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Dismal Science Revisited

Dismal Science Revisited

| March 12, 2019

As you no doubt know by now, on a somewhat regular basis, I like to share reports about our economy that I glean from the various sources I visit regularly.  The first is the annual update from Mark Perry where he compares our States’ GDPs with those of whole countries. Here is a link to the entire post on February 28 - Putting America’s Huge $20.5T Economy Into Perspective by Comparing US State GDPs to Entire Countries.


“It’s pretty difficult to even comprehend how ridiculously large the US economy is, and the map above helps put America’s Gross Domestic Product (GDP) of $20.5 trillion ($20,500,000,000,000) in 2018 into perspective by comparing the economic size (GDP) of individual US states to the entire national output of other countries.  For example:

America’s largest state economy is California, which produced nearly $3 trillion of economic output in 2018, more than the United Kingdom’s GDP last year of $2.8 trillion.  Consider this: California has a labor force of 19.6 million compared to the labor force in the UK of 34 million (World Bank data here). Amazingly, it required a labor force 75% larger (and 14.5 million more people) in the UK to produce the same economic output last year as California!  That’s a testament to the superior, world-class productivity of the American worker. Further, California as a separate country would have been the 5th largest economy in the world last year, ahead of the UK ($2.81 trillion), France ($2.79 trillion) and India ($2.61 trillion).

America’s second largest state economy – Texas – produced nearly $1.8 trillion of economic output in 2018, which would have ranked the Lone Star State as the world’s 10th largest economy last year.  GDP in Texas was slightly higher than Canada’s GDP last year of $1.73 trillion. However, to produce about the same amount of economic output as Texas required a labor force in Canada (20.1 million) that was nearly 50% larger than the labor force in the state of Texas (13.9 million).  That is, it required a labor force of 6.2 million more workers in Canada to produce roughly the same output as Texas last year. Another example of the world-class productivity of the American workforce.”

Mr. Perry concludes - “Overall, the US produced 24.3% of world GDP in 2017, with only about 4.3% of the world’s population. Four of America’s states (California, Texas, New York and Florida) produced more than $1 trillion in output and as separate countries would have ranked in the world’s top 16 largest economies last year.  Together, those four US states produced nearly $7.5 trillion in economic output last year, and as a separate country would have ranked as the world’s third-largest economy.

Adjusted for the size of the workforce, there might not be any country in the world that produces as much output per worker as the US, thanks to the world-class productivity of the American workforce.  The map above and the statistics summarized here help remind us of the enormity of the economic powerhouse we live and work in. So let’s not lose sight of how ridiculously large and powerful the US economy is, and how much wealth, output and prosperity is being created every day in the largest economic engine there has ever been in human history.  This comparison is also a reminder that it was largely free markets, free trade, and capitalism that propelled the US from a minor British colony in the 1700s into a global economic superpower and the world’s largest economy, with individual US states producing the equivalent economic output of entire countries.”

Last week, the Wall Street Journal had an editorial titled: Trade Deficit Freak Out - There is no Need to Panic.  Mark Perry summarized it, added a graph and commentary in his blog post on March 7. Here is a link to it - WSJ: Trade Deficit Freak Out, No Need to Panic.  The graph below provides an interesting perspective - note carefully the numbers on the left vertical axis.



“Note that the trade deficit expanded in 2018 even as the U.S. unemployment rate fell.  This gives the lie to the common political claim that a higher trade deficit means lost American jobs.  Capital investment matters more to job creation than trade flows do.

As the chart above shows graphically, there is a very clear and significant inverse relationship over time between rising (falling) US merchandise trade deficits (blue line) and falling (rising) US unemployment rates (black line) In fact, the simple correlation coefficient between those two variables (goods deficits and jobless rate) is 0.76 between January 2002 and December 2018, and a linear regression model confirms that highly significant statistical relationship with a t-statistic of 15.1 (and probability of 0.0000) on the goods trade deficit as an explanatory variable for the monthly US jobless rate.

For example, note that the US goods trade deficit shrank dramatically by 50% during the Great Recession at the same time as the US jobless rate spiked and roughly doubled from less than 5% to 10% over that period.  Since the economic recovery started in 2009, the monthly US goods trade deficit has roughly doubled from $40 billion to $80 billion while the monthly US unemployment rate dropped from 10% to less than 4%. As the WSJ points out, the empirical evidence pretty much destroys the persistent, fact-resistant myth that higher trade deficits destroy American jobs.

The WSJ editorial board concludes that:

The main point is that a larger trade deficit is a benign byproduct of a healthier American economy.  Supply-side policies revived animal spirits and gave the economy a second wind. Trade negotiations that further open foreign markets like China’s to U.S. goods and investment can keep growth humming, but tariffs that retard growth in the name of reducing the trade deficit are destructive.  The best way to respond to a trade deficit is to ignore it.

Another reason not to freak out about the “trade deficit”?  Because what is called, frequently pejoratively, in the upside down world of media news reporting, a “trade deficit in goods” is in reality exactly the opposite: a “trade surplus in goods” if you account for who actually ends up with the most goods on net.  For example, in 2018, the US imported about $2.6 billion in goods produced in other countries and we exported only about $1.7 billion of US goods produced here, resulting in a record “trade deficit” of about $900 billion (see chart above). That “unfavorable trade imbalance” as the media frequently describes it, was actually a “favorable trade balance” for the US viewed differently, since we benefited from a “net inflow of goods” of nearly $1 trillion or “goods surplus” of nearly $1 trillion last year.

Here’s how Milton Friedman explained it:

When people talk about a favorable balance of trade, what is that term taken to mean?  It’s taken to mean that we export more than we import. But from the point of our well-being, that’s an unfavorable balance.  That means we’re sending out more goods and getting fewer in. Each of you in your private household would know better than that.  You don’t regard it as a favorable balance, when you have to send out more goods to get fewer coming in. It’s favorable when you can get more by sending out less.

Bottom Line: As the Wall Street Journal advises, there’s no need to panic, and no need to freak out about the US “goods surplus,” aka the US “merchandise trade deficit.”

As someone once said - “You might be a protectionist….if you send a vessel loaded with domestic goods out to sea, and pray that it comes back empty!”

I end with a quote from Ludwig von Mises’ 1922 classic “Socialism”- In fact Socialism is not in the least what it pretends to be.  It is not the pioneer of a better and finer world, but the spoiler of what thousands of years of civilization have created. It does not build, it destroys.  For destruction is the essence of it. It produces nothing; it only consumes what the social order based on private ownership of the means of production has created.”

Until next time, cheers!