Here’s a letter to a regular correspondent who is “sold on the need for our country to abandon free market fundamentalism”:
I did indeed read Oren Cass’s 2019 essay “Putting Dynamism In its Place,” although I didn’t blog on it. You’ll be unsurprised to learn that I don’t share your high opinion of it, for it’s marred by a persistent feature that runs through all of Cass’s work: excruciating ignorance of economics.
Consider, as an example, this paragraph:
That [trade] balanced outcome is by no means guaranteed. If trillions of dollars of foreign goods are flowing into the United States, then Americans must send back something in return. But other countries might impose obstacles to American producers selling in their markets and instead acquire U.S. assets like stocks, bonds, and real estate. For instance, what if China sends $50 billion worth of electronics to the United States and we send $50 billion worth of U.S. Treasury bonds back to China? In colloquial terms, China has sent the goods on credit. American production is lower, and government debt is higher. Such an imbalanced exchange is far from the model of prosperity-enhancing free trade taught in economics classes. It is disruptive, yes, but in ways that can reduce opportunities for workers, lower the trajectory of their productivity, and diminish the nation’s real prosperity.
To expose this paragraph’s many errors would require a lengthy monograph, so I here mention only two of Cass’s errors.
Contrary to Cass’s description, we Americans don’t pay for imports with stocks, bonds, or other such assets. We pay for imports with cash, usually dollars. Foreigners can then use those dollars to buy whatever Americans are selling. To the extent that foreigners use those dollars to buy American exports, America’s trade deficit does not rise. To the extent that foreigners use those dollars to buy American assets – that is, to invest in America – America’s trade deficit does indeed rise.
But foreigners cannot compel Americans to sell assets any more than they can compel Americans to sell goods and services. Cass therefore is mistaken to suggest that foreign tariffs on Americans’ exports somehow cause Americans to sell more assets to foreigners. Each asset sold by an American to a foreigner is one that its American owner voluntarily chose to sell.
Cass is also mistaken to assume that such asset sales are undesirable. For several reasons – also too many to cover here – this assumption is unwarranted. But I will say a few words about this assumption’s deepest flaw – namely, its exclusion of the fact that foreigners’ purchases of assets from Americans increase the size of America’s capital stock and, thus, increase the American economy’s productivity.
When, for example, foreigners buy newly issued stock by General Motors, G.M. acquires more funds for upgrading its factories and training its workers. You and Cass will insist that the same would be true if G.M.’s newly issued stock were instead bought exclusively by Americans. To which I answer, ‘Yes, perhaps, for G.M. But not for the American economy at large.’
An American outbid by a foreigner for shares of G.M. stock will likely invest elsewhere. If this American invests elsewhere in the U.S. – say, in his nephew’s new start-up in Texas – the amount of capital at work in America is greater than it would be without foreign investment here. Had no foreigner bought the G.M. stock, this American investor would have bought it, leaving him unable to invest those funds in his nephew’s start-up. (If this American instead invests abroad, the result is to push the U.S. trade deficit lower – a topic for another time, but a result presumably applauded by you and Cass.)
Bottom line: Foreign purchases of assets from Americans increase the amount of capital at work in America – a fact that, contrary to another of Cass’s uninformed claims, expands rather than reduces opportunities for workers. The protectionism that Cass endorses would thus not only deny to American consumers opportunities to get more for their dollars, it would also reduce the amount of capital at work in the American economy
I close with James Pethokoukis’s observation about Cass’s 2018 book – an observation that applies equally well to this essay by Cass that you find to be “terribly compelling”:
Although praised by several high-profile conservative wonks and writers, the only thing The Once and Future Worker really demonstrates is that it’s devilishly difficult to make sense out of nonsense. And trying to do so forces one to embrace the absurd.
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
UPDATE: Commenting at Facebook on my letter on Cass, John Csekitz writes:
I had to read this from Cass twice because it is so far off the mark the first time I didn’t believe what I was reading- “For instance, what if China sends $50 billion worth of electronics to the United States and we send $50 billion worth of U.S. Treasury bonds back to China? In colloquial terms, China has sent the goods on credit. American production is lower, and government debt is higher.”
Little did I know we could keep our government from borrowing by not purchasing foreign goods.
John’s point is excellent. And I thank him for making it, for in doing so he gives me the opportunity to ask again a favorite question of mine: Why would anyone who worries about the obscene size of the U.S. government’s indebtedness wish to turn over to the same irresponsible pols who create this indebtedness the power to use industrial policy as an alleged means of ensuring that the American economy is operated to perform well over the long-run?
It’s downright comical that many of the same people who complain (as Oren Cass does) that private markets are too heavily biased to the short-run believe that the ‘solution’ to this alleged problem is to give more power over the economy to politicians – the same politicians who prove time and time again, by running up debt, that their horizons extend only to the next election.
Oh, note also from the part of the Cass quotation featured by John that Cass mistakenly concludes that if Americans pay for imports with assets – or, more generally, in a way that causes the U.S. trade deficit to increase – the result is reduced American production. Like many of Cass’s errors, this one is a blooper committed by students who fail Econ 101.