Tweet [1]
Mental models in which economic activity is done, not by individuals, but by collectives — by "China" and "the United States" or by "us" and "foreigners" — unfailingly lead to misunderstanding.
Consider this editorial [2] in today’s New York Times. It makes some good points. But it also slips up when it discusses the alleged dangers of the U.S. trade deficit. Here’s a letter that I sent to the Times in response:
To the Editor:
You
wisely warn against the protectionism lurking in allegations of an
undervalued yuan ("Truth About the Trade Deficit," Nov. 13). But you
unnecessarily fret about the U.S. trade deficit, worrying that "If
foreigners chose to invest elsewhere – like the strengthening economies
of Europe or Japan – the result would be higher interest rates and
higher prices in America."First, the world’s capital stock
isn’t fixed. If America remains attractive to investors, foreigners
can, and will, continue to invest here while they invest more
elsewhere. Second, investment is investment, regardless of investors’
nationalities. Suppose Americans saved more and invested these savings
today at home. Would you then ask in a worrying tone: "If Americans
chose to invest elsewhere, the result would be higher interest rates
and higher prices in America"? Would this possibility be cause for
concern about Americans’ savings and their large investments in the
U.S.?Sincerely,
Donald J. Boudreaux