Things that smart people don’t know

It would be interesting to make a list of things that smart people don’t know.  Unfortunately, I don’t have enough paper or barrels of ink.  One of my favorites is trade, where smart people think China is an outlier.  Actually, only tiny Belgium has more balanced trade than China:

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Why don’t smart people know this?  Because they don’t bother looking at the data.

Another misconception is that trade deficits are bad.  This article at National Interest caught my eye:

Trump is right to push on trade. A simple return to anything resembling a balanced international trading system would result in massive gains for the United States. What presidential advisors Peter Navarro and Wilbur Ross call the deficit drag depresses the American economy by about 3 percent overall. That is to say, if international trade were balanced, the American economy would be 3 percent larger than it is now.

I had to read this twice, to make sure my eyes weren’t deceiving me.  The Navarro/Ross argument is based on this equation:

GDP = C + I + G + (X-M)

They assume that if X-M is negative 3% of GDP, then this causes GDP to fall by 3%.  Actually it has no effect, because the negative caused by subtracting M (imports) is exactly balanced by a positive to C + I (consumption and investment).  Every time you buy an imported car, consumption rises by the amount of the purchase.  Every time someone buys an imported truck, investment rises by the amount of the purchase.  If you switch from imports to domestic cars, the labor to produce those domestic cars doesn’t just magically appear on the scene, it gets diverted from some other type of production.  Can reducing the trade deficit boost total aggregate demand? No, for standard monetary offset reasons.  But even if I’m wrong, higher AD has no long run impact on employment, for standard “natural rate” reasons.

Yup, this is all just EC101. And yes, Trump’s top economic officials do not know this stuff.  It reminds me of when freshmen in economics get lost trying to write an answer to an essay question:  “Demand goes up so price rises.  The higher price causes demand to fall.  The fall in demand then lowers the price, which causes demand to increase . . .”  Eventually they give up and stop writing, hoping for the curve to allow them to pass the course.

Irving Kristol, who was a supply-sider, founded The National Interest back in 1985.  Perhaps it’s fortunate he passed away in 2009, and did not have to see what happened to his neoconservative journal.  The article was titled:

Trump Is Right: The U.S. Can’t Lose a Trade War

BTW, Trump supporters who care about trade deficits (do they even exist?) might be interested in knowing that Trump’s policies are making the US trade deficit larger.  Or maybe they don’t care.  In fairness, it’s not growing as fast as the budget deficit, which is now rising rapidly. During an expansion.

PS.  The comment section after my previous post reminded me of an old joke.  A guy tells his friend that he has an uncle who insists that there’s an alien from Alpha Centauri who wears a sport coat with pink polka dots, and that lives in a tiny teapot on his fireplace mantle.  The friend responds, “Oh come on, how likely is it that someone from Alpha Centauri would rear pink polka dots.”

Commenters thought the best way to respond to Trump’s latest outrage was to discuss the merits of breastfeeding.

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27 Responses to “Things that smart people don’t know”

  1. Gravatar of Gordon Gordon
    9. July 2018 at 15:41

    The news organizations do a terrible job covering economics. If they were as haphazard in covering physics and medicine, then flat earth and anti-vaxxer beliefs would be treated as valid and physicists and doctors would have as much trouble convincing the public that these views are wrong.

  2. Gravatar of Christian List Christian List
    9. July 2018 at 16:27

    I think Trump’s focus on the trade deficit is a trademark and an “anchor” (sorry, I don’t know a better English term). A bit like his focus on “The Wall”. These are “problems“ that can never be finally solved which is actually nice because it means that you have to remain in office forever to “fix“ them. Similar anchors might be “security“ for conservatives, “inequality“ for leftists and maybe “freedom“ for libertarians.

    I don’t agree with your last post at all. A supra-nationalist, post-democratic organization like the UN should not decide such issues at all. The behavior of the US might look silly to you and one-sided papers like the NYT but those UN decisions have a lot of real-world implications. It’s massive regulation through the backdoor in all fields. I’m not against regulation in general but regulation like this should happen at the national democratic level only. We have more than enough regulation already. I’m glad that a US government is finally standing up against this UN madness.

  3. Gravatar of ssumner ssumner
    9. July 2018 at 16:30

    Gordon, Agreed. BTW, the new Italian government is helping to spread the anti-vaccine hysteria, and (not surprisingly) measles are becoming much more common in Italy.

  4. Gravatar of Christian List Christian List
    9. July 2018 at 16:35


    Trust me, they don’t cover medicine and physics correctly either.

    Secondly economics is not physics. A lot of famous economists oftentimes can’t even agree on the most basic issues. Take the “trade deficit issue” as one infamous example. Scott is completely right that this is not a real-world issue at all. But at least 50% of all relevant economists don’t agree with him on this issue at all. And 50% is a very conservative number.

    Or take his monetarist approaches as another example.

  5. Gravatar of Benjamin Cole Benjamin Cole
    9. July 2018 at 16:47

    In the macroeconomic pantheon, the largest totem of all is “free trade.”

    Even chronic current-account trade deficits must be genuflected to. Heavy incense is burned to eliminate even the slightest scent of nationalism.

    There is a nearby totem, sometimes floodlit and other times not, that federal budget deficits are bad.

    Still, there are credentialed high priests in the temple who sometimes whisper that chronic trade deficits are bad, or that federal budget deficits are benign.

    Some high priests denigrate other high priests as mere econo-shamans or frauds. Are the totems to which I kneel but glorified voodoo dolls?

    Faith is required.

  6. Gravatar of E. Harding E. Harding
    9. July 2018 at 21:08

    Commenters thought the best way to respond to Trump’s latest outrage was to discuss the merits of breastfeeding.

    I would be happy to discuss the merits and lack thereof of American imperialism.

    BTW, the new Italian government is helping to spread the anti-vaccine hysteria, and (not surprisingly) measles are becoming much more common in Italy.

    There has hardly been enough time the Italian government has been in power for it to have made any difference.

  7. Gravatar of ssumner ssumner
    9. July 2018 at 21:30


    “I don’t agree with your last post at all. A supra-nationalist, post-democratic organization like the UN should not decide such issues at all.”

    How does your second sentence follow from your first? I also don’t think the UN should involve itself in those sorts of issues. What’s your point?

  8. Gravatar of B Cole B Cole
    9. July 2018 at 23:41

    OT but topical and fun:

    “Kavanaugh seems most likely to make his mark are in two areas important to Washingtonians—executive authority and administrative law. As befits an executive creature, Kavanaugh’s decisions incline toward the “unitary executive” view of presidential power, which holds that Congress cannot set up federal agencies that are not under the direction and control of the president.” — Atlantic

    The Federal Reserve?

    Of course, law is just politics in drag, so I doubt anything will be done to the independence of the Federal Reserve.

    President Ronald Reagan once advocated placing the Fed into the Treasury Department, but I doubt Trump would be that extreme.

    Or would he be?

  9. Gravatar of Bruno Duarte Bruno Duarte
    10. July 2018 at 02:03

    Sure – but corporate profits and CA turned symmetric (from even paced) in 2008. As financialisation took hold of corporations, either refinancing or reaping the benefits of lower interest rates, investment budgets began to matter more.

    Fair enough, it is not maximising consumer welfare. As financialisation is running at the fastest pace since the 1990s, the choice seems to be between retaining output domestically (if less efficient, more costly) or shipping it abroad. Considering financialisation…

    Charts available here:

  10. Gravatar of Packard Day Packard Day
    10. July 2018 at 05:07

    Trade deficits aside, I have always been very careful about investing too much of my own money in states with no history or tradition for respecting personal property rights. The same applies to placing a great deal of trust on any released numbers or data sets from these “developing” countries. Oh, and did I mention the risk of outright theft of an investor’s intellectual property when located within the shores of these 3rd world states?

    China and Russia certainly come immediately to mind here, but there are others that fit these descriptions as well. What you think is yours today, can and very easily does become the foreign state’s property tomorrow regardless of any published deficits between countries. Caveat emptor…I guess.

  11. Gravatar of Dylan Dylan
    10. July 2018 at 07:50

    In GDP = C + I + G + (X-M) if the (X-M) value is increased by requiring domestic manufacturing the value of C isnt altered as long as the car is still purchased. Ignoring how the variables relate to each other a increase in (X-M) raises GDP right from a purely accounting standpoint? Or am i missing something?

  12. Gravatar of Jerry Brown Jerry Brown
    10. July 2018 at 12:00

    I think what you say about GDP is correct but wouldn’t you have to assume full and optimum use of all available resources in the economy at that time? I mean when Trump was campaigning he was claiming the unemployment rate was anywhere between 20 to 40% if I remember right. So, at least in his bizarro world, the spending on imports could be considered as the equivalent of a decrease in GDP, because otherwise the spending just adds to Consumption or Investment without then being subtracted by Imports. Lot of assumptions in that also…

    I wonder what he says the unemployment rate is now?

  13. Gravatar of Christian List Christian List
    10. July 2018 at 14:53


    My point is that you (and the NYT) are nitpicking and that you are trying to separate points that can not be separated. I couldn’t care less that US diplomats aren’t (allegedly) nice enough to Ecuador in your opinion. The abuse of the UN is evident and must be stopped. It’s a good thing that US diplomats and/or the US administration are getting this point. The shades of niceness don’t really matter, what really counts is that they are finally standing up. And oh boy they do stand up.

    You guys didn’t complain at all when Obama, in his madness, completely alienated Israel and Saudi Arabia, to get his senseless deal with Iran. Israel and Saudi Arabia are just our closest (and only relevant) allies in the region but this never mattered to you guys.

    I find it astonishing (and completely shocking) that a madman like Trump is capable of a foreign policy that (as of yet) is more reasonable than the one of Obama and his elite buddies ever was. That’s the really shocking part to me in this troubled times: A madman has a clearer view of reality than the so-called “reasonable” guys. I wish so much that it would be the other way around, but unfortunately it isn’t so.

  14. Gravatar of Richard A. Richard A.
    10. July 2018 at 16:22

    Exports and imports are tied together. When we buy their exports, they now have our money which they use to buy our exports. If Trump suppresses M with tariffs, X will be suppressed by an almost equal amount and that is without retaliation.

    Japan has a zero tariff rate on autos compared to our 2.5%, and 25% on light trucks that the trump administration doesn’t talk about. They accuse the Japanese of having non-tariff barriers on autos but that would be WTO illegal. They won’t take this to the WTO because Trump, Ross, and Navarro are lying.

  15. Gravatar of Ted Ted
    10. July 2018 at 16:53

    A short play

    Starring Scott Sumner and Peter Navarro

    Written by Ted

    The curtains open onto the following scene: We produce stuff. Most of that stuff we use ourselves. Some that stuff we trade for other people’s stuff, which we then use. And occasionally, to get other people’s stuff, instead of giving them our stuff, we give them promises for future stuff (or stuff that stays here, that they have to come visit in order to use).

    Navarro: “Yo. I have a great idea. Have you noticed that we’re promising to give stuff to other people? Like, what if instead we didn’t promise to give them stuff? Then, like, we’d be richer because we wouldn’t owe them stuff. I’m a genius.”

    Sumner: “Wait up, yo. If we stop promising other countries stuff, they’ll stop giving us stuff in exchange for those promises. So, really, we’re not gonna be any richer. All of our gains from owing fewer promises is balanced by not having the stuff they shipped us in exchange for those promises. And even if we redirect our efforts to making the stuff they used to ship us, that means we’ll probably be making less of our other stuff as result.”

    Steelmanned Navarro: “Yo. Hold up. You’re misinterpreting. I’m not saying that lower trade deficits make us richer necessarily. I’m saying that if we hold everything else constant, except for how good we make stuff, then if we get so good at making stuff that we don’t have to make promises anymore, *then* we’ll be richer. That’s what I mean when I say we’d be 3% richer if we got rid of our 3% worth of promises.”

    Steelmanned Sumner: “Yo. You’re dumb. Why would you hold everything else constant? And, duh, of course if we can get good at making stuff we’ll be richer. Really your argument is that if we get good at making stuff we get richer, not that if we get rid of our promises to other countries we’ll get richer. Even if getting rid of promises is correlated with getting richer, your causation is backward – getting richer might make us use fewer promises, but fewer promises doesn’t cause us to get richer.”

    Steelmanned Navarro: “Yo. You’re misinterpreting me again. I’m not saying things that true, I’m saying things that aren’t obviously untrue so that outside media and observers don’t realize how dumb I am. This was never about Truth, Steelman Scott.”

    Steelmanned Sumner: “Of course, Steelman Navarro, on this we can finally agree. It’s never about Truth. I was not arguing against your truth statements earlier, I was signalling to my readership that I, and by extension them, are smarter and higher status than a truth flouter like you. This is how we feel good about ourselves. I’m not trying to change the world, I’m just trying to take actions that aren’t obviously not changing the world so that we can believe in a communal fiction where blogging and other forms of internet conversations aren’t total wastes of time, as measured by the real-world consequences that ensue.”

    Steelmanned Navarro: “I’m glad we agree that we live a post-Truth world where nothing matters, life is meaningless, and reality itself is denied. Yo.”

    Steelmanned Scott: “Yo.”

    [None of this is meant in any spirit other than mirth and friendliness. I hope no one is offended. If you are, I am happy to delete.]

  16. Gravatar of art andreassen art andreassen
    10. July 2018 at 17:48

    Scott: I take it that you therefore accept the arithmetic calculation that indicates that PCE is 70% of GDP? You are correct that if PCE doubled its Imports then PCE and Imports would simultaneously increase and offset each other’s impact on GDP. However, the employees that created the added PCE would be foreign workers not US. See Chentrens, Andreassen “Induced Consumption: Its Impact on GDP and Employment” Federal Forecasters Conference, 2009.

    PCE is not 70% of GDP because Imports are subtracted from total GDP but are not removed from PCE.

  17. Gravatar of ssumner ssumner
    10. July 2018 at 21:19

    Jerry, No, because when interest rates are positive the Fed offsets any impact on AD.

    You asked:

    “I wonder what he says the unemployment rate is now?”

    After taking office, they immediately started saying the unemployment rate was only 4.5%. I recall Sean Spicer jokingly implying that Trump’s comments during the campaign were just lies. But then Trump’s supporters say he never lies.

    Christian, You said:

    “what really counts is that they are finally standing up.”

    Do you have any idea how idiotic this sounds? Trump is Putin’s poodle; a big bully to tiny Ecuador, but afraid to criticize Putin. He’s afraid to threaten sanctions on Russia for promoting breastfeeding. And you call that “standing up”?

    If I kick a baby girl and run away from a grown man, does that make me macho in your eyes?

    “to get his senseless deal with Iran.”

    As compared to Trump’s sensible deal with North Korea? The one that has already fallen apart after we gave in to them on training exercises, and they backtracked on denuclearization? Seriously?

    Iran has lots of problems, but they actually refrained from getting nukes.

    And don’t look now, but Trump is showing signs of caving on Iran. Seems he’s worried high oil prices might hurt the GOP in the midterms. Look for sanctions on Iran to be relaxed. The midterms are more important than America’s national security.

    Richard, Agreed.

    Art, I have no idea what you are trying to say.

  18. Gravatar of ssumner ssumner
    10. July 2018 at 21:30

    Dylan, You said:

    “requiring domestic manufacturing”

    What a great way to boost GDP. Why didn’t Argentina think of that? Seriously, it’s not that simple. Just passing a law requiring firms to produce more doesn’t magically cause total GDP to rise.

  19. Gravatar of Britmouse Britmouse
    10. July 2018 at 21:45

    I have always wondered whether the obsession with cutting trade deficits is anything more complicated than simple linguistic (mis-)interpretation – a deficit meaning something missing, something we’ve lost, something bad – hence, “cutting the deficit” is obviously desirable and good.

  20. Gravatar of Anonymoose Anonymoose
    11. July 2018 at 05:09


    Do you really think that the US gave up anything material in cancelling a few training exercises with South Korea? They can still be resumed at any time.

    Are you aware that the breastfeeding resolution which Russia introduced was materially softer than that which Ecuador introduced?

  21. Gravatar of art andreassen art andreassen
    11. July 2018 at 09:25

    Scott: Sorry, I got thrown off by your rationalization that we don’t have to worry about imports because: A) it’s our fault, we spend too much, or B) an increase in imports translates into a balancing increase in one of the demand components. The latter reason seemed to imply that that was good for GDP and employment. Unfortunately GDP does not increase only the percentage take of of the purchasing component does. I would rather the US had the problem China and Germany has of finding employment to match demand in house rather than by imports.

  22. Gravatar of Scott Sumner Scott Sumner
    11. July 2018 at 09:57

    Britmouse, Good point.

    Art, The Eurozone has the world’s biggest CA surplus. We have the world’s
    s biggest CA deficit.

    We have 3.9% unemployment, while the Eurozone has 8.4% unemployment.

    I’ll take our system.

    And I never said “we spend too much”.

  23. Gravatar of Doug M Doug M
    11. July 2018 at 13:07

    You hit on one of the big holes in the way that EC 101 is taught.

    The Keynesian demand side economics.

    We start with.

    Y = C+I+G+(X-M)

    And then say that if we can boost C, I, G, or (X-M) we can boost Y.

    But this only works if there is unemployment (and more than frictional unemployment). If the economy is near capacity, boosting some element of demand, that demand can only be filled if some other demand is left unfilled. This nuance is entirely overlooked in most intro to economics classes. Even some senior economists seem to be lacking in this fundamental piece of information.

    As for the statistics, everyone lies. If you add them all up (which I haven’t actually done) I will wager that they will show that the world is a net exporter. So, who is importing? Mars?

  24. Gravatar of بلیط هواپیما, خرید بلیط هواپیما,بلیط هواپیما خارجی,ایران چارتر، بلیط چارتر, رزرو بلیط هواپیما, قیمت بلیط هواپیما, خرید اینترنتی بلیط هواپیما بلیط هواپیما, خرید بلیط هواپیما,بلیط هواپیما خارجی,ایران چارتر، بلیط چارتر, رزرو بلیط هواپیما, قیمت بلیط هواپیما, خرید اینترنتی بلیط هواپیما
    12. July 2018 at 04:30

    @Eric – It can be any Chase card in theory.

  25. Gravatar of Jerry Brown Jerry Brown
    12. July 2018 at 08:48

    ” when interest rates are positive the Fed offsets any impact on AD.”

    Scott, aren’t you then assuming that the economy is always where the Fed wants it to be? And assuming that the Fed will always try to offset fiscal (or trade) policy? And assuming that the monetary offset will always be successful?

    But anyways, how can it be that increased aggregate demand would not have any long run effects on demand for labor and therefore employment if you aren’t also assuming that the economy is at, or usually operates at, full employment?

    And I don’t want to be real critical, but if I said ‘God would offset that’ every time someone asked me about something… well, you know.

  26. Gravatar of ssumner ssumner
    12. July 2018 at 10:35

    Doug, Good points.

    Jerry, You said:

    “Scott, aren’t you then assuming that the economy is always where the Fed wants it to be?”

    No, I’m saying that when interest rates are positive, the expected future growth in demand is always where the Fed wants it to be. Is that even controversial?

    BTW, people discussing this issue seem to not understand that dozens of countries have tried this protectionist approach, and it hasn’t worked. Check out India in the 1960s, or Argentina for much of the 20th century. People write as if it’s debatable as to whether you can cause long run economic growth by boosting AD, or relying on protectionism. It’s not even an open question.

  27. Gravatar of Jerry Brown Jerry Brown
    12. July 2018 at 14:16

    Yes Professor, it is controversial, or at least debatable, as to how effective monetary policy actually is. What does “expected future growth in demand” and the Fed’s putative ability to set that wherever it wants it to be even mean? Expected demand is not actual demand and just who is it that counts as far as these expectations anyways?

    As far as President Trump’s policies- I disagree with them. But I do look at history and think that countries like the UK and the US and Japan more than kind of had protectionist policies while they industrialized. And I ask- if you do not believe that an economy always returns to full employment all by itself and spends the majority of its time at full employment, how can you rule out boosting AD as a possibility of creating actual growth? If I have gotten anything from reading that god awful (to read at least) book by Keynes, it is that economies do not always trend to full employment.

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