Conard on Trade and the Trade Deficit
By David Henderson
I’m working on a book review of Edward Conard’s book, Unintended Consequences. I’m over half way through the book and, although there are a few cryptic passages, when he’s good, he’s very, very good. And he’s often good. I hate the subtitle: “Why Everything You’ve Been Told About the Economy is Wrong.” Really? Everything? Hard to believe.
But large parts of the chapter titled “The Role of the Deficit” are brilliant. An excerpt:
As the U.S. economy moved production offshore, balanced trade would have required the United States to produce goods for export. Instead of selling goods to offshore producers to balance trade, we sold them assets (ownership rights to future cash flows split into debt and equity; in this case, the United States sold debt to offshore producers). This also allowed the United States to use freed-up resources to increase domestic investment. We also redeployed freed resources to the domestic service sector.
Increased and more productive investments grew U.S. assets faster than the sale of assets to buy and consume imports. While debt owed to foreign economies grew, assets owned by Americans grew even more. Household net worth increased. As long as we continue to produce assets faster than we sell them, the trade deficit can grow forever. As long as the United States continues to earn a higher rate of return on investments than its cost to borrow cheap foreign capital, this can remain the case, and likely will remain so for the foreseeable future.
Later, in discussing why cheap foreign labor is a boon:
Now imagine that those offshore workers were willing to work for free. If their labor was free, how much of it should we buy? All of it. At seventy-five cents an hour, it is effectively free. At that price, surely we can find better uses for our own labor.
And, on “dumping”:
When offshore producers “dump” incremental production between full cost, we capture the benefit of lower prices. When foreign governments subsidize trade with tax credits or hold dollars to support their currencies, we capture the value of those subsidies.
I think he uses the word “support” in a strange way. “Support” usually means keep the price of a currency high. But clearly, in context, Conard is using “support” to mean “keep the price of a currency low.”