The Danger of Intellectual Ruts
by Pierre Lemieux
Peter Navarro’s film raises one interesting question: How can somebody be so wrong?
In the wake of the new tariffs on steel, a Wall Street Journal story reminds us of the steel industry’s influence over the U.S. government (“Navarro’s Ties to Nucor Highlight Trump Advisers’ Steel-Industry Connections,” March 16, 2018). Many of the senior advisors to the President have worked in or for the steel industry. Peter Navarro, a senior trade advisor, received $1 million from Nucor Corp., a steel manufacturer, to produce a 2012 documentary film, Death by China, against imports in general and from China in particular. A book with the same title was published in 2011, co-authored with journalist Greg Autry.
These facts confirm one of the conclusions of public-choice theory and the theory of collective action: special interests, especially producers’ interests, will capture the government to obtain interventions to their benefit. This is called rent-seeking, of which steel tariffs are just an example.
The poor economics of Navarro’s documentary has been well criticized by Daniel Griswold of the Mercatus Center. The film is pure propaganda. So is the book, but I will focus on the film here. Peter Navarro’s film raises one interesting question: How can somebody be so wrong?
Among the errors, one is particularly glaring. It is worth watching Peter Navarro at 1:08:12 in the film. With great certitude and professorial confidence, he says:
And the argument is pretty simple. The gross domestic product grows with only four things: consumption, investment, government spending, and net exports. And when you run a trade deficit, the simple math of that is that that’s a negative in terms of growth.
This is simply and demonstrably false. As I explained in a previous post here (“Misleading Bureaucratese“), GDP is not equal to the sum of consumption, investment, government expenditures, and net exports (exports minus imports). It is instead the sum of consumption (right!), investment (right!), government expenditures (right!), and exports (not net exports!). GDP is the acronym of gross domestic product, and only expenditures on domestic production are included.
The reason why, as a pure accounting operation, the national statisticians of the Bureau of Economic Analysis (BEA) subtract imports is that they are already included in the measure they have of consumption, investment, and government expenditures. The value of GDP they thus calculate does not include imports in any way–and specifically not as a subtraction–because GDP cannot include them by definition.
In short, imports do not reduce GDP or its growth in any way.
A good introductory textbook of macroeconomics will explain this. Moreover, one can easily check it in the official explanation of the nature and measurement of GDP, the BEA’s Concepts and Methods of the U.S. National Income and Product Accounts (November 2017). I quote from p. 2-9:
Thus, GDP is equal to personal consumption expenditures (PCE) plus gross private domestic fixed investment plus change in private inventories plus government consumption expenditures and gross investment plus exports minus imports. In this calculation, imports offset the non-U.S. production that is included in the other final-expenditure components. For example, PCE includes expenditures on imported cars as well on domestically produced cars; thus, in order to properly measure domestic production, the sales of foreign-produced cars that are included in PCE are offset by a comparable entry in the imports of these cars.
All statistical agencies in the world follow the same methodology.
How can somebody like Peter Navarro, who after all has a Ph.D. in economics from Harvard University and used to teach business at the University of California at Irvine, defend an interpretation that contradicts a fact that even college economics students must understand? Perhaps he simply ignores what GDP is, because he touched so many other fields of inquiry and action, and has been teaching business, not economics? This is not a very satisfactory answer because he knows, or at some point has known, basic national accounting, and the sources of information are easily available to him. He could just check the BEA’s Concepts and Methods.
Another hypothesis is that his opinion was bought off by the steel industry, but I don’t think this is satisfactory either. We must assume, at least for the purpose of discussion, that, wherever the money comes from, the proponent of an opinion maintains basic intellectual honesty. The opinion must be discussed on its own merits.
Here is another hypothesis, more acceptable I think. Navarro may have once heard, or perhaps even read (although a written source would not be easy to find), a different interpretation of the accounting identity referred to above. Perhaps he just quickly glanced at the accounting identity in a macroeconomics textbook without carefully reading the explanation. This immediately confirmed his previous political preferences–his prejudice–and he did not further investigate the matter. Psychologists and behavioral economists call this a “confirmation bias” (see, for example, the discussion of psychologist Raymond Nickerson in the Review of General Psychology, 1998).
It is as if Professor Navarro’s intellectual wheels had got stuck in ruts and he had no good reason to get his chuck wagon out of them. He had no good reason because the wagon moved in the direction he wanted to go. That some people would pay him to stay in the ruts, he might have seen as further confirmation that his peculiar theory was true.
Of course, we are all subject to fall in intellectual ruts, to accept facts or ideas simply because they confirm our prior opinions and values. It takes effort to avoid confirmation bias. It’s difficult to admit that one was wrong. But trying to avoid confirmation bias and be ready to admit error would seem to be a necessary condition for any intellectual (and not purely rhetorical) enterprise. Truth, even if the quest is difficult, must be the ultimate criteria. I like how, in Freedom and Reform, Frank Knight set the standard:
And the obligation to believe what is true because it is true, rather than to believe anything else or for any other reason, is the universal and supreme imperative for the critical consciousness.