Trump's Top Economist On Trade Still Fuzzy On Trade Economics

Peter Navarro will master Econ 101 one of these days.
Author:
Updated:
Original:

Peter Navarro, director of the White House National Trade Council, gets paid to be right about economics. That's why UC-Irvine employed him as a professor for all those years, and it's ostensibly why Donald Trump has tapped him to lead trade policy. Despite his occasional wild-eyed screeds against those commie libtards at Citigroup, he's supposed to be good at this stuff.

PeterNavarro

So it's mystifying when someone like Navarro is not only wrong, but so repeatedly wrong, and on such an elementary and foundational point, that all those fancy credentials start to seem like a practical joke. Here's Navarro in the Wall Street Journal's opinion pages, musing on “Why the White House Worries About Trade Deficits”:

The economic argument that trade deficits matter begins with the observation that growth in real GDP depends on only four factors: consumption, government spending, business investment and net exports (the difference between exports and imports). Reducing a trade deficit through tough, smart negotiations is a way to increase net exports—and boost the rate of economic growth.

If the argument sounds familiar, that's because it was espoused by Navarro last year in his analysis of Trump's economic plan, prompting a widespread critical shellacking. Noah Smith at Bloomberg wrote, “Navarro is making a mistake that an econ professor like him really shouldn’t be making.” CATO's Dan Ikenson went a bit farther:

To those mindful of history and the laws of economics, this week’s appointment of Peter Navarro to head the newly established National Trade Council within the White House is the latest assault on the fundamental premise that public policy should be rooted in fact and reason.

The criticisms honed in on Navarro's suggestion that “when net exports are negative…this subtracts from growth.” It's quite a broad claim, and critics assumed that Navarro was simply taking the simple accounting identity from which we derive GDP and treating like holy gospel. As Navarro's recent op-ed confirms, critics' assumptions were correct. As he writes in the WSJ:

Suppose America successfully negotiates a bilateral trade deal this year with Mexico in which Mexico agrees to buy more products from the U.S. that it now purchases from the rest of the world. This would show up in government data as an increase in U.S. exports, a lower trade deficit, and an increase in the growth of America’s GDP.

How does Navarro know that? As he notes, economists calculate GDP as the sum of consumption, government spending, investment and net exports (exports minus imports). In algebra form, that's Y = C + G + I + X - M, where M is imports.

If you stopped learning any economics right at this moment – which typically takes place in the first weeks of any standard Econ 101 class – you might assume that the higher the imports, M, the lower our output, Y. Thus imports hurt GDP.

But as undergraduates learn in the subsequent minutes of the lecture, imports are negative not because they diminish economic output, but because they automatically increase the other terms of the equation. When an American buys, say, a French cheese, that cost is added that to consumption, C. But this cheese was not made on American shores, so it shouldn't count toward our domestic output. That's why we subtract the import term: to get rid of any false boost in output owing to purchases from overseas.

Reducing imports would diminish other sums in the equation, not raise GDP. That's not to say there aren't possible advantages to producing more at home, which might have effects that aren't captured in the barebones national income identity. But that's exactly the point: how GDP is calculated tells us very little about what policies affect it. Just because something appears in a formula doesn't give it magical powers of causation.

So why would Navarro, who we've established should know better, continue beating this long-dead horse? There's a few options:

  1. Political expediency. As Trump's top economist, he needs to toe the party line, and repeating this old flub gets the job done.
  2. Ideological commitment. Navarro subscribes so completely to the “economic nationalist” camp that he is useless to his profession.
  3. Honest error. Navarro believes that the metrics Simon Kuznets and friends formalized in the 1930s direct the course of the economy with unswerving precision.

I suspect the answer is #2 with a little bit of #1. Navarro is no Johnny-come-lately to Team Free-Trade-Is-Bad. He is the author, after all, of multiple apocalyptically titled books on China: “Death by China” and “The Coming China Wars.” It was the latter, published in 2006, that caught Trump's attention.

But having an axe to grind is not uncommon in economics, and it's no reason for an economist to besmirch himself so completely as Navarro has. There's a perfectly sound body of research undergirding the idea that offshoring can hurt the economy, and Navarro is free to sample from it.

Why Navarro instead harps on the national income identity probably has to do more with its appeal to those unencumbered by economic education than any true argumentative heft it might have, somewhat like throwing a snowball in the hopes of disputing climate change. That this posture alienates Navarro's professional peers is evidently no bother.

Related