A Few Economic Misconceptions

MSN Money recently published an on-line article by Morgan Housel in which these misconceptions were reported and dashed:

1. Most American consumer spending is on products made in China
2. Most of our national debt is owed to China
3. We get most of our oil from the Middle East

You might be surprised to learn each of these is not correct and by a long shot! Housel found the following facts reported by the Federal Reserve:

Fact 1: Only 2.7% of our personal consumption goes for Chinese goods. An impressive 88.5% of US consumer spending is for American made goods and services.  

Fact 2: China owns $1.14 trillion of our national debt which totals $14.4 trillion. Japan owns $937 billion, while the United Kingdom owns $397 billion. The Federal Reserve owns $1.6 trillion. Astoundingly, the Federal government owns a total of $4.4 trillion of the debt which they borrowed from their own trust funds (Medicare, Social Security, and others)

Fact 3: Oil from Middle Eastern countries total 9.2% of all oil consumed in the USA. We consume 19.2 million barrels of oil each day and 49% of that comes from within our national borders. Canada and Mexico provide 18.5% of our daily oil consumption. We still absorb another 24% of our consumption from other nations; our reliance on foreign supplies is a problem that still needs to be fixed. Our over-consumption heats world demand for oil and drives up both the price and geopolitical tensions.

What this brief discussion raises our attention to are these:

• We are not in as bad a situation as we assumed with regard to China
• We are not as dependent on Middle Eastern oil as we had thought
• Our national debt has interesting components which most of us did not know and raises even more questions political and ethical

Some comments:

1. Our trade imbalance is out of whack. We should bring it closer into balance; imbalances are OK as long as they are not huge as they are today
2. Trade imbalances should be diversified throughout the globe, not concentrated with a few nations
3. Foreign trade allows our consumers to acquire goods much cheaper than domestic goods; this increases our standard of living while our higher cost labor is employed in producing higher economic goods (only helpful if our labor pool is well employed!)
4. Trade imbalances when critical enough provide economic incentive for domestic producers to innovate and compete effectively with foreign suppliers

I read recently where our national gross domestic product is actually higher and growing steadily. That is being accomplished with drastically reduced labor requirements, hence unemployment. Technology and innovation in production techniques has made our national productivity the envy of the world. That is a very good thing.

The bad side of this issue is the slow rate of re-employing labor displaced by productivity gains toward new industries or products. This sluggishness may be caused by the following elements:

• Low confidence in future growth depresses willingness to risk investment in new products, industry and technology
• Re-training and educating the idle workforce is a slow process; knowing where the new opportunities will be is a risk to individuals trying to retool their skill sets for new employment
• Slow rate of adapting educational offerings to emergent needs
• US housing/mortgage mess that needs repair if we wish a return to a stronger economy

International trade is a fascinating topic for later examination but let us understand a few basics. First, exporting our goods to other lands keeps our employment rates high; second, our goods in other lands raise their quality of life; third, our trade with other nations provides us with foreign currency or credits which we use to buy raw materials, services and goods from them, thus boosting their economic activity; fourth, foreign nations provide us with a continuing and growing market for our goods.

Large swings toward imbalanced foreign trade are a problem for all nations to correct. Natural market forces will tend to resolve these imbalances but some imbalance during the short term is normal and to be expected. Some solutions loom large and slow their acceptance: reducing our foreign oil appetite in the long run will be solved by replacing oil as an energy source, not drilling for more.

With a deep breath and renewed confidence in the future we can take advantage of the opportunities ahead of us. Challenges, of course. Doom? Not by a long shot. But first we have to understand and believe that things are not as dire as they seemed.

Not a bad reality check from time to time!

November 1, 2011