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Weekend Update: An Excellent Feature

DeLong Smackdown Watch

A correspondent writes, challenging my claims about the Stupidest People Alive. I confess that I was in error:

Brad DeLong, you are a fool.

Donald Luskin's claim to the "Stupidest Man Alive" crown cannot be shaken.

Consider this:

The Conspiracy to Keep You Poor and Stupid: Consider this passage [from the Post editorial]:

The U.S. current account deficit has grown to an astonishing 6.5 percent of gross domestic product... This means that the nation is consuming around $700 billion more than it earns each year and paying for the difference by mortgaging or selling assets.

...focus on the factuality of the claim... that a trade deficit necessarily entails debt creation. This is simply not the case. When an American... earn[s] money... spend[s] that money on foreign goods, and (3) the foreign maker of those goods doesn't spend that money on American goods, somehow debt is created. I don't see it. Where's the debt?... There's simply no debt involved, necessarily, anywhere in the transaction. Yet the notion of debt is always evoked... some kind of overhanging Sword of Damocles... inescapable doom.... Now consider this passage....

Every year Americans sell or mortgage a slice of their productive assets to foreigners, with the result that income from those assets must flow abroad in the future

...the catastrophists... trot out this idea that when foreigners buy our productive assets... we are sacrificing all future benefits from those assets... utter misunderstanding of how such assets are priced in an efficient market.... If you take money today in exchange for that share of stock, you have captured the present value of all its future benefits... an asset's price make you indifferent between holding the price in cash and holding the asset.... America becomes no poorer when an American accepts Chinese cash for a share of IBM.... Before, the American held stock. After, the American held cash equal to the present value of the stock's future earnings potential...

Let us summarize the transaction. Chinese investors buy shares of IBM from us Americans. They pay us in yuan. We Americans take those yuan and use them to buy a bunch of frozen shrimp and a bunch of running shoes from producers in China. We eat the shrimp. We go jogging and wear out the running shoes. Next year the profits the shareholders of IBM earn are credited to some guys in China rather than to some of us. Our national product is thus reduced by the amount of the dividends and retained earnings credited to the foreign owners.

We Americans are poorer in an income sense: the trade deficit-creating transactions have reduced next year's national product (and national product in every year thereafter). We Americans are poorer in a wealth sense as well: a greater share of IBM is owned by foreigners, and there is no compensating greater share of a foreign company owned by Americans.

Donald Luskin--somehow--fails to understand this.

I will not bother to observe that Luskin's quotes from the Post nowhere say anything close to "trade deficit necessarily entails debt creation."

Our correspondent is correct: the Post says that a trade deficit leads (on net) to Americans "mortgaging or selling assets" to foreigners. Mortgaging assets creates debt. Selling assets doesn't.