Thursday, 29 September 2016

A basic lesson in trade economics for Trump’s ignorant economic adviser


Don Boudreaux, who blogs at Cafe Hayek and is a professor at George Mason University, explains basic trade economics to Trump’s ignorant economic adviser.

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.

An important lesson there too for sundy local anti-trade ignorati.


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