The U.S. trade deficit has been trending up over the past year, and the goods deficit is now at the highest level since November 2008.  While a large and persistent trade deficit is not a good thing for the American economy, the recent trend should not itself be particularly alarming: at this point, we are merely retracing declines in the deficit that came as a result of the economic downturn. The recent increases in the deficit can be seen as symptoms of an improving U.S. economy that is consuming more goods and services, and importing more to meet that demand.

That said, we should consider how we are funding this increase in imports.  The last two expansions in the trade deficit corresponded with asset bubbles: the tech bubble and the housing bubble. U.S. investment outpaced U.S. saving, and foreign investment made up the gap-- and the influx of money enabled the United States to buy more from abroad.  Where are we getting the funds to increase our imports now? Part of the answer may be that households are consuming more and saving less (savings rose during the recession), but another source may be government debt. U.S. Treasuries fared well during the crisis, as investors turned to them in a flight to safety.  If investment in U.S. government debt really is a driving force of the increase in the trade balance, this could be concerning, because, while we certainly don't want investment bubbles in any asset type, we should generally prefer to go into debt in order to increase future growth.  Taking investment from abroad is great if it increases future growth in the tech sector; if it is fueling consumption that won't translate into future growth, it is concerning.

One could argue that the government stimulus policies are indeed an investment in future growth, because they have prevented a potentially devastating depression.  However, as the economy starts to turn around, I think the United States will need to tackle the discrepancy between domestic saving and domestic investment and consumption.

To note, Ghana is doing its part to help the U.S. trade balance: the U.S. is currently running a surplus with Ghana.  Main exports include petroleum products, mining equipment, and cars.  If you all will send some more Parmesan cheese this way, we can do even better!

The Council of Economic Advisers has released the 2010 Economic Report of the President.  You can find a link to the full report, as well as a summary of the highlights, here. 


Quick summary: The economy was a mess when President Obama came into office, because of problems that were a long time in the making, including stagnating middle class incomes, rising health care costs, and flawed and under-regulated financial markets.  The economy is still not great, with a slow recovery and lagging job formation expected, but it is in better shape than it would have been if the stimulus bills had not been implemented.  We should still do more.  Pass jobs support and health care reform now!

Today I attended a World Bank training on survey methods in developing economies.  (I would just like to say, the World Bank has great food, and where do they get their papaya, because when I buy papaya here it always tastes funny.) 

One interesting bit of the training seminar had to do with calibrating surveys to adjust for differences in perceptions or attitudes among respondents.  To get a more concrete idea of the problem, imagine asking two people to rank their health from 1 to 10.  The first person is a young, Olympic athlete with a cold and sprained ankle, who rates her health as 5.  The second is an old, barely mobile man who had a good day and was able to do a lap around his building with his walker. He ranks his health as 8.  Is he really more healthy than the athlete? No, but the respondent's relative baseline matters.  

An example from actual research: Gary King, Christopher Murray, Joshua Salomon, and Ajay Tandon asked survey respondents in China and Mexico to rate their ability to participate in governance. Chinese respondents, on average, ranked their political efficacy higher than Mexican respondents. 

Few people would really believe that citizens have more political efficacy in China than Mexico. More likely, what Chinese citizens considered to be a "high" level of efficacy was different from what Mexican citizens considered to be a "high" level of efficacy. The researchers devised a way to account for differences in the respondents' relative baselines. They used vignettes, or stories illustrating a particular level of political participation, and asked respondents to compare themselves to the hypothetical.  Using this method, Chinese respondents ranked their political efficacy lower than Mexican respondents, on average.

Similar use of hypothetical vignettes can be used in surveys on other topics, including health, access to resources, education, etc., to ensure that respondents interpret questions similarly, and that their responses have the same meaning. 

I just came across this rather wacky article about how buying holiday gifts is bad for the economy: http://articles.moneycentral.msn.com/Investing/top-stocks/blog.aspx?post=1498404&_blg=1,1498404. Is this true? I will recap the main arguments, and tell you whether they are true or false. 


#1. Gift-giving is inefficient. 
True. The economic paper The Deadweight Loss of Christmas theorizes that when you buy someone a gift, it is likely that if they had had the money instead, they would have bought something different.  This means that your gift is less efficient than just giving them the money.  However, the paper also points out that gifts can actually be MORE efficient in some instances-- for example, because the item is a gift, it may have sentimental value beyond its purchase price. However, the main problem with this argument is that it confuses microeconomic efficiency with macroeconomic benefits.  If consumers spend more as a result of gift-giving than they would if they only bought items for themselves, then this is good for the macro economy, and good for creating jobs. 


#2. Consumption is less of the economy than we think, because the middle steps of production aren't counted.
Bizarre. I don't think the author understands the concept of GDP and how it relates to consumption at all. GDP is the total value of everything produced in the United States. You can't count the middle steps, because that would be double-counting. We count GDP by measuring the four things that we can do with what we produce: consume it, invest it, import it, or use it in the government. Those four things drive demand for our goods and services.  Yes, there are middle steps-- but no one would pay people to cut lumber for couches if someone wasn't eventually going to buy the couch.  So when economists say consumption is 70% of the economy, consumption really is 70% of the economy-- or at least it drives 70% of it. 


#3. Consumer confidence is misleading because the survey only asks 6 things.
False. Complain about how many questions there are all you want, but the consumer confidence indices that come out of those questions have shown themselves to be accurate reflections of how the economy is behaving. Next time you want to complain about an indicator, show me evidence that it contains no information. 


#4. The seasonal upward trend in the stock market isn't due to gift shopping.
Who cares? There is no reason to expect it would be.  Market participants know that consumption goes up in December, so that would already be built into prices.  Stock prices might rise if retail numbers were much stronger than market participants expected (or might fall if they were weaker.)  But none of that is a reason that gift shopping is bad, if gift shopping raises overall consumption.


There is a real reason gift-giving can be bad: we can't afford it.  If purchasing gifts drives consumers into debts they would not otherwise have, it is probably not good for individuals.  It may be bad for the United States as a whole as well, since low saving is a driver of the trade deficit.  However, if you can afford it, and you feel so moved, don't be a Scrooge-- go buy that gift and encourage job growth! 

The preliminary estimate of GDP growth was revised down this week from 3.5% at an annual rate to 2.8%.  While we'd clearly rather have the higher number, 2.8% is still pretty good compared with recent quarters.

What's behind the revision? New, better data indicate that personal consumption rose less than initially estimated.  Also, imports, which don't count towards U.S. GDP, were a larger share of the increase in consumption.  On the plus side though, exports rose more than the preliminary GDP report estimated.

While the increased imports mean a lower estimate of U.S. GDP, they can still be seen as good news for our trading partners.