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I [Heart] America's Trade Deficit!

Posted By Don Boudreaux On March 30, 2008 @ 11:37 am In Balance of Payments,Myths and Fallacies,Trade | Comments Disabled

In his brilliant book, The Myth of the Rational Voter [1], my colleague (and EconLog [2]‘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 [3].

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

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URLs in this post:

[1] The Myth of the Rational Voter: http://www.amazon.com/exec/obidos/ASIN/0691129428/invisiblehear-20

[2] EconLog: http://econlog.econlib.org/

[3] this recent essay by Peter Morici at Forbes.com: http://www.forbes.com/opinions/2008/03/25/globalization-recession-bernanke-banks-oped-cx_pm_0326morici.html

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