The Christian Science Monitor

Commentary>Opinion

from the January 04, 2007 edition

Middle-class woes? A letter to Lou Dobbs.

America's trade deficit is evidence of its economic vigor and promise, not a cause for concern.

By Donald J. Boudreaux

FAIRFAX, VA. – Dear Mr. Dobbs, Congratulations on having a large new bloc of voters bear your name! Politicians ignore the "Lou Dobbs Democrats" at their peril.

Every night on CNN you claim to speak for these people. They are America's middle class: decent folks who work hard and play by the rules but who, you insist, are abused by the powerful elite. Free trade is one of the policies allegedly supported by the elite and for which you reserve special vitriol. You thunder that imports destroy American jobs, reduce wages, and make the economy perilously "unbalanced."

But you are mistaken.

First, some basic facts about the state of middle-class Americans. The US unemployment rate now is at a healthy 4.5 percent. This rate is lower than the average annual unemployment rate for the 1970s (6.2 percent), the 1980s (7.3 percent), and even the high-growth 1990s (5.6 percent). Inflation, meanwhile, is running below the average for the 70s, 80s, and 90s.

Here's more good news for ordinary Americans. The percentage of Americans who own their own homes is higher than ever, even though the size of today's typical home is larger than ever. Workers' leisure time, too, is at historically high levels. And jobs are just as secure today as they were in the late 1960s, according to a research paper by University of California-Davis economist Ann Huff Stevens.

Perhaps you think that this prosperity exists only because so many of today's households require two income earners. But women started leaving homes for paid employment at least a century ago, with no jump since the end of World War II in the rate at which women enter the workforce, according to a recent report by the Bureau of Labor Statistics.

Had worker pay truly deteriorated in the past 30 years, and had families reacted by sending moms to the workforce, the rate at which women join the workforce would have increased. It did not.

Today, the percentage of household expenditures used to buy nonessential items is at an all-time high - about 50 percent compared with about 45 percent in the mid-1970s. That undercuts your notion that two incomes are needed just to scrape by. Not only is America's middle class not disappearing - it's thriving.

Perhaps you miss this fact because you are misled by familiar trade jargon. In your book, "Exporting America," in your columns, and on your television show you complain vigorously and often about America's trade deficit. You call it "staggering," and wonder how long America can continue to run such deficits.

Admittedly, the word "deficit" sounds ominous. In fact, though, America's trade deficit is evidence of its economic vigor and promise. Here's why:

When Americans buy foreign-made goods and services, foreigners earn dollars. The only way America would run no trade deficit is if foreigners spent all of these dollars buying goods and services from Americans. Instead, though, foreigners invest some of their dollars in America. They buy American corporate stock, they build their own factories and retail outlets in the US, they lend dollars to Uncle Sam, and they hold some dollars in reserve as cash.

Aren't you proud that so many people the world over eagerly invest their hard-earned wealth in America?

As an American, I'm proud and optimistic. Foreigners invest in the US so readily because its economy is so strong. And even better, these investments strengthen the economy by creating more capital for American workers. These investments raise workers' productivity and wages.

Remember: A trade deficit is not synonymous with debt.

I'm writing this letter on a new Sony computer that I bought with cash. I owe Sony nothing. If Sony holds the dollars it earned from this sale, or if it uses these dollars to buy stock in General Electric or land in Arizona - that is, as long as Sony invests its dollars in America in ways other than lending it to Americans - the US trade deficit rises without raising Americans' indebtedness.

Americans go more deeply into debt to foreigners only when Americans borrow money from foreigners. Uncle Sam, of course, borrows a lot of money, from both Americans and from non-Americans. I share your concern about the reckless spending and borrowing practiced by politicians in Washington.

Foreigners, however, are not to blame for this recklessness. Indeed, I'm grateful that foreigners stand ready to help us pay the cost of our overblown government. Fortunately, Washington's spending binges are not serious enough to cripple America's entrepreneurial economy. If they were, foreigners would refuse to invest here.

If you're still skeptical that America's trade deficit is no cause for concern, perhaps you'll be persuaded by Adam Smith, who wrote that "Nothing, however, can be more absurd than this whole doctrine of the balance of trade."

Smith correctly understood that with free trade, the economy becomes larger than any one nation - a fact that brings more human creativity, more savings, more capital, more specialization, more opportunity, more competition, and a higher standard of living to all those who can freely trade.

Sincerely,

Donald J. Boudreaux

Chairman, Department of Economics, George Mason University.