Wednesday, April 6, 2016

Beating the Zombie Horse

By Donald Boudreaux

Noah Lawrence e-mails me:
Dr. Boudreaux, You are wrong. A worsening [that is, a rising] trade deficit for the US cannot help but reduce demand for US products and US laborers.
Mr. Lawrence’s claim is simply, factually, uncontestedly mistaken.  But because this faulty assertion continues to be believed by many people – including by at least some economists, such as Peter Morici – I will continue to combat this error.  There is, however, no reason for me to write anything new on the topic. This 2010 essay of mine explains why Mr. Lawrence’s claim is mistaken.  Here are the opening few paragraphs:
Suppose Toyota sells a $20,000 car to an American and then immediately uses that $20,000 to buy software from Microsoft. Because the value of additional U.S. imports (a car) equals the value of additional U.S. exports (software), there’s no change in the U.S. trade deficit.
Now tweak the example just a bit. Toyota sells a $20,000 car to an American, then uses that $20,000 to buy stock in AT&T from another American. The American who sold the AT&T stock, in turn, spends the $20,000 on software from Microsoft as part of his effort to launch a new business. Because Toyota spent none of the $20,000 on U.S. exports, the U.S. trade deficit rises by $20,000.
Is the second situation worse than the first?
If the pronouncements of the mainstream media and of most politicians are to be believed, the answer is a resounding yes. A rising trade deficit is bad!
But look more closely. In both cases, Americans get an additional car worth $20,000, and Microsoft produces and sells additional software worth $20,000. In both cases, the amount of extra American-made output produced and sold as a consequence of Toyota selling that car to an American is the same: $20,000 worth of Microsoft products. If you’re a Microsoft employee, shareholder or creditor, it matters not a whit to you whether that company’s increased sales are made to foreigners or to Americans.
Clearly, a rising U.S. trade deficit does not necessarily mean less demand for American-made goods and services.
The above originally appeared at Cafe Hayek.

5 comments:

  1. So what is the effect on the American work force if Microsoft hires a New Delhi firm who hires Indian programmers to create the software and Microsoft pays the company $19,500?

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  2. .
    .
    The facts are, if you bother to look at Toyota Financial Statements
    Toyota cash and cash equivalent $20.64 billion 2015 Q4.
    .
    Suppose Toyota sells a $20,000 car to an American and then immediately holds onto the money.
    .
    Which is factually accurate; Toyota and the ridiculous hypothetical posed herein by author Boudreaux- or Toyota holding the money ?
    .
    Boudreaux writes often but is most often incorrect by utilizing child like examples.
    .
    .

    ReplyDelete
  3. .
    .
    The facts are, if you bother to look at Toyota Financial Statements
    Toyota cash and cash equivalent $20.64 billion 2015 Q4.
    .
    Suppose Toyota sells a $20,000 car to an American and then immediately holds onto the money.
    .
    Which is factually accurate; Toyota and the ridiculous hypothetical posed herein by author Boudreaux- or Toyota holding the money ?
    .
    Boudreaux writes often but is most often incorrect by utilizing child like examples.
    .
    .

    ReplyDelete
    Replies
    1. Toyota just invested money in a new Lexus production line in KY. They have also committed to a complete overhaul of the Toyota production lines in KY. This is in addition to the constant equipment and building refurbishment that takes place every year. I know this because I'm the one writing the proposals to make things happen. Toyota is not holding cash. Only children look at financial statements and don't bother to do actual research.

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    2. Alexaisback2: If Toyota literally held the cash permanently that would be fantastic for American consumers. If we could convince all foreigners to do this than we could all retire in luxury. Sadly Toyota only accepts green pieces of paper in exchange for their cars because they want to buy other things with those dollars.

      Delete