The new President of the Institute for Humane Studies, Emily Chamlee-Wright (a GMU Econ alum, and a long-ago undergraduate student of mine) sat down last February with a former student of hers, my colleague Virgil Storr, for this interesting podcast. (HT Mike Mertens)
Foreigners like American exports, but they love American assets. In a typical year, foreigners take about $500 billion of what they earn selling us imported goods and services and use those dollars to acquire U.S. assets. That’s another way of saying our $500 billion current account deficit is exactly offset by a $500 billion investment surplus. The net inflow of foreign capital allows our level of domestic investment to exceed our level of national savings, fueling productivity and growth. If politicians try to “fix” the trade deficit, they will only succeed in cutting off the net inflow of foreign investment, leading to higher interest rates and less investment in foreign-owned factories.
But it doesn’t matter much, anyway, because in reality, trade deficits are not a threat to robust growth and full employment. The United States had a large trade deficit in 2009, when the unemployment rate reached 10 percent, but it had an even larger trade deficit in 2006, when the unemployment rate fell to 4.4 percent.
Rather than reflecting the failure of American economic policy, the trade deficit may be better viewed as a sign of success. The relative vibrancy and safety of the American economy is why so many investors around the world want to move their assets here. (And similarly, it is why so many workers want to immigrate here.)
Cowen: Trump and Bernie Sanders, for all of their populist talk, their actual recipes in both case lead to crony capitalism … a system where businesses who are in bed with the government and who give the president positive press releases are rewarded and where companies who oppose or speak out against the president are in some way punished.