Here’s a letter to the Wall Street Journal.
Editor:
John Cochrane is always worth reading, and his “Trump’s Monetary Policy Desires Aren’t Crazy” (Oct. 22) is no exception. But as even Homer sometimes nods, so, too, does Mr. Cochrane at the end of his essay.
He’s correct that “countries that run perpetual trade deficits to finance consumption, borrowing abroad to do so, eventually must pay back the debt. Saving and investing rather than borrowing and consuming is good for an economy as it is for a family.” But he’s mistaken that “the central problem in our case – and in much of history –is the bounty was consumed rather than invested.”
The U.S. has run consecutive annual trade deficits for the past 50 years. If Americans used the bulk of this inward flow of foreign capital to finance consumption, our real net worth would have fallen. Yet in fact it has risen. The average American household’s real net worth is today 236% higher than it was in 1975 (and 142% higher than in 1994 when NAFTA took effect, and 80% higher than in 2001 when China joined the WTO).
While some of this foreign capital did indeed unfortunately finance the wasteful consumption that results from deficit spending by government, the bulk of it clearly was used to increase the size of America’s capital stock and, hence, to raise the productivity of our economy.
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
