Sex and National Income Accounting

Actually there is no sex in this post, but I needed a hook.

Paul Krugman has a useful explainer about how Trump understands the trade deficit. In a nutshell, Trump thinks a deficit means the U.S. gets less than it gives up. I’ve been saying this for a long time, so why do you need Paul Krugman?

The truth is that under a deficit, we get stuff, goods and services, and the other side of the trade gets our money, used to buy U.S. assets, usually Federal government bonds. There is no inequality, much less a ripoff, except in Trump’s lizard brain. It’s possible the thought of foreigners acquiring assets in the U.S. bothers him, though that doesn’t stop him from selling them his cheeseball apartments.

When foreigners acquire U.S. debt, the Feds pay them interest. In the mammoth Federal budget, this is not a big deal. Google’s AI robot says it was $197.5 billion in 2023. Total Federal spending in 2023 was $6,160 billion.

My other sex and income accounting bit pertains to the Muskonomic theory that the measurement of GDP, the Gross Domestic Product, should exclude “government.” GDP is calculated as the cost of all goods and services. It measures just what it is supposed to measure. In Principles of Economics courses, every student is told that GDP does not and is not supposed to measure well-being. If a hurricane smashes a town, the rebuilding goes to GDP. The loss of housing and infrastructure is not counted as a negative component. That’s a balance sheet item, and GDP is a flow quantity. The degradation of the environment is not counted at all. Cleanup at an EPA superfund site (do we still have any of those?) goes into GDP.

If a Federal agency buys a pencil from a private business, that is no different than if you buy it, as far as GDP is concerned. Most Federal government output is measured at cost, since its value is not reflected in market prices, since it is not sold in a market.

It would be simple to back out Federal purchases from GDP, but to what end? If the Feds buy stuff, that benefits business, and the business of America is business, as Calvin Coolidge did not quite say. Call me suspicious, but if you reduce measured GDP retrospectively, the next increase looks larger. Who might favor that outcome? You know.

Perhaps the Muskrats think that a cut in Federal spending will not show up in their new GDP ex-government number. Sadly for them, less Federal spending will likely reduce GDP no matter how it is measured. That’s kind of basic economics, but we are ruled by morons.