Here’s a letter to a new correspondent.
Mr. C__:
Thanks for your email in response to Mark Perry’s and my Washington Post piece – a piece showing that, over the past 50 years, as U.S. trade deficits increased, Americans’ real net worth rose. Accusing Perry and me of “confusing correlation with causation,” you also write that “Americans would be even more rich today if that investment was done by us instead of foreigners.”
With respect, we don’t confuse correlation with causation. The common accusation about U.S. trade deficits, such as the one we quote from Warren Buffett, is that these trade deficits reflect irresponsibly excessive American consumption – consumption paid for either with funds borrowed from foreigners or with funds received in exchange for the sale to foreigners of valuable assets. If this accusation were correct, the average real net worth of American households would have fallen just as the average real net worth of the households on your neighborhood block would have fallen if those households generally and irresponsibly borrowed and sold off assets in order to fund current consumption.
The fact that the real net worth of the average American household rose, rather than fell, over the past 50 years shows that U.S. trade deficits do not generally reflect irresponsibly excessive consumption by Americans.
Now about your claim that we Americans would be even richer had we, rather than foreigners, done those investments: This claim is trivially true. But it’s trivially true in the same way that it’s trivially true that I would today be even richer had I, and not Jeff Bezos, launched Amazon in 1994. The reality, of course, is that it was Jeff Bezos, and not I, who had the idea for Amazon. If Bezos hadn’t had the idea for Amazon, no miracle would have bestowed that idea on me (or anyone else). The idea itself would not exist and nor would Amazon as we know it. The central point here is that Bezos’s launch and successful operation of Amazon took nothing from me; nor did it make me poorer. In fact, Bezos enriched me and hundreds of millions of other people by creating the greatest retail experience so far known to humankind.
Nor did Bezos’s launch of Amazon prevent me from starting a new business, either in competition with Amazon or in some other industry. If I had more entrepreneurial creativity and gumption, I’d have done so. But my failure to do so wasn’t caused by Bezos.
The story is the same with foreign investment in the U.S. That investment doesn’t prevent American investors and entrepreneurs from taking advantage of new opportunities to produce and profit. To suppose otherwise is to believe that entrepreneurial opportunities are fixed in number and exist independently of the creative minds that conceive and implement them. Such a belief is profoundly mistaken.
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
