Bernanke’s point is that in the second quarter households, the government, and investing businesses bought one-half percent more goods and services than U.S. producers made and U.S. businesses (net) imported. Thus inventories are now below levels that businesses think they need to run their operations efficiently. In the next several quarters, therefore, businesses are going to ramp up production in order to build their inventories back to a comfortable level. This is an important thing to notice.
Credit also goes to Mark Thoma for pointing out something Tamny and Lawrence Kudlow never understood – that the law of scarcity applies to macroeconomics as well in the form of a full employment constraint.
Since Brad and Mark have so ably corrected the two most egregious problems with Tamny’s most recent demonstration of his complete lack of understanding of economists, it’s left to this Angrybear to pick up on the remaining morsel:
Indeed, a major reason why our economy continues to outperform those of other countries has to do with the fact that just as our companies don’t limit themselves to the “available” U.S.-based labor force, they similarly are not hamstrung by the “output gap” beliefs held by Bernanke – beliefs that assume growth is limited to static estimates about our domestic production capacity. In truth, as commentators like Lou Dobbs continuously remind us, U.S. companies regularly source jobs and manufacturing outside the United States.
Even though I’ve already left this comment over at Mark’s blog, permit me to repeat myself. Tamny seems a little confused as to national income accounting. Let’s suppose IBM outsources tasks to an Indian subsidiary that hires Indian workers. The employment income received by those workers is not part of U.S. national income. And let’s suppose the subsidiary’s assets are financed by a combination of loans from Indian banks and equity issuance to Indian shareholders. Much of the operating profits would be recorded as Indian income. And yet Tamny thinks Indian generated income is part of U.S. GDP?