“Ron” Boudreaux Responds to Ian Fletcher

by Don Boudreaux on February 12, 2011

in Balance of Payments, Myths and Fallacies, The Economy, The Hollow Middle, Trade

Here’s a letter to the Huffington Post:

The only forgivable error among the many in Ian Fletcher’s most-recent effort to convince your readers that American manufacturing output is inadequate is that he misspells my first name (“Yes, American Manufacturing Really Is in Trouble,” Feb. 12).

In response to data offered by myself, by Dan Griswold, and by others, that real U.S. manufacturing is at an all-time high, Mr. Fletcher notes correctly that “the only way to consume is either to produce what you wish to consume, or produce something else you can exchange for it.”  But he then immediately runs off the rails: “And this is where American manufacturing is clearly falling short, because America is running a huge trade deficit in manufactured goods, and we don’t produce enough of anything else (raw materials, services) to cover the gap.  So instead we borrow and sell off existing assets to pay for imports.”

Two points.  First and most obviously, by this logic Mr. Fletcher can just as well argue that America’s service-sector output is too low as he argues that America’s manufacturing output is too low.  Because the U.S. trade deficit would narrow no less with a $1 increase in service exports as with a $1 increase in manufactured exports, neither the existence of a general U.S. trade deficit nor of a U.S. deficit in the trade of manufactured goods is evidence that U.S. manufacturing output is too low.  Service, mining, or agricultural output can equally be accused of being too low.

Second and most importantly, Mr. Fletcher doesn’t understand what a trade deficit is.  An increase in the U.S. trade deficit does not necessarily mean that Americans are borrowing more or are selling off assets.  The volume of productive capital assets is not fixed.  Foreigners who invest dollars in creating and expanding businesses in America increase America’s capital stock without either putting Americans further in debt or decreasing Americans’ ownership of assets.  Given that America is the world’s leading destination for foreign direct investment, it hardly seems plausible that the U.S. trade deficit is evidence of American impoverishment or of inadequate production.

Sincerely,
Donald J. Boudreaux

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