Quotation of the Day…

by Don Boudreaux on March 15, 2017

in Balance of Payments, Myths and Fallacies, Trade

… is from pages 313-314 of UCLA economist William Allen’s 1989 collection of the transcripts of his insightful and still-germane radio addresses, The Midnight Economist; specifically, it’s from Allen’s May 1985 address “Mouse Wisdom: Borrowing and Buying”:

South_Street-c18271Prior to World War I, the United States was a persistent long-term borrower.  It made sense for a young, growing economy with great prospects to borrow, and it was an attractive economy in which to invest.  And it has been a relatively attractive place of investment in recent years – inflation has been down, output has been rising, rates of return have been substantial, and there are no fears of Big Brother expropriating assets or forbidding their being taken home by foreign investors.  So both American and foreign capital has been channeled into this economy because it has been strong, not weak.

DBx: Bill Allen here summarizes the main reason why healthy economies – which necessarily are economies that grow (because creative destruction is allowed) and that have secure property and contract rights – very often run persistent capital-account surpluses.  (Capital-account surpluses are the flip-side of current-account [sometimes called “trade”] deficits.)

Trump, his trade triumvirate, and a depressingly large number of other politicians and pundits – along with most men-in-the-street – do not understand this reality.  When these people hear “the U.S. trade deficit has risen” they immediately leap blindly to the mistaken conclusion that (1) Americans necessarily are becoming more indebted to foreigners, (2) that whatever additional funds Americans do borrow from foreigners make Americans poorer and the American economy weaker, and (3) demand is ‘leaking’ out of the American economy and thereby increasing secular joblessness.

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