3 Economic Misconceptions That

Need to Die
By The Motley Fool Posted 3:35PM 02/13/12 Economy
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By Morgan Housel

At a conference in Philadelphia last October, a Wharton professor noted that one of the
country's biggest economic problems is a tsunami of misinformation. You can't have a
rational debate when facts are so easily supplanted by overreaching statements, broad
generalizations, and misconceptions. And if you can't have a rational debate, how does
anything important get done? As author William Feather once advised, "Beware of the
person who can't be bothered by details." There seems to be no shortage of those people
lately.

Here are three misconceptions that need to be put to rest.

Misconception No. 1: Most of what Americans spend their money on is made in

China.

Fact: Just 2.7% of personal consumption expenditures go to Chinese-made goods

and services. 88.5% of U.S. consumer spending is on American-made goods and
services.

I used that statistic in a recent article, and the response from readers was overwhelming:
Hogwash. People just didn't believe it.
The figure comes from a Federal Reserve report. You can read it here.

A common rebuttal I got was, "How can it only be 2.7% when almost everything in
Walmart (WMT) is made in China?" Because Walmart's $260 billion in U.S. revenue
isn't exactly reflective of America's $14.5 trillion economy. Walmart might sell a broad
range of knickknacks, many of which are made in China, but the vast majority of what
Americans spend their money on is not knickknacks.

The Bureau of Labor Statistics closely tracks how an average American spends their
money in an annual report called the Consumer Expenditure Survey. In 2010, the average
American spent 34% of their income on housing, 13% on food, 11% on insurance and
pensions, 7% on health care, and 2% on education. Those categories alone make up
nearly 70% of total spending, and are comprised almost entirely of American-made
goods and services (only 7% of food is imported, according to the USDA).

Even when looking at physical goods alone, Chinese imports still account for just a small
fraction of U.S. spending. Just 6.4% of nondurable goods -- things like food, clothing and
toys -- purchased in the U.S. are made in China; 76.2% are made in America. For durable
goods -- things like cars and furniture -- 12% are made in China; 66.6% are made in
America.

Another way to grasp the value of Chinese-made goods is to look at imports. The U.S.
imported $399 billion worth of goods from China last year, which is 2.7% of our $14.5
trillion economy. Is that a lot? Yes. Is it most of what we spend our money on? Not by a
long shot.

Part of the misconception is likely driven by the notion that America's manufacturing
base has been in steep decline. The truth, surprising to many, is that real manufacturing
output today is near an all-time high. What's dropped precipitously in recent decades is
manufacturing employment. Technology and automation has allowed American
manufacturers to build more stuff with far fewer workers than in the past. One good
example: In 1950, a U.S. Steel (X) plant in Gary, Ind., produced 6 million tons of steel
with 30,000 workers. Today, it produces 7.5 million tons with 5,000 workers. Output has
gone up; employment has dropped like a rock.

Misconception No. 2: We owe most of our debt to China.

Fact: China owns 7.6% of U.S. government debt outstanding.

As of November, China owned $1.13 trillion of Treasuries. Government debt stood at

$14.9 trillion that month. That's 7.6%.
Who owns the rest? The largest holder of U.S. debt is the federal government itself.
Various government trust funds like the Social Security trust fund own about $4.4 trillion
worth of Treasury securities. The Federal Reserve owns another $1.6 trillion.

Both are unique owners: Interest paid on debt held by federal trust funds is used to cover
a portion of federal spending, and the vast majority of interest earned by the Federal
Reserve is remitted back to the U.S. Treasury.
The rest of our debt is owned by state and local governments ($700 billion), private
domestic investors ($3.1 trillion), and other non-Chinese foreign investors ($3.5 trillion).

Does China own a lot of our debt? Yes, but it's a qualified yes. Of all Treasury debt held
by foreigners, China is indeed the largest owner ($1.13 trillion), followed by Japan ($1
trillion) and the U.K. ($429 billion).

Right there, you can see that Japan and the U.K. combined own more U.S. debt than
China. Now, how many times have you heard someone say that we borrow an inordinate
amount of money from Japan and the U.K.? I never have. But how often do you hear
some version of the "China is our banker" line? Too often, I'd say.

Misconception No. 3: We get most of our oil from the Middle East.

Fact: Just 9.8% of oil consumed in the U.S. comes from the Middle East.
According the U.S. Energy Information Administration, the U.S. consumes 19.2 million
barrels of petroleum products per day. Of that amount, a net 49% is produced
domestically. The rest is imported.

Where is it imported from? Only a small fraction comes from the Middle East, and that
fraction has been declining in recent years. Last year, imports from the Persian Gulf
region -- which includes Bahrain, Iran, Iraq, Kuwait, Qatar, Saudi Arabia, and the United
Arab Emirates -- made up 9.8% of total petroleum supplied to the U.S. In 2001, that
number was 14.1%.

The U.S. imports more than twice as much petroleum from Canada and Mexico than it
does from the Middle East. Add in the share produced domestically, and the majority of
petroleum consumed in the U.S. comes from North America.

This isn't to belittle our energy situation. The nation still relies on imports for about half
of its oil. That's bad. But should the Middle East get the attention it does when we talk
about oil reliance? In terms of security and geopolitical stability, perhaps. In terms of
volume, probably not.
A Roomful of Skeptics

"People will generally accept facts as truth only if the facts agree with what they already
believe," said Andy Rooney. Do these numbers fit with what you already believed? No
hard feelings if they don't. Just let me know why in the comment section below.