I’m aware that I’m a broken record. But I’m a broken record only in response to the greater brokenness of a record that protectionists never tire of playing.
Mr. McKinney:
Thanks for sending along JB Macro’s essay “We Can’t Keep Living Like This” (May 20) – an essay that you insist “discredits” my “refusal to sound the alarm on US trade deficits.”
I disagree. Mr. Macro repeats a fallacy that’s been repeated umpteen times. Incessant repetition never renders a fallacy factual.
Focusing on China (although the point is more general than China), he writes that
the problem with this arrangement [i.e., net inflows of global capital to the U.S. economy] is that those savings are not freebies, they must be paid back in the future. Whenever Chinese savings are transferred to the US, China gains a financial claim on the US. This needs to be paid back at some point, and it would not make sense for China to keep stacking these claims up should it reach the point where the US might become a bad debtor.
First of all, the only savings that “must be paid back in the future” are savings that foreigners lend to Americans. And even then, if Americans use these borrowed funds productively, there is no time limit to American borrowing of such funds. Contrary to Mr. Macro’s argument, we Americans could indeed “keep living like this.”
Second and more fundamentally, when foreigners – including, of course, the Chinese – invest their savings in America in ways other than lending those savings to Americans, no Americans are obliged to ‘pay back’ those savings.
For example, the Korean owners of the Kia plant in West Point, Georgia, obviously expect a positive return on their investment. But they’ll earn such a return only if they operate that plant profitably. Such profits, it’s important to note, are created. These profits are wealth that would not exist were it not for the skilled foreign ownership and operation of that plant on U.S. soil. These profits aren’t extracted or withdrawn from Americans. And because payment of these profits to the plant’s foreign owners are not made by Americans – because these payments are made by the foreign owners of that plant – payment of these profits to foreigners does not reduce Americans’ net worth .
This economic reality is masked by the accounting convention that requires that those returns be recorded, in balance-of-payments accounts, as payments from America to Korea. Yet as I wrote yesterday, accounting ain’t economics. And nor is simple geography. Again, while the economic value out of which these payments are made is – because of America’s high-quality economy – generated on American soil, these payments are not made by Americans or by America.
Economically, it’s simply untrue that the U.S. cannot for the rest of time generate, year after year after year, the accounting artifact called “U.S. trade – or current-account – deficits.” Not only can we do so, we can do so in ways that enrich us as foreign capital, seeking opportunity and security, is drawn to our shores. And we should welcome such foreign capital rather than mistreat it – as it’s commonly mistreated – as both an effect of current economic extravagance and a cause of future economic burdens.
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
