Monday, April 30, 2007

Wealth and Money (Part 1 of 2)

Earlier today Donald Luskin at the National Review tackled Lou Dobbs' Congressional testimony, held last month. While he explains why Dobbs is wrong, they are not always make quite the same points I'd make (though they are accurate). One, in particular, deserves special commentary.
Second, and more important, the argument that the trade deficit is a "drag on growth" at all makes no concrete economic sense. Yes, if we imagine that every penny spent on imports were instead spent on similar goods made in the U.S., then our gross domestic product would be higher, by definition. But what if there were a law saying U.S. consumers could no longer buy, for instance, German beer? Does that mean U.S. consumers would actually switch to American beer? The answer is not clear. And even if they did, given that today some consumers must prefer German beer to American beer when there is choice, it’s not evident that our growth would be any higher, as Dobbs predicted.
The crucial point, the idea everyone always seems to skip over, the idea that Luskin notes but doesn't embrace, is that money is not the same thing as wealth.

Economists often treat money and wealth as the same simply because true wealth--computers, haircuts, trips to the Grand Canyon, and all the other things that increase the standard of living--is hard to judge. We know that $1,000 is more than $100 but is one car better more than 100 DVDs? Depends on the car, the DVDs, and who you are.

Money is a convenient shorthand because money can be turned into anything. Generally this simplification isn't a problem until people start claiming dollars are more important than wealth. This is Dobb's mistake. Trade means everything is cheaper; we can use the same amount of money to buy more wealth. Less trade means less wealth. When Lou Dobbs says the country should sacrifice production to keep more pieces of paper in the country, he is actually telling us currency is better than the things we buy it with. He thinks that a nation which merely sits upon a throne of gold is wealthier than one of jazz, Spider-man, stuffed animals, and CNN. If people wished to they could hoard dollar bills in their mattress and claim affluence. But they know better: money is a means, not an ends.

1 comment:

Jason Br. said...

Money assuredly cannot be turned into anything, Professor Youngblood. :)