Cafe Hayek

Regressive Thinking about Trade

Here's a letter that I sent yesterday to the American Prospect:

Dear Editor:

You boast that your magazine is "the essential source for progressive ideas."  And yet your contributors, including recently Dean Baker in the blog that you host, are forever lamenting the U.S. trade deficit ("China Knows It Will Take a Beating on Its Treasury Investments," May 21).  Alas, these laments reveal no progress beyond the poor economic thinking and mercantilist policy proposals of the late middle ages.

For example, in 1381 Richard Leicester, worried about England importing more than it exports (and paying for these extra imports with money), could have been featured in your pages when he wrote that "Wherefore the remedy seems to me to be that each merchant bringing merchandise into England take out of the commodities of the land as much as his merchandise aforesaid shall amount to; and that none carry gold or silver beyond the sea, as it is ordained by statute."*

True progress in understanding the nature of trade and the absurdity of fretting about the "balance of trade" - in understanding that wealth is access to goods and services and not gold, silver, or currency per se - did not begin until the late 17th century, especially with Nicholas Barbon.  Adam Smith capped this progress when in 1776 he noted that "Nothing, however, can be more absurd than this whole doctrine of the balance of trade."**

Sincerely,
Donald J. Boudreaux

* Quoted in Jacob Viner, Studies in the Theory of International Trade (1937), p. 6.

** Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations (1776) Book IV, Chapter 3, paragraph 31.

Yet More Deficient Thinking

Here's a letter that I sent yesterday to the Wall Street Journal:

University of Massachusetts economics professor Ronald Olive asserts that "When a country runs a current account deficit it must incur liabilities, that is, borrow or run down its foreign assets, or do both" (Letters, 15 May).

This assertion is simply untrue.  If Mr. Olive spends $500 on a bottle of Chateau Latour and the owner of that French chateau then holds those dollars as cash, or uses them to buy dollar-denominated equities or real estate, America's current-account deficit rises without any corresponding increase in Americans' indebtedness or any reduction in Americans' holdings of foreign assets.

Sincerely,
Donald J. Boudreaux

Everyone Has a Favorite Horse to Beat. Mine is Not Dead.

Earlier today I heard Washington Post columnist Robert Samuelson interviewed on WTOP radio (a local all-news/sports/weather channel in DC).  Samuelson is usually pretty good, but he -- like so many others -- fails to understand the trade deficit.  He said in this interview (as he says sometimes in his columns) that the trade deficit "must be financed."

That's simply not so.

If Mr. Toyota sells $1 million worth of cars to Americans in 2009, spends $600,000 buying ("current") goods and services -- exports -- from Americans, and stuffs the remaining $400,000 into his mattress, the U.S. trade deficit rises by $400,000 but there's no more "financing" of this amount going on than if Americans had spent that $1 million buying, not Mr. Toyota's product, but Mr. Chrysler's and Mr. Chrysler had used the proceeds exactly as Mr. Toyota did.  The only difference between these two scenarios is that, in the first, the U.S. trade deficit rises while in the second it does not rise.

Ditto if, say, Mr. Toyota used the $400,000 to buy shares of General Electric and 3M -- or if he used the $400,000 to buy real-estate in Ohio.

Only if Mr. Toyota lends the $400,000 to Americans is there any financing going on, but even here there isn't necessarily a problem.  Is it worse for Entrepreneur Jones in Jacksonville to launch his firm with money borrowed from Mr. Toyota than with money borrowed from, say, Bill Gates?  In both cases there's debt.  But economically it matters not one whit which government issues the creditor's passport.  If the borrowed funds are used wisely, they serve a useful purpose.  Period.  End of story.

If the borrowed funds do represent a problem, it must be because the debtor went into debt unwisely -- say, he borrowed the $400,000 not to launch a new firm but to throw a gigantic party.  (Yes, yes.  I know that even gigantic parties are not unambiguously wasteful or unwise, but please don't be pedantic with me on this point.)  But the problem here, again, is not the nationality of the creditor but the status of the debt -- how it was used.

There is a great deficiency in the way even otherwise well-informed pundits think and write about the so-called "trade deficit."

Deficient Economic Thinking

Here's a letter that I sent yesterday to the Wall Street Journal:

Peter Morici asserts that America's trade deficit with China causes "a huge drain on the demand for U.S.-made goods and services. The absence of reciprocal free trade is an important reason the U.S. economy is in its current mess," (Letters, Feb. 11). Untrue. Dollars the Chinese do not spend on U.S.-made goods and services are invested in dollar-denominated assets. These investments raise demand for U.S. output just as would more direct expenditures on goods and services. Consider what happens, for example, if the Chinese buy shares of Microsoft, thus raising America's trade deficit with China. First, the American sellers of these shares get more dollars to spend on U.S.-made goods and services. It's economically irrelevant if the persons buying these outputs are from Seattle or from Shanghai. Second, Microsoft's cost of capital falls, making that company more likely to expand operations, or at least less likely to contract them. Concerns about the U.S. trade deficit are unwarranted.

Lose the 'We'

Beware double-counting.

Credit Is Too Tight, Except When It's Too Loose

Below (and here) is a letter that I sent this morning to the Washington Post.  Can anyone tell me why more people don't pick up on this obvious inconsistency?

Treasury Secretary nominee Timothy Geithner sides with those who worry, as you put it, that "Beijing has kept its currency artificially low to keep the prices of its goods cheap and generate trade surpluses. That has led to a global capital imbalance, as American consumers borrowed and spent and China became the United States' largest foreign creditor" ("Geithner Says China Manipulates Its Currency," January 23).  And he threatens to act "aggressively" to stop this alleged wrongdoing.

Overlook the reality that the only way Beijing can push the price of the yuan lower is through inflation or other policies that weaken the Chinese economy.  Instead ask: why should the Obama administration be so upset by Beijing pumping easy credit into markets at a time when this same administration is deeply worried that credit has become too tight?

Sincerely,
Donald J. Boudreaux

Some Imbalances are More Mythical than Others

Do current-account "imbalances" cause economic downturns?  No.

On Peter Morici On the Trade Deficit

I take issue here with Peter Morici's understanding of the trade deficit.

Shameless Bragging and Self-Promotion

I thank Phil Murray for this very nice review of my book Globalization.

Deficit Hawk(ins)

Here's a letter that I sent recently to the Washington Times:

In "Other economic numbers need attention" (Oct. 16), William Hawkins assumes that every dollar increase in America's trade deficit is a dollar increase in Americans’ debt.  Not so.  If Mr. Hawkins pays for a new car with $20,000 cash and then observes the car dealer stuffing that cash into a mattress, Mr. Hawkins's trade deficit with that dealer rises by $20,000 while his debt to that dealer rises by exactly $0.

More fundamentally, the trade deficit means that foreigners invest in the U.S. rather than spend all of their dollars on U.S. exports.  If Mr. Hawkins mistakenly thinks such investments to be undesirable, I have good news for him: as Uncle Sam meddles much more aggressively in capital markets, foreign investors will be scared away.  America will then be much more likely to run trade surpluses - just as it did for nine out of ten years of the greatly depressed 1930s.

Sincerely,
Donald J. Boudreaux

Stiglitz Errs

Despite being a Nobel laureate in economics, Joseph Stiglitz needs a refresher course in basic trade theory.  In his Vanity Fair article he asserts that greater purchases by Americans of foreign oil would put upward pressure on the U.S. trade deficit and thereby "force the U.S. to continue borrowing gargantuan sums from abroad, making us even more indebted."  This claim is simply wrong, on two counts.

First, if Americans increase their imports of oil, this fact does not necessarily increase the size of the U.S. trade deficit.  If the foreign suppliers of this oil spend all of their dollar earnings buying American exports, then there's no increase in the size of the U.S. trade deficit.

Second, even if we assume that foreigners who sell more oil to Americans will spend none of their resulting earnings on American exports during the current period, not a single dollar earned by these foreigners need be borrowed back from these foreigners by Americans.  Americans can borrow these dollars from foreigners, of course.  But John Doe in Denver or Jane Roe in Roanoke (or Uncle Sam in Washington) is no more "forced" to borrow back the dollars they spend buying oil from Sheikh Faisal in the middle east than they are "forced" to borrow back the dollars they spend buying mutton from shepherd Frank in the Midwest.

If foreign oil suppliers to the U.S. lend the dollars they earn to Uncle Sam or to the likes of General Electric, then greater Americans' oil imports do indeed make possible not only an increase in the U.S. trade deficit, but also an increase in Americans' indebtedness.  But if these same foreign suppliers instead hold on to their dollars, or buy equity in General Electric or real-estate in Rhode Island, or if they use these dollars to fund foreign direct investments in the U.S., then even though the U.S. trade deficit rises, it does not increase Americans' indebtedness.

I'd give an "F" to any of my undergraduate students who would make such a fundamental mistake as the one made here by Stiglitz.

Does America Need a Trade Surplus?

Here's a letter of mine published last month in the New York Sun:

Usually sure-footed, Martin Feldstein stumbles when he argues that "America will need a trade surplus" in order to "repay" today's trade deficit [Opinion, "Thinking About the Dollar," July 28, 2008].

First, the only part of the trade deficit that must be repaid is the part that becomes debt, such as when foreigners buy Treasury notes. When foreigners buy dollar-denominated equity or real estate, or when they make greenfield investments in America or simply hold dollars, no debt is created. None of these investments require repayment.

Second, when it comes to repaying debt, the trade deficit is a red herring. It matters not if a creditor is an American or an Armenian: the debt must be repaid and, if repaid in dollars, those dollars will eventually be redeemed for American goods, services, or assets. (The last could put upward pressure on America's trade deficit.)

Uncle Sam and many private Americans might well have financed excessive consumption with excessive debt, but, if so, the problem is the debt and not the nationalities of the creditors.

Donald Boudreaux

Big Industry in Manufacturing Myths

Here's a letter that I sent today to the Washington Post:

Harold Meyerson insists yet again that America has lost its manufacturing, alleging also that investors are abandoning the U.S in favor of "nations with far cheaper workforces" ("Obama's Factory Factor," August 21).  Mr. Meyerson predictably singles out China as one such nation.

Facts utterly contradict Mr. Meyerson's fantasies.  First, U.S. manufacturing revenues (adjusted for inflation) reached their all-time high in 2006. 2006 was also a peak year for inflation-adjusted manufacturing profits in the U.S. and for inflation-adjusted U.S. manufacturing exports.  And the U.S. accounts for the largest share of the globe's manufacturing output; Americans today produce 2.5 times more manufactured goods than do the Chinese. [See here.]

Second, in 2007 the flow of per capita foreign direct investment into the U.S. was up 13 percent from 2006, to $675. In China, it was up 14 percent - to $55.  [I derived these these figures from here, here, and here; I got population figures from the CIA World Factbook .]

Harold Meyerson is a perfect example of the Beatles' "Nowhere Man":
"He's as blind as he can be / Just sees what he wants to see."

Sincerely,
Donald J. Boudreaux

I also posted this letter in the Comments section that accompanies Meyerson's articles.  It's extraordinarily disheartening to read most of the other comments.

Liberalized Capital Accounts and Wages

What is the effect of liberalizing a country's capital account (that is, making it less costly for assets to flow into and out of the country)?  In this recent paper published by the NBER, Peter Blair Henry and Diego Sasson report their empirical findings on this topic; here's the abstract:

For three years after the typical developing country opens its stock market to inflows of foreign capital, the average annual growth rate of the real wage in the manufacturing sector increases by a factor of seven. No such increase occurs in a control group of developing countries. The temporary increase in the growth rate of the real wage permanently drives up the level of average annual compensation for each worker in the sample by 752 US dollars -- an increase equal to more than a quarter of their annual pre-liberalization salary. The increase in the growth rate of labor productivity in the aftermath of liberalization exceeds the increase in the growth rate of the real wage so that the increase in workers' incomes actually coincides with a rise in manufacturing sector profitability.

This effect is unsurprising.  Liberalized capital markets makes capital more abundant, and more abundant capital means higher worker productivity -- which, of course, results in higher real wages.

(HT Bob Higgs)

Raise a Glass!

Anheuser-Busch is being bought by InBev of Belgium.  Although there is absolutely no reason to object to this transaction -- indeed, the greater the interconnectedness of 'national' economies, the better -- there nevertheless will be continue Lou Dobbsian moaning, groaning, and ignorant pontificating about it.

John Burger, an economist at Loyola University of Maryland, has a very nice answer to those who think this transaction to be bad for Americans.

On Savings

One of our age's truly great communicators of economics (as well as a first-rate economic scholar) is Steven Landsburg ("the Armchair Economist").  Steve's review, in today's Wall Street Journal, of Ronald Wilcox's Whatever Happened to Thrift? is a gem.  Here's a slice:

The tax code alone is reason to believe that Americans don't save enough. Mr. Wilcox offers a menu of other reasons, not all of them convincing. He repeats the canard, popularized by Robert Frank of Cornell University, that "keeping up with the Joneses" is a force for excessive consumption. One could argue equally well that it is a force for excessive saving. If I am trying to outshine the neighbors' Mercedes, I might well decide to be extra frugal until I can afford a Rolls Royce.

Mr. Wilcox makes another fundamental error when he points to high foreign savings as a cause of excessive U.S. consumption. When foreigners save, U.S. interest rates drop. This makes it smart for Americans to consume more. "More" is not always the same as "excessive."

I add only a point that I'm certain that Steve agrees with, namely, the freer are trade and international capital flows, the less meaningful it is to speak of national rates of savings.  As a worker I care whether or not my employer is modernizing his operations to increase my productivity; I don't care (or shouldn't care) whether the savings used to finance such investments come from Dallas or from Dubai.  As a consumer, I care that savings is available to finance innovations and the production of attractive goods and services; I don't care (or shouldn't care)  -- as long as trade is free -- if any particular such investment takes place over here or over there, or about the nationalities of the persons who supply the savings to finance this and other investments.

The Globalization of U.S. Business Investment

In this very careful, data-rich, and important new paper from the Dallas Fed -- entitled "The Globalization of U.S. Business Investment" -- economists Mark Wynne and Erasmus Kersting document recent trends in U.S. FDI (both incoming and outgoing).  Here's the abstract:

This paper documents some key facts about foreign direct investment flows by U.S. businesses overseas and foreign businesses in the United States. We show how the pattern of flows has evolved, examine the sources and destination of these flows, document associated employment and productivity gains, and show how investment-related sales compare with traditional exports. While the United States is a net debtor to the rest of the world, direct overseas by U.S. businesses exceeds direct investment in the U.S. by foreign businesses. Furthermore, U.S. businesses seem to earn more on their foreign investments than foreign firms earn on their U.S. investments. The globalization of business investment is a long-standing phenomenon, but it has accelerated in recent years and become a source of concern for some, as it is intimately related to the debate on offshore outsourcing. Yet contrary to what some think, the bulk of U.S. investment overseas is in other high-income countries. And foreign investment in the U.S. has been an important source of employment growth in recent years. [emphasis added]

Current-Account Deficit = Capital-Account Surplus

I sent this letter this morning to the Wall Street Journal:

John Engler rightly defends NAFTA against political-candidates' misrepresentations of this trade agreement ("What Nafta Trade Deficit?" April 21).  But he stumbles into a common error when he asserts that much of the U.S. trade deficit is caused by U.S. imports of oil.

A trade deficit reflects decisions made by persons on both sides of a border.  If foreign suppliers of oil to America spent all of their dollars on goods and services produced in the U.S., Americans' imports of oil would not raise the size of the U.S. trade deficit.  America's trade deficit grows not just because Americans import lots of things (including oil), but also because foreigners choose to invest their dollar earnings in the U.S.  For this reason, Mr. Engler's conclusion that it would be "good" if America's trade deficit were lower is questionable.  I, for one, welcome capital inflows into the U.S.  Such inflows of capital not only directly fund private investments in America, but help to lower Americans' cost of financing Uncle Sam's reckless habit of spending beyond his means.

Sincerely,
Donald J. Boudreaux

If it's true that Americans save too little, we Americans should be especially pleased that foreigners save and invest much of their savings in the United States.

Globalization Podcasts

In these two Cato Institute Daily Podcasts, I discuss globalization with Cato's Caleb Brown.  The first is here; the second is here.  Both are quite brief.

I [Heart] America's Trade Deficit!

In his brilliant book, The Myth of the Rational Voter, my colleague (and EconLog's) Bryan Caplan identifies the "anti-foreign bias" as a major impediment to economic enlightenment.  That bias is real and ubiquitous -- see, for example, this recent essay by Peter Morici at Forbes.com.

I sent the following letter in response to Mr. Morici's essay:

Peter Morici unloads a riotous barrage of accusations against free trade: Free trade caused, among other misfortunes, the collapse of the market for adjustable-rate mortgages, excessively high CEO compensation, inflationary monetary policy, and Uncle Sam's inexcusable bailout of Bear Stearns ("It's Time To Cut The Trade Deficit," March 26).  Mr. Morici, however, doesn't explain how allowing consumers to take advantage of bargains from abroad caused these calamities.  He simply assumes it to be self-evident that America's growing trade deficit proves that free trade triggers countless system-wide maladies.

Alas, Mr. Morici doesn't know what he's talking about.  America's trade deficit represents capital flowing into the U.S.  True, some of this inflow finances Uncle Sam's Eliot-Spitzer-party-like spending.  But that spending is caused by reckless politicians, not consumers.  Nearly all the rest of the trade deficit represents positive investments in America - investments that not only signal continued investor confidence in the U.S. economy but, more importantly, investments that finance R&D, product development, worker training, new firms, factory modernization, and other activities that promote economic growth.  Does Mr. Morici really think that such investments harm Americans?

Sincerely,
Donald J. Boudreaux

Nothing Unbalanced About So-called "Trade Deficits"

In this recent Wall Street Journal op-ed, Dartmouth economist Matthew Slaughter describes some of the benefits of foreign direct investment (FDI).  Here's an important part of his essay:

Foreign direct investment (FDI) has long been a source of strength for the American economy. In 2005, insourcing companies employed nearly 5.1 million Americans, 4.4% of the private-sector labor force. Beyond their employment, insourcing companies perform large amounts of the crucial activities that make their workers and the overall economy more productive. They invest in physical capital and in research and development, and they help connect the U.S. to the global economy through international trade. The bottom line is larger paychecks. In 2005, compensation per worker at insourcing companies was $66,042 -- 31.8% above the average for the rest of the private sector of $50,124.

I do, though, pick one (admittedly small) nit with Mr. Slaughter's exposition, as I explain in this letter that I sent to the WSJ:

Bravo for Matthew Slaughter's outstanding explanation of the pattern and enormous benefits of foreign direct investment (FDI) in the United States ("What Tata Tells Us," March 27).

I've one nit to pick: Mr. Slaughter incautiously aids and comforts protectionists when he writes that FDI today is driven by "the evolving pattern of global imbalances." While incoming FDI does indeed increase America's current-account deficit and many other countries' current-account surpluses, there's nothing unbalanced - either in the sense of being unsustainable or of being harmful - about America's attractiveness to investors, or about foreigners being especially keen to invest their dollars in the U.S. rather than spend these dollars on American-produced goods and services.  Indeed, as Mr. Slaughter ably explains, such actions by foreigners are a great boon to foreigners and Americans alike.

Sincerely,
Donald J. Boudreaux

Hooray for America's Trade Deficit

The Financial Times published this letter of mine yesterday:

From Mr Donald J. Boudreaux.

Sir, Pat Buchanan's hostility to free trade (Letters, March 5) reflects his misunderstanding of fundamental concepts. He complains that "since Nafta . . . we have run $5,000bn in trade deficits". For Mr Buchanan, this fact is clear evidence of the dangers of freer trade. But let us reword his complaint: "Since Nafta, we have run $5,000bn in investment surpluses." Putting it like this - which is simply another way of reporting the fact that Mr Buchanan finds so troubling - reveals that, since Nafta, $5,000bn worth of capital has flowed into the US.

This capital helped to create and modernise many US companies, to fund research and development, to train workers, and to ease the burden imposed on Americans by Uncle Sam's profligacy. Does Mr Buchanan really lament this capital inflow?

It is worth pointing out, too, that this inflow of capital is precisely the opposite of what Ross "Giant Sucking Sound" Perot predicted would happen if Nafta were passed.

Donald J. Boudreaux,
Chairman,
Department of Economics,
George Mason University,
Fairfax, VA 22030, US

The Practicality of Free Trade

One of the most intellectually shallow arguments against free trade is the one that motivates this op-ed in today's New York Times by Robert E. Lighthizer.  In short, the argument is that free traders are impractically principled; a better policy (the argument implies) is one that recognizes that trade is sometimes good and sometimes not so good.  Here are two letters that I sent to the NYT in response.

Robert Lighthizer dismisses principled free-traders as dogmatists who impractically stick to their guns "no matter how many jobs are lost, how high the trade deficit rises or how low the dollar falls" ("Grand Old Protectionists," March 6).  Alas, the impractical dogmatists are Mr. Lighthizer and his fellow trade "pragmatists."

There is no credible evidence - none, nada - that free trade causes net job losses.  Moreover, far from being undesirable, a higher U.S. trade deficit means increased foreign investment in the American economy.  And a falling dollar generally reflects worsening U.S. domestic policies, such as inflationary money-supply growth, the likelihood of higher taxes or more command-and-control regulations, and, indeed, an increased probability of U.S. protectionism - protectionism that, by stifling entrepreneurial dynamism, makes America a less attractive place for foreigners to do business.

Sincerely,
Donald J. Boudreaux

My second letter:

Among Robert Lighthizer's objections to principled free-traders is their opposition to protectionism "no matter how many jobs are lost" ("Grand Old Protectionists," March 6).

If Mr. Lighthizer is referring to overall employment, his facts are wrong.  Free trade does not reduce net employment.  But perhaps he's talking about specific jobs, such as those lost in Carolina textile mills when Americans buy more textiles from abroad.  The argument seems to be that practical statecraft often justifies protecting such jobs even if doing so prevents the creation of other jobs in their place.  If this is Mr. Lighthizer's point, he's too modest when calling for trade policies that allow for "practicality, nuance or flexibility."  Because technology destroys far more jobs than does trade, Mr. Lighthizer should endorse also a "pragmatic" approach to innovation - empowering government with the flexibly and nuance to block firms' introduction of efficiency-enhancing production techniques that displace workers.  Surely, according to Mr. Lighthizer's practical logic, we must reject the "dogma" that tolerates "unbridled" improvements in firms' operating efficiencies.

Sincerely,
Donald J. Boudreaux

A Review of Globalization

I've always admired the judgment and insight regularly displayed by John Tamny over at RealClearMarkets.  Proof that my admiration is well-placed is supplied today by John's review of my book Globalization.

Silly Stats

One of my professors from my undergraduate days at Nicholls State University, Oscar Varela (who now teaches at U.T. - El Paso) recently published this fine letter in the El Paso Times:

Regarding your opinion in “Trade deficit: China keeps beating up on U.S.” (12.24.2007), the U.S. trade deficit with China reflects the voluntary preferences by U.S. residents for Chinese goods. Efforts to punish China for the U.S. trade deficit would in the end punish these U.S. residents.   I (and others in El Paso) have a growing trade deficit with you, as every day I buy your paper but never sell you a thing. You are not beating me up, as my purchases are freely made without coercion. Would you support any efforts to punish you for my deficit through some government action that would restrict my pleasure in buying and reading the El Paso Times?  

Oscar Varela

And relatedly, I sent the following letter today to the New York Times:

Every month you report Commerce Department figures on the U.S. trade deficit with individual countries.  For example, we learn today that last year "[t]he trade deficit with China continued to rise, jumping by 10.2 percent to $256.3 billion" ("U.S. Trade Deficit Drops in 2007," February 14).

Before again reporting such figures, your reporters (and the Commerce Department) should ask a fundamental question: In this world of extensive multilateral trade and investment, of what conceivable relevance is a measure of the volume of good and services trade between any two countries?  America's "trade deficit" with China is as relevant as is your "trade deficit" with, say, your columnist Maureen Dowd.  I'm sure that every year you buy more from her than she buys from you.  I'm also sure that you're not bothered by this "deficit" - and for good reason: in a world of multilateral trade, no two entities are likely to have so-called "balanced" trade with each other.

Sincerely,
Donald J. Boudreaux

Down With Economic Nationalism

Baltimore Sun columnist Thomas Schaller favorably quotes Nobel laureate economist Joseph Stiglitz's concern about debt run up during G.W. Bush's years in the White House:

Nobel-winning economist Joseph E. Stiglitz points out in the current Vanity Fair. "Cumulative borrowing from abroad during the six years of the Bush administration amounts to some $5 trillion," he writes

I'm not sure if Stiglitz is alleging that $5 trillion of Uncle Sam's debt has been sold over the past half-dozen years to foreigners, or if this figure includes private debt.  Or if Stiglitz's figure includes also the U.S. trade deficits over these years.

If the latter -- if it includes the trade-deficit figures -- it's a bogus number.  The reasons are two: first, because the trade deficit is not synonymous with debt, and (2) if part of it becomes debt by foreigners using their dollars to purchase U.S. Treasury securities, then double-counting is in play if the trade-deficit figures are added to the U.S. budget-deficit figures.

But let's assume that Stiglitz's figure refers only to actual borrowing by Americans from foreigners (whether this borrowing be done by government or by private citizens or organizations).  Stiglitz's concern still is off the mark.  Here's a letter that I sent this morning to the Baltimore Sun:

Thomas Schaller favorably quotes economist Joseph Stiglitz's concern that "Cumulative borrowing from abroad during the six years of the Bush administration amounts to some $5 trillion" ("On economy, GOP candidates offer up slogans instead of solutions," December 5).

Regardless of this debt's merits or demerits, what is the relevance of creditors' nationalities?  Whether the creditors are in Utah or Ukraine, Baltimore or Beijing, the debt must be repaid.  And that is the burden of the debt; the nationalities of creditors are irrelevant.

Sincerely,
Donald J. Boudreaux

If you question my claim, ask if Stiglitz would be less critical -- or should be less critical -- if every cent of these borrowed funds were raised from Americans.  Would the borrowers (chiefly, of course, Uncle Sam) be less irresponsible or less blameworthy had they run up the same amount of debt but only by borrowing from Americans?

Should Americans Worry That Foreigners Hold Lots of Dollar Assets?

I don't worry about foreigners holding lots of dollars and dollar-denominated assets.  I explain why here.  And below is a clip:

Might Beijing's motive for acquiring large holdings of dollar assets be the sinister one of eventually dumping these assets simply to disrupt American economic growth? It's possible. But if so, the American economy enjoyed huge benefits to offset any problems springing from the later disruption.

During the time that the government in Beijing was accumulating dollar assets -- accumulating these assets by paying for them prices higher than they are really worth - Beijing transferred wealth to Americans.

To see why, suppose that an evil businessman seeks to disrupt the economic future of innocent Ms. Jones. This businessman reasons that if Ms. Jones unexpectedly is fired from her job, she will suffer. And she will suffer even more grievously if any new job that she finds pays her less than the job she lost. So Evil Businessman hires Ms. Jones at a salary well above her true market value. For several years Evil Businessman keeps paying Ms. Jones a salary much higher than she would command on a market not poisoned by the uneconomic motive of Evil Businessman.

And then one day, suddenly and unexpectedly, bam! Evil Businessman fires Ms. Jones, who then discovers that the best new job that she can get pays her an annual salary that is $100,000 less than she "earned" while employed by Evil Businessman.

Without doubting the disappointment and inconvenience Ms. Jones suffers when she is suddenly fired, we can nevertheless doubt that Evil Businessman really hurt Ms. Jones on net. During all the time that he employed her she earned more than she would otherwise have earned. And during this same time, Evil Businessman was paying the price for the later privilege of disrupting Ms. Jones' economic life by firing her.

Rather than "Evil Businessman," he really should be called "Stupid Businessman" -- and the U.S., like Ms. Jones, should count its blessings if it's really true that Beijing or any other wealthy entity consistently overpaid for American assets.

Does It Matter that Other People Save? Yes. Does the Nationality of these Savers Matter? No

Arnold Kling insightfully points out that among the distinguishing features of economics as it is taught and researched here at George Mason University is that we resist the temptation to treat abstract collectives as acting, relevant beings.  The typical GMU economist doesn’t believe that just because a group of people are conventionally called by a certain name – “Americans,” or “Ukrainians,” or “Taiwanese” – that such a designation carries much economic relevance.

Nowhere is the need to “lose the we” more important than in discussions and analyses of international trade – and in particular in discussions and analyses of the so-called “trade deficit.”

Nearly every American is part of the economy that can, without risking too much misunderstanding, be called the American economy -- or, alternatively, the global economy.  But also part of this economy are foreigners who sell their goods and services to Americans – so too are foreigners who buy American-made goods and services – so too are foreigners who invest in dollar-denominated assets.

It’s easy to confuse Americans getting poorer with the American economy getting worse.  The latter does not necessarily follow from the former.

Suppose that 100 percent of Americans are irresponsible spendthrifts – something like the teenager who, upon receiving his first paycheck, spends it all on beer and rock concerts.  Clearly, unless this teenager changes his habits, prosperity beyond the norm will not come his way.  But if American institutions – work habits, trustworthiness, laws, structure of government, and so on – remain attractive to investors, then capital will continue to be invested in America.  New jobs will become available, jobs offering higher and higher pay.  New products and services will be produced, and their qualities will generally rise and prices generally fall over time – becoming more and more affordable even to spendthrift Americans.

Of course, in this scenario all investments will come from non-Americans – from foreigners who, being more prudent and patient than Americans, save and invest part of their current earnings in the economy of which Americans are part.  This economy thrives even if (in this unrealistically extreme example) no American enjoys the fruits that come from owning assets deployed in a vibrant economy.

Americans thrive more than they would thrive if foreigners didn’t invest in America (or if foreigners invested less in America).

Here’s good news for all of us who live in the United States: as long as lots of people are willing to invest in the U.S. economy, we will enjoy benefits over time even if each of us Americans is a spendthrift.  It should make no difference to me or to you if those people who do invest in the United States have passports issued by Uncle Sam or have passports issued by some other government.  If you are a spendthrift, you will not, of course, benefit from this thriving economy as much as you would if you became one of the savers and investors.  But whatever is your own personal rate of saving and success at investing, your material prosperity will be higher the greater is the willingness of other people – including foreigners – to invest in the American economy.

Put differently, if you become the only American willing to save and invest, and if foreigners (for whatever reason) stop investing in the American economy, you will likely be much worse off over time than you would be if you continue your spendthrift ways and foreigners continue their saving and investing-in-America ways.

Investment Does NOT 'Weigh Down' Economic Growth

Here's a letter of mine, published today in the Washington Times:

Incessantly repeating that "U.S. growth... has been weighed down by soaring deficits with China" does nothing to render true this false bit of conventional wisdom ("China won't adjust currency," Page 1, Saturday). Indeed, it is false on too many levels to list here.

Most fundamentally, the flip side of a rising U.S. trade deficit is a rising U.S. capital-account surplus — meaning a hefty inflow of capital into America. More capital means lower real rates of interest. Lower real rates of interest mean more investment. More investment raises worker productivity. Rising worker productivity raises real wages. And rising real wages enable Americans to enjoy higher and higher standards of living.

DONALD J. BOUDREAUX
Chairman
Department of Economics
George Mason University
Fairfax

Nation-States and Foreign Direct Investment

Here's my review -- appearing in The Independent Review -- of Nathan Jensen's useful book, Nation-States and the Multinational Corporation.

Cartoons, Capital, and Competition

Here's my latest column in the Pittsburgh Tribune-Review.  In it, I draw an economic lesson from The New Yorker's weekly cartoon-captioning contest, in which people are invited to submit captions to accompany uncaptioned cartoons.  My vanity compels me to quote at length from the heart of the article.

Think of each uncaptioned cartoon as a capital good. It has the potential to create value (in this case, to make readers laugh). By itself, though, this capital good produces almost no value; without a caption, each cartoon is virtually worthless. The cartoon becomes valuable -- it contributes to human satisfaction -- only when a clever caption is added to it.

Suppose for a moment that The New Yorker allowed only residents of Manhattan to submit captions. No doubt many submitted captions, when added to the cartoons, would produce the intended humorous result. But editors of the magazine could not be certain that the best possible caption was submitted.

What if, for a particular cartoon, someone living in Brooklyn had an even better idea for a caption? By prohibiting non-Manhattanites from contributing their caption ideas to the cartoons, the caption that would have been submitted by the person in Brooklyn -- the caption idea that would have added to the cartoon even more value than is added by the best caption from Manhattan -- never is added. Thus, the cartoon -- this particular capital good -- fails to produce as much value as it would have produced had Brooklynites been among those who were permitted to submit captions.

Sadly, though, no one ever learns this fact. The winning caption submitted from Manhattan might be judged by everyone to be excellent. But because the even better caption from Brooklyn never materializes, no one ever discovers just how funny that cartoon could be.

If the goal is to ensure maximum value of this particular capital good (a weekly uncaptioned cartoon), clearly it is advisable to have larger, rather than smaller, numbers of people able to try their minds at devising clever captions. With everyone in the world free to contribute captions, each cartoon is joined with cleverer and more creative captions than would be the case if only Manhattanites -- or only residents of New York state, or even only Americans -- were allowed to submit captions.

The very same process is true of factories and machines and workers. It might be that the entrepreneur with the best idea for how to use a particular factory and its machines and workers to produce maximum value is an American. But fewer than 5 percent of the world's people live in America. So it is inevitable that the best and most creative ideas for how to use particular assets that are located in America will often be possessed by non-Americans.

The Trade Deficit and Economic Performance

Cato's Dan Griswold amasses further evidence against the myth -- a myth piled higher than the dung in King Augeas's stables -- that the U.S. trade deficit is a drag on American economic growth, or that this "deficit" is necessarily evidence of poor American economic performance:

[T]here is no evidence that an expanding current account deficit is associated with slower economic growth. In fact, data show the opposite correlation:

• In those years since 1980 in which the current account deficit actually shrank as a share of GDP, real GDP growth averaged 1.9 percent.
• In those years in which the deficit grew modestly, between 0.0 and 0.5 percent, GDP growth averaged 3.0 percent.
• And in those years in which the current account deficit expanded by more than 0.5 percent of GDP, real GDP growth grew by an average of 4.1 percent.

In other words, economic growth has been more than twice as fast, on average, in years in which the current account deficit grew sharply compared to those years in which it actually declined. If trade deficits drag down growth, somebody forgot to tell the economy.

Protectionists Never Learn

The Cafe's own Russ Roberts hits a home run in today's Wall Street Journal, with an op-ed entitled "Protectionists Never Learn."  Here are the final few paragraphs of Russ's op-ed:

Yes, China holds a lot of our bonds. But Japan holds more. Yes, we run a big trade deficit with China. But that lets us buy lots of inexpensive stuff instead of having to make it for ourselves. Yes, there are more than a billion Chinese. I guess that means they can take all of our jobs four times! But our economy keeps growing. We have more jobs than ever before. And contrary to popular belief, the American standard of living and the American middle class are thriving.

We were told that at a minimum China (and India with its own billion-strong population) would take all our high-tech jobs. But the high-tech sector bounced back from its downturn (a downturn that had nothing to do with outsourcing) and is growing again, partly because we can get some of the simplest database and programming tasks done so cheaply by Indians and Chinese.

So why can politicians still make China scary? Why didn't Americans learn from the previous sky-is-falling episodes? The simple answer is that if you don't understand economics, you might be convinced by a politician who says that trade with China is bad for America.

The next time you find yourself losing sleep over China, remember that you were worried about Japan and Mexico and everything turned out OK. Then ask yourself if America would be a richer country if China cut itself off from the rest of the world.

The Economic Meaninglessness of Political Borders

Sheldon Richman, of the Foundation for Economic Education, firmly grasps what Adam Smith meant when that Great Scot wrote in The Wealth of Nations the following wise words:

In the foregoing Part of this Chapter I have endeavoured to shew, even upon the principles of the commercial system, how unnecessary it is to lay extraordinary restraints upon the importation of goods from those countries with which the balance of trade is supposed to be disadvantageous.

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. When two places trade with one another, this doctrine supposes that, if the balance be even, neither of them either loses or gains; but if it leans in any degree to one side, that one of them loses and the other gains in proportion to its declension from the exact equilibrium. Both suppositions are false [emphasis added].

In this essay, Richman wisely asks

What is an export? What is an import? These words are defined in  reference to political boundaries of only one kind: national boundaries. If there were no such boundaries, there would  be no exports or imports. But political boundaries are just that. They are not economic boundaries. To the extent that they can, people go about their business as though those boundaries weren't there. People cross the Canadian-American and Mexican-American borders to transact business every day. If they give them a thought it is only because governments put up barriers patrolled my armed guards who make them wait in line. People learn early in life that they can gain immensely from trade, and with that understanding comes the insight that it doesn't much matter on which side of a Rand-McNally line your trading partner lives.

So the very concepts imports and exports are founded on an arbitrary construct that has little practical consequence for people's economic activities. Back in the 1980s, when neomercantilists feared Japan's economic success at selling us stuff (seems a little crazy now, no?), I used to ask what would happen to the trade deficit if Japan were made the 51st state. Obviously, the deficit would have disappeared because we don't reckon trade imbalances between states. Why not?

In reality, then, there are no imports and exports. There is only what I make and what everyone else makes. Few people would want to live just on what they themselves could make. Frederic Bastiat pointed out that each of us daily uses products we couldn't make in isolation in a thousand years. Talk about poor, solitary, nasty, brutish, and short! "What makes this phenomenon stranger still is that the same thing holds true for all men," Bastiat wrote. "Every one of the members of society has consumed a million times more than he could have produced; yet no one has robbed anyone else."

This is just another way of saying that the case for free trade is conceded the moment someone eschews self-sufficiency. After that, we're just haggling over the size of the trade area. But if free trade (read: division of labor) is good, then the bigger the free-trade area the better. Globalization should be the worldwide removal of all barriers to the exchange of goods and services -- rather than trade managed through state capitalism and multinational bureaucracies. Unilateral, unconditional free trade is the smartest policy.

Cartoon Economics

If you want to laugh, you might watch cartoons of the Road Runner and Wile E. Coyote -- but you don't watch these cartoons in order to learn the laws of physics.  Indeed, if you take seriously the "physics" portrayed in these cartoons, you'll soon kill yourself.

Likewise, if you take seriously the pronouncements on international trade issued by politicians such as U.S. Senators Byron Dorgan and Sherrod Brown, you'll learn nothing except how utterly bizarre and cartoonish allegedly serious adults can be when discussing international trade.  (Alas, unlike Warner Bros. cartoons, politicians aren't good for laughs, for their detachment-from-reality has serious and sad real-world consequences.)

Today's Washington Post gives these politicians an entire op-ed column in which they parade their ignorance -- ignorance of economics, of facts, and of what constitutes a serious argument.

Countless falsehoods, half-truths, non sequiturs, and irrelevancies permeate Dorgan's and Brown's essay.  Were I not loaded down today with lots of law-student exams to grade -- and had not Greg Mankiw already tackled some of these worthies' questionable claims -- I might vent my spleen by picking apart many of these flaws.  But I'll content myself here with pointing out that these buffoons' fretting over the large and growing size of the U.S. trade deficit is inconsistent with their (mistaken) belief that "a global race to the bottom" is underway -- a race among corporations to set up shop in low-wage, poor countries.

A large and growing U.S. trade deficit is evidence that investment capital is flowing generously into the United States rather than away from the high-wage, high-labor-standards American economy.

But what relevance do facts and logic possess when political grandstanding must be done to appease the greedy interest groups who are so vital to keeping arrogant, obnoxious, and utterly repulsive politicians in power?