Greg Mankiw includes Donald Boudreaux on his reading list. Now I’d be all in favor of a good letter telling Lou Dobbs that his trade protectionist rants should not be listened to by any policy maker, but this is not the letter that one should send:
First, some basic facts about the state of middle-class Americans. The US unemployment rate now is at a healthy 4.5 percent. This rate is lower than the average annual unemployment rate for the 1970s (6.2 percent), the 1980s (7.3 percent), and even the high-growth 1990s (5.6 percent). Inflation, meanwhile, is running below the average for the 70s, 80s, and 90s. Here’s more good news for ordinary Americans. The percentage of Americans who own their own homes is higher than ever, even though the size of today’s typical home is larger than ever. Workers’ leisure time, too, is at historically high levels. And jobs are just as secure today as they were in the late 1960s, according to a research paper by University of California-Davis economist Ann Huff Stevens.
For the most part – this is the standard Karl Rove rant. But if workers have more leisure time – doesn’t that mean we have moved down the labor supply curve as opposed to the usual supply-side claim that Bush’s tax cuts encouraged more work not less? Boudreaux finally gets around to the trade deficit:
Admittedly, the word “deficit” sounds ominous. In fact, though, America’s trade deficit is evidence of its economic vigor and promise. Here’s why: When Americans buy foreign-made goods and services, foreigners earn dollars. The only way America would run no trade deficit is if foreigners spent all of these dollars buying goods and services from Americans. Instead, though, foreigners invest some of their dollars in America. They buy American corporate stock, they build their own factories and retail outlets in the US, they lend dollars to Uncle Sam, and they hold some dollars in reserve as cash. Aren’t you proud that so many people the world over eagerly invest their hard-earned wealth in America? As an American, I’m proud and optimistic. Foreigners invest in the US so readily because its economy is so strong. And even better, these investments strengthen the economy by creating more capital for American workers. These investments raise workers’ productivity and wages. Remember: A trade deficit is not synonymous with debt. I’m writing this letter on a new Sony computer that I bought with cash. I owe Sony nothing. If Sony holds the dollars it earned from this sale, or if it uses these dollars to buy stock in General Electric or land in Arizona – that is, as long as Sony invests its dollars in America in ways other than lending it to Americans – the US trade deficit rises without raising Americans’ indebtedness. Americans go more deeply into debt to foreigners only when Americans borrow money from foreigners. Uncle Sam, of course, borrows a lot of money, from both Americans and from non-Americans. I share your concern about the reckless spending and borrowing practiced by politicians in Washington.
I trust Professor Boudreaux understands that Federal debt is our deferred tax liabilities? After all, his claim that we are not borrowing seems to rank with some of the dumbest things we’ve seen from the National Review. Professor Boudreaux closes with:
Smith correctly understood that with free trade, the economy becomes larger than any one nation – a fact that brings more human creativity, more savings, more capital, more specialization, more opportunity, more competition, and a higher standard of living to all those who can freely trade.
This is a nice general defense of free trade but when Professor Boudreaux suggests that the U.S. has more savings, he seems to be ignoring the evidence that our national savings rate has declined. Maybe Dr. Mankiw should have spent his time not reading this letter but writing a much better letter to Lou Dobbs.