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With his contribution to the Cato Institute’s important “Defending Globalization” project, Norbert Michel explains the logic of global capital flows as he also debunks the economically uninformed notion that U.S. trade deficits are a cause for concern. Four slices:

The US dollar is the most coveted national currency, and America’s financial markets are the envy of the world. Because US financial markets provide more trading opportunities, liquidity, and security than those of any other country, it is easier for both Americans and foreign residents to invest, efficiently allocate capital, and diversify their risks. Ultimately, these benefits from such a high demand for dollar‐​denominated assets make it easier for people to earn income and build wealth. Yet, some critics of US economic policy want to suppress investment in America for the sake of reducing the country’s trade deficit.

The US trade deficit is defined as the value of America’s imports exceeding the value of its exports during a given period. It is one of the most misunderstood concepts of all time, and it has spawned numerous bad policies. One of the latest examples is a proposal to “balance trade” by taxing international capital flows. Supporters of this policy aim to shrink the trade deficit (i.e., to balance trade) by taxing the capital surplus that goes along with a trade deficit to zero out the balance of payments. Such a policy is highly flawed on theoretical, empirical, and practical grounds.


Trying to ensure that trade flows—or capital flows—are regularly “balanced” has no foundation in economic theory. Simply put, a country’s capital inflows do not have to match its capital outflows, just as a country’s trade inflows (imports) do not have to match its trade outflows (exports). The failure of these flows to “balance” does not prevent a nation from reaching its maximum economic potential. Economically, it would make as little sense to try to balance these figures as it would to try to balance the goods or capital flows between Walmart and American consumers.


The flawed idea of balancing trade is a long‐​running misconception dating back to the days of Adam Smith (“Nothing, however, can be more absurd than this whole doctrine of the balance of trade”). The concept’s modern roots, which continue to bear rotten fruit even today, lie in a misunderstanding of the accounting framework used to create international (and national) economic accounts. These modern accounts can be traced to the 1920s, when the US Department of Commerce first published the balance of payments accounts, a system designed to measure the flow of goods and services abroad. Many aspects of these accounts have an arbitrary nature that if handled differently would result in a very different set of accounting outcomes.

For instance, all real estate transactions are classified as capital purchases (or sales), but there is no reason why these transactions could not be classified as consumption expenditures. Under the existing framework, if a Chinese resident buys a newly built house in the United States for $1 million, the transaction increases the US current account deficit. If, however, the same transaction was recorded as a consumption expenditure, it would decrease the current account deficit because it would be treated as an exported good (a US‐​produced good sold to a foreign resident). More broadly, if the overall accounting framework was designed, instead, to track the quantity of goods, a trade deficit would be referred to as a “goods surplus.” Regardless, a trade deficit does not indicate that anyone has lost anything or that anyone is owed anything.


It is unsurprising, therefore, that there is no solid empirical support for the notion that trade deficits (or surpluses) cause economic problems. Nor is it surprising that the United States has run a trade deficit for most of its history, through all phases of its many business cycles. For instance, on an annual basis, the United States ran a trade surplus only 2 times from 1790 to 1819, 11 times from 1820 to 1860, and 23 times from 1861 to 1900—a surplus in only 36 of 108 years. In the post–World War II era, from 1960 to 2022, the United States ran a trade surplus in 13 of 62 years. And in the 1930s, one of the most dismal economic periods on record, the United States had a trade surplus for 102 of the decade’s 120 months.

Still, supporters of restricting US trade exploit the negative‐​sounding term “trade deficit.” They often argue that policies to balance imports and exports are necessary to protect American workers in manufacturing. Yet, they ignore the fact that most industrialized countries are experiencing a downward trend in manufacturing jobs—very much like America did after 1979—despite the fact that they consistently experienced trade surpluses. For instance, the same type of employment declines are found in “countries such as Germany, Japan, and Italy, which have had trade surpluses in manufacturing trade that between 1973 and 2010 averaged 7.6, 6.2, and 4.2 percent of their GDPs, respectively.” From 1994 to 2018, in a nine‐​country sample of developed and underdeveloped nations, some with trade surpluses and others with trade deficits, all but India and Pakistan displayed a decline in the percentage of their population employed in manufacturing.

Scott Lincicome and Clark Packard understand that China’s government raises real concerns, but “revoking Permanent Normal Trade Relations would address none of them.” A slice:

This is especially the case given that many of the Chinese products not currently facing US tariffs have no connection to US national security. Instead, many of the newly taxed items would be basic consumer goods like clothing and toys, which means higher prices for American families already struggling from years of abnormally high inflation. Sabine Weyand, the European Union’s Director‐​General for Trade, recently noted in an essay for Internationale Politik Quarterly that 94 percent of EU trade with China is “unproblematic” and that only about six percent is the result of a one‐​sided dependency for EU member nations. A comparable analysis for the United States would almost certainly produce similar results. Holiday season aside, taxing Americans’ toys is not a serious way to counter China.

How Bad Are the Plagiarism Allegations Against the Harvard President? It Depends on Whom You Ask.” A slice:

But to Jeremy Horpedahl, an associate professor of economics at the University of Central Arkansas, some of the examples are “very clear and egregious” instances of plagiarism, including the borrowing from Palmquist and Voss. Sure, Gay was not wrongfully taking credit for a new theory or some other innovation, Horpedahl said, but acknowledging the work of those who came before you and tracing the history of an argument are fundamental to academic research.

“There should be some punishment of some sort, and the fact that a lot of people who are involved in this are seeming to say, ‘Not a big deal’ — to me, that raises red flags,” Horpedahl said. “Harvard is one of our most prestigious research universities in the country, and she is both the president of it and was a graduate student there. And if no one there thinks this is a big deal, to me, that signals a huge problem in academia.”

When Phillip W. Magness, an economic historian at the American Institute for Economic Research, assessed the examples, including ones not discussed in this article, he saw “a pattern that seems to be going on for large swaths of her career.” Harvard, like other Ivy League institutions, is strict about what it considers acceptable use and citation practices, and it appears Gay has run afoul of their standards, Magness said. “Common sense would dictate that they should hold faculty, and especially their university leadership, to at least the minimum standard that they apply to their own students.”

Two leaders of the National Association of Scholars called on the Harvard Corporation to remove Gay, citing not only her “shoddy professional work” and the plagiarism claims, but also her “racialist policies” and “moral obtuseness that marries intolerance for all dissent from the diversity, equity, and inclusion regime.”

Writing in the Wall Street Journal, Cliff Asness express his justified dismay at the state of higher education. A slice:

Alumni donors like me don’t object to free speech. What we can’t abide is the extremely asymmetric application of free-speech principles. For years these schools, Penn prominently included, have actively suppressed ideas disagreeable to the progressive worldview of their administrations, faculties and hard-core student activists. Now that those groups are talking about wiping Israel off the map, these college presidents are wrapping themselves in the First Amendment.

The best solution to this problem is free speech for all, including those spouting things I find deeply offensive. The distant second-best solution is symmetric enforcement of speech restrictions not driven by an administration’s own ideology. Unacceptable is the current status quo of free speech for those chanting slogans that amount to “death to the Jews” but not for those committing alleged microaggressions against the politically favored.

Sarah Schutte reports on Charles Cooke’s levelheaded assessment of last-week’s appearance before Congress of three presidents of elite universities. A slice:

There is a “double standard” being held by these administrators, Cooke stressed. “In Congress,” he said, “those three administrators — and I call them that deliberately, because that’s what they are, they’re not academics or scholars — the three administrators made it about as obvious as they could that they did not believe a word of what they were saying. And they did not believe a word of what they had said prior to that hearing either.”

Megan McCardle believes that the world would be well-served by a few more jerks. A slice:

Allow me to introduce myself, then, as the jerk who thinks we need more jerks, particularly in knowledge-making fields such as journalism and academia — or at least the kind of people who get called jerks for saying things their colleagues don’t want to hear.

These professions used to be sheltered workshops for those kinds of “jerks”: naturally distrustful folks who like asking uncomfortable questions and experiencing an uncontrollable urge to say whatever they’ve been told not to. These character traits don’t make people popular at parties, but they might well help them ferret out untruths, deconstruct popular pieties and dismantle conventional wisdom.

These days, human resources departments have cracked down on all manner of jerk-ish behavior — including, of course, saying things that offend one’s colleagues. But if you’re in the truth business, all this niceness comes at a cost, as a perspective just published in the Proceedings of the National Academy of Sciences makes clear.

The paper’s multiple authors exhaustively categorize the rising pressures for, and tolerance of, academic censorship — including self-censorship. For example, they write, “a majority of eminent social psychologists reported that if science discovered a major genetic contribution to sex differences, widespread reporting of this finding would be bad.”

GMU Econ alum Romina Boccia and co-author Dominik Lett report on the U.S. government’s appalling abuse of emergency-spending powers.