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The Horse Being Beaten Isn’t (Alas) Dead

Here’s a note to a “new lurker” on my blog:

Mr. M__:

Thanks for your e-mail.

Dismayed by my “academic denial of the threat of perpetual trade deficits,” you “can’t fathom” why I continue to support free trade “since we’ve now got virtually 50 years of [trade] deficits.”

I cannot say in one reasonably sized note all that I have to say in response to your e-mail. So I content myself to make three points.

First, even if (contrary to fact) U.S. trade deficits are, as you believe them to be, unambiguously bad for Americans, there’s no evidence that trade restrictions short of those that move us close to autarky do much to reduce them. As Mary Amiti, Mi Dai, Robert Feenstra, and John Romalis note, “a country that increases its tariffs is likely to not only reduce its imports but also reduce its exports.”

Second and more fundamentally, the amount of capital in the world and in the U.S. can – and, when markets are free, does – grow. Because U.S. trade deficits result from the U.S. receiving net inflows of capital from around the world – and because more capital raises economic productivity – I fail to see how U.S. trade deficits (a.k.a. “capital-account surpluses”) pose a threat to us Americans. These trade deficits capital-account surpluses, in reality, are a blessing for which we should be grateful.

I’ll make my third and most fundamental point in the form of questions: How does my choosing to sell my land to a Latvian or to borrow cash from a Canadian – both activities that enlarge the U.S. trade deficit – bestow on the government the right to restrict your ability to spend your income in whatever peaceful ways you choose? Even if I – a fellow American – choose to frivolously increase my consumption today by borrowing money or selling my assets to non-Americans, why should the government therefore prevent you and other Americans from spending your dollars in peaceful ways that you judge will yield to you and your family the greatest amount of satisfaction? I can find no reason in economics or ethics why my financial decisions, even if irresponsible, justifies government restricting your freedom.

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

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