Quotation of the Day…

by Don Boudreaux on March 22, 2017

in Balance of Payments, Myths and Fallacies, The Future, Trade

… is from page 43 of my Mercatus Center colleague Dan Griswold’s compelling 2009 book, Mad About Trade:

Linkedin_fig_564x314_5CW-695x419Globalization has helped to boost the net worth of American households in two main ways: first, by raising household income above what it would be without expanded trade, and second, by enlarging opportunities to tap into global capital markets directly and indirectly.

DBx: You and your young family live in a cool, small city – call it Apertus.  With a couple of young children, you don’t yet save much.  But you do manage to buy a small share of ownership in the organic-foods market (“Compete Foods”) located just down the street from you.  You’re impressed with the majority-owner’s – Ann’s – entrepreneurial vision and drive.  In fact, lots of people are impressed with Ann’s business acumen.  People from all over the state, and many from outside of the state, invest in Complete Foods.  These investments allow Complete Foods to grow and improve.  As it grows, Complete Foods hires as employees more people from Apertus.

And, of course, these investments in Complete Foods from people outside of Apertus also increase the value of your share of ownership in that company.  You become wealthier.

Life, while not perfect, is pretty good.

On election day, however, the majority of the voters in Apertus surprisingly choose as the new mayor Mr. Clausus.  Mr. Clausus’s key campaign theme was Apertus’s trade deficit with the rest of humanity.  “Non-Apertusians are killing us!” he routinely thundered while on the campaign trail.  “We buy lots of stuff from outside of Apertus, but they don’t buy as much from us as we buy from them!  That’s very, very bad behavior!  Very bad!” Clausus would insist.  “Our leaders have for too long failed to put Apertus first!”

After a pause, Clausus on the campaign trail would continue: “Our trade deficit not only means that many of our jobs are destroyed because non-Apertusians unfairly buy too little of what our hardworking men, women, and merchants produce.  It means also that non-Apertusians are buying up all of Apertus.  And it means that Apertusians are sinking ever more deeply into debt to non-Apertusians.”  (No one ever bothered to point out to Clausus that most of the investment by non-Apertusians in Apertus is in equity shares of Complete Foods – and that these investments, while they do raise Apertus’s trade deficit, are neither a cause nor a symptom of Apertusians going further into debt.)

“Elect me and I’ll put an end to the economic homicide committed by non-Apertusians!” Clausus would always end his campaign tirades.  “Let’s together make Apertus great again by putting Apertusians first!!”

Once elected, Clausus immediately set to work to fulfill his campaign promises.  He convinced the city council to punitively tax each purchase by an Apertusian of a good or service not produced in Apertus.  (Many on the city council worried that this policy was bad for the people of Apertus, but a majority of the council members – enjoying their positions of power above all else – went along with Clausus out of fear that failure to do so would result in their losing their coveted council seats.  “I can’t do any good for the people of Apertus if I’m not in office,” each such council member would assure himself or herself, and explain to his or her friends.)

Now, with Clausus in the mayor’s office, you and other denizens of Apertus pay higher prices for medical care, auto and home repair, lawn care, babysitting, and fresh fruits and vegetables.  As a result, you and other Apertusians have less money to spend patronizing the upscale Compete Foods.  Complete Foods starts to decline.  It contracts its operations.  And, of course, worried investors – many of whom are from outside of Apertus – sell their shares of Complete Foods.  The value of your modest investment in Complete Foods tanks.

One evening at home you enjoy some local craft beers with your neighbor Bob.  Being brewed in Apertus, your purchase of these beers isn’t hit by Mayor Clausus’s punitive tax on outside-of-Apertus purchases.  But you realize that the price you pay for this local brew has nevertheless risen substantially.  And this beer doesn’t taste as yummy as it once did.  You sigh as you open two more bottles for a second round.

As you’re serving the second round, Bob remarks, trying to sound enthusiastic: “Isn’t it good that Apertus no longer has a trade deficit?!”

You shake your head.  “I don’t know.  Things seem to be worse now, not better.”

“But look,” Bob continues, “Apertus as of last week has a trade surplus!  That’s gotta be good news, right?!  We Apertusians are investing more outside of Apertus than non-Apertusians are investing in our economy.  Surely that’s great economic news!”  Bob pauses, reflecting on what he just said.  Then, in a more ambivalent tone, he adds “I mean, Mayor Clausus said just today that this news is really good.”

You and Bob say nothing more.  You pour a third round.


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