Today at Law & Liberty I respond at length to Oren Cass’s January 2nd, 2024, “Free Trade’s Origin Myth.” Two slices from my response:
The truth is that US trade deficits are neither evidence of a faltering economy, nor a source of such faltering. Quite the opposite. US trade deficits exist because investors across the globe find America to be an attractive place to invest. Faltering economies don’t fit this bill. And foreign investors are subject to the same rules of reality as Americans. Just as Cass cannot spend all of his dollars on consumption if he wants to have dollars available to invest, foreigners cannot spend all of their dollars on exports from America if they want to have dollars available to invest in America. Foreigners wishing to invest in America, therefore, refrain from buying some American exports in order to have the dollars they need for such investment. The US trade deficit thus swells.
That global investors continued, for almost a half-century, to invest in a tanking American economy is a mystery. The mystery is solved by recognizing that, because no one intentionally invests in places that are tanking, the American economy is actually doing quite well, at least as judged by global investors.
Cass will demur. He’ll remind us, as he does in his essay, that the productivity of American manufacturing workers has declined since 2012. He wants us to think that this falling productivity results from America’s ongoing annual trade deficits. But when we look at a longer picture, his case collapses. While dipping during recessions, the productivity of American manufacturing workers steadily increased from the end of WWII until 2012; it neither stopped nor even slowed when America’s run of annual trade deficits started in 1976. In fact, in the 1980s, its rate of growth slightly rose. The non-recession-years decline in productivity began only in 2012, 36 years after America’s unbroken string of trade deficits started. Cass blames the recent stagnation of manufacturing-worker productivity on trade deficits, but his argument fails the smell test.
If Cass were really interested in what [Alfred] Marshall thought about free trade, a tad bit of research would have led him to H. W. McCready’s 1955 Journal of Political Economy paper that contains revealing correspondence from Marshall. In this 1903 correspondence, Marshall makes clear that, while he accepted the validity of some theoretical exceptions to the case for a policy of free trade, he didn’t believe that these abstruse points created a practical case for protectionism. Marshall comes out firmly in favor of free trade and opposes even retaliatory tariffs as being too likely to lead to unwarranted levels of protection. Further research by Cass might have also alerted him to Doug Irwin’s 1991 Journal of Economic Perspectives article in which Irwin writes that “despite the outpouring of theoretical work on tariffs using the analytical tools he had developed, Marshall was convinced that the reintroduction of tariffs in England would ‘be an unmixed and grievous evil.’”