Tweet

Here’s a letter to a new correspondent.

Mr. E__:

After reading this post, you think me “kind of silly and shallow for comparing trade deficits to witches given witches are figments of imagination but trade deficits are actual, objective things.”

There is indeed an actual accounting artifact called “trade deficit,” but it’s a highly subjective product of human imagination. It is a human choice, for example, to mark monetary payments for imports with a negative sign, and to mark monetary receipts for exports with a positive sign. The choice could easily have been the opposite, marking payments for imports with a positive sign (to record the value of what we obtain from trade with foreigners), and marking receipts for exports with a negative sign (to record the value of what we transfer through trade to foreigners). This lone change in an accounting convention would, without any change whatsoever in real economic activity, show that the U.S. is today on track to run its 50^th consecutive year of annual trade surpluses.

Even if we keep the signage unchanged, it’s a human choice – to take another example – to count as a U.S. export a foreigner renting as a residence a condo in Houston, but not to count as a U.S. export a foreigner buying as a residence a condo in Houston. Were such real-estate purchases counted, like real-estate rentals, as U.S. exports (rather than as foreign purchases of U.S. capital), U.S. trade deficits would be smaller.

U.S. trade deficits would also fall if we were to count as U.S. exports the U.S. dollars that foreigners obtain to conduct international commerce.

My point here isn’t to recommend these or any other changes in these accounting conventions. My point, instead, is to point out that U.S. trade deficits are not nearly as objective as you and most people suppose them to be. Indeed, they are so economically nebulous – and, hence, misleading – that the world would be a much better place had no one ever thought to invent this accounting convention that Adam Smith rightly dismissed as “absurd.”

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

Tweet

… is from David Hume’s 1742 essay “Of the Balance of Trade” (here from pages 314 of the 1985 Liberty Fund collection of Hume’s essays, edited by the late Eugene Miller, Essays: Moral, Political, and Literary) [original emphasis; footnotes deleted; the Heptarchy is the term for the independent Anglo-Saxon kingdoms in England from the fifth to the ninth centuries AD]:

And no doubt, had the Heptarchy subsisted in ENGLAND, the legislature of each state had been continually alarmed by the fear of a wrong balance; and as it is probable that the mutual hatred of these states would have been extremely violent on account of their close neighbourhood, they would have loaded and oppressed all commerce, by a jealous and superfluous caution. Since the union has removed the barriers between SCOTLAND and ENGLAND, which of these nations gains from the other by this free commerce? Or if the former kingdom has received any encrease of riches, can it reasonably be accounted for by any thing but the encrease of its art and industry? It was a common apprehension in ENGLAND, before the union, as we learn from L’ABBE DU BOS, that SCOTLAND would soon drain them of their treasure, were an open trade allowed; and on the other side the TWEED a contrary apprehension prevailed: With what justice in both, time has shown.

DBx: Fear of so-called “trade deficits” is as rational as is fear of witches. And declaring that persistent trade deficits are a national emergency makes no more sense than would declaring that the prevalence of witches in our midst is a national emergency.

Tweet

The Editorial Board of the Wall Street Journal shares the findings of a new paper from the Dallas Fed that details “the economic drain of mass deportation.” Two slices:

The loss side of the ledger is that mass deportation of productive employees will drain economic growth and make it harder for Mr. Trump to deliver a return to the prosperity of his pre-Covid first term. Consider an economic paper published Tuesday by the Federal Reserve Bank of Dallas. “Our analysis,” the authors say, “raises the concern that a sharp tightening of immigration policies has the potential to substantially reduce output growth.”

The study is based on a model that includes historical data on immigration and the economy from 1955 to 2019. “U.S. GDP growth typically increases for two years in response to an unexpected increase in net unauthorized immigration and then gradually reverts to its mean,” the authors write. “Inflation shows almost no response in the first few years but decreases slightly at longer horizons.”

…..

The study finds that “high interior deportation,” with removals gradually rising to 437,500 a year, would cut economic growth by 0.83 percentage point this year and 0.84 in 2027.

If there’s a “self-deportation wave,” meaning half of the people with TPS leave the U.S. before mid-2026, that would shave GDP growth by 1.01 point this year and 0.45 in 2027.

Under “mass interior deportation,” with removals rising over the next two years to a million annually, growth would be 0.89 point lower this year and 1.49 in 2027.

Economic models aren’t perfect crystal balls, as the authors warn. “However, this does not mean the results are not informative,” they say. “There is good reason to be concerned that immigration policies that lead to a reduction in net unauthorized immigration relative to historical trends, all else equal, are likely to significantly lower real GDP growth.”

My intrepid Mercatus Center colleague, Veronique de Rugy, applauds Congress’s Freedom Caucus for preventing the Big Ugly Bill from being even uglier. Two slices:

When it comes to the One Big Beautiful Bill Act (OBBBA), two things can be true at once:

The legislation contains some truly important policies, including permanent 100 percent bonus depreciation and other TCJA tax reforms, as well as changes to Medicaid and SNAP, steps toward energy independence, a permanent cap on the mortgage-interest deduction, and some welcome reductions to the Inflation Reduction Act subsidies, among others. That’s great.

But, the bill’s bottom line is fiscally irresponsible because it combines expanded and new tax breaks for special interests, while implementing only modest spending restraints (many of them in the future) relative to projected revenue losses. This bill, even accounting for any economic growth it spawns, exacerbates our already dire fiscal woes. That’s a shame.

I’ve made no secret of my disappointment with the fiscal impact of OBBBA. In fact, I have written pieces that are quite similar to Mark Antonio Wright’s excellent piece yesterday.

And yet, I also want to acknowledge that the final outcome could have been worse if it weren’t for some Republicans in Congress who fought hard to make things better. I find this thought terrifying, but such was the trajectory early on.

…..

Members who advocate for fiscal responsibility and threaten to withhold their votes if more cuts aren’t implemented are often dismissed as unhelpful or extreme. But as they always do, these members serve as a critical check on both parties. In this case, they reminded their colleagues that tax cuts without spending reform are not fiscally conservative; such cuts risk the fiscal sustainability of this country. These members also pushed back against the idea that expanding the welfare state indefinitely is costless.

The Cato Institute has filed an amicus brief in the case of V.O.S. Selections, Inc. v. Trump – a case challenging Trump’s use of the executive power to impose tariffs.

Also filing an amicus brief in V.O.S. Selections, Inc. v. Trump are scholars at the American Enterprise Institute.

Mike Viola sensibly predicts that “populist rage against credit cards will backfire on consumers.”

Michael Chapman is correct: Henry Hazlitt’s 1946 Economics In One Lesson remains relevant. A slice:

Take the minimum wage, for example. Last month, Senators Josh Hawley (R‑MO) and Peter Welch (D‑VT) introduced legislation to raise the federal minimum wage to $15 an hour, with automatic inflation adjustments. Vice President JD Vance favors an $11 rate. In New York City, mayoral candidate Zohran Mamdani, a self-declared socialist, wants a $30 minimum wage for the city. According to Welch, “Every hardworking American deserves a living wage.”

But as Hazlitt explained nearly 80 years ago, that kind of economic paternalism ignores reality. A wage is not a moral declaration—it is a price. Raise the price, and demand falls. When wages are mandated above the productivity level of the worker, employers have limited options: lay off staff, cut hours, reduce hiring, or replace workers with machines. Hazlitt’s summary still holds: “For a low wage you substitute unemployment. You do harm all around, with no comparable compensation.”

Benjamin Zycher explains that “natural gas is green and hugely beneficial economically.” A slice:

Let us not forget the adverse environmental effects of wind and solar power, studiously ignored by the opponents of fossil fuels: heavy-metal pollution, wildlife destruction, noise and flicker effects, massive land use and degradation of vistas, landfill problems, and on and on.

And there also are the enormous costs of renewable power compared with fossil electricity. When we include the costs (all in in year 2024 dollars per MWh) of backup generation ($132.65, for the most part, natural gas turbines) needed to avoid service interruptions, the Energy Information Administration cost estimates are as follows. Combined-cycle natural gas: $44.95. “Ultra-super critical” coal: $92.98. Nuclear: $99.31. Photovoltaic solar: $173.72. Onshore wind: $177.93. Offshore wind: $286.29. Unconventional power is not competitive, and the past efforts to force a shift toward wind and solar electricity has yielded substantial economic harm.

Tweet

… is from page 265 of Johan Norberg’s splendid 2023 book, The Capitalist Manifesto:

Liberalism does not deny man’s need for belonging, it just denies that [Patrick] Deneen and [Noreena] Hertz know which collectives we should belong to. Liberalism is not about finding all life’s meaning in a shopping list, it just says that we need more meaning than can be found in a ballot paper. And that those who seek the meaning of life in collective projects the they try to enforce on everybody have less of a sense of the beautiful richness and diversity of human nature than the alleged cold and robotic market liberals.

Tweet

… is from this Facebook post shared by Trace Mitchell:

“True socialism has never been implemented.”

No, but attempts to get closer to it have resulted in death and poverty.

“True libertarianism has never been implemented.”

No, but attempts to get closer to it have resulted in peace and prosperity.

Choose your direction.

Tweet

Here’s a letter to CNN.com.

Editor:

Reporting on Trump’s tariffs, Olesya Dmitracova misleadingly, if unintentionally, understates the economic case for free trade by writing that “mainstream economists … have long disliked tariffs and can point to research showing they harm the countries that impose them, including the workers and consumers in those economies” (“Trump has delayed his monster tariffs. Here’s why you should care,” July 9).

Proponents of even the most outlandish notions can “point to research” that supports their positions. But on the question of free trade, the research in its favor is overwhelming. The freer are the people of a country to trade, the higher is their per-capita GDP, the faster is their rate of economic growth, the longer they expect to live, and the less likely their governments are to go to war with trading partners. Those researches that find otherwise are relatively minuscule, as can be verified by consulting almost any respected work on the economics of trade – works such as Jagdish Bhagwati, In Defense of Globalization (2004), Daniel Griswold, Mad About Trade (2009), Douglas A. Irwin, Free Trade Under Fire (2020), Pierre Lemieux, What’s Wrong With Protectionism? (2018), Johan Norberg, In Defense of Global Capitalism (2003), Arvind Panagariya, Free Trade & Prosperity (2019), and Martin Wolf, Why Globalization Works (2004).

Especially after what is now 250 years of serious economic theorizing and research into every nook and cranny of arguments for protectionism, these mainstream findings shouldn’t be surprising: National-security considerations aside, protectionism is the bizarre belief that a government can increase its citizens’ access to goods and services by decreasing its citizens’ access to goods and services. Or stated slightly differently, protectionism is the blind faith that by enabling some particular producers to commandeer parts of the incomes of their fellow citizens, governments raise the incomes not only of the privileged producers, but also of their victimized fellow citizens.

Protectionism, in short, is a belief in miracles. As such, it is a vestige of humankind’s pre-enlightenment, superstitious past – and its peddlers should be met with no less skepticism than is accorded palm-readers and hawkers of penis-enlargement pills.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

Tweet

My intrepid Mercatus Center colleague, Veronique de Rugy, reveals “the overlooked side of the Planned Parenthood funding issue.” A slice:

State governments are not powerless either. If Massachusetts, California, and New York want to ensure that Planned Parenthood’s doors stay open, they are free to allocate state taxpayer dollars to make that happen. And if some rural communities want to fund a women’s health clinic offering the full range of reproductive services, nothing in federal law stops them from raising money locally to do so.

But instead of holding those debates at the state or local level, we immediately rush to the courts and insist that the funding must come from Washington, D.C.

This reflex is part of a deeper problem: a political culture in which every program, every priority, and every budget line item must be nationalized. If something is valuable, we assume that it must be federally funded. If the federal government steps away, we act as though the service will vanish forever. That’s incorrect. Unfortunately, this way of thinking has been behind much of the federal government’s expansion over the last 100 years and our inability to scale it back.

Wall Street Journal columnist Matthew Hennessey applauds the denial of federal funding to Planned Parenthood. [DBx: One can applaud removal of these subsidies even if one is not opposed to abortion. As Vero notes in what’s linked above, there’s no good case for federal-government subsidies of these clinics.]

Pierre Lemieux warns against the (strange) allure of industrial policy.

Eric Boehm files a report from the front lines of the trade war. A slice:

One of the supposed goals of the Trump administration’s trade policies is to protect and promote American-made products.

Greg Shugar, who owns a business that does make things right here in America, has a hard time seeing it that way.

“I’m charging more and I’m making less,” says Shugar, owner of Beau Ties of Vermont, which manufactures neckties, socks, pocket squares, and other fashion accoutrements.

While the vast majority of American clothes and accessories are imported these days, Shugar’s company, which employs 18 people, is one of the few that are cutting and sewing those products here in the United States. He told Reason last week that the tariffs have not been a boost for his business. Quite the opposite, in fact, since his products depend on silk jacquard and other materials that are imported from overseas—mostly from China but also from Italy.

Bjorn Lomborg is correct: “Ignoring free trade benefits is absurd.”

GMU Econ alum Dave Hebert asks: “What is the Jones Act – and can it be fixed?” Two slices:

Counter to the goals of the Jones Act, raising the cost of domestic sea-shipping to such a degree has encouraged domestic producers to find alternative means of transporting their wares. In an extreme case, cows from Hawaii are frequently shipped by air because it is cheaper than shipping them by water. By reducing demand, high shipping costs actually reduce the number of domestically produced ships, the domestic shipbuilding facilities, jobs in the shipbuilding industry, and the number of qualified mariners available to crew Jones-Act-compliant ships.

Rather than nurturing an abundance of ships and mariners standing ready to bolster naval operations, the Jones Act has produced the opposite: shortages of both. In 2017, the Maritime Workforce Working Group reporteda deficit of 1,839 mariners for a “sustained sealift,” meaning “sustained wartime efforts.” Even this estimate assumes that all currently “actively sailing and qualified mariners with unlimited credentials available to crew… [were] available and willing to sail.” At a 2023 hearing before the Department of Transportation, Ann Phillips, then the Maritime Administrator, noted that since the 2017 study, “globally standardized credentialing requirements” and “the COVID-19 pandemic” have both “negatively impacted mariner retention.” While she did not provide new figures for the deficit, one can only surmise that the situation has gotten worse, not better.

The sobering unintended consequences of the Jones Act go further. At a 2013 hearing before the House Subcommittee on Coast Guard and Maritime Transportation, the Subcommittee’s staff reported as “Background” that between 1983 and 2013, at least 300 shipyards closed, leaving just four remaining open today.

The result of all of this has been a massive decline in the capacities of the US shipbuilding industry.

…..

Estimated savings from repealing the Jones Act would be enormous. In 2019, the OECD projected that “an abolishment of the Act will result in net economic gains for the US, in particular for US industries dependent on water transportation services for intra-US sales, and the shipbuilding industry itself” (emphasis added).

Nathan McGrath explains “how labor unions feed campus antisemitism.” A slice:

Although Mr. Lax wanted nothing to do with his union, he had no choice. In most unionized public-sector workplaces, even nonmembers must accept a union’s “exclusive representation,” meaning Jewish CUNY professors have to allow the PSC to represent them in contract matters even though the union prohibits nonmembers from voting on contracts. The Supreme Court opted not to review the practice after a legal challenge by Mr. Lax and others represented by the Fairness Center. Exclusive representation was upheld by lower courts, leaving Jews’ terms and conditions of employment in the hands of union officials responsible for effectively purging them from their membership rolls.

Arnold Kling summarizes the “God’s View” of the economy that too many economists began taking in the mid-20th century (and, I believe, continue to take today).

Alan Dlugash is correct: “Trump’s whirlwind of lawlessness sets up a disastrous blueprint for future presidents.”

Damon Root reports on Arizona Supreme Court justice Clint Bolick warning that the Trump administration is further battering the rule of law. (Bolick, it’s worth pointing out, is co-founder of the Institute for Justice and a personal friend of Clarence Thomas.) A slice:

In a sane political climate, Bolick’s words of warning would be big news in conservative media. After all, he is a highly respected Republican-appointed jurist with a lengthy track record as a textualist. His resume and accomplishments should earn him a fair hearing from “his side” of the political aisle.

Yet as the Arizona Republic reports, the conservative response so far to Bolick’s speech has been a barely veiled political threat. “Justice Clint Bolick should stay out of the political arena,” declared Mike Davis, the head of the pro-Trump Article III Project. “When judges take off their judicial robes, climb into the political arena, and throw political punches, they should expect political counterpunches,” Davis told the Arizona Republic.

The fact that Bolick delivered this speech at this time suggests that he is ready for the fisticuffs. “Standing up for the rule of law and the independent judiciary, no matter who is attacking it, is an absolute priority,” Bolick declared, before adding, “count me in.”

Bolick is a principled legal thinker and one of the genuine good guys in American law. If he is worried about the health of our constitutional order, we should all pay heed.

Tweet

… is from page 218 of Michael Strain’s 2025 paper “The (non) effect of tariffs on manufacturing employment” [link added]:

But when they study the effects of trade more broadly, Feenstra et al. find that job losses identified by [“China Shock” researchers] Acemoglu et al. and Autor et al. are fully offset by job gains due to US exports.

DBx: Shocking! (Not.)

Tweet

… is from this excellent new essay, at National Review, by the businessman Neal B. Freeman:

You hear it said frequently that we Americans don’t make things anymore. While it’s true that we don’t make many of the things you see around the house – plastic flatware, keychains, underwear, sparklers – we make many of the things that are harder to make and that create more economic value – computer software, rockets, semiconductors, medical devices. And we make a lot of them. Of the 195 countries doing or trying to do business internationally, the U.S. manufactures and sells more products than all but one of them – China, which has a population four times larger than ours.