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What an Embarrassing Performance by Peter Navarro

Monday, March 6, 2017 14:57
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(Don Boudreaux)


Here’s a letter to the Wall Street Journal:

Peter Navarro’s attempted justification of policies to reduce America’s trade deficit is a river of rubbish (“Why the White House Worries About Trade Deficits,” March 6).

Our first hint of Mr. Navarro’s confusion comes when he writes that “growth in real GDP depends on only four factors: consumption, government spending, business investment and net exports (the difference between exports and imports).”  The famous C+I+G+(X-M) equation – to which Mr. Navarro here refers – breaks down GDP, not according to how it is produced but, rather, according to how it is spent.  So for Mr. Navarro to suggest that U.S. national income will rise as a matter of arithmetic if government forces us Americans to stop spending more on purchases of imports than we earn on goods that we export from our country makes no more sense than to suggest that Mr. Navarro’s household income will rise as a matter of arithmetic if government forces him to stop spending more on purchases of books and movies than he earns on the books and movies that he produces and exports from his household.

An equally serious confusion appears in Mr. Navarro’s breathless warning that “running large and persistent trade deficits also facilitates a pattern of wealth transfers offshore.”  This assertion rests on the unstated assumption that the amount of capital in the global economy is fixed.  If the amount of capital were indeed fixed, then increased capital ownership by non-Americans would indeed mean less capital ownership by Americans.  But in reality capital grows when and where economies are open and markets are free.  For example, the building of a new store in Utah by Ikea does nothing to reduce Americans’ ownership of assets despite the fact that this foreign investment in America raises the U.S. trade deficit.  Foreigners can increase their investments in the U.S. economy (and thus cause the U.S. trade deficit to rise) without Americans’ net investments falling – and, hence, without any “wealth transfers offshore.”

Many other flaws infect Mr. Navarro’s apology for the Trump administration’s embrace of 17th-century mercantilism.  It’s disgraceful that someone boasting a PhD in economics from Harvard, as Mr. Navarro does – and who serves as a trade advisor to the president of the United States – is so hopelessly confused about the simplest facts and economics of trade.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030


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