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‘We Were Just Standing There When, Boom!, These Savings from Afar Fell and Crushed Us!’

Here’s a letter to Jared Bernstein:

Mr. Bernstein:

In your blog post today, “Do economists understand economies?,” you state that “The assumption that more international trade is always a plus has led too many economists to miss problems in global macro.  Most importantly, some of our trading partners suppressed their consumption, boosted their savings, and exported those savings to us such that their trade surpluses become our trade deficits.  The need to offset that macro drag, in tandem with large inflows of cheap capital, led to destabilizing bubbles that were missed by most economists.”

I disagree.

First, no economist assumes that “more international trade is always a plus.”  Instead, economists who support free trade argue that individuals and firms should be allowed to buy from, and to sell to, whomever they please without regard to political borders.  More international trade is a plus only insofar as it results from people’s voluntary choices.  Any amount of international trade beyond that which people voluntarily perform, with only their own money, is a minus and not a plus.

Second, you write as if foreigners force their savings onto us Americans, while we then – refusing to restrict imports – watch helplessly as asset prices in the U.S. bubble as a result.  There is much that is mistaken here, not least of which is the fact that there’s no credible evidence that asset bubbles in the U.S. are caused by artificially boosted foreign savings flowing onto our shores.  Certainly, no inflow into the U.S. of ‘excess’ foreign savings explains the housing bubble that preceded the Great Recession.  As my colleague Johanna Mollerstrom and her co-author David Laibson show in a 2010 paper, the rate of global savings during the time when U.S. housing prices were bubbling did not increase enough to cause this bubbling.*  Hence, the unusually high U.S. current-account deficit of ten years ago was not caused by any glut of foreign savings being forced onto Americans.

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

* David Laibson and Johanna Mollerstrom, “Capital Flows, Consumption Booms and Asset Bubbles: A Behavioral Alternative to the Savings Glut Hypothesis,” Economic Journal, Vol. 120, May 2010, pp. 354-374.


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