Lies, Damned Lies, and Corporate Statistics

CSI, or Crime Scene Investigation, is a very popular, extremely boring (IMHO) television show.

Paul Krugman uses it as the title of his column today on the trade deficit:

CSI: Trade Deficit (behind the TimesSelect wall)

Here's the puzzle: the trade deficit means that America is living beyond its means, spending far more than it earns. (In 2005, the United States exported only 53 cents' worth of goods for every dollar it spent on imports.) To pay for the excess of imports over exports, the United States has to sell stocks, bonds and businesses to foreigners. In fact, we've borrowed more than $3 trillion just since 1999.

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How is this possible? The answer, almost certainly, is that there's something wrong with the numbers. (Laypeople tend to treat official statistics as gospel; professional economists know that putting these numbers together involves a lot of educated guesswork — and sometimes the guesses are wrong.) But depending on exactly what's wrong, the U.S. economy either has hidden strengths, or it's in even worse shape than it seems.

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There's something wrong with this picture. As Daniel Gros of the Center for European Policy Studies puts it, it's hard to believe that foreigners would continue investing in the United States "if they were really being constantly taken to the cleaners."

In a new paper, Mr. Gros argues — compellingly, in my view — that what's really happening is that foreign companies are understating the profits of their U.S. subsidiaries, probably to avoid taxes, and that official data are, in particular, failing to pick up foreign profits that are reinvested in U.S. operations.

If Mr. Gros is right, the true position of the U.S. economy isn't as bad as you think — it's worse. The true trade deficit, including unreported profits that accrue to foreign companies, isn't $800 billion — it's more than $900 billion. And America's foreign debt, including the value of foreign-owned businesses, is at least $1 trillion bigger than the official numbers say.

Shorter Krugman: There's a light at the end of the trade deficit tunnel, and it's a train.

Link to full article: Middle Earth Journal