Can we list and address other common econ journalism fallacies? Like the idea that the strength of a country’s currency represents how strong their economy is?
I always had a soft spot for Dan Davies sarcastically referring to the exchange rate of a country's currency as its "national sperm count" (https://twitter.com/dsquareddigest/status/1156261914441322496). Captures the talismanic quality that exchange rates and sperm counts take on in certain minds!
This is a great post. Such a clear explanation not only of how imports don't count in GDP but why it matters that people are getting it wrong. Thanks for writing this.
Mostly interested in macroeconomics since I'm pretty curious about global trade patterns. Honestly, any recommendations for study material would be amazing!
Honestly just reading _anything_ by Krugman is not a terrible idea. The back issues of his blog contain gems like the "IS-LMentary" thumbnail sketch of one of the most important macro models.
The "aha!" moment for me in realizing I _wanted_ to understand econ, and that it was worth understanding, was Krugman's "Baby-Sitting the Economy", back in the very early days of Slate. Unfortunately I don't think a complete version is still online -- the original had a couple of sidebars, which apparently got lost in a CMS transition.
In particular, at the end, there's a (now-broken) link in the sentence, "And once you understand that this is what has gone wrong, the answer to Japan’s problems is, of course, quite obvious."
What that last sidebar explained is that this toy economy was saved by inventing inflation -- they made the coupons lose value over time. A small, steady amount of inflation helps encourage spending in the present, which is exactly what you want if you have a shortfall of demand.
Oh, I should add, that sidebar also included the delightful line about how central banks needed to figure out how to "credibly promise to be irresponsible". That is, traditionally we expect central banks to panic and raise rates at the first sign of rising inflation. But _when you are in a liquidity trap_, you need to get people to believe that not only will inflation rise, but you're going to allow it to stay a bit high for at least a year or three. Unless people believe that, they're not going to do what you want, which is rush out and spend now instead of hoarding cash.
I'm not sure if the baby-sitting co-op piece was the _first_ place that line appeared, I think he might've had it in an academic paper on Japan already, but I'm pretty sure it's where it was popularized.
Thank you, thank you, thank you! I teach over 100 AP Macroeconomics students each year that imports do not reduce GDP even though some college-level textbooks and other resources do not teach this or don't emphasize it.
On the one hand, we teach that comparative advantage through specialization and trade makes both countries better off. On the other hand, many sources indicate that importing goods and services hurts the domestic economy. It's not rational.
Thanks Noah. I am arguably one of your biggest fans. Another amazing conclusion. Continue to stay humble, down to earth, and culturally relevant. You are the Kat Williams of comedy, and I mean that in the highest regards. May God bless your shining face, and May your continue to lead as an educator in a field which matters so much. I pray for your safety, peace, and salvation. Maybe God bless you.
"Macroeconomics", the title of the 2019 MMT text-book (by Mitchell, Watts and Wray), also agrees with you:, in resource terms..... Mitchell sees exports as a loss to the domestic economy because the nation loses the ability to consume that portion of its output which is sent overseas.
And if every 'imported' category starts to exceed each 'domestic' category, GDP is going to decrease, especially on a year to year and month to month comparison basis. Which IS what is actually happening.
That's my take too. Q4 2021 we had clogged ports, worries that Christmas gifts wouldn't get delievered until January and people posting pictures of empty shelves at the grocery stores. That implies a lot of pent up demand for imported consumption that wasn't happening.
Q1 2022 then is a story where domestic consumption went up a little, but imported consumption when up a lot. Hence GDP fell because some Q4 domestic consumption switched over to imported consumption. Why? Because imported consumption has been slowly recovering and that's a positive thing because it means inflationary pressures are now less in the US.
To be honest I'm getting kind of frustrated at this whiplash. First we hear panic over supply chains being clogged. Then we have panic that the economy is running to hot (how dare anyone call it transitory, it's been a week and nothing has changed!). Now we're going to panic the economy is not running as hot?
Agreed. Focus keeps hopscotching to single factors.....it's all balance, so at least one will be negative and always get the focus.
The dynamics involved are way too much for most to grasp. I find it hugely frustrating when current numbers are compared to any pandemic year!! Makes no sense.....skip to 2019.
At least people are employed!!!
And the nutty stock market....the Fed's next move has been factored in months ago. Inflation was only as transitory as the supply chain issues were.
Well here's the thing. Inflation is NOT prices going up. That is just a price increase. Inflation is sustained price increases. If some UFO visited earth and sucked away half our oil, the price of fuel would go up a lot as would products that depend on fuel. But then that would be it. Once the higher price is in place, there would be no reason for continued price increases and no reason to task the Fed with trying to use rate hikes to 'restore' the prevous price. In fact, it would be pretty bad for the Fed to try to 'solve' that type of inflation since it really isn't inflation.
If supply chains do not get better, if they get worse, then prices should increase because you need to spend more to get a widget from points A to B. The higher price is actually useful because it signals to the market that anyone who can figure out how to even partially restore supply chains can get paid a lot. Likewise if supply chains slowly improve, then inflation should not be a problem unless you have a monetary problem.
Great post! I've always been confused by something - why are imports generally thought of as harmful or less desirable than exports? Going back to the moon-base example - aren't the moon colonists getting a great bargain? They do no work and yet enjoy $420M in consumption! The suckers are the exporters on Earth who are laboring away and giving away their wares for useless Moon-bucks they can't spend.
Naively, it seems like importing more than you export should be desirable. You're getting more useful goods than you're giving.
I listened to Bloomberg Surveillance this morning (June 16th) and heard Bloomberg's Chief U.S. Economist, Anna Wong, state that net exports are a negative drain on U.S. GDP. WTF??
My pick for most common mistake in econ journo is the equation of annual GDP with "the size of the economy". E.g. Peterson Foundation: "The National Debt Will Grow to Be Twice the Size of the Economy in 30 Years". No, the national debt will grow to be twice the economy's annual income or output.
The most common mistake economic journalists make is the assumption GDP is still a relevant metric. With this almost religious assumption you feed an economic machine that literally is destroying human existence as we speak.
>>>if the government forced American car producers to use more expensive American steel and less cheap European steel, U.S. steel producers would enjoy a boom, but this would probably be outweighed by the reduced output of American car companies<<<
This is important.
The MAGA movement supposedly prioritizes the strength of US manufacturing. But I can think of no better way to *weaken* American manufacturing than to interfere with the ability of US factories to source the best possible inputs at the lowest price.
Can we list and address other common econ journalism fallacies? Like the idea that the strength of a country’s currency represents how strong their economy is?
Then do "multiple exchange rates"!
This is a Latin American favorite, along with price controls.
I always had a soft spot for Dan Davies sarcastically referring to the exchange rate of a country's currency as its "national sperm count" (https://twitter.com/dsquareddigest/status/1156261914441322496). Captures the talismanic quality that exchange rates and sperm counts take on in certain minds!
This is a great post. Such a clear explanation not only of how imports don't count in GDP but why it matters that people are getting it wrong. Thanks for writing this.
Do you have any advice on self-studying economics? This post made me realize how much of economics I don't understand.
Depends on which stuff you want to self-study! There's a lot of good stuff for microeconomics, but less for this sort of macro stuff.
Mostly interested in macroeconomics since I'm pretty curious about global trade patterns. Honestly, any recommendations for study material would be amazing!
Well, Krugman's textbook is good: https://www.amazon.com/Macroeconomics-Paul-Krugman/dp/1464110379
I agree and written at such a simple level anyone can understand it.
Honestly just reading _anything_ by Krugman is not a terrible idea. The back issues of his blog contain gems like the "IS-LMentary" thumbnail sketch of one of the most important macro models.
https://krugman.blogs.nytimes.com/2011/10/09/is-lmentary/
The "aha!" moment for me in realizing I _wanted_ to understand econ, and that it was worth understanding, was Krugman's "Baby-Sitting the Economy", back in the very early days of Slate. Unfortunately I don't think a complete version is still online -- the original had a couple of sidebars, which apparently got lost in a CMS transition.
https://slate.com/business/1998/08/baby-sitting-the-economy.html
In particular, at the end, there's a (now-broken) link in the sentence, "And once you understand that this is what has gone wrong, the answer to Japan’s problems is, of course, quite obvious."
What that last sidebar explained is that this toy economy was saved by inventing inflation -- they made the coupons lose value over time. A small, steady amount of inflation helps encourage spending in the present, which is exactly what you want if you have a shortfall of demand.
Oh, I should add, that sidebar also included the delightful line about how central banks needed to figure out how to "credibly promise to be irresponsible". That is, traditionally we expect central banks to panic and raise rates at the first sign of rising inflation. But _when you are in a liquidity trap_, you need to get people to believe that not only will inflation rise, but you're going to allow it to stay a bit high for at least a year or three. Unless people believe that, they're not going to do what you want, which is rush out and spend now instead of hoarding cash.
https://slate.com/business/2012/06/the-incredible-credibility-problem.html
I'm not sure if the baby-sitting co-op piece was the _first_ place that line appeared, I think he might've had it in an academic paper on Japan already, but I'm pretty sure it's where it was popularized.
I also found it very clear and easy to read (I also read Mankiw's macro textbook but Krugman's was better).
Thank you, thank you, thank you! I teach over 100 AP Macroeconomics students each year that imports do not reduce GDP even though some college-level textbooks and other resources do not teach this or don't emphasize it.
On the one hand, we teach that comparative advantage through specialization and trade makes both countries better off. On the other hand, many sources indicate that importing goods and services hurts the domestic economy. It's not rational.
Thanks Noah. I am arguably one of your biggest fans. Another amazing conclusion. Continue to stay humble, down to earth, and culturally relevant. You are the Kat Williams of comedy, and I mean that in the highest regards. May God bless your shining face, and May your continue to lead as an educator in a field which matters so much. I pray for your safety, peace, and salvation. Maybe God bless you.
Haha awww thanks man.
Great post. Thank you for the excellent explanation.
Good post.
Very well done sir!
How did I not know this - thanks Noah
"Macroeconomics", the title of the 2019 MMT text-book (by Mitchell, Watts and Wray), also agrees with you:, in resource terms..... Mitchell sees exports as a loss to the domestic economy because the nation loses the ability to consume that portion of its output which is sent overseas.
And if every 'imported' category starts to exceed each 'domestic' category, GDP is going to decrease, especially on a year to year and month to month comparison basis. Which IS what is actually happening.
That's my take too. Q4 2021 we had clogged ports, worries that Christmas gifts wouldn't get delievered until January and people posting pictures of empty shelves at the grocery stores. That implies a lot of pent up demand for imported consumption that wasn't happening.
Q1 2022 then is a story where domestic consumption went up a little, but imported consumption when up a lot. Hence GDP fell because some Q4 domestic consumption switched over to imported consumption. Why? Because imported consumption has been slowly recovering and that's a positive thing because it means inflationary pressures are now less in the US.
To be honest I'm getting kind of frustrated at this whiplash. First we hear panic over supply chains being clogged. Then we have panic that the economy is running to hot (how dare anyone call it transitory, it's been a week and nothing has changed!). Now we're going to panic the economy is not running as hot?
Agreed. Focus keeps hopscotching to single factors.....it's all balance, so at least one will be negative and always get the focus.
The dynamics involved are way too much for most to grasp. I find it hugely frustrating when current numbers are compared to any pandemic year!! Makes no sense.....skip to 2019.
At least people are employed!!!
And the nutty stock market....the Fed's next move has been factored in months ago. Inflation was only as transitory as the supply chain issues were.
Well here's the thing. Inflation is NOT prices going up. That is just a price increase. Inflation is sustained price increases. If some UFO visited earth and sucked away half our oil, the price of fuel would go up a lot as would products that depend on fuel. But then that would be it. Once the higher price is in place, there would be no reason for continued price increases and no reason to task the Fed with trying to use rate hikes to 'restore' the prevous price. In fact, it would be pretty bad for the Fed to try to 'solve' that type of inflation since it really isn't inflation.
If supply chains do not get better, if they get worse, then prices should increase because you need to spend more to get a widget from points A to B. The higher price is actually useful because it signals to the market that anyone who can figure out how to even partially restore supply chains can get paid a lot. Likewise if supply chains slowly improve, then inflation should not be a problem unless you have a monetary problem.
Agreed, but so few people realize the global nature of all modern economies.
Great post! I've always been confused by something - why are imports generally thought of as harmful or less desirable than exports? Going back to the moon-base example - aren't the moon colonists getting a great bargain? They do no work and yet enjoy $420M in consumption! The suckers are the exporters on Earth who are laboring away and giving away their wares for useless Moon-bucks they can't spend.
Naively, it seems like importing more than you export should be desirable. You're getting more useful goods than you're giving.
I listened to Bloomberg Surveillance this morning (June 16th) and heard Bloomberg's Chief U.S. Economist, Anna Wong, state that net exports are a negative drain on U.S. GDP. WTF??
My pick for most common mistake in econ journo is the equation of annual GDP with "the size of the economy". E.g. Peterson Foundation: "The National Debt Will Grow to Be Twice the Size of the Economy in 30 Years". No, the national debt will grow to be twice the economy's annual income or output.
And more broadly, econ journos just don't get stocks vs. flows.
The most common mistake economic journalists make is the assumption GDP is still a relevant metric. With this almost religious assumption you feed an economic machine that literally is destroying human existence as we speak.
>>>if the government forced American car producers to use more expensive American steel and less cheap European steel, U.S. steel producers would enjoy a boom, but this would probably be outweighed by the reduced output of American car companies<<<
This is important.
The MAGA movement supposedly prioritizes the strength of US manufacturing. But I can think of no better way to *weaken* American manufacturing than to interfere with the ability of US factories to source the best possible inputs at the lowest price.