Here’s a letter to Foreign Affairs.
Editor:
Michael Pettis writes as if humanity’s chief economic problem is that we’re too rich – that we’re so abundantly awash in goods and services that the demand to purchase these outputs is inadequate (“How to Fix Free Trade,” November 17). As such, he insists that governments’ main economic duty is to protect its citizens from receiving from foreigners more goods, services, and capital than those citizens send to foreigners.
Pettis peddles hydraulic Keynesianism. He writes of some countries (including the U.S.) being “forced” to “absorb” capital and goods from other countries as if national economies are distinct entities connected to each other by a series of tubes through which flow savings and goods. In this bizarre mechanical view, when, say, the Chinese save ‘too much’ and produce more than they consume, the excess must “flow” somewhere. For a variety of reasons, most of this excess today “flows” into America. We Americans find ourselves with more capital and goods than we ourselves produce.
Poor us, having to “absorb,” year after year, lots of capital and goods from abroad.
Absent from Pettis’s analysis are microeconomic factors that better explain the persistence of U.S. trade deficits. Despite its imperfections, America remains an attractive place for foreigners to choose to invest. This attractiveness, in turn, prompts foreigners to choose to save more than they would otherwise. Similarly, the production of tradable goods outside of America is done largely because non-Americans – mostly led by price signals and the desire to earn profits – choose to produce the goods that they then choose to offer for sale to Americans.
Americans also choose. Every import bought by an American is one that an American chooses to buy, presumably because the price is right. Every asset sold by an American is one that an American chooses to sell, presumably because the price is right. To write, as Pettis does, of imports, exports, and savings flowing from country to country as if these are akin to hydraulic fluids mindlessly moving from higher-pressure to lower-pressure locations is not to do serious economics.
The global trading system has many problems, including mercantilist policies pursued by both Beijing and Washington. But these policies, contrary to Pettis’s assertions, are problems largely for the countries that practice them. If there is excess production in China, that’s a problem mostly for the Chinese. If there are excess savings in Germany, that’s a problem mostly for the Germans.
Pettis’s attachment to hydraulic Keynesianism prevents him from understanding the realities of global trade and investment.
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
