Wednesday, May 8, 2019

Interview: Richard Ebeling says "trade deficit fear is all an illusion", explains why

Editor's note: This interview was originally published in March 2017.

This is the second of seven articles spanning my discussion with Dr. Richard Ebeling. The first piece is available here. 
Story by Joseph Ford Cotto
"Soon after taking the oath of office, President Donald J. Trump signed a series of Presidential Memoranda to fulfill his promise to make America Great Again on trade and other issues," the White House's public relations arm declared shortly after Trump assumed office.
It continued: "The first executive action the President took was to permanently withdraw the United States from the Trans-Pacific Partnership, a multinational trade agreement that is not in the best interest of American workers. 
"This action ushers in a new era of U.S. trade policy in which the Trump Administration will pursue bilateral free trade opportunities with allies around the world, wherever possible, to promote American industry, protect American workers, and raise American wages. It is the policy of the Trump Administration to represent the American people and their financial well-being in all negotiations, particularly the American worker, and to create fair and economically beneficial trade deals that serve their interests."
A few days later, the Donald announced his plan to change the conditions of America's participation in the North American Free Trade Agreement, a trilateral commerce bloc which binds us with Canada and Mexico.    
“I’m deeply concerned by President Trump’s statements today reaffirming his commitment to renegotiate the North American Free Trade Agreement (NAFTA)," John McCain said shortly after. "While renegotiations could help to strengthen and modernize NAFTA to benefit American businesses and consumers, any effort to restrict or impose new barriers on our ability to trade with Mexico and Canada could jeopardize the future of this trade agreement and have serious consequences for Arizona and the country." 
McCain later added: “The free flow of trade has been the foundation of U.S. economic policy for decades, and a major factor in our prosperity and greatness. We should not have to relearn the lessons of history. Retreating from NAFTA and other international trade agreements will harm our ability to compete in today’s global economy, raise costs for consumers, threaten jobs, and undermine our relations with our closest neighbors.”
What is going on here? So many sparring perspectives on trade from such powerful people.
The Trump-McCain spat is but one theater in a battle of ideas between protectionist and laissez faire personalities. This disagreement has come not only to dominate the right, but our country's left -- think of the difference between Bernie Sanders and Hillary Clinton on economic policy.
Few people are so familiar with the limited government perspective as Dr. Richard Ebeling.
As his employer, The Citadel (South Carolina's prestigious military university -- an unlikely site for such a titan of libertarianism), tells, he "is the BB&T Distinguished Professor of Ethics and Free Enterprise Leadership .... Among the courses he offers are "Entrepreneurial Leadership and Capitalist Ethics" and "Ethical Entrepreneurship and Profit-Making."
"Dr. Ebeling is recognized as one of the leading members of the Austrian School of Economics and is the author of Austrian Economics and Public Policy: Restoring Freedom and Prosperity (Future of Freedom Foundation, 2016); Monetary Central Planning and the State (Future of Freedom Foundation, 2015); as well as the author of Political Economy, Public Policy, and Monetary Economics: Ludwig von Mises and the Austrian Tradition (Routledge, 2010) and Austrian Economics and the Political Economy of Freedom (Edward Elgar, 2003)." 
Ebeling recently spoke with me about several issues concerning the American economy. Some of our conversation is included below.
Joseph Ford Cotto: Libertarian economic theorists tend to believe that trade deficits are of minimal importance. Do these deficits really have a great impact on America's economy?

Dr. Richard Ebeling: Suppose that people in the United States buy, say, $1,000 worth of goods or services from France. And the French sellers who have earned this $1,000 turn around and only purchase $800 of American finished goods and services. This is what seems of concern to some people. Does the United States not now suffer from a balance of trade deficit? “They” – people in France – sell to “us” – people in the United States -- $1,000 of goods but “they” only buy $800 of “our” goods.

Now let’s think for a minute. With the remaining $200 the French sellers have earned, what are their options? First, they could directly invest, perhaps, $100, of that $200 in starting up or partnering with an existing business in the U.S. If they do, then that $100 is spent hiring American workers, and purchasing or renting land, buildings and equipment in the United States.

Second, those French earners of dollars could, then, decide to indirectly invest in the United States by depositing $75 of that $200 in an American financial institution to earn the offered interest income. This is no different than when your or I decide to put aside part of our income to earn interest and accumulate the principle for some future use we may have for it.

If this second course is followed, the available pool of savings is increased in the United States to fund investment projects by Americans and, other things held the same, at a lower interest cost to the U.S. borrowers than if these French had not chosen to save part of their earned dollars here in America.

It might be said that the $800 of purchased consumer goods, plus $100 of direct investment in the U.S., plus the $75 in the form of indirect investment through an American financial institution is still less than the $1,000 the French sellers have earned selling their goods in America. What may they do with the remaining $25? Perhaps the French holders of those dollars would prefer to buy a German product. But he needs Euros, not dollars, to make that purchase in Europe. So he will sell those $25 on the foreign exchange market to someone in trade for the desired Euros. But why would that someone have sold Euros in exchange for dollars? Because that person would want those dollars, to do what? To buy a finished America-manufactured good, or to directly invest in the U.S. due to an expected profit opportunity, or to put it in an American financial institution to earn attractive interest income.

Hence, at the end of the day the balance of payments on the balance sheet balances for every trading partner. Thus, the balance of trade deficit fear is all an illusion.