My Debate with Ian Fletcher
By David Henderson
After my article appeared in which I criticized Ian Fletcher’s argument for more manufacturing in the United States, Fletcher responded by e-mail and we carried on a back-and-forth debate. It was pretty civil on both sides, something that, unfortunately, is not that common any more. He gave me permission to quote from our e-mail correspondence. You will get more out of it if you read my original critique of Fletcher first. Here are some excerpts that are, of course, chronological.
First, you seem to contend that FDI [foreign direct investment] is an exception to the basic rule in economics that, in Milton Friedman’s words, “there is no free lunch.” That is, you ignore the fact that when foreigners make an investment in the U.S., they own the investment. That the investment took place may be a good thing, but this doesn’t change that fact that when foreigners, rather than Americans, own an investment, this increases the net worth of foreigners and reduces the net worth of Americans by the same amount.
The key here is to take the right baseline. If your baseline for foreign-financed investment is no investment at all, then yes, we should view foreign investment as an unalloyed gain. But the alternative to foreign-financed investment isn’t no investment, it’s American-financed investment. Once one looks at the problem this way, it’s obvious that America is better off with American-financed investment, as then Americans will own the assets and receive the returns they generate.
Second, you seem to contend that the use of the dollar as an international reserve currency obviates our need to pay for a trade deficit by borrowing and selling off assets. Again, this is a baseline problem. The U.S. dollar would still be an international reserve currency even if the U.S. were not running a huge deficit. Running that deficit does not increase the size of our international dollar seignorage. Therefore every additional dollar of deficit we run still compels us to either a) assume another dollar of debt or b) sell off another dollar of assets.
You seem to be making the point, in numerous ways, that if we forego consumption and instead save, we will be better off in the future. But that doesn’t mean we’re better off making that choice. Take whatever amount you’re spending this year on consumption, Ian, and instead spend $1,000 less. A year from now you’ll be better off by $1,000 plus interest. So why not do it? And if you do, then slice off the next $1,000 from consumption, and so on. The point is that we make tradeoffs between current and future consumption and you’re saying that we’re making the wrong tradeoff. How do you know?
I am well aware of the concept of intertemporal substitution of consumption.
Granted, if one is indifferent to the idea of staging a consumption binge in the short term at the expense of future prosperity, then my argument doesn’t hold water.
But this is an abstract and silly position, as the political consensus of all major political parties, both in the U.S. and every other nation of which I am aware, explicitly opposes deliberately choosing economic decline.
Nobody defends this outcome as a sincere preference; it is only defended by people who paint themselves into the theoretical corner you are now in.
When I see anyone run on a declinist platform and get elected, I will consider that choice an appropriate guide to public policy.
It seems that you think I’m advocating economic decline. I’m not. And I’m not sure how you got that idea.
You aren’t advocating economic decline, but you’re saying it’s fine if people choose to maximize short-term consumption at their long-term cost–which means saying it’s fine if people chose economic decline.
Correct. This time you said it accurately.
Indifference to economic decline, in the face of forces pushing this country in that direction, means choosing to let it happen.
It seems to me that you’re saying, then, that you would not let it happen. So then the question becomes, “Which choices of people that are causing it to happen would you not allow?”
As noted, I propose to manipulate matters at the systemic level through tariffs, not intervene in specific individual choices.