The problem with economics is the economists. They arguably understand what powers economic growth the least.
Consider “World Pays a Price for China’s Growth,” the latest piece by Wall Street Journal columnist Greg Ip. In it, the non-economist (that’s not a knock on him) in Ip wrote that “Even as the U.S. rolls out tariffs, its imports are up 10% so far this year from a year earlier,” while China’s are down 3%. Translating Ip’s agitation, “China” is exporting in growing amounts “while imports have flatlined.” Ip contends that China is “pursuing a ‘beggar thy neighbor’ growth model at everyone else’s expense.” Naaaah.
For one, there’s nothing “beggar thy neighbor” or harmful about exports. They always lift the world precisely because exports signal work divided, and our individual productivity is lifted in enormous amounts the more that we’re specializing via division of work with others. The pejorative “beggar thy neighbor” should be “elevate thy neighbor.” Sadly, economists don’t grasp this truth.
Wedded to the charitably obtuse measure of economic growth that is Gross Domestic Product (GDP), economists view soaring imports as an economic negative. In their confused view of the world, GDP declines as imports outpace exports. On its face, such a view is powerfully absurd. How could an ability to command growing amounts of the world’s production signal economic weakness within the country commanding it? How indeed. Furthermore, the notion that imports can outpace exports is impossible as is.
More realistically, there are certain market goods that don’t factor in the export equation. This looms large with the United States. One of its biggest exports is shares in the world’s greatest companies. Savers around the world line up to buy pieces of U.S. companies, but since the export of shares doesn’t count in what shouldn’t be measured as is (the trade balance), what’s undeniably bullish for U.S. economic growth shrinks U.S. GDP. Think of this with China top of mind.
Still very poor relative to the U.S., some of the monetary proceeds from the production of its people don’t go toward the import of typical market goods. Instead, the Chinese save. Brilliant. Their saving represents demand for shares in companies (U.S. and other nations), debt, not to mention global consumption.
Ip believes, as do economists in general, that to save is to not spend. Translated, the Chinese export without using the proceeds from same to import. Such a view is wholly confused. No act of saving, short of stuffing savings under the proverbial mattress, ever subtracts from demand to the global economy’s detriment as Ip imagines.
Instead, what the Chinese don’t spend is merely shifted to those with near-term consumptive desires. All Ip need do to understand this is to imagine what would happen if Elon Musk, the world’s richest man, were known to make pennies scream. If so, nothing about his individual parsimony would shrink consumption as much as it would shift it to others. Banks don’t house money to stare at it, they “rent” savings to lend it out.
It all speaks to what Ip (and the economists he follows) misses with his expressed belief that that the “World Pays” for parsimony within China. No, it doesn’t. Production is not only the only the source of demand, it’s also true that production paired with thrift in no way subtracts from spending. Ip is incorrect about the economic burden that is China, as are the economists he follows.
Originally posted to Real Clear Markets.
