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So, how are we doing?

April 20, 2013 - Harry Eagar
About 45 years ago, when I was trying to learn how economies work, I subscribed to the Journal of Economic History and read each issue through. (I am pretty sure I was the only non-academic who subscribed and also pretty sure that nobody read the whole thing the way I did for about 3 years.)

A lot of the articles were by doctoral or master's candidates trying to construct price series for different places and times. (These familiar "deflators" are used to say what a dollar or a guilder today is worth compared to 100 or 400 years ago.)

What I learned from that is that a) it is challenging to build a series; b) you have to guess at or assume some of your inputs; and c) you end up with a simple number that conceals as much as it reveals.

This is hardly a brilliant insight. Stephen Jay Gould used it to demolish the concept of IQ in "The Mismeasure of Man"; and anyone who looks even briefly at the climate fearmongers' work learns that the so-called temperature series they rely on are largely faked.

Still, people (and I'm lookin' at you, fellow newspapermen) are transfixed by simple numbers the way birds are said to be immobilized by the gaze of a snake.

All this by way on introduction to a read-the-whole-thing op-ed in the Washington Post by Zachary Karabell making the same point about economic series generally. If anything, economic stats are even dicier than climate numbers. Take, for example, the iPhone:

"Take trade statistics. These strongly shape our sense of whether the United States is competing effectively in the global economy. The most sensitive of these is the annual trade deficit with China, which has led to considerable animosity and hand-wringing over the past decade and has yawned wider as the U.S. economy has sagged.

"Apple, that icon of American innovation, famously does not make its devices in America. It outsources production to factories in southern China, where its largest contractor, Foxconn, has come in for significant international criticism over the way it treats workers. And each time an iPhone is shipped from those factories to the Port of Long Beach, it adds about $200 to the trade deficit between the United States and China.

"Or so the official statistics tell us. But are they right?

"Surely, they are correct about the $200, which is — give or take — the declared wholesale value of the phone. Surely, that is correctly ascribed to China under the rules of the World Trade Organization, which dictate that a country of origin for a manufactured product is the place where it has undergone its last “major transformation.” But does that mean, as the numbers say, that $200 has simply left American shores to end up in the pockets or vaults of the Chinese? No, it does not.

"Trade statistics, compiled in the United States by the Census Bureau, are based on straightforward reporting on customs forms, adhering to standards that have evolved over decades and are now codified by the WTO. But they stem from an earlier era, when something made in country X was, indeed, made in country X.

"Today, however, many intricate manufactured goods are made in multiple countries. As companies such as Apple seek the least expensive and most efficient supply chain, various components and parts are made all over, shipped to a factory where they are put together and then sent to their final destinations. Foxconn may run the factories where the iPhone is assembled, and it may operate in China, but only in the world of static trade statistics is China where the iPhone is 'made.'

"In recent years, various academics and trade groups have attempted to break down the components of an iPhone and an iPad to determine where the money goes. The estimates vary but all indicate that only a fraction of the final price tag goes to China, as little as $10 per device, and those devices retail for more than $500 (before carrier rebates). The rest of the money goes to a web of suppliers based in Germany, Taiwan, Malaysia, Korea and the United States — and above all to Apple, the creator of the idea and provider of the intellectual property that made the devices possible. Almost none of that complexity, however, is visible in trade statistics.

"Worse, those numbers make it seem as if China is accruing advantages that it is, in fact, not.

"Statistically, of course, these devices do benefit China. Every iPhone sold in the United States adds about $200 to the U.S.-China trade deficit, and each iPad adds $275, at least according to economists who looked at the issue in 2010. That means that Apple sales of the iPhone in the United States add billions of dollars to the trade deficit with China every year. But if the numbers reflected the complexity of the supply chain as well the intellectual property provided by Apple, much of this benefit would evaporate.According to the Asia Development Bank, if the official figures incorporated a more accurate measure of value added, the balance of trade for the iPhone alone would be a paltry $73 million for China instead of billions. Similar studies have been done by the WTO and Organization for Economic Cooperation and Development."

So the next time some Tea Partier says the debt is unsustainable, ask him how he knows that.


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