My good friend and frequent (and favorite!) conversation partner, Randy Tobler, alerted me to this clip of Kevin Hassett, who currently serves as Director of the National Economic Council and is thus advising the President on economic issues.
Suffice it to say that I disagree:
Coincidentally, I’m in today’s Wall Street Journal making this point. A snippet:
Nobody asked the question that would unravel the whole story: Why are imports subtracted from GDP to begin with?
The claim that imports “subtract from growth” confuses an accounting operation with a causal relationship. GDP tabulates domestic production, but because directly measuring every U.S. factory’s and office’s output is difficult, the government approximates it by counting expenditures. This includes household consumption, private investment, government purchases and exports. All of these spending categories, aside from exports, include purchases of both American and foreign goods.
The $1,000 Italian espresso machine bought in Ohio enters consumption spending even though it wasn’t produced in the U.S. So to total domestic production accurately, the tabulators subtract its import value. The purchase adds $1,000 in one column and subtracts $1,000 in another. As the agency tasked with tabulating official GDP statistics, the Bureau of Economic Analysis, says, “to avoid including foreign production in GDP it is necessary to subtract the value of imports.”
Imports are subtracted not because they make the U.S. poorer, but because foreign production isn’t American production. Trade protectionists incorrectly view domestic production and economic health as synonymous. But American prosperity comes from what people can buy and use, and the factory’s address has nothing to do with that.
If you’ve never been trained to think like an economist, trade deficits are difficult. But Kevin Hassett has been trained like an economist; he earned a PhD from the University of Pennsylvania in 1990! And he should know better. The charitable interpretation is that he’s just forgotten this, which I suppose is understandable - he’ has been out of the classroom for a while now, after all. The less charitable one is that he hasn’t forgotten it. I’ll leave it to you to figure out what that would imply…
If you want a deeper dive into the nuances of GDP and trade deficits, check out some of my other work:
Kevin cites Gross Domestic DEMAND, not Gross Domestic PRODUCTION. Is this a case of apples vs oranges or is it an intentional or unintentional misuse of the WORD.