Receiving open letters is always fun, even if one can’t respond every time. But once you’ve received six or seven (6–7!) from the same hapless correspondent, a continued silence might discourage further missives, which would be disappointing for all involved. Oren is on the case:
Donald Boudreaux is an economics professor at George Mason University. As far as I know, he’s a very nice guy. We had a fun conversation once on a “Critic’s Corner” episode of the American Compass Podcast, and he writes frequent “open letters” to me about my incorrigible failure to grasp even the most basic economic concepts. The one he published last week was numbered “Another Open Letter to Oren Cass 6” by his content management system, which gives a sense of his oeuvre.
This latest effort is noteworthy for its sheer sophistry, and what that sophistry illustrates about the core assumptions and quality of thinking atop which the market fundamentalist’s worldview is built. Boudreaux’s first, somewhat bizarre point is that the United States actually has balanced trade, notwithstanding its $1 trillion trade deficit. After all, the trade deficit in the so-called “current account” is precisely offset by a surplus in the “capital account”; other countries are not sending us an extra $1 trillion out of the goodness of their hearts, they are exchanging it for $1 trillion in American assets. Thus, says Boudreaux, “only by ignoring the capital account can you describe U.S. trade as being unbalanced.”
As a preliminary matter, it’s worth noting that Boudreaux is playing a silly word game. The term “trade imbalance” refers to an imbalance between imports and exports, such that a deficit or surplus emerges. The answer to his question, “why do you continue to describe America’s trade as being unbalanced?”, is that this is how language works. We use terms with agreed upon meanings to communicate ideas.
But let us more generously credit him with attempting to make a perhaps interesting point, which is that this commonly understood definition of trade imbalance is a confusing one. In the view that he is advancing, analysts should be indifferent between goods and assets. If the United States exports $100 billion of airplanes and imports $100 billion of cars, we would call that “balanced trade” rather than lamenting an airplane imbalance. So why feel differently when the export is $100 billion of treasury bonds?
As against the conventional view that producing and exporting $100 billion of airplanes has very different economic implications than printing a piece of paper that says “we owe you $100 billion,” Boudreaux posits the purportedly sophisticated thought that the wise economist is indifferent between the two. Each basket is worth $100 billion, who are we to say that one is better than the other?
I belabor the point not because it is interesting but, to the contrary, because it is so banal. The investment, innovation, jobs, capacity, skill, and so on associated with the production of goods for export all have social and economic value for the nation. Issuing debt instead imposes costs on both the present and future. Economists literally do not understand this, and pride themselves on not understanding it. They write open letters to advertise that they do not understand it, in the belief that they are landing blows on behalf of their discipline.
Boudreaux is not some loon. He is a tenured professor at a prominent university. On Monday, the Wall Street Journal published his latest essay on the wonders of free trade. You can find his sentiment throughout his profession, on both the left- and right-of-center. Jason Furman, the former chair of Barack Obama’s council of economic advisers and now a professor at Harvard University, would actually go further, and say that insofar as an imbalance exists it is to the benefit of the side issuing debt rather than making anything. Lecturing last year in Geneva, he explained, “economists understand imports are actually the good thing that is what we enjoy, it’s the benefit we get from trade. Exports are the unfortunate thing we do just so we can get those desirable imports.”
Where Boudreaux’s first complaint relies upon unwisely abstracting away the distinction between production and debt, his second erases the social reality in which his economic policy needs to operate: A concern about a trade imbalance with foreign countries would suggest that the existence of countries matters. His razor-sharp intellect seizes on this undefended assumption. “I don’t see why the nationalities of savers and investors matter economically. You, in contrast, apparently do. What am I missing?”
The pattern repeats itself, the banality beggars belief. Why would Americans care whether economic transactions, productive activities, and long-term control of assets are located in the United States? That’s the question?
It can admittedly sound like strawmanning to say that economists resent the existence of borders and build their case for free trade on a globalist indifference to the wellbeing of their countrymen and the strength of their nation. But it’s just true. More dangerous, they will genuinely be unaware that their work relies upon these assumptions, or that the assumptions are neither compelling nor widely held ones.
In a new collection for American Compass, our policy advisor Mark DiPlacido has written a wonderful series of essays tracing the intellectual decline from the political economy that shaped early thinking about free trade to the dogmatic economics that drove globalization off a cliff. “Ideology Over Interest” is of particular relevance. He and I also discussed these issues on this week’s podcast. Check it out. — Oren
TRADE AND CHINA
Speaking of imbalances: China reported a trade surplus in goods of more than $1 trillion, a level “never before seen in recorded economic history.” Remarkably, China’s undervalued currency suggests that its export dominance is understated, as the Wall Street Journal reports: “When calculated by value, China accounts for roughly 15% of global goods exports. But in volume terms…every shipping container being sent from Europe to China is outnumbered by the four containers heading in the other direction. In volume terms…China accounts for some 37% of everything being exported in shipping containers.”
China has achieved this record-breaking export volume even as the United States turns its own back, with President Trump’s tariffs drivingAmerican imports from China down by nearly 20% over the past year. This fact pattern has led many observers to claim that China is winning the U.S.-China trade war, but is that true? In Commonplace, trade attorney Nicholas Philips makes the compelling argument that “On Trade, China Isn’t as Strong as It Looks.”
The recent pessimism ignores a fundamental reality: tariffs on China are significantly higher than tariffs on the rest of the world, and as long as that remains the case, it will drive a structural realignment in the global trading system that disadvantages China. In order to keep exports growing in the face of U.S. tariffs, China must increase sales to new markets. But those new markets tend to be exporters themselves, and don’t have the ability to painlessly replace U.S. demand. China can only access these markets by aggressively underpricing its exports—weakening the balance sheets of its manufacturers and subjecting its trading partners to China Shock dynamics of bankruptcy, unemployment, and deindustrialization. That encourages China’s replacement markets to block its exports, just as the U.S. did following the first China Shock. In essence, the measures China must take to fuel its export machine end up undermining it.
Indeed, China’s rising export volumes amid declining exports to the United States requires exports rising even faster to other countries. And that’s what we’ve seen: China’s exports to Africa, Southeast Asia, and Latin America have increased by 26%, 14%, and 7%, respectively. Its exports to Europe increased by 15% year-over-year in November; exports to Germany, France, and Italy increased by 15%, 18%, and 25%, respectively.
The U.S.-precipitated trade diversion presents these countries with a stark choice: Absorb China’s overcapacity and deindustrialize (or, in the case of developing countries, fail to industrialize) or join the United States in raising tariffs on Chinese goods to protect their home markets. Toward this end, Philips says the Trump administration should do “more diplomatically to create a united anti-China trade bloc, conditioning preferential tariffs on blocking Chinese exports and levying high tariffs on countries that remain open to them”—our preferred posture at American Compass. A recent Bloomberg article puts it bluntly: “China Forces Reckoning in Europe as Trade Turns Existential.” They should act accordingly.
Also worth reading:
China’s Growth is Coming at the Rest of the World’s Expense (WSJ): “China is swallowing up a growing share of the world’s market for manufactured goods. This reveals an uncomfortable truth: Beijing is pursuing a ‘beggar thy neighbor’ growth model at everyone else’s expense.”
‘Unbearable Imbalances’ Cast Shadow on Emmanuel Macron’s Beijing Bonhomie (FT): “‘These imbalances are becoming unbearable,’ Macron said at a joint appearance with Xi in Beijing on Thursday. It was a remark that reflected sharpening French demands on Beijing to spur consumption and curb exports…Paris is demanding Beijing recalibrate its trade and investment relationship with the EU. ‘We are at the last stop before a crisis,’ a French official warned. ‘If we don’t change course, we will worsen global fragmentation,’ they added, suggesting Paris would have to consider ‘protective measures.’”
Ford’s Jim Farley: Europe is Risking the Future of Its Auto Industry (FT): “On one side, we face the world’s most aggressive carbon mandates, regulations that demand a pace of electrification that is decoupled from the reality of consumer demand. On the other, we face a flood of state-subsidised EV imports from China, structurally designed to undercut European labour and manufacturing.”
A Grand Strategy for Europe in the New Cold War (The Republic): An excellent essay on Europe’s time for choosing, which in many ways pairs well with Oren’s recent Foreign Affairs essay on a grand strategy of reciprocity: “Europe’s path to renewed agency lies not in emancipation from the West but in deepened integration within it as an equal partner with clearly defined responsibilities.”
And finally, U.S. Trade Representative Jamieson Greer recently sat down for two longform interviews to discuss the administration’s trade agenda, one with Politico for a general political audience and one with the Atlantic Council. Both interviews provide insights into what the administration has done, why it has done so, and what it might do next.
THIS WEEK’S GOOD, BAD, AND UGLY FROM THE NDAA
The Good: As part of this year’s National Defense Authorization Act (NDAA), Congress included authorities for the federal government to review outbound investment into the Chinese economy. Reports Politico: “The inclusion of so-called outbound investment restrictions puts lawmakers on the brink of capping off a multi-year effort to pass legislation that would curtail U.S. capital from flowing into certain sectors of the Chinese economy, such as semiconductors and artificial intelligence.” American Compass has been leading this effort and we are pleased to finally be crossing the finish line.
The Bad: The Trump administration blocked inclusion of the GAIN AI Act in the NDAA, which would have restricted advanced chip exports to China, and instead gave Nvidia the green light to export its H200 chip to China in exchange for a 25% cut of all sales remitted to the U.S. government. This is great news for Nvidia and its shareholders, as well as for Chinese companies that want advanced semiconductors that their own economy cannot produce. Suffice to say it’s bad for U.S. competitiveness. Oren joined Steve Bannon’s WarRoom to explain why. And for a longer explanation, it’s a good time to revisit the recent American Compass paper on why the government should impose stronger—not weaker—export controls on advanced semiconductors: Stop Selling the Rope.
The Ugly: After Congress rejected a moratorium on state-level artificial intelligence regulation in both this year’s reconciliation bill and the NDAA, President Trump took unilateral action and signed an executive order to preempt such regulation, which is… not something an executive order can do. The principle of federal preemption for regulation of a general-purpose technology is defensible—a patchwork of state-level laws that allows the lowest common denominator to establish a national standard is suboptimal. But such preemption assumes the federal government has a standard it wishes to impose, not merely a protective handout to Big Tech allies it wishes to distribute. The White House’s approach here is neither legal nor sensible nor popular.
IMMIGRATION
Nearly a year after President Biden left office, the New York Times has published a damning retrospective on his administration’s immigration policies: “How Biden Ignored Warnings and Lost Americans’ Faith in Immigration.” The report details what most Americans already knew, that the decision to allow for an unprecedented number of immigrants to enter our nation unlawfully was precisely that—a decision. Advisors warned Biden before taking office that “his positions threatened to drastically increase border crossings.” Instead of heeding them, he plowed ahead, reversing the policies of his predecessor in a bout of thermostatic reactionism and imposing others that worsened the problem. Only after the immigration crisis became an undeniable electoral liability did he use his executive authority to begin addressing what had become an unmitigated disaster for his administration and for the nation.
President Biden’s failure to secure the border and enforce the nation’s immigration laws is one of the primary reasons President Trump sits in the White House for a second term, where he is prosecuting an even more aggressive immigration policy than in his first term. He has proven that the border can, in fact, be secured with executive action. Having “lost Americans’ faith” on immigration, the question for Democrats will be whether they learn from the mistakes of the Biden administration or repeat them the next time they are in power. If they hope to reclaim power, they’ll need to nominate candidates who credibly believe in securing the border and enforcing our immigration laws as a matter of sound public policy. It’ll be a tall task.
In other immigration news, NBC reports that “ICE Has Arrested Nearly 75,000 People with No Criminal Records, Data Shows,” and the New York Times reports that “Most Immigrants Arrested in City Crackdowns Have No Criminal Record.” While both outlets are presumably attempting to make the point that such arrests do not represent efforts at deporting the “worst of the worst,” they seem oddly unaware that being arrested for committing unlawful acts is exactly how one develops a criminal record, which each of these individuals now has.
Also read: the latest commentary from Craig Fuller at FreightWaves—“How America’s Trucking Industry Became a Hellscape”—on the impact of illegal immigration on the trucking industry and the deleterious effects for American truckers and trucking companies that follow the law:
Over the past few months, I’ve spoken with hundreds of senior executives at America’s largest trucking companies. Nearly all say they only recently discovered the massive influx of foreign drivers and motor carriers. Most assumed the trend was gradual; none realized it was exponential….These minimally trained foreign drivers cannot pass the vetting of large, compliant carriers (no work authorization, poor English, zero experience). They end up at small, often foreign-owned fleets that pay 40% below market ... .The results are undeniable: Legitimate carriers and drivers can barely break even; trucking has become an economic backwater motor carriers that follow the rules. Cargo theft is now an industrial-scale national-security crisis coordinated by foreign dispatchers and brokers working in concert with foreign-born drivers inside the United States. Despite billions spent on safety technology, fatal truck-involved crashes are up ≈40% since 2014—almost entirely because of untrained, overworked, and inexperienced drivers now operating 80,000-pound rigs. In short, a well-intentioned but catastrophically naive campaign to “fix the driver shortage” combined with regulatory loopholes, unchecked immigration, technology back doors, and offshoring has fundamentally broken America’s trucking industry in less than a decade—and virtually no one in Washington or in corporate corner offices saw it coming.
WEEKEND READS:
How Private Equity Is Changing Housing (The Atlantic)
Education in an Age of Polarization (Democracy Project) by American Compass advisor Ashley Rogers Berner.
REINDUSTRIALIZATION
Some positive news to end the week:
U.S. Steel to Restart Blast Furnace at Plant Trump Pushed to Preserve (WSJ): “U.S. Steel plans to resume steelmaking at an Illinois plant where the Trump administration intervened last summer to keep production going. The company stopped making steel at Granite City Works two years ago and had planned to further curtail operations before the administration blocked the move in September. It said it now sees signs of rising demand that justify restarting one of Granite City’s two blast furnaces early next year to produce molten iron for steel….The company expects to add about 400 employees at Granite City to operate the blast furnace, raising the plant’s workforce to about 1,200…”
Eli Lilly to Build $6 Billion Alabama Plant as Part of U.S. Investment (WSJ): “Eli Lilly plans to build a $6 billion facility in Huntsville, Ala., to make active pharmaceutical ingredients, including those used in weight-loss drugs. The site is the third of four new facilities in the U.S. that the pharmaceutical company plans to announce, Eli Lilly said Tuesday ... .The site will bring 450 jobs to the area, including engineers, scientists and lab technicians. Construction is scheduled to begin in 2026 and is anticipated to create 3,000 construction jobs. Completion is slated for 2032.”
Enjoy the weekend!
I loved this one. I got into it with Don years ago on CafeHayek.
I had just finished a book called Free Trade Doesn't Work by Ian Fletcher and wasn't sure whether Fletcher's argument held water. I decided to use the internet to throw Fletcher at a legitimate academic economist and rabid free trader. I chose Don Bourdeax.
The argument I used with him? "When we import something, we can pay for it with stuff we make now, stuff we make later, or stuff we've already made. The first one is exports; the second is bonds; the third is hard assets. #2 has to be paid back and #3 you will eventually run out of, so you should attempt to maximize 1." This was Fletcher's basic case that I found so convincing and eye opening.
Don didn't. He deleted the comments on that blog post, but after going back and forth with him 4-5 times (using Fletcher's arguments) Don was simply talking himself in circles and saying nothing. I finally decided Fletcher must be right since the smartest libertarian economist in the room didn't have an answer.
Don's final response to me: https://cafehayek.com/2017/10/free-trade-not-founded-religion.html (as a separate post) sounds a lot like his responses to you: "it's obvious and you're just too dumb to see it." Isaac Asimov once opined, "violence is the last refuge of the incompetent", but I think personal insults are a good indicator too.
So in a weird way, Don Bourdeaux helped make me skeptical about free trade.
BTW: For all social media's problems, the internet is amazing. How else can a schmuck from Sacramento have a public debate with the chair of the George Mason economics department? (And, if I do say so myself, kick his butt -- with help from Ian.)
"The investment, innovation, jobs, capacity, skill, and so on associated with the production of goods for export all have social and economic value for the nation... Economists literally do not understand this, and pride themselves on not understanding it."
This cuts straight to the rot at the heart of modern economics. It doesn't matter whether they're colored in blue, red, or yellow & black—today's economists fashion themselves as priests in a temple most people can't enter, then pontificate about free trade as though the real world operates on their chalkboards.
The trouble is they've abandoned reality for ideology. They only model frictionless markets in a world where nations, borders, families, and actual human beings still matter. This isn't merely ridiculous...
It's intellectual malpractice dressed up in mathematical clothing.
Their fantasy has little connection to how economies function for working people.
Thanks for the analysis, Oren. Someone needs to speak plainly about what they do.