The derisible notion reported by Sternberg is peddled these days most persistently by Michael Pettis.
Editor, Wall Street Journal
1211 6th Ave.
New York, NY 10036Editor:
Reporting that “economists influential in the Trump orbit complain that Germany chronically underconsumes and oversaves, recycling excess cash into capital outflows that land in the U.S. and cause our trade deficit,” Joseph Sternberg describes this proposition as “debatable” (“The EU Doesn’t Need Trump for a Trade War,” May 29). He’s too kind. This proposition is derisible.
When your next-door neighbor in Georgetown works hard and lives frugally, the many resources that he doesn’t consume are saved and transformed into capital goods – that is, into means of production. America’s capital stock is thereby enlarged and the productivity of American workers rises. And rising worker productivity is the source of higher real wages. The same is no less true if your across-the-ocean neighbor in Germany works hard, lives frugally, and pays compliments to America by entrusting her savings to our economy. America’s capital stock is thereby enlarged, and American workers’ productivity rises, pushing up wages.
It’s ludicrous to assert that hard work, thrift, and investment in America is a boon to the U.S. economy when done by individuals holding U.S. passports, but a burden to the U.S. economy when done by individuals holding non-U.S. passports.
Equally ludicrous is the claim that foreign savings “land in the U.S. and cause our trade deficit.” In fact, America’s entrepreneurialism and relative freedom attract foreign savings into the U.S. And although as a matter of accounting these inward flows of global capital are registered as U.S. trade deficits (and also as U.S. capital-account surpluses), it’s more accurate to say that U.S. trade deficits are caused – not by foreign capital mindlessly “landing” here – but instead by the dynamism and promise of America’s economy. As a matter of economics, U.S. trade deficits are caused by us – by Americans – by our market-oriented institutions and entrepreneurial, bourgeois virtues. Further, these inflows of capital from around the world make our economy stronger.
The administration’s failure to grasp these foundational realities is as scary as it is sad.
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
