The GDP and ‘Trump-o-nomics’ explained

After sexual assault, cyber espionage, and criminal racketeering, the third presidential debate suddenly took up the topic of Gross Domestic Product. Chris Wallace asked Hillary Clinton to explain how her economic plan differs from that of President Obama’s, “which has led to the slowest GDP growth since 1949.”   

Donald Trump added, “Correct.” And he’s right. GDP growth since the 2008 recession has been historically weak for both the United States and Europe. Yet, counterintuitively, the U.S. economy has added over 14 million jobs since the depths of the recession in 2010.

{mosads}This unusual situation, pairing slow GDP growth with strong job growth, prompted the Federal Reserve to recently question the durability of Okun’s Law, the mainstream economic theory that correlates jobs to GDP, saying America’s “growth rate is roughly half of what our rule of thumb would suggest we need just to hold the unemployment rate constant.”   

What’s going on here? To answer that, we need to consider how GDP is calculated. Though it’s widely considered synonymous with the economy at large, GDP shows us just one particular view of it. And while there are a few different ways to calculate GDP, the usual method — and the one employed by U.S. government agencies, the World Bank, and the IMF — is by adding up expenditures (how much households, businesses, and government spend over a certain period of time) plus the value of exports and minus the value of imports. Baked into the GDP formula, then, is the notion that imports subtract economic growth, and therefore, as per Okun’s Law, jobs.

That may have been truer in 1938, when the GDP metric was designed. But the opposite is true today. Imports actually support millions of American jobs. That’s because the goods that we buy from other countries usually contain a lot of U.S. value-add. In today’s global supply chain, products are rarely made in one country anymore — the job is shared among many.

The United States often adds value at the beginning and end of the process. At the beginning, with design, raw materials, capital equipment, and critical components; and at the end, when imports must be brought to market, with transportation, warehousing, retailing, permitting, servicing, legal, accounting, and construction.

A lot of the money we spend on imports actually stays in the U.S. and supports American jobs: over 40 cents of every dollar’s worth of Mexican imports and over 55 cents of every dollar’s worth of Chinese imports go to American factories and farms. Since 2010, the growth in Mexican and Chinese imports has contributed to America’s 14 million new jobs, contradicting the GDP-Okun’s Law formulation.

China, meanwhile, finds itself in the opposite situation — relatively faster growth, but hemorrhaging jobs, shedding millions of them in the steel, aluminum, and coal industries, which are bloated with growth-choking overcapacity. Trump held up China for comparison in the debate, asserting that “China is growing at 7 percent. And that for them is a catastrophically low number.”  

At this point, the Chinese would be ecstatic with 3 or 4 percent growth, much less 7. The 2008 recession hammered China, too, as worldwide trade has declined sharply, and China’s rosy GDP statistics put out every quarter are considered “for reference only” by top government officials.

Who can blame them when, year after year, the sum of the GDP of the provinces exceeds the GDP of the whole country by trillions of Yuan?  The parts total more than the whole? It would be a Mel Brooks movie, if it weren’t standard operating procedure for China’s Bureau of Statistics, whose most recent chief is on trial for corruption.

Hardly an example of an economy America should emulate, China is facing its own looming debt crisis and several sectors, such as steel and cement, are in recession.

Rather than use misleading metrics like GDP to make comparisons to China, we should instead compare balance sheets, not expenditures. Considering what we own minus what we owe (across households, businesses, and government) the United States is more than $35 trillion wealthier than China. And the gap is growing fast, not shrinking.

China is falling farther and farther behind in national wealth. And with a population that has gotten old before it has gotten rich, China is sinking into what will most likely be a long period of economic stagnation, as happened with Japan.

Donald Trump often calls the United States a debtor nation. That he wants to make America “rich again.”  Though you may take issue with how the wealth is distributed, America is rich already. We have a $35 trillion lead over the supposedly second largest economy in the world.

Haft (@jeremyrhaft) is an adjunct professor at Georgetown University whose latest book is Unmade in China: The Hidden Truth about China’s Economic Miracle.

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