By Pierre Lemieux
by Pierre Lemieux
…the BEA’s casuistry is confusing if not misleading for the typical journalist, not to speak of the typical citizen.
In a press release of October 5, the Organisation for Economic Co-operation and Development (OECD) presented its estimates of GDP growth for the second quarter. After giving the “[c]ontributions from private consumption and investment,” the press release stated that “the contraction in net exports pulled OECD growth down by 0.1 percentage point.” This last statement is highly misleading. Except in a narrow bean-counting sense, “net exports” (exports minus imports) cannot subtract anything from GDP, for the very simple reason that imports are not part of GDP, which is gross domestic product.
The rest of the press release, which reviews the data for major OECD countries, repeats the error. Moreover, a one-page “methodological note” on these regular OECD press releases does not mention the problem when explaining what the “contributions” to GDP, including the contribution of “net exports,” mean. A commercial entity who said anything similar would be sued by the government for misleading advertising.
The OECD’s misleading statements can be explained as an elementary accounting error: see any good macroeconomics textbook or other economic explanation. By definition, GDP is made of domestically-produced goods for consumption, investment, government expenditures, and exports, that is, C+I+G+X. When they actually measure GDP, however, statisticians only find a C, an I, and a G that include imported goods and services. In order to correct for that, they have to remove all imports from the formula, which becomes the familiar C+I+G+X-M, where M represents imports. Compounding the error, the formula is usually written as C+I+G+(X-M), where (X-M) is labelled “net exports,” a subliminal version of the trade balance. It looks as if imports subtract from GDP while, in fact, M is subtracted only because it was already hidden in the available data. “Net exports” do not enter in the definition of GDP.
The OECD is not the only government organization to use this equation (an accounting identity, in fact) to give the misleading impression that imports are deducted from GDP. Many national statistical agencies – probably most of them, perhaps all of them – do it, too. The Bureau of Economic Analysis, the US statistical agency responsible for GDP and national accounts calculations, does it too, but is a bit more prudent than the OECD. (Here, “render unto Caesar what belongs to Caesar” can be taken both figuratively and literally.) In its Survey of Current Business as well as its GDP press releases (see the release of September 28, 2017), the BEA presents imports as “a subtraction in the calculation of GDP” (my underline).
When I prodded the BEA two years ago, the agency admitted my main point. A bureaucrat wrote:
The reason imports are a subtraction in the calculation of GDP (C + I + G + +X – M) is because imported goods and services are included in the value of consumer spending (C), business investment (I), and government consumption expenditures and gross investment (G). Because we only want to measure what is produced domestically, we therefore must subtract imports in the equation to ensure that imports do not enter into our value of domestic product (GDP).
The bureaucrat added that the BEA’s formulation “correctly identifies imports as a subtraction in the calculation of GDP without saying it ‘contributes’ to GDP in any way.” Note that “the measurement of GDP” would be more correct than “the calculation of GDP,” as the latter suggests a theoretical justification that does not exist.
At any rate, the BEA’s casuistry is confusing if not misleading for the typical journalist, not to speak of the typical citizen. A Wall Street Journal reporter, whom I queried for writing that trade imposed a” major drag” on GDP (the original version of the story was slightly different but at least as misleading) replied: “All we mean is what the Bureau of Economic Analysis said…” Other financial papers, including the Financial Times, repeat the same error non-stop, like Echo repeating Narcissus. A Financial Times columnist even wrote about Greece that “[a]bout three quarters of its GDP is domestic”!) No wonder so many people think that imports reduce GDP. (I wrote more at length about all that in my Regulation article “What You Always Wanted to Know about GDP but Were Afraid to Ask.”)
Back to the OECD. After the Organisation’s October 5 press release, I sent three emails querying its spokesmen about its treatment of imports in GDP. Government bureaucrats normally answer questions of this nature, often intelligently. Although I have a journalist accreditation with the OECD, I am still waiting for a reply.
Why does this sort of misleading statements persist? Here is a simple public-choice hypothesis. The typical government statistician, economist, or PR bureaucrat is not less honest than the average citizen, but he is not less self-interested either. Why would he go out of his way to fight a practice that serves his bureaucracy, his political masters, and his own career? It is generally useful for politicians to scare people with foreign scapegoats and invasive imports. When faced with providing a necessarily imperfect explanation – these matters are complex, even for economists who have studied them – government bureaucrats will naturally err on the side of the state.
Pierre Lemieux is an economist affiliated with the Department of Management Sciences of the Université du Québec en Outaouais. His latest book is Who Needs Jobs? Spreading Poverty or Increasing Welfare (New York: Palgrave Macmillan, 2014). He lives in Maine. E-mail: PL@pierrelemieux.com.