Senator Lankford Is Confused About the Trade Deficit

Yep, the senator from Oklahoma says it is good in a Washington Post column. Most of Senator Lankford's confusions are pretty standard, but he does come up with an original one.

"For starters, a powerful economy such as ours often runs a trade deficit because of the immense buying power of its people. Mexico’s average net per capita income is roughly $13,000, while the average U.S. household brings in more than $41,000 each year. Americans have a far greater capacity to buy goods than do consumers in Mexico. It should come as no surprise that we do exactly that."

Okay, we have a trade deficit simply because we are a rich country. I suppose someone forgot to tell Germany that it is a rich country since it has a massive trade surplus of more than 8 percent of GDP (roughly $1.6 trillion in the U.S. economy.)

He then tells us that our imports frrom Mexico will help it to grow and eventually make Mexico a better market for U.S. products. While this is true, Mexico's economy has actually grown less rapidly on a per person basis than the U.S. since NAFTA went into effect in 1994. While NAFTA may not be the cause of weak growth in Mexico, it apparently has not prevented the two economies from diverging further.

Then we get some of the standard confusion pushed by denialists:

"Foreign investment also tilts the trade-balance calculation. Because we have the world’s largest economy and the strongest currency, more money comes into the United States than goes out. This surplus of investment adds to our trade deficit, even though this foreign cash stimulus is a positive for our economy.

"When a Canadian company decides to invest in a U.S.-based company, it increases our trade deficit. Similarly, when the Mexican government buys U.S. Treasury bonds (as most of the world does), the likelihood of an American trade deficit increases. Investments such as these are indicative of a strong economy.

"It should be an encouraging sign that we are by far the world’s largest receiver of foreign direct investment. Our trade deficit means, in part, that U.S. companies are considered to be a better investment than companies in other countries. More investment in American businesses means more jobs and higher wages for American workers."

Actually, there is no direct relationship between the decision to invest in a U.S. company by buying its stock and bonds and investment in the economy. The stock market has soared in the recovery, but investment is at best mediocre. Companies invest when they see more demand for their output, not when their stock price rises.

It is also important to note that much foreign investment in the U.S. is done by central banks to acquire dollars in the form of U.S. government debt. This is not for profit, but done either out of desire to increase reserves as insurance against financial disruptions or to deliberately keep down the value of their currency against the dollar. The decision of foreigners to buy government debt has as much impact in creating jobs as the Federal Reserve Board's decision to buy government bonds. The market doesn't care which actor bought the debt, the impact is the same.

Saying the dollar is the world's strongest currency is either meaningless or wrong. If we want a dollar to buy more, we can redefine the "new dollar" to be worth ten old dollars, with everyone having to turn in their old dollars at this rate. The new dollar will be ten times as strong as the old dollar, in the sense that it would have ten times as much purchasing power. That would be a way for the dollar to be the world's strongest currency, but it is absolutely meaningless. Zimbabwe can do the same trick.

We can mean "strongest" in terms of whether the dollar has been rising or falling against other currencies. In this sense the claim is clearly wrong. The dollar has been falling in value for the last six months.

Finally, Senator Lankford reveals himself to be a big supporter of protectionism. He argues for stronger intellectual property rules in trade deals. Patent and copyrights are extremely costly forms of protectionism, raising the prices of protected items by several thousand percent above the free market price. There are other more efficient mechanisms for supporting innovation and creative work, but Lankford apparently prefers protectionism to serve the pharamaceutical, software, and entertainment industries.


Reposted from CEPR