Daily Speculations

Buffett, an annoying cuss

Don Boudreaux, chairman of the economics department at George Mason University, the best in the world by our lights, on the latest outrage from Warren Buffett in Fortune magazine.
 

25 November 2003

Editor, Fortune

Dear Editor:

Warren Buffett worries about the U.S. trade deficit ( Warren Buffett Issues Warning about U.S. Trade Deficit and Offers a Solution, October 27th). He can rest easy, for the only real deficit here is Mr. Buffett s understanding of trade.

The so-called trade deficit is conjured up by looking only at one side of the international-exchange accounts. It is true that America s current-account is in deficit meaning that Americans import more goods and services than we export. But America s capital-account is in surplus meaning that foreigners who earn dollars selling things to Americans invest a good deal of these dollars in American assets.

In addition to being evidence of the American economy's vigor who wants to invest in a failing economy? these investments create more capital (such as machines and R&D) that increase the productivity of American workers. The happy result is rising wages and higher living standards.

Like Ross Perot, George Soros, and countless other business people, Warren Buffett is proof positive that someone skilled at creating wealth does not necessarily understand the economic system that makes wealth creation possible.

Sincerely,
Donald J. Boudreaux
Chairman, Department of Economics
George Mason University
Fairfax, VA 22030