Red is Red…. and, Apparently, Also Green

by Don Boudreaux on November 10, 2010

in Balance of Payments, Growth, Myths and Fallacies, The Economy, Trade

Here’s a letter to the New York Times:

In a letter to G20 leaders, President Obama noted that “the foundation for a strong and durable recovery will not materialize if American households stop saving” (“In Message to G-20 Leaders, Obama Aims to Calm Tensions,” Nov. 10).  He’s correct that economic growth requires savings.  But Mr. Obama’s frequent bemoaning of America’s trade deficit makes me wonder if he understands why this fact is so.

Savings promote growth by supplying resources used for constructing factories, funding research & development, training workers, building infrastructure, and financing all of the other investments that increase worker productivity.  It’s these investments that fuel economic growth; savings, as such, simply make these investments possible.

So given that what we really want are more such investments, Mr. Obama should applaud America’s trade deficit, for that ‘deficit’ (also known as a capital-account surplus) is the result of foreigners investing large amounts in the American economy – including, by the way, in helping to finance Uncle Sam’s ginormous budget deficits.

Investments in America promote American economic growth; the nationality of the investors and savers is irrelevant.

Sincerely,
Donald J. Boudreaux

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