- Cafe Hayek - https://cafehayek.com -

This Dangerous Horse Appears, Alas, to Be Immortal

Tweet [1]

Are people with blue eyes benefitted less when the factory across town and the shopping mall down the street are owned or financed by people with brown eyes than they are when these enterprises are owned or financed by people with blue eyes?  The logic of Mr. Romano’s argument suggests – wrongly, of course – that the answer is ‘yes.’

…..

Editor, NetRightDaily

Sir or Madam:

Robert Romano’s complaint about the U.S. trade deficit reflects deep misunderstandings of economics (“$8.7 trillion of economic growth lost to trade deficits since 2000 [2],” April 15).  An example of one such misunderstanding is this passage in which Mr. Romano replies to a (sound) explanation that Tim Worstall offered of the trade deficit [3]: “Having the $8.7 trillion of trade deficits ‘all invested back into the U.S. economy,’ in Worstall’s words, into U.S. government treasuries, mortgage-backed securities, corporate debt or equities, which are then owned by foreign governments and investors is not the same as the alternative.  Which is, profits in companies earned by Americans offering jobs to Americans, rising incomes with additional demand for labor.”

A factory in Florida, a hotel in Hawaii, and a shopping mall in Missouri create jobs and promote wage growth – and, also, improve consumers’ options – no less surely, and in no smaller numbers, if these enterprises are owned or financed by non-Americans than if they are owned or financed by Americans.  Also, the profits earned from the successful operation of these enterprises will be re-invested in the U.S. economy by non-American earners no less (or no more) surely than these profits would be reinvested in the U.S. economy by American earners.  And because these profits are earned in dollars, even non-American owners who wish to spend or invest all of their dollar profits only outside of America must first exchange their dollars for foreign currencies – exchanges that are possible only because other foreigners wish to spend or to invest at least the same number of dollars in America.

As for Mr. Romano’s concern that some dollar-denominated assets are owned by foreign governments, that’s a red herring.  Until and unless foreign-government owners of such assets begin to pursue political goals by using these assets in ways that intentionally diminish their market value, the fact that some foreign investors are foreign governments is irrelevant both to Mr. Romano’s faulty case that a U.S. trade deficit necessarily slows U.S. economic growth and to the correct case that it does no such thing.

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

Comments