I committed an economic crime recently.
In the past few months, I’ve permitted myself to spend a few dollars frivolously when I publish an article or give a speech. Most recently, I went to a Birmingham Legion soccer game and bought myself a replica jersey for $65. That would all be well and good; the $65 enters the national income accounts as a consumption expenditure, and it is recorded in US GDP.
Except for one thing: the jersey was imported.
From Honduras.
Those sneaky Hondurans. Don’t they know they’re taking work away from Americans and reducing American GDP? After all, one of the components of GDP is net exports, which is Exports minus Imports.
Not so fast. First, the shirt manufactured in Honduras is only part of a larger body of activity involving American workers at the cash register, operating and doing data analytics for the Legion, arranging jersey sponsorship, transporting the jersey to the stadium, and running the companies and financial organizations that process the payments at rates of thousands of payments per second. Extracting raw materials, processing them, and turning them into a jersey are only a few parts of the jersey’s value. It looks like spending a dollar on an imported good reduces GDP, but as the St. Louis Fed explains, accounting for net exports “allows for correct accounting of intermediate goods in a global economy where few goods fall cleanly into the two buckets of being produced either domestically or abroad.”
“But,” I hear you saying, “importing the jersey is still bad for Americans. If it were made in America, the money would have stayed here and continued circulating here.” It’s true, the money would have stayed here, but it would buy less. Maybe I’d get a fuzzy feeling knowing I’m embracing a lower standard of living for the sake of American textile workers, but with an unemployment rate of 3.5 percent, the problem is that we have too few workers, rather than too few jobs (largely because we keep a lot of willing workers on the other side of the border to our detriment, but that’s a different conversation).
Even then, we must ask why Hondurans want US dollars and what they plan to do with them. The answer is simple: they want US dollars because they want to do business in the US. Or at least, someone does. The Hondurans who made my shirt want US dollars because they want to do one of five things. The list is familiar to anyone acquainted with principles of macroeconomics textbooks; I draw the list indirectly from Cowen & Tabarrok, Modern Principles: Macroeconomics:
Buy American Goods and Services. It’s a mistake to say Americans “don’t make anything anymore.” Real GDP grew by 2.1 percent in 2022, and while industries like mining, construction, and nondurable goods manufacturing cooled off, durable goods manufacturing contributed 0.15 percentage points to the increase.
Even if Americans “don’t make anything anymore,” it’s not clear this matters very much. The US economy is still growing, but its leading contributors in 2022 were “Professional, scientific, and technical services,” “Information,” “Real Estate and rental and leasing,” and other private services. We might not spend as much time working in loud and grimy mines and mills as our grandparents did, but that’s because we spend much more time working in hospitals, banks, and air-conditioned office buildings. And if you ever find yourself in an Orlando, Florida theme park, listen carefully for people speaking Spanish, Chinese, German, French, and a host of other languages. They bought their park tickets with dollars.
Invest in the US. Persistent trade deficits suggest foreigners don’t want dollars because they want to buy American goods and services, though. A second reason foreigners want to sell us stuff is so that they can earn dollars to invest in the US. The US is a very attractive place to invest because, for all its problems, it remains the world’s largest and most dynamic economy. In the past thirty years, many foreign manufacturers have built factories in Alabama and other southern states. They had to get the dollars from someone. As Thomas Phillipon put it in his book The Great Reversal: How America Gave Up on Free Markets (which I review here), “The US trade deficit reflects in part the desire by many other countries to park their wealth in US dollars.”
Hold the Dollars. Maybe they don’t just want to hold dollar-denominated assets. Maybe they want to hold literal dollars. The US dollar is, for now, the world’s reserve currency, and in countries where inflation is a huge problem, people use US dollars for many transactions. I have a badly-worn US dollar I bought from a student who grew up in Zimbabwe about a decade ago. Incidentally, the people who are holding stacks of US currency abroad are paying an “inflation tax,” insofar as the currency they are holding has lost value over time. They are willing to pay this price, however, because the dollar is a safer bet than many other world currencies.
Lend to the US Government. This is a special case of “Invest in the US.” US Treasury securities are widely considered to be the safest assets in the world, and the ballooning US debt – over $31 trillion – suggests that the US government is all too happy to meet global demand for secure assets.
Sell the Dollars to People Who Want to Do 1, 2, 3, or 4. Orlando vacations might be distant dreams for people selling jerseys to Americans, and maybe foreign exporters don’t want to spend time and energy evaluating US investment opportunities very carefully. That’s OK, because there are a lot of people who do – and who stand ready to buy US dollars and sell Honduran lempira.
One of the hardiest and most enduring fallacies in economics is the mercantilist fallacy: buying from foreigners is bad for us because we should “keep the money here;” selling to foreigners is good for us because we can pile up more money. Even though the money “leaves” when we buy goods made elsewhere, it comes back eventually, either in the form of demand for American goods and services or investment in the US economy. Of the crime of hurting the American economy by buying a soccer jersey made in Honduras, I plead “not guilty.”
