Investment Does NOT ‘Weigh Down’ Economic Growth

by Don Boudreaux on October 22, 2007

in Balance of Payments, Trade

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

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