Who is We?

by Don Boudreaux on December 19, 2005

in Myths and Fallacies, Trade

Commenting on this blog-post, Barry Ritholtz argues that

While it may not involve indebtedness, the obvious parallels [of a trade deficit to debt] are to spending more than you earn. In the case of the US, we now consume much more than we produce.

I disagree.  The reason is that there’s a fundamental confusion over who the ‘we’ are.

Trade makes the relevant economic ‘we’ larger than the population of people living within any one political jurisdiction (say, the United States).  When someone in Boston or Bakersfield refrains from spending his income on current consumption in order to build a business with that income, pundits applaud.  Someone — in this case an American — who had a claim on resources that he could have used for current consumption instead refrained from consuming in order to invest these resources in a wealth-producing asset.  Because this investor is an American, his investment is counted as an ‘American’ investment.

But when a foreigner does the same thing, pundits get hot and bothered and lathered in anxiety.  But why? The foreigner could have used his claim on resources to fund his current consumption; instead he used it to invest in an asset.  What possible difference can it make to me (an American) if a stranger in Boston or Bakersfield makes such an investment, or if a stranger in Kyoto or Kiev does so?

More importantly, when the foreigner makes such an investment, he becomes in an economically relevant way one of ‘we.’  He is part of our economy.  What does it matter that his passport is issued by another government or that he lives across the ocean?  The number of ‘us’ in the economy expands — and ‘we’ are thereby made wealthier.

No less than when investment is done by people holding U.S. passports, when foreigners invest in the U.S. there is more investment in the U.S.  The fact that title to this particular investment is held by someone living abroad and perhaps not even speaking English and unable to locate Kansas City on a map of the U.S. is irrelevant.

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