… if technology were a country – say, Technologia – would warn his fellow citizens that unless they erect barriers against the goods and services that routinely are exported from Technologia, they will eventually be impoverished by the bounty that would otherwise “unfairly” and surely “flood” into their country.
Scott Sumner thinks that trade deficits have eventually to be repaid. I think he’s mistaken – at least on any meaningful definition of the word “repaid.”
In practice some portion of a trade – or, current-account – deficit must be repaid. For example, the $1,000,000 that Mr. Nonamerican lends to Uncle Sam when Mr. Nonamerican buys U.S. Treasury notes instead of buying American exports must be repaid – and when it is repaid Mr. Nonamerican will use the proceeds to buy American exports (or he’ll push the transaction forward one more ‘period’ by reinvesting the proceeds in dollar-denominated assets).
But suppose instead that Mr. Nonamerican uses the $1,000,000 that he earned on sales of goods to Americans, not to buy U.S. Treasury notes, but to open a restaurant in Fairfax, Virginia. What is there here to repay? Repay to whom? And repay for what?
It’s true that Mr. Nonamerican opened this restaurant in Fairfax with the hope and expectation of earning a profit on it. If his hope and expectation turn out to be true, then the net present value of his investment rises to some figure greater than $1,000,000. Let’s assume that it rises after one year to $1,500,000. And let’s further assume that Mr. Nonamerican then sells his Fairfax restaurant to Ms. American for $1,500,000 and that Mr. Nonamerican then immediately spends all of his sales proceeds on American exports. I suspect that Scott might call this sale (and purchase of American exports) a repayment of that part of trade deficit that was created one year earlier when Mr. Nonamerican chose not to buy American exports with his $1M but instead to use all of these funds to open a restaurant in America. (Note that I do not deny, in this example, that Mr. Nonamerican’s investment in the U.S. in year one leads to an increase in American exports in year two.)
I believe, though, that to label as “repayment” either the dollars paid to Mr. Nonamerican for his restaurant, or the American exports that he buys with these proceeds, is misleading. First, to call it “repayment” implies that it satisfies some debt obligation. But in this example – which is highly realistic – there is no debt involved. No one loaned any funds to, or borrowed any funds from, anyone.
Second, the $1.5M that Mr. Nonamerican receives when he sells his Fairfax restaurant is value that he – Mr. Nonamerican – created. He created the original $1,000,000 of value by successfully offering to American buyers the goods that he produced, exported to America, and sold here for that sum. He created the remaining $500,000 of value by launching a restaurant in Fairfax and operating it so successfully that its value increased. Had he operated the restaurant in a way that did not create value, the Fairfax restaurant would be worth one year later no more than, and quite possibly less than, $1,000,000 (in real terms).
Suppose that Mr. Nonamerican operated the restaurant so poorly that its value one year after he opened it is only $600,000. He sells the restaurant to Ms. American for that sum, and Ms. American then transforms that restaurant into some other business – perhaps another restaurant or perhaps some other, entirely different business. As in the case of Mr. Nonamerican’s successful operation and then sale of the restaurant, in the case of his unsuccessful operation of the restaurant there is no transfer of funds either made or destined to be made that is appropriately classified as a “repayment” of the original set of transactions that one year earlier raised the U.S. trade deficit by $1M.
Let’s look at third possibility: Mr. Nonamerican retains ownership indefinitely into the future of his Fairfax USA restaurant. Presumably he keeps this restaurant open as long as he earns profits from doing so. Again, it was the prospect of earning these profits that prompted Mr. Nonamerican to open the restaurant to begin with. Some people – perhaps Scott – might call this stream of profits (or the American-made goods purchased with them) “repayment” of that $1M portion of the U.S. trade deficit that was created when Mr. Nonamerican chose to open the restaurant in Fairfax. But again, in what way are these profits repayments? They are the monetized value that Mr. Nonamerican himself created. These profits would not exist were it not for his entrepreneurship, risk-taking, and efforts. So anyone who insists on classifying these profits as American (re)payments to Mr. Nonamerican should recognize that Americans were able to make these “(re)payments” only because Americans were thereby enriched, at least to the tune of the value of these repayments, by Mr. Nonamerican’s operation of his Fairfax restaurant. (Furthermore, there’s something more than passing strange about calling “repayment” that portion that becomes profit out of the voluntarily payments that American consumers pay for the food and drinks that they voluntarily order in that restaurant.)
Of course it’s true that all commercial transactions are made in the expectation of some gain, be it in money or purely in form of subjective utility. In this sense everyone expects “repayment” for his or her participation in any commercial transaction. The American who opens a restaurant in Fairfax expects such “repayment” no less and no more than does the non-American who opens a restaurant in Fairfax. Likewise, the American who lends $1M to Uncle Sam expects repayment of her loan no less and no more than does the non-American who lends $1M to Uncle Sam. The fact that accounting conventions cause some such transactions to be classified as ones that cause “deficits” or “surpluses” in artifactual accounts (here, the current account), while other identical transactions cause no such changes in any measured accounts, is economically irrelevant.
…..
I fully agree with and endorse what I take to be Scott’s essential point – namely, that foreigners, like domestic citizens, typically do not go about with the intention of bestowing economic gifts on strangers. Every commercial transaction is done in the expectation of some gain, where the gain ultimately comes in, or is expected to come in, the form of the receipt of real goods and services. What I object to is labeling as “repayments” all of the expected receipts from one subset of commercial transactions, when the receipts from economically identical other commercial transactions are not labeled “repayments.”
Language matters, and in no area of economics or economic policy is the language so geared to create false impressions as it is in the area of trade and trade policy. Foreigners want to gain from their trades with us. We want to gain from our trades with them. But because the term “repayment” suggests – or is taken to imply – a debt, it is simply too misleading to call the expected gains from trade “repayments.”
… believes that if a man refuses to perform an unpleasant, arduous, and pointless task – say, using a small hand-held shovel to move a mountain of manure from point A to point B and then back again to point A – unless he is paid a great deal of money to do so, then the society of which that man is a member is enriched if other members of that society are forced to pay this man a sum of money sufficient to entice him to perform that task.
Tariffs Slow Economic Growth
– Average American tariffs fell from almost 60 percent in 1932 to under five percent in 2018.
– The International Monetary Fund has found that these types of reductions in trade barriers can “boost productivity and output,” which can, in turn, mean faster rates of economic growth.
– Economic growth in the late 19th century, while sometimes attributed to high trade barriers, actually resulted from significant population growth and accumulated capital. Tariffs during that time may have hurt growth by raising prices on capital imports.
Tim Worstall has joined in the productive fun of describing the essence of protectionists. A slice:
A protectionist is someone who argues that you should be poorer so they can be richer.
John Cochrane writes sensibly about the prospect of truck-driving jobs being automated.
My GMU Econ colleague Larry White trusts Bitcoin more than he trusts some of its academic critics.
Mark Perry has good news about the state of forests in the U.S. and globally.
Here’s a letter to a new correspondent:
Ms. Elaine Dorman
Ms. Dorman:
You’re correct that my arguments about the increasing wealth of ordinary people – and about the disappearing observable differences between the super-rich and the rest of us – are chiefly arguments about material possessions and not about “our emotional well being and satisfaction.” You’re correct also that these latter things matter and, indeed, that ultimately they matter much more than do material possessions.
Yet I believe that you’re incorrect to declare my argument to be “thus irrelevant and beside the point.”
First, unless increased access to material goods and services (above, say, that which is necessary for bare subsistence) never contributes to improved “emotional well being and satisfaction,” then documenting the increasing access of ordinary people to material goods and services is to document the reality that we ordinary people have improved access to an important means of achieving greater life satisfaction.
Second, my argument is aimed at those who deny that we ordinary people enjoy greater access to material goods and services than we did 40 years ago; it is not aimed at those who deny that we human beings today in modern societies are happier or more satisfied than we would be were we today no more materially prosperous than we were 40 years ago (or, worse, were we still mired in the muck of pre-industrial poverty). And so if you criticize me for documenting ordinary people’s still-improving access to material goods and services, you should also criticize the many people who continue to complain about what they believe to be ordinary people’s lack of improved access, over the past few decades, to material goods and services.
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
… believes that Castro’s Cuba would have been even poorer had the United States government not done the people of that island the great good favor of enforcing an embargo against it.
The April 2004 Freeman contains one of my many attempts to bust the myth that a trade deficit – or a current-account deficit – necessarily is something to lament. In reality, such a “deficit” (It’s a deficit only by accounting definition, not in economic reality) is typically, in a market economy, evidence of relatively sound economic policies and of a relatively promising future. And such a “deficit” is itself never a cause of any economic damage; it is almost always a cause of economic improvement relative to what the situation would be absent the “deficit.” My column is below the fold.
… is from page 151-152 of the 1992 Liberty Fund edition of John Taylor‘s 1822 tract, Tyranny Unmasked:
Monopoly is a word sufficiently indefinite, to enable ingenuity to obscure its malignity, by extending it to property acquired by industry and free exchanges; and though private property begets civilization, society, and happiness, it is made, by calling it monopoly, to supply arguments for its own invasion. If monopoly, like money, does really reach every species of acquisition, yet it may also possess good and evil qualities; and a discrimination between them is necessary, to reap the good and avoid the evil. The monopolies obtained by industry, admitting the phrase to be correct, are, like earning money, beneficial to society; those obtained by exclusive privileges, like stealing money, are pernicious.
DBx: If a firm grows to be unusually large in a free market, it does so only because it is unusually good at satisfying consumer demands. But count on it: pundits, professors, and politicians will nevertheless complain bitterly of the “monopoly” harms that this firm is imagined to impose on the good people of the country. Yet if a firm is failing, or is not doing quite as well as its owners and workers desire it to do, many of these very same pundits, professors, and politicians insist that the good people of the country will be well-served only if the government arranges for this firm to grow larger by bestowing upon it artificial monopoly power in the form of penalties extracted from the good people of the country who purchase foreign-produced products instead of the products produced by this privileged firm.
It’s utterly bizarre to fear and complain about the genuine successes of firms achieved through what Deirdre McCloskey calls “market-tested competition” while simultaneously welcoming and celebrating the artificial ‘successes’ of firms achieved through the application of state privilege and force.
… is convinced that 5-1=6.
Here’s a letter to an economics graduate student who asked to remain anonymous:
Mr. T:
You accuse me of “doing a disservice” to you and other of my fellow economists by “over-simplifying our theoretical understanding of trade.” You insist that the “exceptions shown by theory to [the case for] free trade should not be ignored.”
With respect, while I appreciate your e-mail, I disagree with your assessment of my efforts. Nearly all of my writings on trade are for popular audiences. These writings appear on my blog and in newspaper and magazine columns. These audiences are not composed of my fellow economists who understand the elemental case for free trade. Instead, these audiences are composed of people many of whom do not understand the important basics that economists understand – people who do not understand, for example, that foreigners sell to us only because they wish to buy from us or to invest in our economy; that resources diverted to domestic industry X by a tariff are thereby diverted away from domestic industries Y and Z; that a rising U.S. trade deficit does not imply that Americans are going further into debt; that the low wages paid to many foreign workers – especially, but not only, because these low wages reflect low productivity – do not give low-wage countries an “unfair” advantage (or, for that matter, any advantage at all). Until and unless non-economists better understand these and other foundational truths, ordinary men and women will be unwitting victims of demagogues and cronyists.
You might respond that I’m nevertheless professionally obliged always to point out the ifs, ands, and buts that appear in textbooks and academic papers on trade. And I would disagree with your response, for four reasons.
First, the qualifications to the economists’ case for a policy of free trade are very few in number. Second, they are unlikely to arise in reality with sufficient frequency to justify our condoning government discretion to obstruct trade. Third, although we economists can describe these exceptions theoretically, we – and much more so politicians and other government officials – can be trusted neither to identify the existence of these exceptions in reality nor to respond to them apolitically and in ways that will actually improve matters.
Fourth and most importantly, to the extent that trade policy today falls short of what most economists would recommend, the reason is that ordinary people do not understand the basic case for free trade. In other words, actual problems with existing trade policy are not the result of a failure of policy-makers and the general public to appreciate and acknowledge the theoretical exceptions to the case for free trade; instead, these problems are the result of a failure of the general public to understand the case for free trade itself. Therefore, before any public discussion of exceptions to the case for free trade becomes important, the public must first have what it doesn’t now have: an adequate understanding of the case for 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
