Open Letter to Lori Wallach

by Don Boudreaux on October 12, 2011

in Balance of Payments, Myths and Fallacies, Seen and Unseen, Trade

12 October 2011

Ms. Lori Wallach, Director
Public Citizen’s Global Trade Watch

Dear Ms. Wallach:

Apparently because of some bizarre sense you have that American corporations deserve special government privileges purchased at the expense of American consumers – namely, protection from competition – you are distressed that Pres. Obama pledges to sign pending free(r)-trade pacts.  Indeed, you’re so angered that your office blasted an e-mail this evening featuring this headline:

Obama Shifts Away From Jobs Message to Promote Bush-Signed Trade Pacts Projected by Official Government Studies to Increase Trade Deficit.

Permit me to re-word your headline in a way that changes its factual meaning not one whit:

Obama – in a Step that Will have No Long-Run Effect on the Number of Jobs – to Promote Bush-Signed Trade Pacts Projected by Official Government Studies to Increase the Amount of Capital that Foreigners Invest in America.

Can you give me one good reason why we Americans should be distraught over legislation that makes our economy a more attractive place to invest?

Sincerely,
Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA 22030

…..

Note that exactly 519 years ago today the trade deficit of the Americas began to rise.

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{ 26 comments }

Michael E. Marotta October 13, 2011 at 12:02 am

I wonder how Lori Wallach tallies her balance of trade? How is a household not a small nation, if you want to think of it that way? You export labor, take foreign currency in, and with that import foreign goods. Wallach is renovating her Mount Pleasant D. C row house. So, she may be producing several kinds of decorative architectural treatments, perhaps sewing her own drapes, or refinishing her wooden floors. Of course, those require the import of other materials.

Would it not make more sense for her to have, say a dozen kids, and raise them to be carpenters and electricians and masons and tilers? As children they could make brushes, grind pignments, etc. She would be fantastically wealthy according to her own theories.

Don Lloyd October 13, 2011 at 12:03 am

“Can you give me one good reason why we Americans should be distraught over legislation that makes our economy a more attractive place to invest?”

Depends on the investment. Just as the expansion of credit by the Fed can lead to more and more marginal investments that steal and bid up resources and waste them, reducing the returns of solid investments, foreign investments can add to the standard of living of Americans by adding to the supply of domestic consumption goods and services, or it can subtract from the standard of living and not do so.

Regards, Don

Andrew_M_Garland October 13, 2011 at 5:11 pm

So, increased foreign investment in America can be bad in exactly the same way that increased domestic investment can be bad, by competing for real resources to apply to the investment projects.

So, the prices for investment goods might be increased, having the effect of discouraging further investment in low-return projects as the available investment goods are fully employed in high-return projects.

How do you see that as bad?

Somejerk October 13, 2011 at 12:32 am

False

vidyohs October 13, 2011 at 6:34 am

“Note that exactly 519 years ago today the trade deficit of the Americas began to rise.” :-)

I wish I could be that precise on laying out the date that globalization became inevitable, but I can’t put a date on the first trade made by our ancestors, I only have my positive conviction that it happened well before the Neanderthals appeared.

Kirby October 13, 2011 at 6:38 am

That was the day that Columbus began ‘trading’ -by which he means massacreing- people in Haiti and the Dominican Republic and later forcing other natives to mine gold.

Karl smith October 13, 2011 at 8:08 am

I am flying today but I think this post might be meant to address an issue I raised with don over email.

I am on an andriod so brevity will force me to be a bit technical. The problem is that capital inflows do not increase the capital stock att
the zlb. Indeed they can lower it. This is because changes in the capital stock are dominated by the return on capital and the real oberst rate on bonds. The latter can rise if capital inflows are deflationary. Thus the former must rise meaning the stock must fall.

muirgeo October 13, 2011 at 8:32 am

One good reason?;

Because if they are set up like our other trade agreements they will incentivise moving productivty off shore. Moving production offshore does not make us more productive. It makes us less productive because we aren’t really producing more things we are producinng less things even if a so called Ameircan company is producing more things.

And selling off your assets to to pay for your decreased productivty and your productivity deficit makes you poorer not richer…. unless you are a multinational corporation who shields their income in off shore endevours.

As evidence I give you the real world economy out there 10-15 years hence of moving productivity offshores. It is not even close to supporting your claims.

Methinks1776 October 13, 2011 at 8:45 am

I have some earth shattering news for you, Muirdiot. Trade agreements are not required for United States companies to leave the United States and incorporate in other countries.

muirgeo October 13, 2011 at 8:58 am

No need for the ad hom. I’m trying to refrain from such at Don and Russ’s suggestion. Actually, I see our exchanges as funny and I don’t take them personally weather they are intended to be or not. I have very similar conversations with good friends and family but it doesn’t effect our relationship. Its just a matter of jocularity.

So on your point why didn’t companies move production overseas before the trade agreements were signed?

Methinks1776 October 13, 2011 at 10:18 am

I forgot (no I didn’t). You think correlation and causation are the same thing. I can’t help you. Nothing on this planet can.

khodge October 13, 2011 at 11:17 am

Your assumption is that the rest of the world is riding high because the US is in financial ruin due to outsourcing. I think that global statistics do not support your hypothesis.

Jon October 13, 2011 at 4:20 pm

Question: if, as you claim, by moving production offshore makes us less productive, why does the US continue to be the single largest producer in the world? And not by a small margin, either.

Another thought: since, when you go grocery shopping, you are reducing your productivity (as you claim), why not stop grocery shopping and grow your own food? For that matter, build your own car, computer, telephone, Internet connection? Is not all that lost productivity in your household?

muirgeo October 13, 2011 at 8:48 am

And here is the evidence I finalely found that strongly suggest you are using bad numbers when you claim manufacturing productivty is way up. In fact I came to this suspicion of my own accord and now have to wonder if there isn’t a conspiracy with thes numbers to protect the interest of the powerful people profitting handsomely from our trade policy arrangements.

http://www.businessweek.com/magazine/content/07_25/b4039001.htm

But new evidence suggests that shifting production overseas has inflicted worse damage on the U.S. economy than the numbers show. BusinessWeek has learned of a gaping flaw in the way statistics treat offshoring, with serious economic and political implications. Top government statisticians now acknowledge that the problem exists, and say it could prove to be significant.

Seth October 13, 2011 at 10:17 am

Strongly suggests?

More quotes from your article:

“As a result, the actual size of phantom GDP could be a lot larger, or perhaps smaller.”

“In a broader sense, though, the problem with the statistics reveals that the conventional nation-centric view of the U.S. economy is completely obsolete. Nowadays we live in a world where tightly integrated supply chains are a reality.

For that reason, Landefeld of the BEA suggests perhaps part of the cost cuts from offshoring are being appropriately picked up in GDP.”

Jon October 13, 2011 at 5:08 pm

Economists have long argued that the statistics used do not provide an accurate measurement of true economic value. GDP looks at only final products (and treats imports as a negative) and is far too simple a calculation.

I ask you to look at a simple, straightforward calculation (no indices, no revises, no bias): Manufacturing New Orders. New Orders for the past 12 months have totaled (in value) $5.2 Trillion. $5.2 trillion! That’s almost a record level.

Slappy McFee October 13, 2011 at 9:09 am

Why is your focus always on domestic production?

Do you realize that there is a symbiotic relationship between producer and consumer? There isn’t one without the other. Increased production costs due to domestic protectionism come directly out of the pockets of the domestic consumers. Being as there will always be more consumers of manufactured products than there will be domestic manufacturers, what group are you really looking to protect?

Slappy McFee October 13, 2011 at 9:10 am

That was towards the good doctor

Bill Koehler October 13, 2011 at 9:31 am

Isn’t a corporation by it’s very nature given special privileges? A corporation (as we know them) is created through government action.

vidyohs October 13, 2011 at 10:10 am

Ah, funny you should bring that up. Yes, a corporation is a legal person created by government (legislative branch). Then that person is given special privileges that not available to the natural man. Such as the privilege of writing off expenses that you and I could never be allowed to write off.

But, even as interesting is this tidbit. SCOTUS, has ruled that Congress controls what Congress creates; therefore, it is Congress that created the territories (Washington D.C,, Puerto Rica, Viginan Islands, Marianas, Somoa) and corporations, and it Congress that exercises judicial, legislative, and executive power over those.

Think about the implications of Congress constitutionally controlling corporations. Could be benign or it could be devastating, and the corporation can not escape it.

Just a little something to think about when one is thinking about incorporating. :-)

mcwop October 13, 2011 at 1:52 pm

So a sole proprietor cannot “write off” expenses like cost of goods sold? Please be more specific.

vidyohs October 13, 2011 at 9:31 pm

There are a plethora of write-offs available to corporations that are not available to your typical person (wage earner). If you want more details they are readily available to you by consulting your accountant.
:-)

Invisible Backhand October 13, 2011 at 10:50 am

Yes, and what the principals are afraid of the most is called “piercing the corporate veil”, where their actions they thought the corporation shielded them from can send their soft doughy bodies right into hard time.

http://en.wikipedia.org/wiki/Piercing_the_corporate_veil

Bill Koehler October 13, 2011 at 10:50 am

Some people see a corporation as symbolic of capitalism, if it is, than is not capitalism merely a form of socialism? The free market could have some form of incorporation? perhaps but could never give any special privilege to anyone.

vidyohs October 13, 2011 at 12:41 pm

Some people can be dead wrong. Many people can be dead wrong.

After all we do have the strange critter called Not for Profit Corporation.

Some people are intellectually lazy. As a matter of fact many people are intellectually lazy. Many people prefer running on enculturation or conventional wisdom as well, that is just so much easier than having to actually look, listen, study, learn, and, most important, actually think.

Above all most people have no real idea of what capitalism really is, nor of its natural place in the natural human world.

Because they don’t know what capitalism is, they are easily led into believing it is a negative thing, which is as far removed from the truth as possible.

Jon October 13, 2011 at 4:30 pm

I think what this entire conversation is missing is the lesson we all learned in Econ 101: Specialization.

I’m an economist my trade and a philosopher by training. That means I am good at numbers and thinking. But I know absolutely nothing about cars. So, I import mechanical knowledge (I have the mechanic work on my car) and I export my unique knowledge on the business cycle to the mechanic (my company is a consulting firm). Everybody wins! Could I fix my car on my own? Eventually. Could he figure out his own business plan? Eventually. But why waste the time and resources on such tasks? Through this trade, we both win.

It works the same on an international scale: we export capital- and intellectual- intensive products (our comparative advantage) and we import labor intensive goods. Sure, we could keep those jobs here, but Americans are highly educated (despite our educational problems). Does it make sense for us to be making Frisbees? Or shirts? Do we really want people with college educations making shoes?

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