Thursday, September 29, 2016

An Open Letter to Trump Economic Advisor Peter Navarro

Dr. Peter Navarro
University of California – Irvine
Dr. Navarro:
You write in your document “Scoring the Trump Plan” that “[a]ccording to textbook theory, balanced trade among nations should be the long-term norm, and the chronic and massive trade deficits the US has sustained for over a decade simply should not exist.”
This claim is untrue.  Nothing at all in economic theory says that it’s abnormal for a country to run trade deficits for over a decade, or even for over a century.  Nothing in economic theory implies that years, decades, or even centuries of unbroken annual trade deficits are evidence of ‘unfair’ trade practices by foreigners or of self-destructive economic policies at home.
If investment opportunities available in the United States this year are especially attractive relative to opportunities elsewhere, the U.S. will run a trade deficit this year as global investors use some of their dollars, not to buy American exports but, instead, to invest in America.  If next year the U.S. economy again offers especially attractive investment opportunities, America will run a trade deficit again next year.  Ditto for two years from now if the relative attractiveness of American investment opportunities continues for that year.  For an innovation-filled economy, such as that of the U.S., in a world in which the size of the capital stock can grow, there is no natural limit to the number of attractive investment opportunities that arise each year.  Nor is there a natural limit to the number of consecutive years that a country can, or will, continue to remain a disproportionately attractive destination for investment funds.
The fact that you do not understand this elementary point – along with the fact that you utterly fail also to understand that investments in the U.S. made by foreigners are just as likely to create jobs in the U.S. as are investments made in the U.S. by Americans – is proof positive that you need to consult very different economic textbooks.
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
The above originally appeared at Cafe Hayek.

3 comments:

  1. ─ You write in your document "Scoring the Trump Plan" that "[a]ccording to textbook theory, balanced trade among nations should be the long-term norm, and the chronic and massive trade deficits the US has sustained for over a decade simply should not exist."
    This claim is untrue. ─

    Of course is untrue. For one, like you say later, there's nothing in economic theory that says it is abnormal to have trade 'deficits' (a B.S. term, anyway). Two, the claim that this is 'textbook' theory cannot be validated. It sounds like pure and unadulterated B.S. as well, meant to elicit the awe of the economically illiterate.

    ─ Nothing in economic theory implies that years, decades, or even centuries of unbroken annual trade deficits are evidence of 'unfair' trade practices by foreigners or of self-destructive economic policies at home. ─

    The idea that trade 'deficits' are bad comes mostly, I believe, from a fear of foreigners, Don. If trade deficits were a bad thing as some people think, then trade among the states should be discouraged because you will always have some sort of 'deficit' between, say, Texas and Colorado, or California and Idaho. Or between New York City and New Haven, if one reduces the scope of this analysis. Why is it that these trade deficits are not a problem but trade with Mexico or Canada is?

    The usual answer from the anti-trade ideologues is that the dollars spent stay 'here', meaning inside the United States. But this belief stems from a fallacy of division, that trade within America must be good for each American as long as it is within America. Trade with foreigners would mean that dollars would be used to purchase goods from those foreigners but that does not mean the foreigners are going to stuff their mattresses with dollar bills. They will use that money to buy American-made goods or other goods from other places where they accept dollars. This is advantageous for everyone: for the Americans who buy the foreign-made products, for the foreigners who now have dollars to spend everywhere else and for the other foreigners who can use those dollars to buy American-made goods, or travel to America as tourists or to invest in industries or buy real estate. There's no real 'trade deficit' to speak of, except in the minds of people who only see the dollars going out and not the wealth coming in.

    Of course trade among Americans is good, but so is trade by Americans with people from other countries - meaning, it doesn't matter if individuals trade inside political borders or outside, the advantage is for all who trade. So why would trade 'deficits' invoke such a negative response? I again have to conclude that this fear is based on a fear of foreigners. Because 'textbook economic theory' it ain't.

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