Scott Sumner, over at EconLog, recently wrote that “America can run trade deficits forever.” Scott is correct (although for reasons that I’ll not here get into, I believe that Scott is incorrect to suggest that the running of perpetual and healthy U.S. trade – or current-account – deficits requires that Americans consistently earn good returns on their investments abroad; such consistent and healthy U.S. ‘trade deficits’ are possible even if Americans invest nothing abroad).
Commenting on Scott’s post, “Phil” disputes Scott’s conclusion. “Phil” does so by telling a tale of two hypothetical countries, Squanderville and Thriftville, in which citizens of the former country foolishly and frequently finance irresponsible consumption today by borrowing resources from citizens of the latter country. It’s easy to show that citizens of the borrowing country, Squanderville, run up trade deficits year after year with Thirftville and that Squandervillians will one day be impoverished by having to repay their creditors in Thriftville.
But contrary to what seems to be “Phil’s” implicit assumption (or belief), a country’s trade (or current-account) deficit is emphatically not necessarily debt for the citizens of that country. The fact that country D’s trade deficit can become additional debt for citizens of D is indisputable; that country D’s trade deficit is not necessarily additional debt for citizens of D is also indisputable despite the reality that very few people recognize this fact.
Below the fold is a slightly modified version of a comment that I left on EconLog in response to “Phil’s” comment.
… is from pages 107-108 of Anthony de Jasay’s 1995 article “On Redistribution” as this article is reprinted in the 2002 collection of some of de Jasay’s writings, Justice and Its Surroundings (original emphasis; footnote deleted):
No one has, to my knowledge, explained why redistribution stopping well short of strict, universal equality should appease the less privileged if they were not appeased to start with. If history teaches anything, it is the opposite. More often than not, concessions have only incited the recipients, sensing that the other party was on the run, to demand more concessions. If this were not so, concessions would not almost invariably turn out to be “too little, too late.” Complete breakdowns in bargaining, ranging from deadlock to revolution, are usually proceeded (can we say “brought about”) not by unyielding resistance from the outset, but by a series of piecemeal concessions coming eventually to a halt. What little we know of revolutions does not suggest that distributional conflict and class conflict can be best understood in terms of commercial bargaining, as depicted in the economist’s apparatus of a Pareto-superior contract curve of mutual advantage.
Once we violate the principle against allowing Jones or his agents to seize some of Smith’s stuff – even if the proffered justification for violating this principle is that Smith has a great deal more stuff than Jones has – there is no principle on which to ground either resistance to Jones’s efforts to seize even more of Smith’s stuff or Smith’s efforts to seize some of Williams’s stuff – or, even Smith’s efforts later, when the political tides shift (as they always do), to seize some of Jones’s stuff. The high practical importance of this principle against taking other people’s stuff is one reason why I oppose proposals for minimum-income guarantees. (One other reason I oppose all efforts to use state force to ‘redistribute’ income or wealth is that I believe such efforts to be purely and plainly immoral. What I do not earn or entice through voluntary means to be given to me I have zero moral claim to have. But you need not share my moral beliefs in order to fear, as I do, that as a practical matter of politics opening the doors to state-conducted ‘redistribution’ is to court danger by abandoning a useful bright-line rule.)
The World Health Organization recently endorsed a global hike in the tax on sugary drinks. The stated goal, of course, is to improve people’s health by raising their costs of consuming high-calorie drinks. (Ignore here the officiousness of bureaucrats who arrogantly fancy themselves to be entitled to recommend the forcible extraction of money from people who act in ways that those bureaucrats have divined are ‘bad’ for those people. [I’m not one to propose taxes, but if – as is often asserted – we ‘must’ have taxes, I propose that stiff taxes be levied on all proposals to butt into the private affairs of others, and that stiff X 10 taxes be levied on all actual acts of butting into the private affairs of others.])
Credit the WHO staff at least for correctly understanding basic economics: artificially raising the cost to buyers of acquiring drinks of kind X and Y will reduce (at least in above-ground markets) the number of drinks of kind X and Y that are purchased.
Yet I wonder how many are the pundits, professors, politicians, and preachers who will favorably and self-righteously wave the WHO’s recent proposal as they support hiking taxes on sugary drinks because they predict that such taxes will reduce the quantity of such drinks demanded and who also self-righteously support hiking minimum wages because they predict that such minimum-wage hikes will not reduce the quantity of low-skilled labor demanded.
I’ll bet that the number of such inconsistent people is large.
GMU Econ alum Tyler Watts produced this marvelous short video that very effectively busts the myth that freer trade has led to a permanent decline in American employment as well as to real-wage reductions. This myth, of course, is peddled by people from all across the political spectrum (other than libertarians). Tyler’s video shows that the likes of Donald Trump and Bernie Sanders are utterly ignorant of a reality about which they bellow most confidently.
I saw Tyler this weekend in Atlanta at Hillsdale College’s 10th annual Free Market Forum. At that Forum I was on a panel with Alfred Eckes and Ian Fletcher (the latter of whom I’ve engaged with in several earlier Cafe Hayek posts). I will soon blog more about that panel.
… is from page 205 of the final (2016) volume – Bourgeois Equality – of Deirdre McCloskey’s pioneering trilogy on the essence of bourgeois values, on their transmission, and on their essential role in modern life (footnote deleted; links added):
In 2011 the economist Peter Boettke, commenting on a pessimistic book by Tyler Cowen, argued that Cowen is merely showing that the economy involves a continuing struggle among the Three Ss: Stupidity, Schumpeter, and Smith. Clearly, Stupidity runs much of our private and especially our public lives – and keeps economists and family counselors fully employed. Boettke would argue (because by historical accident for quite a while after the New Deal there were powerful Schumpeterian and Smithian offsets to Stupidity) people have come to believe in magic – that spending causes growth or that obstructing by act of Congress deals among people makes people better off.
In countless fields and by innumerable devices we see the deliberate contrivance of scarcities, the abolition of which would surely enable the dissolution of what we to-day regard as physical poverty.
While many such contrivances have thankfully been abolished or reduced in the 80 years since Hutt wrote these words, too many – such as the tariffs and occupational-licensing restrictions that persist – still remain. And these contrivances that make scarcity artificially worse are endorsed by conservatives and “Progressives” alike.
I find it bizarre that so many people wonder about why people feel poorer – and nobody, even among the Tories, dares to say that perhaps taxing them a bit less would be a way – which is entirely within the power of governments, without entailing bold plans for driving the market this or that way–to make people less poor. This would seem a rather obvious policy choice, for “conservatives.” But apparently it is not.
Being healthier has gotten cheaper. In 1900, for example, the infant mortality rate in countries with a per capita income of $1,000 was 20 per 100 live births. Today, in a country with exactly the same per capita income, the infant mortality rate is 7 per 100 births. “So even if a country had not experienced any economic growth in a 100 years, infant mortality would have been reduced by two-thirds,” he writes. Spillovers in sanitation and medical knowledge help even the very poorest live longer and healthier lives.
But this hurt [falling on foreigners from domestic barriers to trade] would be far from the only kind. Also harmed would be Americans of many sorts. Most important are American consumers, who will gladly purchase products made abroad if those products can make it across the hurdles thrown up by the U.S. government. It should go without saying that depriving American consumers of opportunities to purchase goods that, all things considered, suit them better than domestic alternatives causes them harm. For more than two centuries economists have been laboriously demonstrating how trade restrictions harm consumers in general and benefit protected domestic special interests in particular. And for just as long, of course, many if not most Americans have failed to understand the lesson or have chosen to disregard it, being bamboozled by the privileged special interests, their lobbyists, and their kept politicians.
Domestic consumers, however, are far from the only Americans hurt when the government obstructs international trade. Many kinds of producers rely on raw and intermediate materials from abroad. In some cases they have no other sources of supply. In most cases perhaps they can obtain domestically produced alternatives, but only at higher prices, in poorer qualities, or on other inferior terms, such as slower speed of supply, lesser availability of complementary services, and so forth. When foreign suppliers are shut out, such domestic producers suffer and ultimately the consumers of their products, perhaps several steps farther downstream in the supply stream, also suffer. Again, the idea that trade obstructions simply help Americans and hurt foreigners is revealed as rank nonsense.