both took place in the middle of an American recession and that the major deficits took place during the American economic extensions. This makes sense because the import of the US is very sensitive to US economic conditions, more than proportionally falling when the American GDP falls and increases more than proportionally when the American GDP rises. Just as in the 1980s, American employment expanded, with the US economy adding more than twenty -one million jobs between 1991 and 2004. Employment was also a percentage of the population in 1991 to 64.4 percent of 61.7 percent in 2000 in 2000 and, although it fell to 62.3 percent in 2004, still a modest above the level of 1991.
What about the issue of foreign property? By the end of 2003, Americans had assets abroad worth market prices of $ 7.86 trillion, while foreigners had American assets with a value of market prices of $ 10.52 trillion. The net international investment position of the United States was therefore $ 2.66 trillion. This was only 8.5 percent of the American capital stock.
Herb was my boss at the Council of Economic Advisers in the summer of 1973, when I was a summer trainee fresh from my first year as Ph.D. Student at the UCLA. He was one of the two best bosses I’ve ever had. (The other was Bill Meckling, dean of the Graduate School of Management at the University of Rochester.)