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Beware some economic commentary

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By Donald J. Boudreaux

Published: Tuesday, Oct. 9, 2012, 9:05 p.m.

Economists have failed to communicate the basic insights of economics to the general public. So it's unsurprising that public understanding in the 21st century of elementary truths of the economy is on par with public understanding in the ninth century of elementary truths of the solar system.

A reason for this failure is that most economists have little desire to talk about economics to non-economists. There are exceptions. Milton Friedman regularly explained the economic effects of the likes of inflation and rent control in language that was crystal clear and engaging. But these exceptions are rare.

Worse, a few of these exceptions make matters worse. Some economists who are notable for communicating with the public reinforce, rather than correct, the public's economic misunderstanding.

No economic fallacy is as widespread as the public's sense that the economy suffers when citizens buy goods and services from foreigners. What the non-economist sees is Americans spending dollars abroad rather than in the USA. The non-economist then concludes that American jobs are “destroyed.”

The good economist corrects this misperception by explaining that all dollars earned by foreigners who sell to Americans inevitably return to America. Foreigners use these dollars to buy American exports or to invest in America's economy.

All dollars that Americans spend on imports return to America no less certainly than if Americans had not bought imports at all. And as compared to a situation in which government obstructs Americans' trade with foreigners, these dollars return with greater positive effect on the U.S. economy. The reason is that trade allows Americans to buy from abroad those products that foreigners offer to sell to us at prices lower than it would cost us to make those things ourselves.

Economists have long understood and celebrated the win-win benefits of trade. Yet popular economist-pundit Peter Morici, a professor at the University of Maryland's Smith School of Business and former chief economist at the U.S. International Trade Commission, routinely fuels the public's misunderstanding on this front.

Consider, for example, this recent claim by Morici: “(T)oo many of those dollars were spent on imports that did not return to buy U.S. exports — the gap between new imports and new exports was lost demand for U.S. goods and services.”

He's talking nonsense.

Dollars that foreigners don't spend on U.S. exports are emphatically not “lost demand for U.S. goods and services.” Instead, these dollars are invested in the U.S. And being invested in the U.S., they create demand for U.S. goods and services no less than if they were spent to buy U.S. exports.

The dollars the Chinese invest in U.S. Treasuries become demand for U.S. goods and services — demand expressed by Uncle Sam or by private citizens who sell bonds to China and who then spend in America the dollars they earn on those sales. Likewise, the dollars the Swedish furniture retailer Ikea invests in building stores in America become demand for U.S. goods and services — demand for the likes of construction materials and construction workers in America.

That Morici does not understand this simple reality means that his economic punditry confuses, rather than enlightens, the public. His is a species of economic commentary best ignored.

Donald J. Boudreaux is a professor of economics at George Mason University in Fairfax, Va. His column appears twice monthly.

 

 
 


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