By John Cookson
Fareed’s ‘Book of the Week’ is Zachary Karabell’s The Leading Indicators: A Short History of the Numbers That Rule Our World. GPS's John Cookson spoke with him about trade with China and the troubles of telling just how well an economy is doing.
Last year the United States imported $314 billion more in goods and services from China than it exported to the country. This trade deficit is cited by some as an example of America’s economic decline and China’s ascendency. You say in the book, "not so fast."
I do say, "not so fast" because I think we are calculating the way goods and products are made in a way that goods and products are no longer made. The assumption that every product comes from one country is simply not true. It's something that many people who know this world better than I do have recognized and have tried to show the ways in which an iPhone and iPad are made up of multiple components from many different countries. If you were able to break down where the value of each of these products goes you would find that it goes to lots of different places, and it especially goes to whoever has created the intellectual property in the first place. But most of that is invisible for trade numbers. Because there isn't a system of breaking down every manufacturing good in the world into its component parts, we end up ascribing all the value to a country that has the factory, that did the final assembly, missing out on all these other aspects of how goods are made.
You mentioned the iPhone, which of course advertises itself as being "Designed by Apple in California" and "Assembled in China."
The reality is that from a trade perspective and official trade figures there is no "designed in."
You write that there are problems not only with measuring trade, but also with measuring the overall size of the economy. Should gross domestic product (GDP) and other economic measurements be replaced with something different, such as a poll of how happy we are?
I don't think replacing our numbers with other numbers is really the answer. A happiness index is appealing to people because it purports to measure the value of things, the value of life and the quality of life. But all it does is look at a different set of variables than GDP. There's no one number that can capture our experience of are we collectively and individually doing well. The kind of will-o'-the-wisp of we are going to find a number, a really simple number, and if it goes up that means we are all doing well and if it goes down we are doing badly – that's just silly on the face of it.
Considering all the shortcomings of the measurements that are intended to tell us how an economy is doing, how is the U.S. economy really doing?
There's no one answer to that question. And granted, the world is full of "one answers" to that question. What I try to do in the book is help us understand that, first of all, the economy is just a creation of numbers. It isn't a physical, tangible entity that we can easily measure.
If by "the economy" one means GDP, which is usually the default number that people go to to answer the question of how the economy is doing, GDP only measures how much stuff we are making and how much stuff we are consuming at market prices, that we can measure. And those last two parts are probably the most crucial – at market prices, that we can measure.
There's a lot that GDP doesn't include. The limitations of GDP have long been understood, but the degree to which we continue to cleave to it remains pretty much unmitigated.I don’t think there's an answer to how the U.S. economy is doing unless one starts becoming more specific. What is the earning potential of most people relative to their cost of living? How do we even decide what cost of living is? Companies are doing really well. People who are wage earners are not doing so well. Both of those things are true, while simultaneously the GDP could be growing. So, I don’t think there are the answers we would like, which I know is not nearly as satisfying as if I could come up with the perfect other number that would then answer that question. But I think that's a dream world rather than the real world.