8cda82da_brary_of_Economics_and_Liberty__ast_Highlights_HIDE_HIGHLIGHTS
[Time] 41:56
Trade deficit. Confusion over money. Smith pointed out that wealth doesn't come from money, neither gold nor pieces of paper. Worry when money "leaves the country," trade with Canadian as opposed to trade with someone from another state in the U.S. Is a miser with a lot of money wealthy? Has opportunity but if money is never used, he's very poor, just holding lots of pieces of paper with pictures of presidents. Money that leaves the country is not gone forever. Canadians accept those dollars because they want to buy things priced in dollars--American goods, services, or assets. The money eventually comes back. Though, by the way, it would be good for Americans if it never came back! If we run a trade deficit, i.e., we buy more from foreigners than they buy from us, people worry. Current account deficit is trade in goods and services, as opposed to merchandise trade deficit is just trade in physical goods. Services are a large part of the U.S. economy, so first, merchandise trade deficit is not measuring much of U.S. trade. For 30 years we've run a current account deficit, but that means the money is still coming back--it comes back as demand for assets, measured in the capital account. When you add up the current and capital accounts, by definition they are equal and opposite: the balance of payments is 0. That, too, employs Americans. Other things equal, we have more capital here because it comes back in the capital account: more investment, R&D, other things equal, lower interest rates, etc., in the U.S. Sellers of the assets very much want buyers to bid on them and they want to sell them to the highest bidders. If you had stock in a company would you feel good if only people in your home town could bid on it? Want pool of bidders to be as large as possible. Economically, assets are not just idly held. Foreign direct investment is active involvement and control. People worry about that, but if the most creative idea for how to use a piece of capital machinery in Alaska happens to come from someone in Romania, we sacrifice that creativity by restricting who can buy our assets.
Don Boudreaux on Globalization and Trade Deficits | EconTalk | Library of Economics and Liberty