LETTER TO EDITOR: How to grow the economy

OPINION:

In a June 9 letter to the editor, “Trade deficit offset,” Donald J. 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, Mr. 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.”

Mr. 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 (Eswar Prasad, Raghuram Rajan and Arvind 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. Mr. Boudreaux thinks this inflow of dollars from the Chinese government has been benefiting our country. However, 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.