Gains from trade

I saw this by Pete Hoekstra and John Shadegg in the Washington Times quoted on Free Exchange:

Every month the United States runs a trade deficit of $60 billion, most of which is related to energy. Imagine the impact on the U.S. economy if we invested that money in the exploration and production of American energy. It would lead to job creation, it would ripple through the economy, the dollar would strengthen and we would finally see some stability in energy prices.

It followed this by the author of the Free Exchange post:

A bad reason for new drilling is that it will reduce our dependence on foreign oil. That's a bad reason because it won't, and it's a bad reason because "reduce dependence on foreign oil" is kind of a silly idea.

I agree. The idea of energy independence is pretty silly. First of all, it will never happen, no matter how much we (the government) "invest" in renewable energy. Second, the more resources we forcibly devote to energy, the fewer of those resources we devote to other, more productive endevours. But what got me interested in the Hoekstra/Shadegg quote was the idea that somehow our trade deficit can be otherwise "invested". I don't even know what that means. On this podcast with Don Boudreaux, he gives the example of buying a $2k laptop from Sony. It's a private transaction that doesn't incur debt (necessarily, though it could, but that's a different issue). If he instead bought the laptop (or oil) from a domestic producer, it doesn't mean "we" now have that money to spend or invest. In the end, you gave a producer American money for a good. That producer then must use that American money in places that accept American money (usually that means assets or good denominated in American money) or they can exchange it with someone into their home currency. That money will either be spent on American goods or invested in American assets.

Tyler Cowen sums up well my thoughts on the misguided idea of money leaving the country in a post about sovereign wealth funds:

If capital has "left" the U.S., it's because there was some gain from that transaction, such as when we buy oil. There's then a subsequent gain if those revenue are invested wisely in the United States. It's not just a wash through "recycling." If you spend some money in stores, and then some people then invest in our company, that's not a wash either.