Memo to Pres. Obama: Raise America’s Trade Deficit!

by Don Boudreaux on October 17, 2013

in Balance of Payments, Myths and Fallacies, Trade

A Cafe patron who prefers to remain anonymous sent to me a copy of this short letter to Pres. Obama from several members (from both political parties) of Congress.  The Cafe patron asks my thoughts.

The letter seems fine to me.  I could pick a nit or two, but I’m in overwhelming agreement with it.  Market-driven foreign investment in America is indeed a good thing – because any market-driven investment is a good thing.  The nationalities of the investors don’t matter at all.  And the more the merrier.

I don’t know if the letter has any hidden purpose, such as to prompt Mr. Obama to support U.S. taxpayer subsidies to foreign investors.  If that were the case, then I’d object strenuously and without condition or reservation to its purpose.  But at least on its face, this letter is pretty darn good.

But – I can’t resist – note its opening paragraph:

America has a proud history of promoting trade and investment policies that encourage the top companies in the world to invest billions of dollars in our economy.  The investments these global companies make here in the U.S. help create hundreds of highly skilled American jobs.

What the letter writers say about the consequences of foreign investment in America is true (assuming that that investment is driven by market, and not political, forces).  But a gloss should be added to the first sentence of the above quotation – namely: Such investments increase America’s trade deficit (or, more accurately, America’s current-account deficit).  Given the incessant moaning, groaning, and sometimes shrieking that comes from both ends of Pennsylvania Avenue about America’s trade deficit, it’s not quite accurate to describe America’s history of dealing with such investments as a “proud” one.  We can be proud that America has largely been, certainly compared to many other countries, actually open to foreign investment here – but the complaints about the trade deficit reveal that many people likely do not understand the simple fact that more foreign investment in America means, ceteris paribus, a higher American trade deficit.

I wonder how many of the signers of this letter are on the public record as complaining about rises in America’s trade deficit.  It would be (perhaps unintentional) hypocrisy if one or more of this letter’s signers are also among those who express concern about the size of America’s trade deficit.

While I’m on the subject, consider also this line from the letter:

This commitment [to invest in America] by some of the world’s leading car makers has resulted in the creation of over 76,000 U.S. jobs.

Without vouching for this specific number, the economics here is certainly correct.  Foreign investment in America typically creates jobs in America – yet it also, again, invariably increases America’s trade deficit.  I hope that someone sends this letter to Prof. Peter Morici – and highlights this line – the next time Morici asserts, as he frequently does, that America’s trade deficit necessarily is a drag on job-creation in America.  (Actually, even Mr. Krugman sometimes commits the same error that Prof. Morici often commits.)

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