Home Economics Apparently Robert E Lighthizer Is Innumerate

Apparently Robert E Lighthizer Is Innumerate

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That the world is run by those with little competence is just a penance that has to be paid by our times. It does get rather more worrying when we find out that some to many of those doing the running are ignorant as well.

Robert E Lighthizer is the something or other in charge of US Trade policy. He tells us all of how it’s a battle, a war perhaps, in which trade restrictions can be used as a weapon and etc etc. Sure, you know, clever people doing the hard stuff on our behalf – even if at our cost as well.

In which he says something about trade deficits:

Neither response is satisfactory. Those obsessed with efficiency tend to see employment simply as a means of allocating resources and ensuring production. In so doing, they greatly undervalue the personal dignity that individuals derive from meaningful work. Commentators from Pope Leo XIII in the nineteenth century to Arthur Brooks and Oren Cass today have written eloquently about the central role of work in a well-ordered society. Doing honest work for a decent wage instills feelings of self-worth that come from being needed and contributing to society. Stable, remunerative employment reinforces good habits and discourages bad ones. That makes human beings better spouses, parents, neighbors, and citizens. By contrast, the loss of personal dignity that comes from the absence of stable, well-paying employment is not something that can be compensated for either by increased consumption of low-cost imported goods or by welfare checks.

A lawyer – for that is Mr. Lighthizer’s training and profession – lecturing us on honest work for a decent wage grates, perhaps even irritates. Sure, there may even have been examples of those who did that but memory doesn’t remind. There is also the point that, well, if we get more low-cost imported goods then our real wages are rising which does go a long way to creating that decent wage, doesn’t it?

But this is worse, much worse:

To carry the analogy further, the trade deficit I run with providers of goods and services I consume is benign if it is offset by the surplus I run with my employer through the sale of my labor. But the situation may prove unsustainable if I’m funding my consumption by taking out a second mortgage on my home. And that is essentially what the United States has been doing over the past three decades by running a trade deficit year after year. These persistent deficits are financed by net inflows of capital—which means that every year, the country must sell U.S. assets to foreign investors in order to sustain the gap between exports and imports.

All of that is true which is what makes it worse. For there are many things that are true but not relevant, or not important. As it happens my wife’s apple pie is better than my Mom’s and while I’d certainly tell my wife that – and would whether it were true or not – I’d not my Mom, whether it were true or not, as it’s not relevant to the larger point, her being my Mom.

The worse is that either Mr. Lighthizer is innumerate, in which case why are we paying his wages, or he isn’t and knows this following and is deliberately misleading us – in which case why haven’t we fired him already?

The US trade deficit in 2019 was some $616 billion. That’s the piece of America that has to be sold to foreigners to cover that trade deficit, $616 billion.

The wealth created, brand spanking and new, in America in 2019 was some, oooh, $10 trillion.

Note, the $10 trillion isn’t the total wealth, that’s just the amount we added in that one year. And we have to sell $600 billion of our $10 trillion new and added wealth to cover the trade deficit.

We can actually do this forever with no problems. In fact, if we do this forever then foreigners end up owning an ever smaller portion of the American economy even as we all gain access to those cheap foreign goods, making us richer again.

There are two possibilities here, Lighthizer doesn’t know this in which case he’s innumerate, ignorant of the subject under discussion. Or he does and wishes to skate over it in conversation with us which does make him a lawyer but perhaps not someone we’d wish to employ on our behalf.

You know, the usual employment of a lawyer being to try to bamboozle the other side, not us?

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4 COMMENTS

  1. Question for Tim around this argument. Genuinely a Q: I don’t pretend to know the answer, and I suspect the argument still holds. The numbers would be interesting though, and lead to “how much of a current account deficit can be run in perpetuity?”

    So, I’m one of those people who has lent capital to the USA. Back in 2007 I bought around 20 shares in Apple Computer (they were still called that back then) for about $2,000. Let’s assume for the sake of argument that I bought them from an American who used the money to import some goods or services as per the theory above. After a 7:1 split, I now have 140 shares which are worth a little under $50,000, and cumulative dividends of around $2,500. Let’s assume I’ve not made any further investments into the US: the proportion of US wealth that I own now is greater than the proportion of US wealth that I owned in 2007 immediately after making that $2,000 investment.

    The figure that I suppose I’m interested in is this: how much of that $10trn annual growth accrues to overseas investors? Do Americans get richer out of that growth than foreign investors? And if so by how much?

    • A good question and one to which I can only give a sketchy answer.

      You’re talking about Apple, one of the best investments of all time. So yes, I would expect that your share of US welath has increased more than wealth has in general – your share of the total has thus risen.

      More generally though it’s a known little puzzle. Americans tend to make more on their foreign investments than foreigners do on their American. And natives almost always – on average – make more than foreigners do within an economy. My suspicion there is simply that Angel etc investing is going to be done by those there and on the ground and that’s where the 100 baggers are to be found.

      There are figures out there that can be looked at, foreign holdings of US assets and so on. Which will include the effect you’re talking about, reinvested returns as well as new investments covering the trade deficit. I would expect – expect only – foreign percentage of the whole to have fallen in recent decades. But don’t actually know.

    • “how much of a current account deficit can be run in perpetuity?”

      An amount equal to the total domestic capital stock (pre-existing, for the first year, plus newly created, ongoing). As TW pointed out, this is an enormous amount.

      But, prices being prices, as domestic capital became more dear, it’s price would rise, both decreasing affordability, and stimulating increased supply, making total sale likely an unreachable target.

      But the question of whether this would be good or bad has an easy answer. It is always good, since it is trade. That Americans have a comparative advantage in capital production and Chinese in basic manufactured goods has much to do with the relative maturities of their market economies. Whatever the current account, it is just a reflection of what the trading destinations tend to be better a producing.

  2. […] Tim Worstall uncovers evidence of U.S. Trade Representative Robert Lighthizer’s innumeracy. (The language we’re stuck having to use in discussions of so-called “trade deficits” is unavoidably confusing, not least because the very concept of a country’s “balance of trade” or “balance of payments” is, as Adam Smith observed, “absurd.” But we communicate using language.) […]

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