In defense of Peter Schiff

[Autolykos]

@Esuric

All of this is entirely immaterial when it comes to economic theory, and he’s not a successful economist (he’s not an economist at all). The most successful businessman and investor can be, and usually are, economic Neanderthals (see Warren Buffet). The only things that matter, when it comes to economics as a social science, are facts and logic. The businessman and the economist do two very different things.

I agree. I’d liken it to the trees vs. the forest. The businessman is inside the forest looking around; the economist is outside the forest looking in.

@Esuric

Now, some of the things Peter says are simply false, misleading, or poorly reasoned. For example, his prediction of future Chinese economic dominance is simply nonsensical and shows a fundamental misunderstanding of Austrian insights, such as the coordination/calculation argument. His argument is that China “produces things” and therefore has a structurally sound economy. Now, it’s true that China produces things that Americans will no longer produce, but only because America has moved on and innovated into other, more capital intensive industries. In other words, there have been natural changes in dynamic comparative advantages (though, there have also been some changes in the pattern of production caused by arbitrary interventions. In this respect, Peter is correct, but he often fails to make the distinction). Additionally, China also produces empty ghost cities and super-malls. Production is not the measure of economic success; warranted production is (we must differentiate between investment and malinvestment, or what is also known as "conspicuous production).

Conversely, America is doomed, according to Schiff, because “it doesn’t produce anything.” This is simply false. American production peaked in 2007 before the crises (a global maximum), and is still the center of innovation and entrepreneurship (China is merely an imitator in many respects. Of course, you could point to a counter example, but this would be an exception, and not the rule). Next, there is nothing intrinsically wrong with a current account deficit, not only because it’s met with a corresponding capital account surplus, but also because it’s often better to buy from someone else than to produce it on your own. In other words, cooperation is always more efficient relative to isolationism/self-sufficiency (Ricardo’s law of comparative costs). A trade deficit is only a bad thing when it’s arbitrary and forced, and there’s nothing wrong with being the world’s largest creditor nation and/or the world’s largest debtor nation. America was the world’s largest creditor nation before the great depression. Again, Peter often fails to stress these points/distinctions.

While I do agree with your points here, I don’t think that Peter Schiff is making quite the same arguments as those you’re attributing to him. For one thing, he seems to argue that the US trade deficit is being bolstered by federal-government debt and fiat-currency machinations. He bases this on the fact that US jobs have been moving out of manufacturing and engineering and into service-sector areas such as retail and government. If a trade deficit for a country actually means that country is profiting, as Frederic Bastiat argued, then ceteris paribus one would expect to see expansion of those areas of the economy that are creating the trade deficit. That doesn’t seem to be happening here. Bastiat’s predictions, however, don’t seem to necessarily apply in the case of a fiat currency.

In this light, I think his references to the US economy “not producing things” and the Chinese economy “producing things” make more sense. What he seems to mean is that, contrary to Bastiat’s expectations, the US trade deficit is not actually the result of increased wealth production. If correct, it means that, when the US federal debt finally becomes unsustainable, Americans will find themselves in a far worse economic position than they believed they were in. The Chinese, on the other hand, may not suffer as much since they apparently have more wealth-producing infrastructure.

Strictly speaking, of course, Frederic Bastiat isn’t an Austrian-School economist. However, I haven’t seen anything in Austrian Economics that would argues to the contrary of his position. It would seem, then, that Peter Schiff’s positions on the US trade deficit and the US economy vis-a-vis the Chinese economy are actually consistent with Austrian Economics.