Vox Day wrong about trade, GDP

Vox Day may be a genius at many things, but I think he’s wrong regarding the post Darkstream: Trade war is good for the U.S. economy, in which he writes:

Instead what happened is what anti-free trade people like myself predicted would happen, and what proper economic theory, conventional economic theory, predicts would happen – the economy grew! This is not difficult, this is not at all hard. Now, if you want to argue that the idea of a objective measure of a national economy, especially one that is denominated in a currency, is a contradiction in terms and that it’s not possible to measure a national economy, especially not in its own currency I would accept that argument, but then there’s no point in having this discussion because it’s not possible to argue about something that can’t be quantified becoming larger or smaller. If you’re accepting mainstream economics to the point that you’re talking about the economy growing or the economy shrinking, then you have to accept the mainstream theory and what the mainstream theory very clearly states is that the size of the economy as measured in gross domestic product is C plus I plus G Plus X minus M, as consumer spending plus investment plus government spending plus exports minus imports, so what happens when you reduce imports the economy grows. You know, this is an absolutely straightforward mathematical relationship, it is a very simple equation, and so it’s not at all surprising that despite all the doomsaying, despite all the ridiculous predictions, that the economy has grown and we’ve actually seen the fastest growth rates for the U.S. economy since the 1980s.

To his credit, Vox is right regarding the mainstream media being wrong about the tariffs (I made a similar prediction a few days ago and 9 months ago), but that’s not because the tariffs are effective, but rather because they are too small to have an impact. US GDP is $18 trillion. 10% tariffs on $30 billion of steel and aluminium, comparatively speaking, is a drop in the ocean. Trump’s latest round of tariffs will also prove inconsequential. That’s good and bad..it’s ‘good’ because it means the economy will not be hurt, but it’s ‘bad’ because, contrary to what Vox says, tariffs are not an economic tailwind–they are neutral. I still support the ‘god emperor’ though, but we need to be realists about what tariffs can and cannot do.

The U.S. economy is booming, but not because of tarrfis, but due to consumer spending, intellectual property, low taxes and a ‘pro business’ environment engendered by Trump, innovation from America’s ‘best and brightest’ (HBD), exports, and so on.

But Vox makes a rookie mistake regarding GDP. A positive ‘balance of trade’ (more imports than exports) does NOT imply more GDP growth. It is true that the balance of trade is a component of GDP, but there are three other components, as shown by the GDP formula below:

GDP = C + I + G + (X − M)

X-M is the trade balance; when positive, it adds to GDP.

But, as discussed in the excellent article The Trade Deficit Matters, But Not How You Think, imports are added to the other components. The reason why imports are subtracted from exports is to prevent double-counting:

Many people (even financial reporters and a presidential advisor) mistakenly think that an increase in imports (which also means an increase in the trade deficit) lowers GDP. This misperception comes from a shallow understanding of the formula. Since imports (M) are subtracted in the formula, if M gets bigger, GDP must get smaller, right? Wrong!

 

Imported goods all end up as either C, I, or G because either consumers or the government are consuming them or the imported good is something like a big piece of machinery that ends up in a factory, thereby qualifying as investment (I). Thus, exactly offsetting the negative effect of a new import through the M term is a positive addition to one of C, I, or G.

Furthermore, the evidence suggests the correlation between surpluses and economic growth is flat or negative:

The balance of trade went sharply negative in the early 90′s, which coincided with a strong economy. It surged in 2008-2009, during the worst recession in a long time.

Thus, one important outcome of our perpetual trade deficit is that foreigners are investing in our economy. They can buy government bonds (helping to finance the government’s budget deficit), American corporate stocks and bonds, real estate (like Manhattan apartments), or they can build factories, thereby creating jobs. Without all those years of trade deficits, we might not have all those foreign car plants scattered around the country, for example. A trade deficit makes many people think we are losing jobs to overseas plants making all those imports, but the money comes back home and often creates new jobs here in foreign-owned factories.

Even though I support Trump, I agree. Such facts are frustrating, because they run counter to our chosen narratives. We want to believe foreign investment is bad for America, but the evidence suggests it’s either a positive, or at worst, neutral. We have to look at things from a realistic perspective if we are to understand how things work. As an extreme example, look how well Japan and Germany did after the allied powers invested in them heavily after the War.

People complain about rich Chinese buying up expensive Bay Area and New York homes, but the typical wage worker is not going to be buying a $3 million Silicon Valley home. They are not going to be buying Menlo Park or Palo Alto property. Foreigners buying up real estate and businesses creates jobs in the form of: building/construction, landscaping, contracting, renovation, and other forms of economic activity.