John Hawkins posted an interview he did with Thomas Sowell recently on basic economics. Well, it’s not exactly “basic”, as the Q&As I’m teasing so you read the whole thing are items that wouldn’t be covered in a 100-level course:
…There’s a worry that China could essentially engage in economic warfare against the United States because they hold so much of our debt. Should we be greatly concerned about that?
Yes. For years, the Keynesians loved to downplay the importance of debt by saying we owe it to ourselves. There are problems with that which I go into in Basic Economics. But there are even bigger problems when in fact, we don’t owe it to ourselves, and something like 40 something percent of American debt is owed to foreigners. That means that at some point in the future, all those trillions of dollars worth of real goods and services in output of the American people will have to be shipped overseas to pay back the debt that we borrowed.
Well, speaking of trade issues, the United States has a rather sizable trade deficit. But you say in Basic Economics that the way it’s measured is very misleading and it’s really not that big of a problem. Tell us why that is.
Well, a product or trade is defined as the movement of physical goods across a national frontier, international trade that is, across national frontiers. But of course, that’s just one aspect of international economic relations. If the Japanese send us more cars than we send them and, therefore, they have a trade surplus, they’re not going to just put the money in the bank and let it gather dust. They’re more likely to buy assets in the United States, including such assets as automobile manufacturing plants — so they can build their Toyotas here instead of shipping across the Pacific. So the bigger picture, of course, is the financial picture.
But in general, I think the crucial evidence against the importance of international trade is during the Great Depression in the 1930s. For that entire decade, we had an export surplus. That didn’t seem to do the economy any good. I’m not saying it did any harm either. By the same token, during the 1990s when we had great prosperity, we had a trade deficit. So those things have to be looked at in terms of the specifics of the time and place. They’re not good things or bad things, just in general.