This morning I spent more time than I usually spend reading comments on blogs other than Cafe Hayek. I was distressed by some of the comments that I read on this excellent Carpe Diem post by Mark Perry on why a U.S. trade deficit is nothing for Americans to worry about. (Mark’s blog is hosted by the American Enterprise Institute. The audience of that organization very likely tilts heavily conservative and nationalistic, which perhaps explains some of these comments.)
Here are two comments from “Tom”:
The net inflow of “investment” capital funds the net inflow of trade goods and is paid for by a net outflow of assets other than trade goods.
If I have stock and you have a car I want then you are saying:
When I trade my stock to you for money to buy the car, you are calling this a “net inflow of investment capital” because you’re buying my stocks.
Then I trade this money to you for the car and you call this a “net inflow of goods” because I’m getting a car.
You are ignoring the net outflow of stocks and the fact that the net inflow of investment capital was used to buy the car so there was an equal net outflow of cash for the car purchase.
You’re taking a simple trade of my stocks for your car and trying to make it sound like I got the car (net inflow of goods) and the money (net inflow of investment capital) and made out on the deal.
“Tom” (like many people) is mistaken on this issue. Here’s a slightly edited and expanded comment that I left on Carpe Diem:
Tom: I’m afraid that you’re mistaken. You interpret a net inflow of capital to the U.S. as a net outflow of assets to foreigners. That is, you seem to assume that every $1 invested by foreigners in the U.S. is a $1 reduction in Americans’ net ownership of assets. Your assumption is wrong, for several reasons. Here’s the main one: the amount of capital in the world, and in any one country (including the U.S.), isn’t fixed. It can – and in fact does – grow.
My net asset ownership can grow without anyone else’s net asset ownership shrinking. Indeed, my net asset ownership can grow while that of everyone else also grows. Foreigners who invest in the U.S. often create additions to the net capital stock of the world (and the U.S.). Ikea, for example, improves the stock of retailing capital operating in the U.S. when it builds a store here. But no American (other than, perhaps, some furniture retailers) are thereby harmed. Americans on net benefit. There’s more capital in the American economy (which helps to raise worker productivity and, hence, wages) and there’s an enlarged offering of consumer goods (which pushes down the real prices of consumer goods and improves their quality).
It’s true the American who sells the land on which an Ikea store is situated might spend the funds on a big party. But it’s also true – and empirically more likely – that the American who sells the land to Ikea uses the proceeds to invest in other ways. If these other investments by the American succeed, then the American effectively transforms the capital value that he or she once had in that land into greater capital value that he or she now has in, say, the new business that that this American starts with the funds received from the sale of the land, or in the improved factory in Ohio or Texas that is made possible by his or her investment there of these funds.
Note also that the ability of non-Americans to make offers to buy assets owned by Americans raises the market value of those assets. Imagine what would happen if – say, in a crazy move to eliminate America’s trade deficit – Uncle Sam outlaws the purchase by foreigners of stocks, bonds, and businesses owned by Americans. Such a move would surely eliminate America’s trade deficit. But do you really believe that such a move would increase the net value of Americans’ asset ownership?
And then there’s this remark, from a comment at this same Carpe Diem post, by “Joe B”:
The globalists are a little glib on the merits of running trade deficits.
Sorry free traders, but free trade does not mean there is such a thing as a free lunch.
If a nation consumes more than it produces , it must borrow or sell assets to make up the difference.
Now, in the US, every piece of property is zoned,and that creates scarcity. Our propertied and financial classes like that, and banks have more than half of their loans placed on real estate.
So when that foreign capital pours into supply-constrained real estate you see….yes, real estate price bubbles.
I responded with the following (again, slightly edited and expanded here):
I challenge you to find a free trader who has ever said that there is such a thing as a free lunch – or that free trade supplies free lunches. (Note, by the way, that pointing out the reality of gains from trade is not to allege the existence of free lunches. Profitable trades are real and worthwhile, but they are not costless.)
And you are mistaken to suggest that a trade deficit is necessarily evidence that a nation is consuming more than it produces. (It’s a common mistake, but it’s a mistake nevertheless.)
Finally, while I agree that zoning is a problem, to address that problem with trade restrictions is dumb. The problem is the creation – by zoning – of artificial scarcities. Trade restrictions create yet only more artificial scarcities. How is the latter a solution to the former?
Oh – I know. You’ll say that if we restrict trade then foreigners will have fewer dollars to use to buy real estate. Well, how do you know that those dollars will then not be spent on real estate by Americans? Even if keeping dollars out of the hands of people who carry Chinese passports and German passports will reduce the likelihood of real-estate bubbles in the United States, that would be a terribly high price to pay for the many harms inflicted by protectionism.
(“Joe B”‘s comment contained other flaws, not quoted above. For example, “Joe B” interprets the fact that the real value of the minimum wage is today lower than was the real value of the minimum wage in 1968 as evidence that “we cannot afford the minimum wage of a half-century ago”. I prefer to interpret the lower real value of today’s national minimum wage as evidence of a happy, if unintended, consequence of political forces working to stymie Uncle Sam’s itch to price low-skilled workers out of the job market.)