The Scourge of Economic Nationalism

Mental models in which economic activity is done, not by individuals, but by collectives — by "China" and "the United States" or by "us" and "foreigners" — unfailingly lead to misunderstanding.

Consider this editorial in today’s New York Times. It makes some good points. But it also slips up when it discusses the alleged dangers of the U.S. trade deficit. Here’s a letter that I sent to the Times in response:

To the Editor:

You
wisely warn against the protectionism lurking in allegations of an
undervalued yuan ("Truth About the Trade Deficit," Nov. 13). But you
unnecessarily fret about the U.S. trade deficit, worrying that "If
foreigners chose to invest elsewhere – like the strengthening economies
of Europe or Japan – the result would be higher interest rates and
higher prices in America."

First, the world’s capital stock
isn’t fixed. If America remains attractive to investors, foreigners
can, and will, continue to invest here while they invest more
elsewhere. Second, investment is investment, regardless of investors’
nationalities. Suppose Americans saved more and invested these savings
today at home. Would you then ask in a worrying tone: "If Americans
chose to invest elsewhere, the result would be higher interest rates
and higher prices in America"? Would this possibility be cause for
concern about Americans’ savings and their large investments in the
U.S.?

Sincerely,
Donald J. Boudreaux

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happyjuggler0

I believe Australia this year effectively paid off its national debt. It still has government bonds, but it also has assets set aside equal to or greater than that amount of debt.

There are actually a few countries that have been running budget surplusses annually for a while now, and they too could realistically pay off their debt in the not too distant future if they chose too.

When one thinks about it, one can have a budget surplus with identical taxes to what it now has under a budget deficit, or it can have a surplus with identical spending to what it has now under a deficit, but it can't do both. So there is no real reason why all countries can't run perennial budget surplusses instead of deficits, ecepting perhaps recessions where it isn't healthy to raise tax rates or reduce spending. Depending on how a country prioritizes tax and spending, one of those factors won't have to change at all under budget surplusses.

None of this is particularly relvant to trade though, popular misconceptions to the contrary. Australia still has a trade deficit even with its budget surplusses and effective zero federal debt. The whole notion that trade deficits drive borrowing is either not true at all, or is backwards and actually borrowing drives trade deficits. If it is the latter, then the borrowing is the problem, assuming it is actually problematic. Engaging in trade machinations like tariffs and quotas and devaluations and whatnot completely misses the point.

Kent Gatewood

We went debt free under Andrew Jackson.

Randy

John Konop,

Your post got me to thinking. I cannot think of a single historical instance when a nation in debt actually paid off that debt. So is our national debt even relevant to this discussion? I think not. All that matters to those who buy our government's debt instruments is the risk that they will not be paid. And national debt, budget deficits, trade deficits, entitlement liabilities, and all the like aside, investors have determined that the risk of not being paid is very low. The worst case scenario is not that we will "go broke", but that interest rates may be driven up as the risk increases thus forcing us to live within our means. And I'm not seeing how even that is a bad thing.

John Konop

How Bad Trade Deals are Destroying the Middle Class

This is from “Skeptical Economist”.

So far, our global economic failures show up mainly as discontented workers in areas hard hit by import competition. However, the real problems (and the worker problems are quite real) are considerably worse

The United States as a nation is far from self-sufficient or anything close. Back in Kennedy era, imports and exports were in the range of 4 to 5% of GDP. The US economy was closes to autarkic. These days comparable numbers are imports are 16.22% of GDP and exports are 10.46% of GDP. Per se, there is nothing wrong with trade growing as a percent of GDP. However, the brutal reality is that our nation can no longer pay its bills. Imports of goods are almost double exports of goods. We enjoy a small (and shrinking) surplus on services and are now in deficit for payments (profits received from overseas US investments versus profit earned by foreign investment in the US).

If you could only pay half of your bills, would you think you were doing well? Would that be OK? Might some question of economic failure arise? Wouldn’t virtually every American see it that way? Yet, when it comes to our country, it is somehow OK. Of course, it is not.

If you could only pay half of your bills, your debts would be soaring. Guess what? So are the debts of the United States. Of course, the national debt is growing and more than 50% owned by foreigners. However, the debts of ordinary Americans are rising as well and a growing percentage are owned by foreigners as well.

The trade debate is usually depicted in terms of “cramped, narrow minded, locally oriented protectionists” versus “visionary, open minded, free trading globalists”. This caricature is largely correct. However, that doesn’t mean the protectionists are wrong. With America going broke, they are at least on the right side of the issue..

Thomas Friedman demonstrated again the cluelessness of our elites on trade today. His piece “China: Scapegoat or Sputnik” repeated the usual mantra about education solving our problems. His actual words were “health care, portability of pensions, entitlements, and lifelong learning”. Nice ideas, but will they really help middle aged workers without jobs? No, of course not, but the deeper problem is they won’t fix our trade problems either. We will simply go broke faster. What words were missing? How about “overvalued currency”, “RMB versus the dollar”, “China’s lack of currency flexibility”, etc. All notably missing.

happyjuggler0

*Suppose Americans saved more and invested these savings today at home. Would you then ask in a worrying tone: "If Americans chose to invest elsewhere, the result would be higher interest rates and higher prices in America"?*

Zing! I'm going to shamelessly use this argument in the future. Thanks.

Kent Gatewood

"Essay on the Influence of a Low Price of Corn on the Profits of Stock" maybe guiding book for Dr. B. For some of our competitors, the favored book is that old Kanamit favorite "To Serve Man".