Well Now, Why Would They Sell to Us?

by Don Boudreaux on November 2, 2011

in Myths and Fallacies, Seen and Unseen, Trade

Here’s a letter that appears in today’s Wall Street Journal:

Prof. Meltzer spells out four persuasive reasons why government spending does not bring economic recovery. To those we might add a fifth. The hoped-for result of stimulus is increased consumer spending. A lot of that spending is for cars, flat-screen television sets and the like, largely imported. The economy we stimulate may not be ours.

S. Paul Posner

New York

This letter is a short yet revealing monument to one of the seemingly indestructible fallacies that fuel protectionism – namely, that when domestic consumers buy imports, the foreign sellers of those imports have no further connection with the domestic economy.  It’s the “demand leaks out” fallacy.  My rough guess is that 95 of every 100 proponents of restricting domestic consumers’ freedom to buy unimpeded from foreign suppliers believes this fallacy.

The fact that Mr. Posner’s concern is based squarely on a fallacy can be made clear with one simple question: why do non-Americans accept U.S. dollars in exchange for the goods and services that they sell to Americans?  What do non-Americans do with the dollars they earn on their exports to America?

Is it really the case that non-Americans are overwhelmingly likely – or are more likely than are Americans producers who sell to other Americans – to hoard dollars?  That is, is it very likely that foreigners spend much of their scarce labor, capital, and resources producing valuable things for strangers in the U.S. chiefly for the purpose of accumulating small monochrome portraits of dead American statesmen (or the electronic or digitized versions thereof)?

And – to extend the questioning beyond the specific fallacy that infects Mr. Posner’s letter – is it really true that Americans would be harmed if non-Americans were indeed insistent upon supplying us with valuable goods and services in exchange for nothing, now or in the future, other than small monochrome portraits of dead American statesmen (or the electronic or digitized versions thereof)?

People whose sight-lines of the economy are too narrow to see that dollars spent on imports nearly always return as demand for U.S. exports or as dollars invested in the U.S. – or people who mistake money for wealth, and who (unwittingly) believe that the chief economic problem facing humanity is superabundance of goods, services, and resources – are protectionisms’ legions, from its foot soldiers to its generals.

It is an army armed intellectually only with pathetic little pop-guns, but too often armed on receiving docks at nations’ ports with the force of the state deployed to impose its stupid notions on peaceful people.

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{ 57 comments }

SmoledMan November 2, 2011 at 2:37 pm

If only we followed the liberal prescription for economics all these decades. No outsourcing, no obsolesnce of labor due to technology(smash the machines), a wondrous safety net that would make Sweden envious. We’d be so prosperous, with high speed rail going to every corner of the country!

Ken November 2, 2011 at 2:41 pm

SM,

Is this a serious?

Regards,
Ken

Fred November 2, 2011 at 2:44 pm

The sarcasm is strong in this one.

Ken November 2, 2011 at 2:39 pm

Don,

why do non-Americans accept U.S. dollars in exchange for the goods and services that they sell to Americans?

This doesn’t quite answer the question either. If I buy a Toyota Corolla, then Toyota burns the dollars I gave them, I am still better off, as are Americans. The point is, even if they did nothing, and made it so no one else could do anything, with those dollars, Americans are still better off.

Regards,
Ken

Michael November 2, 2011 at 3:16 pm

Right. This cannot be underscored enough. What some very, very bright people routinely forget is that cash only represents value–what is really valuable is what you exchange it for.

Richard Stands November 2, 2011 at 3:44 pm

Here’s another way to remember that money is not the same as wealth.

vikingvista November 2, 2011 at 11:45 pm

The real question, is for how much longer are Americans going to want those dollars back.

kyle8 November 2, 2011 at 8:42 pm

Actually if they burned the money we would be better off since it would make our remaining dollars worth more.

Hank Rearden November 2, 2011 at 2:40 pm

Um, one thing’s for sure — they’re not buying American goods and services. What they’re buying are American assets and American debt. You seriously believe this is good for the U.S. economy and the U.S. population? Balderdash.

Ken November 2, 2011 at 2:42 pm

How is it bad?

Regards,
Ken

Jon Murphy November 2, 2011 at 3:07 pm

Really? Our exports totaled $1.3 trillion last year. Somebody’s buying our stuff.

gregworrel November 2, 2011 at 4:50 pm

You’re right Hank. If I am selling an asset, whether it be stock, real estate, or my business, it is in my best interest to limit the people who are allowed to bid. I can probably get the best price if I just limit the potential buyers to those who live on my street. Makes sense to me.

vikingvista November 2, 2011 at 11:48 pm

The Congress issuing debt is bad for Americans. Foreigners buying it up just means Congress will require less Federal Reserve money creation to pay the interest on it. Make no mistake, Congress will issue all the debt it wants to, even if there were a total ban on purchasing by foreigners.

Bret November 2, 2011 at 2:42 pm

It seems to me that once you accept the Keynesian approach to stimulating demand (which I don’t), that the argument by Mr. Posner might have some validity. If you don’t accept the Keynesian approach, then his argument is immaterial.

In other words, is his argument fallacious within the context of the Keynesian fallacy? Probably a silly debate anyway.

Jon Murphy November 2, 2011 at 3:09 pm

It is false under Keynesian principles, too. Even the most ardent Keynesian would agree with Don’s writing. Trade is fairly uncontroversial in economics. Maybe in the short run, a Keynesian would agree, but in the medium-to-long run, naw.

Methinks1776 November 2, 2011 at 3:25 pm

But, Jon, stimulus is meant to happen only in the short run. So, unless Keynesians are now claiming that stimulus should be a permanent feature, there is no long run. Thus, either Keynesians agree or disagree.

Jon Murphy November 2, 2011 at 3:31 pm

Astute you are, Methinks.

I guess I mean to say that a Keynesian would still argue against protectionism even in the event of a stimulus for the reasons mentioned above by Don et al. He may prefer the money be spent domestically, but would not say to close the borders.

Methinks1776 November 2, 2011 at 3:44 pm

krugman thinks protectionism is a fine solution as an alternative to forcing a singular macro policy on the rest of the world.

“Let’s be clear: this isn’t an argument for beggaring thy neighbor, it’s an argument that protectionism can make the world as a whole better off. It’s a second-best argument — coordinated policy is the first-best answer. But it needs to be taken seriously.”

http://krugman.blogs.nytimes.com/2009/02/01/protectionism-and-stimulus-wonkish/

Jon Murphy November 2, 2011 at 3:58 pm

Wow..thanks, Methinks, I didn’t see that in my usual walk over to his blog. This is the same man who wrote several books and won the Nobel peace prize arguing against protectionism.

Way to be, Krugman. Make me look like an ass in front of my Internet friends.

Methinks1776 November 2, 2011 at 4:04 pm

Crazy, right? Especially given Krugman’s history.

But Keynes himself turned quite protectionist in the 1930′s

http://webcache.googleusercontent.com/search?q=cache:IQ7csq36ptsJ:www.panarchy.org/keynes/national.1933.html+&cd=2&hl=en&ct=clnk&gl=us&client=firefox-a

Jon Murphy November 2, 2011 at 4:07 pm

Well then…huh…Well…dammit!

kyle8 November 2, 2011 at 8:46 pm

Yes Jon, Krugman has directly gone against nearly every argument which once earned him a Nobel Prize. However, being a reliable shill for the left wing has gotten him even more fame. That is why he has little credibility anymore.

Methinks1776 November 2, 2011 at 9:36 pm

Jon, I’m pretty sure Krugman won the Nobel Prize for economics. The Nobel Peace Prize went to the guy who recently went to war in Libya and killed Osama bin Laden and Moamer QaDaffy.

Maybe Krugman should have gotten the peace prize instead. I don’t think he’s ever started a war or killed anyone, but he’s not really an economist anymore. Freudian slip? :)

Jon Murphy November 3, 2011 at 3:47 pm

DOn’t forget, Methinks, he won that award the first yer of his presidency. He didn;t even do shit than!

Dom November 2, 2011 at 2:42 pm

I have no real background in Economics, so forgive a simple question. You seem to say, “A dollar spent on foreign products, can only be spent in the home of the dollar, the US. For example, if I buy a Japanese car for $20,000, then the Japanese business men who took my money will at some point spend $20,000 on American computers, or whatever. There is nothing else you can do with a dollar. I would never spend $20,000 on computers, so by bringing in Japanese middle men, the Americans are making money they would not otherwise make.” Is that it?

This might be true of other currencies, but the dollar is accepted everywhere. Those Japanese business men can take the currency to Italy to buy wine. And the Italians can take it to Germany. And so on. How can you be certain it ends up here?

Ken November 2, 2011 at 2:46 pm

Dom,

Why would that Italian accept dollars from the Japanese? Why would the German accept dollars from the Italian? It doesn’t matter how many hands it changes, the dollar ultimately ends up back in the US.

Regards,
Ken

Sam Grove November 2, 2011 at 4:23 pm

and if they don’t return to the U.S., the dollars that do remain here would have a higher value than otherwise.

The purpose of production is to provide goods and services that people need or desire for their own consumption.

People do not consume money, they USE money to enable complex exchange with other producers.

Jon Murphy November 2, 2011 at 4:24 pm

Right. Money is not a resource; it’s a medium of exchange

Marcus November 2, 2011 at 4:21 pm

What really happens is the Japanese business man takes his dollars, which he earned selling Japanese goods to Americans, to the currency exchange to exchange for yen.

Now the question is, why is there yen waiting to be exchanged for the dollars the Japanese business man has? Because somewhere there is an American who sold American goods to the Japanese and has a fist full of Yen he wants to exchange for dollars.

It is these transactions that help set the exchange rate between currencies.

To continue with your example, maybe the Japanese business man wants to exchange his dollars for Lira so he can buy some Italian goods, like you suggested. Then the question is, why is there Lira waiting to be exchanged for dollars? Answer, because somewhere there is an Amerian who sold American goods to the Italians and has a fist full of Lira he wants to exchange for dollars.

So, as you can see, it all really does come back here. Now, central banks complicate the picture with the exchange rate games they play, but that’s another subject all together.

Brad Petersen November 2, 2011 at 9:19 pm

Just imagine if all those dollars NEVER returned to the U.S. We’d be even better off because it means they’re trading valuable goods and services for pieces of paper. No one would ever need work again (except to man the printing presses, of course).

vikingvista November 3, 2011 at 12:13 am

“The statistical discrepancy for individual countries and areas includes the net effect of multilateral settlements, which occur when dollar funds move between foreign countries”

THE BALANCE OF PAYMENTS
OF THE UNITED STATES
, page 10.

For 1988, US balance of payments in millions of $ (Ibid p.6):
Credits = 749,105
Debits = 738,464
Statistical discrepancy (SD) = Debits – Credits = -10,641.

So, the SD, which is larger than the amount of money you are talking about for a given year, is only 1.4% of the total USD passing out of the US.

So, to the extent your scenario exists, and USD are accumulating outside the US border, it doesn’t appear to be a significant amount. That is, as a matter of fact, more than 98.6% of USD simply do return home.

vikingvista November 3, 2011 at 1:42 am

In case you are wondering if the year after year cumulative result *is* significant, you should know that there is indeed a bias in the SD–but toward the positive. I.e., if the SD represents an accumulation of USD on one side of the US border, then USD would seem to be accumulating *inside* the US.

Annual data here.

Dom November 2, 2011 at 2:43 pm

I have no real background in Economics, so forgive a simple question. You seem to say, “A dollar spent on foreign products, can only be spent in the home of the dollar, the US. For example, if I buy a Japanese car for $20,000, then the Japanese business men who took my money will at some point spend $20,000 on American computers, or whatever. There is nothing else you can do with a dollar. I would never spend $20,000 on computers, so by bringing in Japanese middle men, the Americans are making money they would not otherwise make.” Is that it?

This might be true of other currencies, but the dollar is accepted everywhere. Those Japanese business men can take the currency to Italy to buy wine. And the Italians can take it to Germany. And so on. How can you be certain it ends up here? (I hope this isn’t a duplicate comment.)

Jon Murphy November 2, 2011 at 3:01 pm

It is, but don;t worry about it :)

Eventually, the dollar does make it’s way back into the US system. For example, let’s assume that the Japanese auto maker takes your $20,000. He wants to deposit it into his own back account, but first he must convert it into Yen. He goes to the bank to do so. Japan’s Central Bank converts the currency and then either hangs onto the dollars, trades them elsewhere for other goods/services/currency, buys US Treasury bonds, or sells them on the open market in currency control methods. The process is repeated over and over until the dollar returns.

Or, of course, he can just put the $20,000 back into the factory in America where the car was built.

The TL;DR version of this is the dollar doesn’t go away, never to be seen again (unless the man hordes the dollar). Through market exchanges, it will eventually return. So, making the argument that buying imports stimulates foreign, and only foreign economies, is illogical.

Methinks1776 November 2, 2011 at 2:45 pm

The leaky stimulus problem again? Ah, Don. You just don’t understand. These are not the halcyon days of normal times.

Just ask Krugman.

muirgeo November 2, 2011 at 3:24 pm

“A lot of that spending is for cars, flat-screen television sets and the like, largely imported. The economy we stimulate may not be ours.”

Wow… I think you’ve finally got it!!!

SmoledMan November 2, 2011 at 5:12 pm

Murigeo wants to turn the clock back to 1979 – when America was truly great.

Mark Bahner November 2, 2011 at 10:51 pm

“A lot of that spending is for cars, flat-screen television sets and the like, largely imported. The economy we stimulate may not be ours.”

Wow… I think you’ve finally got it!!!

Reply

SmoledMan November 2, 2011 at 5:12 pm
Murigeo wants to turn the clock back to 1979 – when America was truly great.

It’s interesting, because it was exactly 1979 (or perhaps 1980) when an economics professor told my class–this was about the Japanese, not the Chinese–”They send us TVs, and we send them worthless scraps of paper…how is that bad for us?”

Nathan November 2, 2011 at 10:05 pm

It takes a special type of stupidity to read a lengthy rebuttal of an argument and then simply quote the original argument in approval and pretend one has done something.

Chris Bowyer November 3, 2011 at 9:14 am

Aye. I was curious as to whether or not he would poke his head into this entry, and when he does I find he has completely failed to address the point at all.

Randy November 2, 2011 at 3:31 pm

Trying to get to the bottom of this… and its really all about jobs, yes?

I mean, would anyone care about balances of trade, etc., if it didn’t mean that some Americans with severely limited skills might be left with nothing to do? And isn’t that the real question? Is it really possible that we have a percentage of the population so incompetent that it cannot be employed in any other way than putting simple parts together by hand or repetitive interaction with a machine? And you know, I do think that is really possible, and assuming that it is, it still seems better that we should employ useful workers overseas to put simple parts together, as this will result in generally better products and a higher level of overall wealth created by the non-useless population. This additional wealth can then be used to virtualize the essentially useless (hat tip to Mencius Moldbug on the idea of virtualization). Yes, being virtualized might be a bit of a blow to the ego, but then, maintaining a population of essentially useless egos could be a really expensive proposition over time. And, of course, those who find the idea of being virtualized unacceptable, might find the thought just the necessary motivation to apply themselves to achieving something better.

Fred November 2, 2011 at 3:52 pm

Is it really possible that we have a percentage of the population so incompetent that it cannot be employed in any other way than putting simple parts together by hand or repetitive interaction with a machine?

I’d say yes. But since it is illegal for them to sell their labor for less than an arbitrarily set wage that is greater than what jobs are worth, they don’t have an opportunity to do that work.
Building codes, EPA regulations, and other government interference make it illegal to live below a certain standard of living, which is above what these people can earn.
For example there are cars that could be sold for as little as five grand new, but it is illegal to sell them in this country.

The solution is to take income from those who can do work that is worth more than that arbitrary wage level, and give it to those who cannot.

dcj125 November 3, 2011 at 2:55 am

“For example there are cars that could be sold for as little as five grand new, but it is illegal to sell them in this country.”

I am guessing you mean cars that do not pass safety and emissions testing by this statement. Are you advocating then, that govt should eliminate environmental laws and safety minimums?

I think letting people drive unsafe, defective, or poorly engineered vehicles is wholly unrealistic and obviously dangerous. It doesn’t make sense to me to let people endanger their own lives and especially the lives of others to achieve a freer market.

And for EPA regulations, wouldn’t the long-term effects of pollution such as increased cancer rates, or mass extinction of sea and animal life, make the economy worse off? I think regulations that protect the waters and lands better ensure sustainability and should improve the economy long term.

Maybe no government regulations would be ideal in theory, but impractical in practice. What do you think/say about that?

Fred November 3, 2011 at 10:24 am

I think that the cost of many goods and services are much higher than they need to be, thanks to well meaning idiots in government telling the experts how to do their job.
The problem is that stupid regulations beget more stupid regulations.
The response to stupid regulations is not to get rid of them, but to create more regulations to deal with the consequences of the preceding stupid regulations.
The result is a sea of regulation that unnecessarily raises the cost of goods and services, all because well meaning idiots in government are so arrogant that getting rid of stupid rules is not an option.

Krishnan November 2, 2011 at 3:42 pm

“Imports are bad, exports are good” (taken to a logical extreme, it means that for prosperity, no country should import anything, but export what they make – and since no one would want to import but only export, no one will be able to export or import – all trade would stop.

Imagine if tomorrow we were to increase our exports to China by say a factor of 1000 – and China insists that they pay us in yuan only. Would we become prosperous because we now have billions in yuan? Yes, only if we can use this yuan to buy something someone else can make that we need – we can exchange the yuan for dollars (assuming someone is willing to do so – which assumes that that someone can do something with the yuan and not bury it in some mattress) – if there is no exchange market for the yuan, it is worse than the paper it is printed on – there is an implicit assumption that the paper (or e-paper) exchanged for goods has value for other goods – that someone is willing to take our paper for their goods – as to why this escapes people remains a mystery – as to why people keep insisting we do not make anything in the US is also a mystery – even as we lead in making just about everything – (except many cheap things or parts that we can have someone else assemble into expensive things that we can sell)

Jon Murphy November 2, 2011 at 4:00 pm

“Imports are bad, Exports are good.” That was the argument for mercantilism: only export. Look how well that worked.

SmoledMan November 2, 2011 at 5:13 pm

“only export” sounds alot of imperialism to me. Is muirgeo a fascist at heart?

kyle8 November 2, 2011 at 8:49 pm

There is no real difference between a fascist, a socialist, or any other would be tyrant. The common factor is a disdain for human liberty.

vikingvista November 3, 2011 at 12:34 am

Another common factor is that they angrily resent being identified as one of their synonyms. It’s rather like an eelpout resenting being called a burbot.

Greg Webb November 3, 2011 at 12:43 am

No, Muirgeo is an idiot.

Greg Webb November 2, 2011 at 4:14 pm

Excellent post, Don! I know that protectionism is nonsense, but you have to keep repeating yourself so that those new to the blog might learn how to view these matters from an economics viewpoint, rather than a racist or nationalistic viewpoint. Thanks again!

Darren November 2, 2011 at 6:22 pm

…dollars spent on imports nearly always return as demand…

Ah ha! You said *nearly*. So we have ‘demand leakage’. If 99 percent returns as demand each year that means after 10 years, only 90.4 percent (.99 ^ 10) returns as demand. Eventually none of it returns as demand. The best thing we can do is buy no imports at all, then demand will never decrease and everyone will always have a job because we need domestic workers produce the products for our enhanced demand. Even better, no state should buy anything made outside state lines. This will increase demand even more! (I’m being sarcastic for those slow on the uptake.)

Jon Murphy November 2, 2011 at 8:35 pm

We need a “sarcastic emoticon.”

Methinks1776 November 2, 2011 at 8:55 pm

Yes!

SmoledMan November 2, 2011 at 9:15 pm

The problem with protectionists is they look strictly at the export/import “deficit” and think that tells the whole story. Countries do not trade, individuals do if they think it’s in their interest. So even the idea of a collective deficit is meaningless.

RobH November 3, 2011 at 1:32 pm

Along these lines, was it on this blog that the crappy EPI study on NAFTA was rebutted? IIRC, the EPI study took the trade deficit w/Mexico and then concluded: if all of the stuff that we imported from Mexico was made by ‘mericans then it would employ X people. Ergo, NAFTA has cost X jobs, QED. I’ve been trying to find that post because a luddite on my Congresscritter’s FB page keeps citing that EPI study to refute the value of free trade.

Ryan Vann November 3, 2011 at 4:05 pm

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