Cafe Hayek - Accounting for the Capital Account
By Don Boudreaux on Trade
Protectionists worry a lot about the trade deficit – that is, the current-account deficit. In response, pro-consumer economists point out that the larger the current-account deficit, the larger the capital-account surplus; therefore, a growing current-account deficit for the United States means increasing foreign investment in the U.S.
One protectionist reply to the pro-consumer economist is that most of the dollars spent by foreigners on U.S. assets are for existing assets and not for new investment. Relatedly (goes this reply) an increasing capital-account surplus means that “we” Americans are transferring “our” assets to foreigners. (A reply making these points came to me in a private e-mail that I’m not at liberty to share.)
This reply is irrelevant and mistaken.
Consider that nearly every dollar spent on stock exchanges such as the NYSE and the NASDAQ is for existing assets. Mr. Jones buys X shares of Microsoft stock from Mr. Smith. If investors are optimistic about Microsoft’s future, they bid up the prices they are willing to pay for its shares. As a result, Microsoft will be better able, if and when it wishes, to issue new stock and to float more debt. That is, a higher price of Microsoft stock means that Microsoft can more easily fund R&D, build new factories, expand its output.
Moreover, whether they're buying existing assets or building brand-spanking new ones in the U.S., the fact remains that investors (many of whom happen to be foreigners) are investing heavily in America – a fact that is irreconcilable with protectionists’ doomsday scenario of an America going to the dogs.
Finally, how utterly misleading is the term "our assets" when used to describe assets owned by others? A thousand shares of General Electric owned by Warren Buffett are no more "mine" or those of any other American, except Buffett himself, than they would be if Buffett sells them to a Japanese or a Sudanese.
A Thought on Democracy
By Don Boudreaux on Current Affairs
In today’s Wall Street Journal, David Hale, an expert on China, has a bracing observation about that country. It’s inspired by the recent election outcome in India:
there is little doubt that if China had a truly open and competitive election, it would produce a populist party opposed to many recent economic reforms. It would demand the restoration of guaranteed employment in state-owned companies, coupled with the free health care, education and pensions which they traditionally provided. China's huge peasant population also would support candidates promising to raise farm prices, limit foreign competition and restore the social services which existed in the countryside 30 years ago.
I have always felt awkward expressing my sincere thoughts about democracy, but here goes: Democracy is poorly understood and vastly overrated. Americans knee-jerkily think of it as being synonymous with freedom, or at least as a damn reliable guarantor of freedom. It is neither.
Many reasons explain this false equation of “democracy” with “freedom.” Perhaps the most important is the simple-minded assumption that democracy gives “voice” to “the people” and, hence, that it gives the people what the people want. What freedom-loving, civilized person objects to letting adults have what they want, even if what they want appears to that person to be foolish?
The problem is that this way of thinking about democracy treats millions of disparate voters as if they are a single person. When thinking about democracy, we transfer all of our civilized and liberal tolerance of individual choice to “the People,” as if “the People” is a person with goals, preferences, perceptions. This move is illegitimate. Put bluntly, “the People” do not exist. It is an abstraction. Each of us, as individuals, exist. We do not become “one” when we yank levers in voting booths; we do not, in voting booths, morph together miraculously to achieve the moral or intellectual character and bearing and worth of an individual. |
