A tale of 3 letters to the editor

On June 6, a letter to the editor that I wrote was published in the Washington Times. This is what I wrote:

Balanced trade is the key

In his Tuesday Commentary column, "Economic Reality Check," Michael Barone cites many trees but misses the forest. He points out that the economy is not suffering from much unemployment (true), nor is there much inflation (true). Nor is the economy shrinking (true). He also points out that the growth rate is mighty slow, but he doesn't stop to analyze why. His conclusion: Barack Obama's "protectionism" would not help the United States economy.

What he misses is the reason U.S. growth is so slow despite the lack of unemployment. It is slow because businesses have not been investing in American production. They have not been investing because they know that if they do, the mercantilist countries that control our level of trade deficits through currency and other trade manipulations will simply drive them out of business. The key to fixing the problem is for the United States to insist on balanced trade.

By the way, Mr. Barone is wrong when he calls Sen. Obama a protectionist. Mr. Obama would not likely do anything more to balance trade than Sen. John McCain. The main reason Sen. Hillary Rodham Clinton was solidly defeating Mr. Obama throughout the Midwest is because the manufacturing voters detected a phony.

As things stand, the Democrats will gain a huge victory in Congress of 1932 proportions as a result of delusional Republican economics as exemplified by Mr. Barone's column. The presidential race, however, is up in the air. Ohio, Michigan and the nation will go to the presidential candidate who persuades voters that he will do the most to balance trade.

HOWARD RICHMAN
Co-author: "Trading Away Our Future"
Kittanning, Pa.

On June 9, Don Boudreaux, Chairman of the economics department at George Mason University responded with his own letter to the editor. Here is what he wrote:

Trade Deficit Offset

Howard Richman argues "Balanced trade is the key" (Letters, Friday/Saturday) to America's prosperity. He's confused, as evidenced by his claim that America's recent economic slowdown is linked to its trade deficit. The United States has run a trade deficit for each of the past 31 years, some of which (like the present) were periods of slow growth, but many of which were periods of high growth. Indeed, the evidence suggests that higher trade deficits are associated with higher, rather than lower, rates of economic growth.

This last point highlights another of Mr. Richman's confusions. He thinks trade deficits mean less domestic investment. Not so. Every trade deficit (more accurately, current-account deficit) is offset exactly by a capital-account surplus - meaning net inflows of capital into the domestic economy. More capital generally means more growth.

DONALD J. BOUDREAUX
Chairman, Department of Economics
George Mason University
Fairfax

Last night, I e-mailed the Washington Times a response to Boudreaux's letter. Here is what I wrote:

How it Works in the Real World

In a June 9 letter to the editor, “Trade Deficit Offset,” Don Boudreaux, Chairman of the Department of Economics at George Mason University, disputed my contention in a June 6 letter to the editor, “Balanced Trade is the Key,” that U.S. investment would increase if we insisted on balanced trade with the mercantilist countries.

Specifically, Boudreaux argued that our trade deficits contribute to our economic growth: “Every trade deficit (more accurately, current-account deficit) is offset exactly by a capital-account surplus - meaning net inflows of capital into the domestic economy. More capital generally means more growth.”

Boudreaux's theory works on the chalkboard of his classroom, but in the real world, the exact opposite occurs. Instead of helping, inflows of financial capital slow the growth of the economy that receives them. In 2006 three International Monetary Fund economists (Prasad, Rajan & Subramanian) found that the more capital a developing country had received from abroad, the slower its economic development because of the harm to its exporting industries. Although the inflow of capital causes lower interest rates, it also causes a higher currency value which makes the products of that country less competitive in world markets.

Many Asian countries, especially China, have been intentionally manipulating their currency values to keep their exports high and their imports low. In order to conduct these currency manipulations they buy dollars and lend those dollars to the United States. Boudreaux thinks that this inflow of dollars from the Chinese government has been benefiting our country. But the inflow of capital into the United States drives down U.S. interest rates while at the same time putting U.S. producers at a competitive disadvantage when competing with Chinese producers.

As I pointed out in my June 6 letter, "businesses have not been investing in American production ... because they know that if they do, the mercantilist countries that control our level of trade deficits through currency and other trade manipulations will simply drive them out of business. The key to fixing the problem is for the United States to insist on balanced trade."

Howard Richman
Co-author: Trading Away Our Future
Kittanning PA 16201

Howard