Here’s a letter to Bloomberg.
Editor:
You accurately report that economists dispute the Trump administration’s assertion that the U.S. today confronts “large and serious United States balance-of-payments deficits” (“Trump Pegs New Tariffs to a Payments Crisis Economists Doubt,” February 22). As Milton Friedman explained, when the dollar’s exchange rate isn’t fixed or pegged – that is, when the dollar’s exchange rate floats – there can be no balance-of-payments deficits. And the dollar’s exchange rate has floated now for more than a half-century.
But the accuracy of your report is compromised by your use of language that, although conventional, sows much confusion about international commerce. Specifically, you describe the $26 trillion excess of foreign investment in the U.S. over U.S. investment abroad as evidence that Americans are “now $26 trillion in the red.”
Not so. While much foreign investment in the U.S. is in the form of loans to Americans – especially to the profligate U.S. government – not all of it is loans. A good deal of foreign investment is in equity stakes, as well as in holdings of real estate and U.S. dollars. Americans are “in the red” to foreigners only for the funds we borrow from foreigners, not for the other foreign investments in the U.S.
In short, increased foreign investment in the U.S. doesn’t necessarily increase Americans’ indebtedness. Therefore, it’s simply wrong to write as if Americans are “in the red” for the full positive difference of foreign investments in America over Americans’ investments abroad. Indeed, such language is worse than wrong: By creating the misperception that we Americans are more indebted to foreigners than we really are, such language helps protectionists stoke unjustified fear of free trade.
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
