The Big Story that is Not a Big Story

It turns out that there is a significant inaccuracy in GDP figures, it has to do with the way that imports are accounted for in GDP:

The fundamental shortcoming is in the way imports are accounted for. A carburetor bought for $50 in China as a component of an American-made car, for example, more often than not shows up in the statistics as if it were the American-made version valued at, say, $100. The failure to distinguish adequately between what is made in America and what is made abroad falsely inflates the gross domestic product, which sums up all value added within the country.

American workers lose their jobs when carburetors they once made are imported instead. The federal data notices the decline in employment but fails to revalue the carburetors or even pinpoint that they are foreign-made. Because it seems as if $100 carburetors are being produced but fewer workers are needed to do so, productivity falsely rises — in the national statistics.

“We don’t have the data collection structure to capture what is happening in a real time way, or what is being traded and how it is affecting workers,” said Susan Houseman, a senior economist at the W.E. Upjohn Institute for Employment Research in Kalamazoo, Mich., who has done pioneering research in the field. “We have no idea how to measure the occupations being offshored or what is being inshored.”

In terms of GDP, this is, for now at least, a pretty small part of the picture, well under 1%, which makes it a small story.

On the other hand, one of the arguments for offshoring is that by shipping jobs to China, where worker and environmental protections are weak, and an under valued currency further subsidizes these imports, is that it allows us to focus on what we are good at, and thus boost productivity and GDP.

The bottom line is, as William Alterman, the assistant commissioner for international prices at the BLS notes, "What we are measuring as productivity gains may in fact be changes in trade."

This is a big part of the story, because the argument for free trade is that it creates, or at least increases, overall well being in our society.

The problem is that the delta from free trade may be grossly overstated, or not exist at all.