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June 03, 2007

I Can Get Mad About Anything

Right now I'm mad at Fareed Zakaria for writing this:

For those who look at the future and see challenges, competition and threats, keep in mind that this new world has been forming over the last 20 years, and the United States has forged ahead amid all the turmoil. In 1980, the U.S. share of global GDP was 20 percent. Today it is 29 percent.

Zakaria likes this little factoid. Here he is using it (with a different number for 1980, weirdly enough) in 2002:

In 1960, the United States' share of world output was thirty per cent; by 1980 it had dropped to twenty-three per cent; today it is twenty-nine per cent.

This may be accurate using market exchange rates. But it's nowhere near right using purchasing power parity. Here's a graph using PPP from the Economist:

So which is the better yardstick? Let's ask the World Bank:

Purchasing power parities
Purchasing power parity (PPP) conversion factors take into account differences in the relative prices of goods and services—particularly non-tradables—and therefore provide a better overall measure of the real value of output produced by an economy compared to other economies...

Market exchange rates
The total GDP data shown here measured in current U.S. dollars use annual, market exchange rates. This means that the values and derived rankings are subject to greater volatility due to variations in exchange rates. Inter-country comparisons based on GDP at market prices should, therefore, be treated with caution.

And the IMF:

Advantages of PPP. A main one is that PPP exchange rates are relatively stable over time. By contrast, market rates are more volatile, and using them could produce quite large swings in aggregate measures of growth even when growth rates in individual countries are stable. Another drawback of market-based rates is that they are relevant only for internationally traded goods...PPP is generally regarded as a better measure of overall well-being.

And the OECD:

What are the major uses of PPPs?
The major use of PPPs is as a first step in making inter-country comparisons in real terms of gross domestic product (GDP) and its component expenditures...Calculating PPPs is the first step in the process of converting the level of GDP and its major aggregates, expressed in national currencies, into a common currency to enable these comparisons to be made.

What are the drawbacks to using exchange rates to convert GDP to a common currency for making international comparisons (e.g. of production or productivity)?
[E]xchange rates do not simply reflect the relative prices of goods and services produced in a country...the PPP approach is preferred conceptually in such cases...As with a time series of GDP at constant prices, it then becomes possible to compare the underlying volumes.

And the Bureau of Labor Statistics:

Because exchange rate movements, in general, tend to be more volatile than changes in national price levels, the purchasing power parity approach provides the proper basis for comparing living standards and examining productivity levels over time

The problem here isn't that Zakaria made a mistake. It's that he would never make a mistake like this in the other direction—i.e., something that made the U.S. look worse than it is. You don't get to be International Editor of Newsweek and host of your own program on PBS and on the board of Yale without having a tendency toward saying inaccurate, self-congratulatory crap about America.

Moreover, to really rise in those circles, it has to be inaccurate, self-congratulatory crap that's no more than two sentences long. Anything more will tax the attention span of the person you're talking to at the reception at the Council on Foreign Relations. Kudos to Zakaria for really honing his skill in this area.

Still, it's not a good thing for countries when their institutions select for people who tell pleasing fairy tales rather than the truth. For instance, such countries often get involved in land wars in Asia.

Posted at June 3, 2007 03:47 PM | TrackBack

But they invite the fairy-tale crapspinners in with other kool kidz to help plan those wars. So they go into them with reeeally high self-esteem. Doubts are icky.

Posted by: Nell at June 3, 2007 07:32 PM

Fareed Zakaria has always been a hack. Anyone who says and/or thinks different was and is living in a fools paradise.

How else would a 'darkie-from-over-there' hold respectability deep in the heart of the Empire of the Frat Boy?

Posted by: at June 4, 2007 10:43 AM

Seems like more than our fair share however you count it.

Posted by: John at June 4, 2007 08:54 PM