Friday, December 30, 2016

An economist goes to Washington

Here is Trump economist Peter Navarro explaining the benefits of protectionism to Paul Solman and the PBS NewsHour audience. The best (worst) part is where they go to a display board and write down the textbook components of final demand that define GDP.

GDP=C+I+G+(X-M). The "chalk talk" quickly gets pretty awful. Trump wants more "I" but "Keynesians" want more "G". Trump-Navarro want to boost GDP by reducing the "trade deficit" (reduce gap between U.S. imports and exports). There follows a discussion of China's trade abuses, including selling their stuff to us at low cost.

Where to start?
1. Trade is a good thing; specialization and exchange are the fundamental insight of market economics; they explain our prosperity.
2.  The "trade deficit" is a meaningless idea left over from the days when mercantilism was a serious idea, embraced by royals seeking ways to pay for their perennial war making. They were perhaps blind to the idea that currency exchange rates are always in flux, responding to the demand and supply for goods and services as well as the demand and supply for assets.  These flows respond to prices (exchange rates). At the end of the day, there are trade flows and capital flows that exactly balance.
3. The international demand for U.S. assets signals confidence in the U.S. economy -- we are still the "tallest pygmy." I would feel better if the U.S. Treasury borrowed less. Tallest pygmy status feeds a bad habit (addiction) by U.S. taxpayers (and Congress). More capital flows would go into U.S. productive projects were there less competition from U.S. unproductive (government) projects.
4. Going back to the textbook definition of GDP, the items on the right-hand-side are not independent of each other. A trade war, for example, could tank "I" as well as "C".
5. If any government anywhere does "manipulate" anything to make their exports (my imports) cheap, thank you very much.

U.S voters have spoken but the conversation never stops. If economists invoke textbook discussions of GDP, they should at least do so without all of the errors that Navarro promotes.