Excessive Spending - Buffett Wrong?
Dr. Don Boudreaux, who contributes to "Cafe Hayek", wrote on March 16:
But having re-read the part of Buffett’s letter dealing with the trade deficit (more accurately, the current-account deficit), I still believe that I’m right and he’s wrong. If my paying my Virginia neighbor $10 to mow my lawn creates neither debt nor other economic problems, how would my paying a Canadian $10US to mow my lawn create debt or other economic problems? What conceivable economic difference can the latitude or longitude of the seller’s residence make?But is there even a whiff of relevant economic difference between this transaction when it takes place between two Americans and this transaction when it takes place between an American and a Canadian?
Perhaps there is a difference – a difference seen by Warren Buffett, David Ignatius, Paul Craig Roberts, Pat Buchanan, Lou Dobbs, and others, but missed by me. Please – and I’m not being facetious – if you detect an economically relevant difference between these two transactions, write to me and enlighten me.
But until I’m shown such a difference, or discover the difference on my own, I cannot but conclude that Buffett’s concerns about the trade deficit are misplaced.
Well, how about this:
The difference between paying a neighbor... or even a Canadian who happens to live close by for a service... and buying goods from a country 8,000 miles away is that... unless the equation is somewhat balanced by that country buying goods or services from the U.S.... there will ultimately be a negative economic impact as the U.S. economy loses it's ability to generate wealth internally.- The Canadian across the river is likely to use his newfound income to purchase goods or services from the area. The economy of the area is infused with income and spending that enriches the area.
- The purchase of goods from an country 8,000 miles away that does not reciprocate, brings goods into the country while moving the wealth generated from production out of the country. Many of those who would normally infuse the economy by spending their income within the country and keeping the economic engine running, move to the sideline or, worse, become a drain on the economy (collect "benefits"). The economy of the country 8,000 miles away grows and prospers, but bad things tend to happen to the U.S. economy such as:
- devaluation of the dollar
- increased cost for goods (inflation)
- higher unemployment
- lower tax revenues
$1 spent on imported goods enriches the exporting nation and the importing company. It may also enrich the retailer. But the negative side is that the U.S. supplier of raw materials loses, the U.S. manufacturer loses, the U.S. manufacturing employee loses, and maybe even the U.S. distributor. $1 at retail multiplies throughout the economy more when production is within the U.S. than when it is elsewhere. Ultimately... say at 5-10% of GNP... the current-account deficit begins to erode the purchasing power of the country as higher paying jobs are replaced with lower paying ones and the value of the dollar drops globally. In simple words: wealth moves elsewhere.
Oh, I know that there is faith that the lost jobs will be replaced by higher-paying, higher-skilled jobs... isn't happening. Faith isn't good enough. One need only look around to see the real dynamics in play.
Some topics I'd like to see at Cafe Hayek:
- The advantages of protecting the home base while invading other economies (I can sell to you, but you can't sell to me)
- Undermining the economy of your competitors by undercutting their means of production
- "Win-lose" economics as a path to power (why use military force when you can drain the resouces of your enemy)
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