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A Fusillade of Fallacies at Breitbart

Below is a letter to Breitbart.  (I thank Scott Lincicome for alerting me to this mountain of economics mistakes.)

John Carney’s essay “No. The U.S. Trade Deficit Is Not a Good Thing” (Aug. 15) is a fusillade of fallacies.  Among the worst is Mr. Carney’s claim that foreign direct investment “isn’t some vote of confidence in the health of the American economy.  It’s just a side-effect of the fact that our deficit leaves the world with excess dollars.”

The U.S. trade deficit arises when foreigners, who earn dollars selling their exports to Americans, invest some of those dollars in America rather than spend those dollars on American exports.  If foreigners had no confidence in the American economy, they would, as quickly as possible, cash out their dollars for American goods and services rather than put those dollars at risk in dollar-denominated investments.  Therefore, by investing in America, foreigners do in fact cast a “vote of confidence in the American economy.”

Furthermore, because foreigners choose to invest in America whatever sum of dollars they invest – that is, because foreigners could have instead chosen to invest fewer dollars in order to spend more on American exports, a move that Mr. Carney would applaud – it is incoherent for Mr. Carney to describe the sum invested in America by foreigners as “excess dollars.”  There’s simply nothing whatsoever that is “excess” about this sum of dollars.

In ridiculing Sen. James Lankford’s optimistic assessment of the U.S. trade deficit, Mr. Carney accuses the senator of having “a kind of dorm room, first three weeks of a freshman taking Economics 101 understanding on international trade and capital flows.”  In fact, the one whose understanding of economics and capital flows is sophomoric and faulty is Mr. Carney.

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