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Political Boundaries Are Not -- and Ought Not Be -- Economic Boundaries

By Donald Boudreaux - February 24, 2006 12:00 AM

What is the American economy? It is conventionally identified as that mix of industrial and commercial activities carried on within the borders of the United States. Its participants are people living within these borders and its resources are the natural and man-made inputs found there.

People outside of these borders (except the tiny handful of Americans living abroad) belong to other economies, not America's. Resources in other locations are part of other countries' economies, not America's. Investments made elsewhere become part of other economies, not ours. Savings done by persons living in Ukraine are Ukrainian savings, not American savings. We speak of America enjoying a comparative advantage at producing this and Ireland having a comparative advantage at producing that. We talk about "China" trading with "America."

Thinking of economies as national phenomena, we measure them as if they are so. We measure Gross Domestic Product of the United States and compare it to the GDP figures of other nations. We calculate America's trade deficit. These statistical exercises reinforce the presumption that the salient economic unit is the nation-state.

But as Arnold Kling argues, this practice of using political boundaries to define economic boundaries is troublesome. In fact, the term "American economy" is more misleading than useful. To see why, consider the following examples.

My next-door neighbor in Virginia agrees to mow my lawn for $25. He mows and I immediately give him $25 in greenbacks. Rather than spend his earnings on beer or a back massage, my neighbor uses the $25 to by a share of Microsoft.

Everyone applauds. An American earns money and invests it, making "our" economy stronger.

Now consider a slightly different example in which I live, not in Virginia, but in Maine on the U.S. side of the Canada-U.S. border. My neighbor is a Canadian living in Canada. He mows my lawn; I pay him 25 U.S. dollars.

While my neighbor and I are just as pleased with our transaction in this example as we are in the previous one, pundits and politicians regard the second case with much more suspicion.

First, by spending his dollars on a share of Microsoft rather than on U.S-made goods and services, my Canadian neighbor increases the U.S. trade deficit. The reason is that statisticians count my purchase of his lawn-mowing services as a U.S. import but, because my neighbor doesn't spend his earnings on goods or services made in the U.S., these statisticians find no U.S. exports to "balance" my imports.

So we cheer when the American saves and invests in America, but quake with anxiety when the Canadian does so, fretting about the "imbalance" in American trade. But no economically significant differences separate these two scenarios.

Second, because my Canadian neighbor doesn't spend his $25 on U.S. goods and services, this $25 is regarded formally as U.S. debt. This statistical classification is what permits Warren Buffett and talking heads such as Lou Dobbs to get away with calling the U.S. trade deficit "debt." But there's no more debt created in the example in which my neighbor is Canadian than in the example in which he's American. In both cases I get my lawn mowed and pay for it fully and immediately. In both cases my neighbor invests his earnings in dollar-denominated equity. In neither case does anyone incur any obligation to repay anything to anyone.

Of course, my neighbor might instead lend his $25 to Uncle Sam. If he does so, debt is created. Uncle Sam now owes him $25 plus interest. But why should anyone care if the creditor is a foreigner or an American? The debt must be repaid by American taxpayers regardless.

"Gotcha!" I hear a skeptic shout. "It's better that an American rather than a foreigner receive this repayment."

"Not so," I reply. It's true that the holder of the debt -- because to him it's an asset -- is wealthier than he would be without this asset. But how is my life affected if the bondholder who receives repayment of this debt lives in Tulsa, Toronto, or Timbuktu?

Obviously, I would be better off if I or someone in my family were the bondholder. But my being an American doesn't mean that I benefit if the bond is owned by another American -- or that I suffer if the bondholder is not American. To imagine the contrary is to mistake the nation for the self or the family. It is neither.

Indeed, the nation isn't even the economy -- a fact that explains my indifference to the nationality of economic actors. Our economy isn't American; it's global. It should be reckoned as such.

The author is Chairman, Department of Economics, George Mason University

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7 Comments

Beautifully reasoned
Somewhere Bastiat is smiling that his legacy continues

Barry M

Trade accounting is one feature but the US economy goes far beyond that in its impact on the world.
There are literally billions of people interracting with the economy of the US from Patagonia to Iceland and Hong Kong to Portugal. This leads me to believe that it is foolish to think of the US economy as beeing bordered by the boundaries of the US.

These billions of persons share more than just money. They share ideas. There is a vast amount of information flowing through the US to other parts of world improving the human condition universally.


Japanese Hype
Recall the hype when the Japanese bought Rockerfella Center. You would have thought they were going to ship it back to Japan.
It is better for money to cross boders than armies taking what the want, as things used to be.

Not New, But...
These arguments are not as Robert Reich and others said the same almost two decades ago. The interesting thing, though, is that many Southeast Asian and East Asian economies remain partly centralized, protectionist, and doing very well.

US debt holder vs foreign debt holder
If an American owns the debt then the US government can tax him for the gain he receives which is the difference between what he paid for the debt and what he will receive when interest is added.

The foreigner does not have to pay the US government the income tax the American does.

So, the American held debt is effectively less than the foreign held debt after income taxes are deducted.

America is in danger of becoming European.
I understand Boudreaux better by what influenced his ideas on his Bio. found on George Mason University's Web. I looked at the namesake of the school and read his brief Bio. too. I think they may have got along until George found him supporting liberal ideas that promote the idea we would do better to be global in our economics.

From the Bio. on the school Site: "Donald J. Boudreaux is Chairman of the Department of Economics at George Mason University in Fairfax, Virginia. He's held this position since August 2001. Previously, he was president of the Foundation for Economic Education (1997-2001); Associate Professor of Legal Studies and Economics at Clemson University (1992-1997); and Assistant Professor of Economics at George Mason University (1985-1989).
During the Spring 1996 semester he was an Olin Visiting Fellow in Law and Economics at the Cornell Law School. His PhD in economics is from Auburn University (1986) and his law degree is from the University of Virginia (1992).

He has lectured, in the United States, Canada, Latin America, and Europe, on a wide variety of topics, including the nature of law, antitrust law and economics, and international trade. He is published in The Wall Street Journal, Investor's Business Daily, Regulation, Reason, Ideas on Liberty, The Washington Times, The Journal of Commerce, the Cato Journal, and several scholarly journals such as the Supreme Court Economic Review, Southern Economic Journal, Antitrust Bulletin, and Journal of Money, Credit, and Banking."

George Mason - namesake of Boudreaux's school, George Mason University.

"At Philadelphia in 1787 Mason was one of the five most frequent speakers at the Constitutional Convention. He exerted great influence, but during the last 2 weeks of the convention he decided not to sign the document.

Mason's refusal prompts some surprise, especially since his name is so closely linked with constitutionalism. He explained his reasons at length, citing the absence of a declaration of rights as his primary concern. He then discussed the provisions of the Constitution point by point, beginning with the House of Representatives. The House he criticized as not truly representative of the nation, the Senate as too powerful. He also claimed that the power of the federal judiciary would destroy the state judiciaries, render justice unattainable, and enable the rich to oppress and ruin the poor. These fears led Mason to conclude that the new government was destined to either become a monarchy or fall into the hands of a corrupt, oppressive aristocracy.

Two of Mason's greatest concerns were incorporated into the Constitution. The Bill of Rights answered his primary objection, and the 11th amendment addressed his call for strictures on the judiciary."

Russia and France
Recent evidence is proving that Russia and France were running interference for Sadaam for national and personal economic gain.
How is this any different than local governments using emminent domain to take property?
Economic nationalism or when governments go into business (socialism) leads down a dangerous path the Germans have already tread.
Economic freedom with the state protecting that freedom will eliminate the corruption of the kind perpetrated by French and Russian officials.

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