Yet Another Open Letter to Peter Morici

by Don Boudreaux on October 22, 2012

in Balance of Payments, Myths and Fallacies, Trade

Prof. Peter Morici
University of Maryland
College Park, MD

Dear Peter:

You repeatedly insist, as you do again today in The Street, that a U.S. trade deficit is a “drain on demand for U.S. goods and services and the principal reason the American economy is growing slowly” (“The Risk of Economic Collapse and the Presidential Elections,” Oct. 22).

I’ve two questions for you.

First, what’s your evidence for the mercantilist proposition that U.S. trade deficits – more precisely, current-account deficits – slow U.S. economic growth?  I’ve encountered no credible evidence that suggests that increased foreign investments in America (that is, rising U.S. trade deficits) damage the American economy.  America, for example, had annual trade deficits for most of the second half of the 19th century,* yet that period was for the U.S. one of impressive economic growth.  Alternatively, America ran trade surpluses for nine of the ten years from 1930 through 1939 – a decade in which the economy was, of course, greatly depressed.  And in a study of the quarter-century ending in 2005, Daniel Griswold found that “economic growth [in the U.S.] has been more than twice as fast, on average, in years in which the current account deficit grew sharply compared to those years in which it actually declined.”**

Second, is more investment in an economy bad or good for that economy?  I ask because in the same breath used to warn that funds from China invested in America weaken America’s economy, you insist that funds from China invested in China strengthen China’s economy.  How is it that more investment in America harms Americans while more investment in China helps the Chinese?  Can you clarify?

Actually, in your article you do supply a hint for how to unravel this seeming contradiction – namely, your express admiration for Beijing supplying “credit to state-owned enterprises” (that is, industrial policy).  You apparently believe, therefore, that when Chinese wealth is directed for investment there by a powerful central bureaucracy the Chinese economy flourishes, but when Chinese wealth flows into an economically freer America and is directed for investment here by market forces the American economy suffers….  Which then prompts me to ask a third question:

How do you explain the fact that China is far wealthier now than it was under Mao, when Beijing exercised even more central and iron-fisted control over the Chinese economy than it does today?

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

* See, for example, George Alessandria, “Trade Deficits Aren’t as Bad as You Think,” Business Review, Federal Reserve Bank of Philadelphia (2007).

** Daniel Griswold, “Are Trade Deficits a Drag on U.S. Economic Growth?” Cato Institute (2007).

….

I thank Bill Heasley for the pointer to Morici’s article.

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