Wednesday, March 24, 2010

Sen. Schumer: "This Fake China Study Like Totally Proves You Should Vote for Me!"

I was hoping tonight to do a quick-n-dirty review of whether the latest legislation attacking China for its currency policy - the Currency Exchange Rate Oversight Reform Act of 2010 (S. 3134) - violated WTO rules.  But alas, that will have to wait until tomorrow because the legislation's loudest sponsor, Sen. Chuck Schumer (D-Fear), is cooing like a giddy little sinophobic schoolgirl about a new "study" by the Economic Policy Institute which "shows" that "unfair China trade," particularly China's currency "manipulation," has "cost" US "jobs."  (Ed. note: quotes intended to convey the author's extreme sarcasm.)

According to EPI, the United States has lost 2.4 million jobs because of China's trade practices, and Sen. Schumer, you see, is gonna milk that sucker for all she's worth, baby::
Since 2001 America's lost 2.4 million manufacturing jobs because of our trade gap with China, which has ballooned due to China's undervalued currency. We cannot ignore the impact of these jobs anymore.  Right now one in ten workers is out of a job in America - 15 million Americans. This report shows that if China were playing by the same rules as the U.S. 2.4 million of those workers might be collecting paychecks instead of job hunting."
He then added:  “These [EPI] figures exceeded even our worst expectations.”  (Cue ominous music.)

Now, I've laid into EPI before, and briefly commented last night on the "think tank's" new anti-China publication, so I really thought that'd be the end of it.  But considering how tense and unstable the current US-China trade relationship is, and considering that China's currency policies are one of the main sources of that tension/instability, and considering that Sen. Schumer is using EPI to push his antagonistic currency legislation, I think it's absolutely necessary to point out tonight just how awful Sen. Schumer's loud reliance on EPI's work really is.

So here we go.

First, let's drop a little knowledge about EPI itself.  Did you know that it's board of directors is manned by nine of the biggest union poo-bahs on earth?  Andy Stern (SEIU)?  Check!  Richard Trumka (AFL-CIO)?  Check!  Ron Gettelfinger (UAW)?  Check!  Leo Gerard (USW)?  Check!  The list literally goes on and on.  EPI also receives about 30% of its annual funding from labor unions.  So it's union-run and union-funded.  And guess who is the primary force against free trade in the United States.  That's right - the unions.  And guess who just loves to use EPI's numbers to push its pernicious protectionism.  Yep - same guys.  So the unions fund and run EPI and then turn around and cite their anti-trade stats as if they come from some reputable, unbiased DC think tank.  Yeah, that's not sketchy at all.  Uh huh.

Now why do you think that the good Senator failed to mention these important little nuggets?

Next, let's look back at EPI's track record when it comes to other "studies" about trade and US job losses.  As I said a few months back:
The problem is that the EPI's numbers are nonsensical, and their basic methodology - simplistically tying the US trade deficit to US job losses - has been routinely debunked for almost a decade.  On the latter point, Cato's [Dan] Griswold (in, among others, 2000, 2001, 2003, 2005, and again in 2007 (PDF)), AEI's Phil Levy (here), the US Chamber of Commerce (here), (here) and even your humble correspondent (here, with Cato's Dan Ikenson) have completely destroyed EPI's methodology.
For some intensive economic criticism on why EPI's models are so ridiculous, go here (and scroll to the middle of the page).  Indeed, Griswold just yesterday mocked EPI by pointing out how recent events blow a massive hole in their buffoonish system:
In years when the trade deficit was rising, it was common practice for the labor-union-friendly Economic Policy Institute to publish detailed studies showing that larger trade deficits caused the U.S. economy to lose hundreds of thousands of jobs each year. For example, according to an October 2008 EPI paper, rising non-petroleum trade deficits from 2000 to 2006 caused a lost of 484,400 jobs per year, while the shrinking deficit in 2007 lead to the creation of 272,500 jobs.

By the EPI’s own internal logic, the past two years should have been a boom time for job creation. Between 2007 and 2009, the non-petroleum trade deficit dropped by $174 billion as the sagging domestic economy cut demand for impost. If that was good news for jobs, somebody forgot to tell the U.S. labor market. Since the end of 2007, the U.S. economy has shed a net 8 million jobs.

Oops, maybe it’s time for EPI to rework its model.
That shrinking 2009 trade deficit kinda makes you wonder why EPI's latest China study, which (again) uses the trade balance to determine "job losses," only goes through 2008, huh?  Actually, no it doesn't.  You see, as Griswold's conclusion above makes clear, EPI is a laughingstock in this town, and pretty much everyone with access to the interwebs knows that their studies are, as the kids say, beat.  Except Sen. Schumer, of course.  Now how could a United States Senator, and his massive staff, fail to just Google EPI and find such widespread, longstanding criticism before trotting out EPI's latest masterwork to support the Schumer/Graham currency legislation?  That's so weird.

And then there's the loud smackdown that EPI's latest China study received today from multiple sources.  First, is the US China Business Council, which (if I don't say so myself) repeats a lot of the stuff I've been saying for a while about protectionist myths and China's currency:
An updated study released yesterday blaming widespread US job losses on trade with China is again based on flawed analysis and distracts from the real challenges facing the US economy and the trade relationship with China, the US-China Business Council (USCBC) said today.

"The Economic Policy Institute's latest study, 'Unfair China Trade Costs Local Jobs' is once again built on the faulty assumption that every product imported from China would have been made in the US otherwise. As I said two years ago, this assumption is clearly wrong--several decades wrong, in fact," said John Frisbie, USCBC's president....

"Much of what we import from China replaces imports from other countries, not products we make in the US today. A jobs impact study that ignores the facts undermines its own credibility."

As of the end of 2008 (the latest data available), the United States was the world's largest manufacturer--and likely remains so today. US manufacturing jobs, on the other hand, have been in a long decline over the past four decades, long before China came on the scene, and now constitute about 9 percent of total US employment.

"The main reason for the decline in manufacturing jobs is productivity, not China. The US makes more with fewer people, primarily because of productivity and technology advances," continued Frisbie....

US exports to China in 2009 were just under $70 billion, about the same amount as in 2008. US exports to the rest of the world in 2009 declined by 19 percent. "China outperformed in a down year," said Frisbie. China remains the third-largest export market for US goods, after Canada and Mexico, and has been the fastest growing market for US goods over the past decade.

EPI's focus on changing China's exchange rate to reduce the US trade deficit is equally flawed, Frisbie noted. "Yes, China needs an exchange rate that better responds to China's global trade flows. But China's exchange rate is probably not as significant a factor in the US trade deficit that some make it out to be."

China's currency appreciated nearly 20 percent between 2005 and the start of the global recession in 2008, when PRC monetary authorities stopped exchange rate movement because of the developing uncertainty in the financial markets. During the period of significant renminbi appreciation, the US trade deficit with China continued to grow, underscoring the limited relationship between the exchange rate and the trade deficit.
And then there's Ikenson again who angrily blogs:
EPI’s methodology (to use the term loosely) is not to be taken seriously, though, because it derives from a simple formula that approximates job gains from export value and job losses from import value, as though there were a straight line correlation between the jobs and trade data. It pretends that there are no jobs created when we import, and that import value is somehow an appropriate measure of job loss.

The flaws of those assumptions are many, but perhaps the easiest one to convey is that most of the value embedded in imports from China is not Chinese....

According to the results from a growing field of research, only about one-third to one-half of the value of U.S. imports from China comes from Chinese labor, material and overhead. Official U.S. import statistics—which pay no heed to the constituent value-added elements—therefore overstate the Chinese value in those imports by 100 to 200 percent, on average. The cited job loss figures are based on import values that are unequivocally overstated because one-half to two-thirds of that value are the costs of material, labor, and overhead added in other countries, including the United States.

What is seldom discussed—because they are often portrayed as victims—is that large numbers of American workers are employed precisely because of imports from China. This is the case because the U.S. economy and the Chinese economy are highly complementary. U.S. factories and workers are more likely to be collaborating with Chinese factories and workers in production of the same goods than they are to be competing directly. The proliferation of vertical integration (whereby the production process is carved up and each function performed where it is most efficient to perform that function) and transnational supply chains has joined higher-value-added U.S. manufacturing, design, and R&D activities with lower-value manufacturing and assembly operations in China. The old factory floor has broken through its walls and now spans oceans and borders.

Though the focus is typically on American workers who are displaced by competition from China, legions of American workers and their factories, offices, and laboratories would be idled without access to complementary Chinese workers in Chinese factories. Without access to lower-cost labor in places like Shenzhen, countless ideas hatched in U.S. laboratories, that became viable commercial products and support hundreds of thousands of jobs in engineering, design, marketing, logistics, retailing, finance, accounting, and manufacturing might never have made it beyond conception because the costs of production would have been deemed prohibitive for mass consumption. Just imagine if all of the components in the Apple iPod had to be manufactured and assembled in the United States. Instead of $150 per unit, the cost of production might be double or triple or quadruple that amount.

Consider how many fewer iPods Apple would have sold, how many fewer jobs iPod production, distribution, and sales would have supported, how much lower Apple’s profits (and those of the entities in its supply chains) would have been, how much lower Apple’s research and development expenditures would have been, how much smaller the markets for music and video downloads, car accessories, jogging accessories, and docking stations would be, how many fewer jobs those industries would support and the lower profits those industries would generate. Now multiply that process by the hundreds of other similarly ubiquitous devices and gadgets, computers and Blu-Rays, and every other product that is designed in the United States and assembled in China from components made in the United States and elsewhere....

EPI’s work on this subject provides fodder for sensational stump speeches. But it is also a major disservice to a public that is hungering for truth, and not self-serving advocacy masquerading as truth.
Other wonks had similarly unpleasant things to say about the EPI study, but hey, you don't need to be a wonk to see just how silly EPI's work really is.  Just look at the numbers themselves.  Without counting a single actual job, the EPI China study showed that by 2008 trade with China had cost the District of Columbia 3100 jobs (thank god I was spared!) or the folks in Santa Clara County 26,900 jobs.  And, as the study's dastardly little footnotes make clear, EPI's numbers are even more exact because they're rounded.  Again, without counting a single job.  Such pseudo-economics makes the White House's Stimulus* job numbers look Nobel-worthy by comparison, and it's so ridiculous that it should be rejected on its face.  Indeed, because most sane people probably would reject their argument if the exact number were used, EPI did that rounding.  It sounds more plausible that way, you see?  Unfortunately, as the analysis above makes clear, it ain't.

Yet despite the clear union-rigging, the history of EPI incompetence, the myriad recent criticisms, and all the failed smell-tests, Sen. Chuck Schumer waves the EPI study around like it's the Gospel and uses it to aggressively push legislation that could legitimately ignite a trade war between the United States and its second largest trading partner.  Now why on earth do you think he'd do that?

A cynic might say that it's because Schumer's up for re-election this year and has a long history of demagoguing China when he's campaigning.  But a United States Senator wouldn't knowingly use a nonsensical, union-funded study from a long-debunked organization to push controversial legislation that could destroy a $400 billion dollar trade relationship and millions of (real) American jobs, now would he?

As that cynic might say, yes.  Hell yes.

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