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Oh, And Naturally He Also Calls for Industrial Policy

American Compass continues to publish ill-informed commentary on trade. Here’s an open letter to that organization.

American Compass:

Samuel Hammond’s “Memo” titled “Capital Flows Are the Core Concern” is a dreadful mix of fallacies and faulty reasoning.

For starters, it’s not true that a U.S. “current account deficit means that the United States is a net borrower.” Many foreign investments that contribute to a U.S. current-account deficit create no debt obligations for Americans. If, for example, foreigners increase their net dollar holdings by $1 billion, the U.S. current-account deficit increases (beyond what it would otherwise be) by $1 billion, but there is no increase in Americans’ indebtedness. The same is true when foreigners use their export earnings to increase their equity holdings in the U.S. and – ironically – their ownership of real estate in America.

I say “ironically” because a foreign investment that Mr. Hammond explicitly identifies as being especially worrisome is Chinese purchases of U.S. farmland. Readers of Mr. Hammond’s memo can be forgiven for coming away thinking that the Chinese are dangerously gobbling up American farmland; after all, as Mr. Hammond reports (quoting Lars Schönander and Geoffrey Cain) “Chinese ownership of U.S. farmland leapt more than 20-fold in a decade, from $81 million in 2010 to $1.8 billion in 2020.”

Scary, right?

No, not when put into perspective. The 384,000 acres of U.S. farmland that Mr. Hammond complains is now owned by the Chinese is 0.04 percent of the total amount (893.4 million acres) of farmland in the U.S. The market value – $1.8 billion – of this Chinese-owned farmland in the U.S. is a minuscule 0.06 percent of the total value ($2.916 trillion) of all U.S. farmland. Only by reporting numbers out of context is Mr. Hammond able to have any hope of convincing his readers to join him in supporting stricter government controls on Chinese purchases of U.S. farmland.

Mr. Hammond’s command of the facts is no better when he lazily repeats the familiar protectionist refrain that “large trade deficits have hollowed out America’s productive capacity.” In reality, America’s industrial capacity has risen steadily over the past several decades; it is today near the all-time high that it hit in 2016 and 137 percent greater than it was in 1975 (the last year in which America ran a trade surplus).

On one matter Mr. Hammond is correct: the great willingness of non-Americans to invest their dollars in America – to send capital to our shores – does indeed keep Americans’ borrowing costs lower than these would otherwise be. Yet from this happy fact he bizarrely concludes that Americans are thereby harmed. All but ignoring the factory expansions, R&D, worker training, and new entrepreneurial start-ups in America funded with much of this capital, Mr. Hammond instead complains that this abundance of capital lowers the U.S. government’s borrowing costs, thus allegedly prompting more government spending.

This complaint makes no sense. Unlike private firms and households which spend their own money prudently, politicians spend other people’s money politically. The likes of Sens. Schumer, Sanders, and Rubio, Reps. Pelosi, Ocasio-Cortez, and Santos, and Presidents Obama, Trump, and Biden do not consult current interest rates to determine how much to borrow and spend. They instead consult pollsters and special-interest groups and spend without regard for fiscal consequences beyond the next election. Higher interest rates resulting from the capital controls for which Mr. Hammond clamors would significantly obstruct entrepreneurs’ and businesses’ access to capital while doing practically nothing to temper the government’s fiscal incontinence. By reducing foreigners’ ability to lend to the U.S. government and thereby raising interest rates on government bonds, Mr. Hammond’s scheme would only further increase the fiscal burden that today’s irresponsible deficit spending imposes on future generations of Americans.

The above doesn’t exhaust all of the many errors packed into Mr. Hammond’s “Memo.” (He’s also wrong, for example, to assert that U.S trade deficits contribute to housing bubbles. I present it as a pop quiz for you to explain why he’s wrong on this front. It’s a pop quiz that most George Mason University undergraduate economics majors would ace.) What I identify above is more than sufficient to warn open-minded readers to approach your organization’s writings on trade with great skepticism.

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