Friday, March 17, 2006

Trade, Government Spending, and Economic Growth

That's the title of a new and very long post I've put up at Liberty Corner II. Here's the executive summary:

One reason for continued economic growth and the resurgence of productivity is the trade deficit, which is not a form of debt. A trade deficit offsets government spending and therefore alleviates the "crowding out" effect that government spending has on private-sector consumption and investment. American consumers and businesses are better off than they would be in the absence of a trade deficit. For the trade deficit is nothing more than a manifestation of voluntary exchange, which -- by definition -- benefits both parties. In the case of international trade, foreigners (on net) are selling us goods and services while we are selling them a combination of goods, services, stocks, bonds, and mortgages. The so-called deficit, then, is nothing more than foreigners' purchases of U.S. stocks, bonds, and mortgages.

Thus, instead of using resources to produce goods and services and sending them overseas in exchange for goods and services of equal value, some resources remain in the U.S. And some of those resources are then converted into capital investments that help make American businesses more productive and profitable. In effect, some foreigners are using the income they receive from Americans to "invest in America," just as some Americans use some of their income to "invest in America." There is no difference.

Nevertheless, when there is a trade deficit we are treated to gloom-and-doom-saying about "foreign "ownership" of U.S. assets and the "exportation" of American jobs. But foreign ownership of U.S. assets is not a threat to Americans; rather, it gives foreigners a stake in America's economic growth. The threat of job "exportation" is just as bogus; when foreigners "do jobs that Americans could be doing" they are enabling Americans to make more productive use of their abilities. If you don't care (and you shouldn't) whether your car in made in Detroit or Tennessee, why should you care whether a computer technician works in the U.S. or overseas? What you should care about is the value you receive when you buy a car or use a computer help line.

The real villain of the piece is government spending, not government deficits. Government deficits are simply the result of government spending. It is government spending -- not government borrowing -- that threatens Americans' prosperity.Through spending (whether it is financed by taxes or borrowing), government confiscates resources and puts them to generally wasteful and counterproductive uses.

Where does the trade deficit fit in? It doesn't create government spending or government deficits. To the contrary, the trade deficit helps to offset the essential wastefulness of government spending by enabling Americans to enjoy and benefit from goods and services that government spending deprives them of.