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Getting the Economics Correct

Here’s a letter to the editor of National Review:

Favorably reviewing Edward Conard’s new book, Patrick Brennan makes several excellent points (“The Conservative Answer to Thomas Piketty That You’ve All Been Waiting For,” Sept. 19).  Unfortunately, he also falls for a couple of errors that mar Conard’s volume.

It simply isn’t true that “Trade deficits flood our economy with risk-averse savings rather than the equity we need to invest in innovation.”  Some foreign savings are indeed invested in U.S. Treasuries, but others are invested in the likes of new Ikea stores and directly in U.S.-based manufacturing.  By 2014, for example, foreigners’ cumulative investments in U.S.-based manufacturing totaled more than one trillion dollars.*  Moreover, foreign investment in U.S. Treasuries frees up Americans’ dollars to be invested elsewhere.  So even if all foreign investment were in U.S. Treasuries, it’s impossible to conclude from this fact alone that the U.S. trade deficit does not lead to pro-growth investments in innovation.

Nor is it true that only high-skilled immigrants help the U.S. economy “while mass immigration brings unskilled workers who absorb already scarce resources.”  First, if one high-skilled immigrant is as productive as are, say, five unskilled immigrants, then five unskilled immigrants add as much value to the economy as does one high-skilled immigrant – and six unskilled immigrants add more.  Second, because even unskilled workers are workers, they do not – contrary to Messrs. Brennan’s and Conard’s apparent assumption – merely “absorb” scarce resources: all workers in the market economy, from the most skilled to the least, contribute productively and positively to the economy, for otherwise they would not be hired to be workers.

I applaud Mr. Conard for taking aim at the many falsehoods and misunderstandings that fuel today’s unhealthy obsession with income and wealth inequality.  But his good effort would have been even stronger were it not weakened by these errors.

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

* See page 6 here.