GDP and Other Mysteries

An Interview with Zachary Karabell

The whole idea that something is made in one country and then either consumed in that country or sold to another country might have been true in the 1950s. Today, very few products -- certainly very few manufactured goods and services -- are actually made in any one country. And much of what China sends the U.S. that shows up as part of our $200- to $300-billion trade deficit, well, a lot of what we buy from China are products made by American companies sourcing their production to China. The iPhone, for instance, adds billions of dollars to the U.S. trade deficit with China every single year. Every time you buy an iPhone, every time you buy an iPad, it shows up statistically as two, three hundred bucks leaving the United States and going to China.

But the idea that those items were made in China in any fundamental sense is highly questionable, if not completely flawed. The OACD, the Asian Development Bank, and some individual economists have really started to look at this question. If something is assembled in China from parts that were made in five or six different countries with intellectual property that came from somewhere else, how much of the money that is ascribed to China for that object actually ends up in China? For the iPhone or the iPad, it’s probably less than $10 of a $600 or $700 retail product and a $200-plus wholesale product.

If only $10 is going to China, where is the rest of the money going? It’s going to Infineon, a German chipmaker. It’s going to Qualcomm, a U.S. chipmaker. It’s going to Samsung, which actually, even though Apple and Samsung fight, they still provide chips and property for each other’s devices. And it’s going to Apple, which provided the intellectual property and the marketing in the first place. You wouldn’t know any of that from the trade numbers because we have no way of breaking down tens of thousands of manufactured goods into their component parts.

Just to add to the complexity, not only does the trade deficit, in this respect at least, overstate the amount of money that’s leaving the U.S. and going to China and how much China is benefiting, there’s also the whole service economy to be accounted for. That doesn’t show up monthly. It does show up yearly, but it’s kept track of by a completely different organization within the government.

If a Chinese tour group comes to San Francisco, the way that gets calculated is as a U.S. export to China: the Chinese are coming here. If they come on an American carrier and they stay in a U.S. hotel and they buy stuff in the U.S., we have exported tourism services to China. This ought to offset some of that monthly trade deficit in goods. But those are kept as totally separate accounts, which you’d never know unless you were highly wonky.

OR: Do you think we actually have a trade deficit with China?

Karabell: Until we have a better way of doing this -- and honestly, we’re not going to have a better way of doing this in the next five to 10 years; no one’s going to pay for this -- we’re dealing with a framework that in my view is so inherently flawed given the world we’re actually living in as to be more harmful than useful.

OR: Early in your book you point out that there was a recent restatement of the way in which GDP is calculated.

Karabell: Yes.

OR: You point out that there was a major change: the equivalent of the size of the economy of Norway, you say.

Karabell: Yes.

OR: Can you talk about the concept of these statistics as moving targets and the methodology itself being revised over time?

Karabell: In the summer of 2013, the Bureau of Economic Analysis, which is the U.S. agency responsible for releasing and calculating GDP -- and which has been revising its methodology for GDP constantly over the past 30 or 40 years -- announced that, in fact, the U.S. economy was (statistically speaking) $400 billion bigger than it had been before, i.e. about three percent of GDP.

Now, it’s not as if everyone just got $400 billion richer. This was a statistical adjustment that said, “Just as we fail to calculate the intellectual property that Apple puts into its iPhones when we look at the trade deficit, we fail to capture the intellectual property development that companies and artists and all sorts of institutions do as part of our GDP.” They had been, until that summer, treated purely as expenses as opposed to consumption or investment. If you spent $10 million on R&D in a company to develop a drug or to develop a new device, that expenditure wasn’t counted toward GDP, it was just counted as a business expense.

But the money you spend to create that is like building a plant in the 1950s. Today’s version of building a factory is spending billions of dollars developing a drug or developing a new device or some information technology, so that the physical form that that investment takes isn’t a building or a factory, it’s an idea -- an idea that then yields future return. And we ought to be counting that as part of our output, and that’s exactly what happened.

And then the Bureau of Economic Analysis went back to 1929 and did its best to revise all prior GDP to reflect this difference, so as not to make it look like GDP just bumped up three percent in the summer of 2013. Nor of course did that new number make any of us actually more wealthy. We were three percent wealthier than we thought, at least in terms of per capita income. But so what?