Here’s a letter to American Greatness.
Editor
Victor Davis Hanson rightly decries the U.S. government’s budgetary incontinence, but critics can too easily dismiss his arguments because his pronouncements about international trade reveal profound economic misunderstanding (“What Are the Left’s Solutions for the Problems They Created?” March 17).
Supposing that U.S. trade deficits are akin to U.S. government budget deficits in putting Americans further into debt, Prof. Hanson believes that trade deficits are not sustainable. This belief is mistaken. While U.S. trade deficits could indicate that Americans’ net worth is decreasing – either through greater net indebtedness, or net asset sales, to foreigners – trade deficits, contrary to Prof. Hanson’s presumption, do not necessarily indicate such an outcome.
Because the size of the world’s capital stock can and does grow, global investors can increase their net investments in the U.S. (thus increasing U.S. trade deficits) while Americans’ net worth also increases, both through Americans’ increased investments made possible by access to global capital markets, and through these inward investments from around the world making American workplaces more productive. And as it turns out, evidence over the past 50 years, during which America ran an unbroken string of annual trade deficits – a.k.a. capital surpluses – is far more consistent with the account of U.S. trade deficits helping to improve Americans’ economic fortunes than with the account of these trade deficits reflecting American economic misfortune.
Prof. Hanson errs even more egregiously when he decries America’s so-called “trade deficits” with Canada and Mexico. In a world of more than two countries there is absolutely no reason to expect any pair of countries to have ‘balanced’ trade with each other. None. Naught. Zilch. Therefore, bilateral trade balances in our world of nearly 200 countries have no policy-relevance whatsoever. Nada. Nil. Zero. Worrying, as Prof. Hanson does for example, that “Canada currently runs a $60 billion surplus” with the U.S. is thus as silly as worrying about an unfavorable horoscope.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
