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Capital Is Not Fixed… Capital Is Not Fixed… Capital Is Not Fixed…

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Here’s a letter to the Wall Street Journal:

Lamenting U.S. trade deficits, John Shaw assumes that these deficits increase foreigners’ ownership of assets at the expense of Americans’ ownership of assets  (Letters [2], Nov. 30). He’s mistaken.

The inflation-adjusted net worth of American households and nonprofit organizations is today 275 percent higher than it was in the mid-1970s [3]* when America’s current string of annual trade deficits began. Even more revealingly, the value of this net worth relative to disposable personal income is today 46 percent higher [4] – a reality made all the more remarkable by the fact that real disposable personal income is today more than double what it was in the mid-1970s [5].

Like so many skeptics of trade, Mr. Shaw assumes that the amount of productive capital in the world is fixed. But this assumption is invalid. Because the amount and productivity of capital can grow, increased foreign investment and ownership of assets in the U.S. emphatically does not imply decreased American investment and ownership of assets.

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

* I adjusted these figures for inflation by using this inflation adjuster [6].

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