Friday, September 10, 2010

People: Accounting identities do not imply causation!

Remember our friend, the trade deficit? You know, the "drag on growth"!

Well exports surged and the deficit fell 14% in July. But our press corps still writes crap like this:

Economists said that the smaller trade deficit in July meant there would be less of an impact on the third-quarter gross domestic product than the deficit had in the second quarter. The estimate for second-quarter growth was revised downward to 1.6 percent, from 2.4 percent, partly because of the expanded June trade deficit, which dragged growth down by 3.4 percentage points that quarter.

As a matter of accounting, the arithmetic is correct. But the suggestion that the trade deficit CAUSED growth to be lower by some measurable amount is completely unproven and just plain wrong.

The argument implies that there somehow would have been perfect substitutes for all imported goods being produced domestically and available for sale at the same price. Thus, if we could just keep out those damn imports, growth and jobs would soar.

Yet, this is far from true on the face of it, let alone considering if we banned all imports, we'd have a pretty hard time making any exports and that might create a "drag" on growth too, no?

This article cites anonymous "economists". No economist worth their salt would make such a claim.

Again, the accounting is impeccable, but the causal implications being drawn are garbage.


John Covil said...

I don't understand: why would domestic goods need to be sailed?

Hilarious: my word verification for this post was, "croog."

Tom said...

Angus: "No economist worth their salt would make such a claim." I heartily agree, but I can think of one person with a Nobel Prize in Economics who says things like that.

Tom said...

The term "trade deficit" is a misnomer. That number should be known as the "investment surplus." It's the net amount of money that people chose to send into the U.S., without any immediate expectation of something in return. High numbers are good :-)

John Covil said...

Tom: that's why I got such a kick out of my word verification :-)

Angus said...

John: post corrected to remove inadvertent nautical reference! thanks.

Max said...

Ahhh, but then, if you follow the argument those people make, you end up in the middle between english imperialism (buying raw products from "foreign countries", refining them and reselling them to a higher price - somehow this is ok, when you are the country doing it) and the economic necessities in the 3rd Reich.

I think national socialism in Germany and the 2nd WW showed us that this kind of protectionist thinking is nonesense, because Germany TRIED to produce everything themselves and they utterly failed. Shortages on all kinds of everyday products occured and priorities were set.

Anonymous said...

Right on, Tom! Accounting identities that the pundits do not grasp:

Net Exports = Net Capital Outflow

so, logically, Net Imports = Net Capital Inflow.

Capital inflow is not a bad thing, especially after getting cheap imports in exchange. Of, course, though, there's a claim on some U.S. asset that will have to be repaid down the line. However, if the capital inflow was used as leverage for growth AND it produces more than what has to be ultimately repaid, it will be a benefit. said...

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