In my August 25th, 2005, column in the Pittsburgh Tribune-Review I continue the discussion on the so-called “balance of payments” that I began in my previous column. You can read the full follow-up discussion beneath the fold.
More trade-deficit talk
Let’s continue conversing with “Mr. Jones,” a sincere soul worried about the U.S. trade deficit:
Jones: Are you serious, Boudreaux? You don’t mind if foreigners profit from the successful use of assets in America?
Boudreaux: What’s truly important for American workers is that they have ample opportunities to employ their talents as effectively as possible. The better these opportunities, the higher will be workers’ wages.
In general, whenever entrepreneurs discover new ways to please consumers — say, by introducing a new product onto the market — new job opportunities arise. As this happens, employers compete more vigorously for labor, obliging firms to pay workers wages that reflect the value that workers contribute to the production process.
The greater the value of the production process (as judged by how well producers satisfy consumer desires), the greater is worker productivity — and, hence, the greater is workers’ compensation.
As for American consumers, what they most need are ample opportunities to spend their incomes in ways that give them the greatest possible satisfaction. More producers mean more goods and services. In turn, this means more intense competition and better selection, higher quality and lower prices.
What difference does it make if the entrepreneur who builds a new factory in the U.S. is an American or not? If this entrepreneur is successful, workers in his firm earn higher wages than otherwise and consumers have greater product selection than otherwise.
Jones: It makes a difference because a successful foreign entrepreneur — rather than an American — will reap the profits.
Boudreaux: Again I ask: So what? Surely any entrepreneur, regardless of nationality, who succeeds in devising more attractive employment and spending options for Americans deserves to profit. Why should it matter to me if the person who expands my employment and consumption opportunities is a stranger from Tennessee or a stranger from Tokyo?
None of this is to deny that I would be better off if I, personally, saved and invested more than I now do. But given whatever amounts I save, I’m better off the greater the amount of market-driven investment that takes place in the economy of which I am a part. And it matters not to me if those doing this saving and investing are Americans or foreigners.
In fact, the greater the number of people who are actively a part of the economy, the better. More potential investors mean more creative ideas and more-vigorous competition. I cannot imagine a good reason to limit the number of people who actively invest in our economy. The fact that such investments by foreigners are recorded in the capital account rather than in the current account — and, hence, the fact that these investments generate current-account deficits — is irrelevant.
It’s important to realize that investment opportunities are not fixed in number. They are as numerous as free, creative human imagination can make them. So when a Brit or a Bolivian opens a firm in the U.S., Americans’ investment opportunities are not necessarily reduced. Indeed, these opportunities might well expand. If the foreigner’s investment is successful, it will likely create profitable opportunities for others to invest in as suppliers.
Jones: That’s true when foreign investment creates new businesses in America. But what about foreigners investing in debt, such as when they lend money to U.S. companies?
Boudreaux: Good question. Foreigners’ willingness to lend to Americans keeps interest rates lower, which raises the profitability of all entrepreneurs and business here to create new firms, expand existing ones, provide more worker training, sponsor more R&D, etc. And as with foreigners creating new firms here in America, foreigners lending money to Americans does not reduce Americans’ opportunities to lend money to each other or to foreigners.
Indeed, if you’re truly worried about Americans saving too little, foreign investment in the U.S. reduces, and possibly totally avoids, the ill consequences that threaten any economy in which investment is choked off by too little saving.
Jones: How about foreigners lending money to Uncle Sam?
Boudreaux: Still no problem — no problem, that is, with the nationality of Uncle Sam’s creditors. What is a problem is Uncle Sam’s profligate spending. It’s this irresponsible spending that creates gargantuan budget deficits.
Few spectacles are as galling as watching members of Congress complain about foreign practices that raise the U.S. trade deficit, for it’s these same politicians whose undisciplined spending requires the U.S. Treasury to borrow money to cover these expenses.
Unquestionably, Uncle Sam’s gluttonous borrowing raises the U.S. trade deficit. But the culprit is the free-spending government, not foreigners who simply purchase the U.S. Treasury Notes whose sale is required by this spending.