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Veronique Is Correct and Her Critic is Not

Here’s a letter to the editor of the site Law and Liberty:


Julius Krein’s response to my colleague Veronique de Rugy’s “Twenty-Five Years of NAFTA” is such a flood of fallacies and half-truths that it’s impossible in a short space even to list – and much less to refute – them all. So I’ll focus on some of the most significant flaws.

First, after expressing agreement with what he calls the “conventional wisdom” that “trade deficits don’t matter,” Krein writes as though they do matter. Krein is simply mistaken to assert that “trade deficits must be balanced either by private-sector borrowing (such as the household borrowing prior to the financial crisis of late 2007 through 2009) or government borrowing.” Foreign holdings of dollars add to the U.S. trade deficit, yet no borrowing is involved. Ditto for purchases by foreigners of American real-estate or foreigners’ creation on American soil of businesses. And therefore Krein is incorrect to assert that the policy of free trade that Ms. de Rugy supports has “created a global economic situation in which the U.S. economy can only grow through widening deficits.”

Second, Krein’s labeling as “misleading” Ms. de Rugy’s report that U.S. manufacturing output is today near an all-time high is itself misleading – and highly so. While Krein’s observation that the all-time high for U.S. manufacturing output was reached in 2007 is correct – and while his claim that this output is “barely higher today than it was in 2000” is defensible (But just barely: is eight percent higher “barely higher”?) – Krein conjures a mistaken impression of a stagnant U.S. manufacturing sector only by forgetting to tell his readers that manufacturing output fell during the recession of 2001 and again during the recession of 2007-09. Apart from these dips – which occur during all recessions – U.S. manufacturing output has long been, and continues to be, on a pretty steady trajectory upward. It is today 45 percent higher than it was when NAFTA first took effect and continues to rise. Furthermore, U.S. industrial capacity has risen consistently since NAFTA took effect (as it had for many years before), and is today at an all-time high and 66 percent greater than it was when NAFTA was launched.

Finally, Krein credulously repeats the unwarranted if commonplace assertion that economically we Americans and our “competitiveness” are “declining.” Yet just last month in the Washington Post Robert Samuelson reported evidence that debunks the stagnation myth. And as for our “competitiveness” – a term, by the way, that has far less meaning than people such as Krein suppose – U.S. exports hit an all-time high this past April (before declining a bit because of Trump’s trade war). U.S. exports are today, in real terms, 200 percent higher than they were when NAFTA commenced.

Again, a host of other flaws infect Krein’s essay. But the ones mentioned above should be sufficient to reveal that his case against Ms. de Rugy’s analysis is superficial and groundless.

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