Among the most frequently encountered assertions of “common good capitalists” is the claim that American workers in recent decades have been, and continue to be, denied their fair share of the fruits of economic growth. Senator [Marco] Rubio insists that American workers are “suffering,” while Oren Cass contends that American workers’ wages are “stagnating.” This suffering and stagnation, in turn, are said — as, for example, in this American Compass study — to result in lower incomes for middle-income households and rising economic inequality.
These and related claims have been repeatedly debunked by serious scholars who, unlike most “common good capitalists,” are deeply knowledgeable about the data and interpret these competently. Consult especially the work of Scott Winship, of Michael Strain, and of Phil Gramm, Robert Ekelund, and John Early. Nearly every assertion that “common good capitalists” make about the alleged desperate and deteriorating economic condition of ordinary Americans is wrong, and often spectacularly so. Far from ordinary Americans being crushed in the last few decades by globalization and the entrepreneurial dynamism that Adam Thierer calls “permissionless innovation,” ordinary Americans’ economic opportunities have expanded and their standard of living has skyrocketed.
Consider, for example, this remarkable fact, amply supported by data, described by Gramm, Ekelund, and Early:
When inflation adjustment accounts more completely for the extraordinary improvements in our well-being from new and improved products, over the last fifty years, all but 6.2 percent of households in 2017 had incomes that would have placed them in the top quintile in 1967.
Or ponder Michael Strain’s summary of his well-documented findings:
A country as large as ours, in which citizens have such varied experiences, makes generalizing difficult. But today’s prevailing narrative is so stark that the task of generalizing becomes much easier. The narrative is wrong. America is upwardly mobile, particularly for those nearer the bottom of the income distribution. Incomes aren’t stagnant. Workers do enjoy the fruits of their labor. The argument that life hasn’t improved for typical households in decades borders on the absurd.
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“Common good capitalists’” carelessness with data is paired with an often comical failure to understand basic economics. One such recurring error is the assertion that US trade deficits represent, or result in, net reductions in demand for American-made outputs. As Oren Cass put it in a 2019 New York Times op-ed, “More trade is good, if that trade is balanced. But huge trade deficits represent supplies [produced by] foreign workers entering the United States market from afar with no commensurate rise in foreign demand for what American workers produce.”
This claim is both factually false and rooted in a mistaken premise.
It’s factually false because most dollars that foreigners do not spend buying American exports nevertheless return to the US; they do so as investments. And this inflow of investment dollars from abroad, no less than an inflow of dollars to buy American exports, fuels “demand for what American workers produce.” It might fuel this demand directly, as when the Dutch company Ikea uses dollars to build a new store in the US. Or it might fuel this demand indirectly, as when non-Americans buy US government bonds, the sales revenues of which are then spent by the US government on military weaponry or on welfare programs that increase their recipients’ spending power. A key reality that Mr. Cass and other “common good capitalists” miss is that foreigners accept dollars in exchange for their exports not because foreigners wish to hoard monochrome portraits of dead American statesmen, but because foreigners wish either to spend or invest those dollars in the US.
The mistaken premise in Mr. Cass’s claim is that Americans would be harmed if, contrary to fact, foreigners literally or figuratively stuffed most or all of their dollars into mattresses. If foreigners were to refuse to spend or invest their dollars in the US, that would be for us Americans, trade-wise, the best of all possible worlds. We Americans would grow even richer at foreigners’ (voluntary) expense.
The cost of printing a $100 bill is 17 cents. Thus, if foreigners hoarded their dollars, for every million dollars worth of goods we import in exchange for hundred-dollar bills, we’d spend a mere $1,700 — netting us Americans a handsome profit of $998,300 on every $1,000,000 of imports purchased. Put differently, the rate of return, in terms of the value of goods and services imported, on trading with foreigners would be 58,724 percent! This rate of return would be even higher if we were to pay with lower-denomination bills (which cost less to produce than do $100 bills), and higher still if we paid with only digital bank-account entries.
How we Americans would be impoverished if foreigners chose to sell to us valuable goods and services in exchange only for fancily inked slips of linen and cotton that we produce at minimal cost is beyond me. Alas, though, foreigners are just like us: they produce and sell in exchange for dollars only because they want to spend or invest those dollars, ultimately in the US. And the spending and investing of dollars by foreigners creates demand for American labor no less than does the spending and investing of dollars by Americans.
Next post: Griswold and Freytag On the So-Called “Trade Deficit”
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