Mailbag: Scale of Econonies

Today I'm traveling to North Carolina for a week of talks with my friend Joe Minicozzi. If you are in the Piedmont Region, please make sure and check out one of the many events. I spent all last week disconnected so I could focus on a major writing project (can't release details yet, sorry) and so the early morning rise allowed me to get caught up on some podcasts/news on the way to the airport. 

Got this really amazing question in my inbox, which I'm going to share with you and then try and get back to offer my thoughts here shortly, maybe even in flight. In the meantime, please provide your two cents.

Hello Chuck,

I’m writing to you about an economics problem that has puzzled me for years.

Economists apparently think that rising new cars sales are a sign of a good economy, even when this happens in a state like Maine where there are no auto assembly plants, and very few auto parts plants.  For example, the Morning Sentinel, published in Waterville, ME, carried an article on Sunday, June 23, titled “Retail sales rise spurs hope of growing recovery”, with the subtitle, “Automobile sales driving increase”.

But to my way of thinking, rising auto sales in Maine are NOT good for Maine’s economy, and are, in fact, very bad for Maine’s economy.  The big problem, of course, is that we don’t make any of the new cars here, and very few of the parts that go into new cars, so how can rising new car sales be good for the local economy?

As I see it, every new car sold in Maine is, in effect, an imported car, and probably 85% of the sale price for each new car is almost immediately drained out Maine’s economy.   How can this be good for the local economy?

Maine also has no oil wells, no oil refineries, no tire manufacturing plants, no battery manufacturing plants, etc.   Therefore, most of the money spent on these products also leaves the state in a matter of days.  How can this be good for the local economy?

Maine has roughly one million registered motor vehicles.  AAA has estimated the average annual cost of owning and operating a motor vehicle at roughly $9,000 per year.  So, if we multiply these two numbers together, the total cost for owning and operating all the automobiles in Maine is in the range of $9 Billion per year.

If 80 to 85% of all this spending leaves the state within days, that means at least $7 Billion per year is drained out of Maine each year.  How can this be good for Maine’s economy?

None of the professional economists in Maine appear to be even remotely aware of this problem.  So I’d like to hear your thoughts on this problem.  Am I missing something important here?  Or is it the Ph.D. economists who are wearing the blinders?

I sometime wonder if one of the requirements for getting a Ph.D. in Economics is for candidates to unlearn the basic mathematics they learned in grade school, including addition and subtraction.

My thoughts -- and my critique of today's version of economist -- begins with the scale of the economy.