Here’s a letter that I sent today to The Economist:
SIR:
You
write that foreigners who buy dollar assets "finance the country’s vast
current-account deficit" ("The Falling Dollar," Dec. 2). By suggesting
that America’s current-account deficit necessarily bodes ill for
Americans, your language misleads – on two counts.
First, this
deficit is at least as much the RESULT of foreigners seeking to invest
in the U.S. as it is of Americans importing lots of goods and
services. The more attractive America becomes to investors, the more
foreigners invest here. These investments expand the U.S. economy and
increase the U.S. current-account deficit.
Second, only about
half of America’s imports are consumer goods. The rest are
intermediate components, raw materials, and capital goods. In fact,
capital goods today are about a quarter of all U.S. imports, up from
only four percent of imports in 1960.*
Sincerely,
Donald J. Boudreaux
* Douglas A. Irwin, Free Trade Under Fire, 2nd ed. (Princeton University Press, 2005), page 12.
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{ 6 comments }
These investments expand the U.S. economy
Nonsense, they just increase asset speculation. Can you say "housing bubble"?
Why do they only cause a housing bubble? It seems to me that they should cause increased competition for all sorts of capital goods.
"they should cause increased competition for all sorts of capital goods."
They do. However, most capital goods have a high elasticity of supply, so increased competition does not lead to higher prices. Housing is peculiar in that a major component of its cost is land, which is a gift of Nature rather than being created by human labor. Since the supply of land is fixed, land speculation has _no_ beneficial effects.
That's not creating new land. It's just an improvement of existing land – raising it so that it's higher than the water.
Re: guest
Why is it that every other day some "expert" makes some hit and run attempts at disturbing this blog. Free expression? Yes. Informed expression? I'll need more data.
How anyone can make a blanket statement such as "These investments expand the U.S. economy? Nonsense, they just increase asset speculation." is beyond me.
Then to actually defend that notion with some crackpot ramblings regarding housing speculation.
If guest really feels that outside investment only leads to one thing, he would do a better service to himself if he strung together words that acutally connoted his ideas. It's like he was typing from a Blackberry while watching the previews at a movie.
Guest, if you want to say something here, please do us the favor of actually hashing out your thoughts, so we can at least communicate.
Are you suggesting that Americans "investing" in factories in India will "only" cause an asset bubble? The people with new or better jobs learning American business techniques might see that differently. But maybe you only meant investment into America, not into any other country.
My sentiments exactly…