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The Compass Remains Broken

Here’s a note to a fan of American Compass:

Mr. S__:

Thanks for sending Sergei Korol’s piece at American Compass. As with the other pieces published by American Compass that you share with me, I am – unlike you – unimpressed (save for with his skill at using the argot – such as “neoliberalism” and “market fundamentalists” – so beloved by opponents of the liberal market order).

Korol’s praise for “neopopulism” has an aura of sagacity. But a careful read reveals it to rest on a series of assertions that are either question-begging or ambiguous. Consider this key sentence describing what Korol felt just after the 2016 presidential election: “Trying to find explanations for America’s decline, I had studied trade imbalances, deindustrialization, and the persistent mystery of the rich constantly borrowing from the poor.”

What deindustrialization? America’s industrial output hit an all-time high in December 2014, less than two years before Trump was elected. In November 2016 this output was only five percent below that all-time high. It was also 16 percent higher than the low it hit during the Great Recession, 12 percent higher than when China joined the WTO, and 140 percent higher than in 1975, the most-recent year in which America ran an annual trade surplus. Also in the month of Trump’s election America’s industrial capacity had never been as large, and it was to get even larger.

In 2016 America was also the world’s second-leading exporter, exceeded only by China. Yet on a per-member-of-the-workforce basis, America that year exported more than two-and-a-half times what China exported.

What about the economic fate of ordinary Americans? In the last quarter of 2016, the total real net worth held by the bottom 50 percent of Americans was 350 percent greater than it was at the end of the Great Recession and climbing. Over the next three years, just up to the start of the pandemic, it would rise by another 63 percent and reach a then all-time high.* Korol and American Compass’s audience would learn much if they read more widely – say, by consulting Michael Strain’s 2020 book, The American Dream Is Not Dead (But Populism Could Kill It), Phil Gramm’s, Robert Ekelund’s, and John Early’s 2022 study, The Myth of American Inequality, and Scott Winship’s and Jeremy Horpedahl’s 2023 paper “The Cost of Thriving Has Fallen: Correcting and Rejecting the American Compass Cost-of-Thriving Index.”

I could point to other data – tons of it – that further contradict Korol’s claims about deindustrialization and decline, but the above should suffice.

As for Korol’s mention of “trade imbalances,” his belief that he might find clues in these accounting artifacts to America’s alleged decline reveals that he doesn’t understand what trade balances signify economically. America’s most famous “trade imbalance” is, of course, her now nearly half-century-long run of annual trade deficits – which is to say, America’s now nearly half-century-long run of annually being a net recipient of capital from abroad. How, I ask for the umpteenth time, does the eagerness of global investors to entrust their funds to the American economy signify that this economy is declining? (Do you knowingly invest in declining firms or industries?) And how does such investment harm us? (When your neighbor saves and invests, are you harmed?)

A final point: When Korol writes of “the persistent mystery of the rich constantly borrowing from the poor” his meaning is opaque. The mystery to which he alludes sound ominous, but what, exactly, is it? I cannot tell. My best guess, however, is that he means that rich America, by running regular trade deficits with the rest of the world – most of which is poorer – results in “the rich constantly borrowing from the poor.” If my guess is correct, Korol is incorrect. Although protectionists stubbornly refuse to acknowledge this reality, trade deficits are not synonymous with borrowing. Foreigners’ purchases of American real estate and their creation of equity in American-based businesses, as well as foreigners simply holding dollars, contribute to American trade deficits without Americans’ borrowing anything from anyone.

The ignorance of basic economic facts and disregard of elementary economic logic that characterize so much of protectionist apologetics should cause you to look elsewhere for enlightenment.

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

* I converted the nominal dollar figures for net wealth into real dollars using this Personal Consumption Expenditures calculator.