Here’s a letter to a new correspondent.
Mr J__:
Thanks for sending a link to Michael Pettis’s American Compass essay titled “America Cannot Continue to Absorb Global Imbalances.”
No, I wasn’t aware of it. Or perhaps I’ve forgotten it given that Pettis repeats ad nauseam the theme that he sounds in this essay. That theme is that trade surpluses are caused by excess saving in surplus countries – savings that are then somehow almost mechanically pumped into other countries (especially the U.S.), thus cursing these other countries with trade deficits which, in turn, result in inadequate aggregate demand in these countries.
Pettis’s economics is not credible, as I’ve explained elsewhere.
Suppose that every year your across-the-street neighbors – the Smiths and the Joneses – spend less on consumption than they earn as income. The amounts not spent are saved and invested. Were he consistent, Pettis would accuse the Smiths and Joneses of inflicting economic harm on others. Specifically, Pettis would assert that these families save excessively, and foist their excessive savings on unsuspecting businesses and other households. In Pettis’s view, receipt of these savings is a curse, for awash with Smiths’ and Jones’s savings, these businesses and other households are thereby denied the opportunity to produce for themselves the goods and services made available to them by Smiths’ and Jones’s savings.
Do you believe that if people across the street from you have a positive rate of savings the proceeds of which they invest outside of their households they thereby harm the economy in general, and, especially, the recipients of their savings? If not, why should you worry that if people living across the ocean from you have savings that they invest outside of their countries they thereby harm the economy in general, and, especially, the recipients of their savings? I see no reason for such worry.
I close by noting that Pettis also errs – wildly so – when he claims that the U.S. cannot continue to absorb what he, largely mistakenly, calls “global imbalances” (that is, other countries’ net savings).
Two days from now the U.S. will close out its 50th consecutive year of annual trade deficits, with no end of these in sight. At the root of this reality are two important facts. First, U.S. trade deficits are overwhelmingly the result of the U.S. having a relatively attractive, market-oriented, and innovative economy. Second, the number of investment opportunities in a market economy is limited only by the human imagination. There’s every reason to believe that, as long as America remains entrepreneurial and market-oriented, it will continue to be powerfully attractive to global investors. These investors will choose to invest in the U.S. as we Americans choose to accept and make a hospitable home for these investments. The continuing net inflow of investment funds to the U.S. will enrich both their foreign owners as well as us Americans.
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
