So the union-friendly folks over at the Economic Policy Institute have released their annual report "calculating" the number US jobs lost because of trade with China. This year's EPI report is pretty much identical to past editions: same (erroneous) methodology, same (erroneous) doom-and-gloom protectionist conclusions. I really shouldn't give the "study" an iota of bandwith, but because it will undoubtedly be mentioned by ignorant journalists or opportunistic politicians looking to respectively score a few cheap pageviews or scare a few unwitting voters, here's all you need to read:
My 2010 blog post dismantling of EPI and its study (including boatloads of links from myriad scholars decrying EPI's asinine "trade deficit = job losses" methodology); and
Today's quick dismissal of the EPI report by the US-China Business Council.
Finally, one quick observation: I just love this chart in EPI's new study entitled "Cumulative U.S. jobs displaced by growing trade deficits with China since 2001":
If you look closely, you'll see that EPI's report shows "cumulative US job losses" supposedly caused by US-China trade plummeting in 2009 - thus indicating a major "gain" of about 300,000 China trade-related jobs in America between 2008 and 2009. This big "victory," of course, is due to the fact that the China-US trade deficit plummeted in 2009 because of the Great Recession, and, as noted above, EPI's "jobs" calculation is wholly dependent on the trade deficit.
Unemployment shot up in 2009 from 7.7 percent in January to 10.1 percent in October before settling at 10 percent in December. Behind those percentages were more than 4.1 million people who lost their jobs during the year. According to data from the Bureau of Labor Statistics, that's the most job losses in a year since 1940.
Funny, I can't seem to find a 2010 version of EPI's annual paper that highlights the impressive 2009 "improvement" in their US jobs picture. How weird. (You can check the BLS numbers - non-farm payrolls and unemployment rate - here, if you really want. Heck, it'd be a lot more informative than reading the EPI study.)
So can someone at EPI - or in the office of, say, Senator Schumer - please call or email me to reconcile the Institute's amazing "improvement" in US-China trade-related jobs in 2009 with the depressing collapse in total non-farm jobs (and the soaring US unemployment rate) shown in the official US employment data? I hereby promise that I will post any explanation in full on my little ol' blog.
Yeah, I'm not holding my breath waiting for the phone to ring on that one.
Anyway, over the next few months, we will undoubtedly be deluged with protectionist rhetoric - from both political parties, unfortunately - about the pernicious effects of the US-China trading relationship on the American job market, and, if history is any guide, EPI's study promises to play a supporting role in such demagoguery. But the next time you hear some campaigning politician breathlessly claim that Chinese imports are destroying millions of American jobs, be sure to remember the chart above, and that said politician is either stunningly ignorant or willfully trying to scare and deceive you.
House Majority Leader Steny Hoyer (D-MD) gave a big political speech today about the horrendous state of American manufacturing. Here's The Hill previewing Hoyer's speech:
In the speech to be delivered at the National Press Club, Hoyer will lament the decline in homemade goods during the last three decades and highlight Democratic efforts to promote “Make It in America” policies as the November midterm elections draw closer.
“Manufacturing, and the middle-class economy it creates, is a part of the American character that we must not give up,” Hoyer plans to say, according to an excerpt released Monday.
Mr. Hoyer and the many other politicians and pundits who keep insisting that U.S. manufacturing is dying remind me of the soldier in Stephen Crane's The Red Badge Courage who warned his fellow troops with great assurance, but with no evidence, that the army was finally to decamp the following morning: "He came near to convincing them by disdaining to produce proofs." The next morning the army remained in camp.
In fairness to these fictional soldiers, however, they – unlike Mr. Hoyer – had no access to overwhelming data that disprove their hallucinations.
Nice. I'd only add that (i) even during our current economic malaise, American manufacturing has been doing relatively well (13 straight months of expansion), and (ii) while American manufacturing employment has declined over last several years, such reductions are happening everywhere in the world - in developed and developing countries, in nations with trade deficits and trade surpluses, and, yes, even in China - because of rising productivity and changing consumer tastes. Oh, and not that it really matters, but the good ol' US of A is still the world's top manufacturer by value, folks. (Cue the"we're #1" chant!)
So why would the House Majority Leader - the number three Democrat in the United States Congress - claim that American manufacturing stinks, despite the "overwhelming data that disprove his hallucinations"?
Obvious answer: to sell his party's big election-year plans, as The Hill also helpfully explains:
House Majority Leader Steny Hoyer (D-Md.) will tout the Democratic Party’s domestic manufacturing agenda, including a bill that could lead to tariffs on Chinese goods....
House Democrats are using the “Make It in America” theme to reach out to middle-class voters, particularly in Rust Belt states that have been hard hit by outsourcing. A centerpiece of the House agenda this week is a bill that targets China’s currency policy, which Democrats and the Obama administration have criticized as manipulative and unfair to American workers....
Another bill the House is expected to pass this week would require American flags purchased by the federal government to be domestically produced.
You see, it's rather difficult to sell your big campaign-season "solution," when it turns out that there is no real "problem" to "solve." So in that rather inconvenient case, you make the problem up, and - BAM! - Democrats to the rescue!
Of course, as I've already mentioned several times, Leader Hoyer is hardly the only member of his party playing fast-and-loose with the facts in order to sell protectionist solutions that almost no one actually needs. In fact, just this week Sen. Russ Feingold - facing increasingly abysmal poll numbers - got into the myth-selling act:
Leaving aside the hilarious contradiction that is a politician using an internet ad to deride innovation and progress (through creative destruction), here's the money quote for today's purposes: "according to independent analysis, unfair trade deals have resulted in the loss of over 64,000 jobs in Wisconsin." But what Feingold fails to mention is that his scary job numbers come from union-backed and union-funded "think tank" and have been routinely debunked for almost a decade. In short, this "independent analysis" is neither "independent" nor "analytical."
But other than that.....
Given the current state of the American economy, one must ask why incumbent Dems like Hoyer and Feingold feel the need to create fake problems to solve when so many real economic problems actually exist. I mean, I get it that our "leaders" want to improve their electoral chances in November by "rescuing" us clueless voters from some impending "catastrophe," but with so many real crises out there, why pick a fake one?
Could it be that they don't want us to notice that their Party has been in charge of Congress for four years, and in total control of the American government for almost two more, and yet they've offered almost nothing in the way of real solutions to real problems?
Could it be that they need a defenseless scapegoat - dirty rotten foreigners(!) - on which they can blame all of America's ills because we're in deeper trouble now than we were back when they took over?
Could it be that if they were to offer real solutions to solve America's real problems, that their plans, while perhaps helpful for the nation, would further hurt their chances in November by highlighting just how dismal the last two years of Obamanomics (and Keynesianism) have been?
And could it be that, by emphasizing (and blatantly misleading the American public about) trade and the state of US manufacturing rather than trying to fix the problems they've helped create, Hoyer and his colleagues in Congress have undoubtedly proven just how desperate they are to maintain their power?
Nahhh, that just couldn't be it, now could it?
Rrriiiiiiiiiight.
On a positive note, at least that awesome "American flag" legislation gives us further proof that, at this point, Congress has run completely out of ideas and is just acting out episodes of The Simpsons until they adjourn for the year. And for that (and only that) I heartily applaud them:
Last week the Washington Post ran a front page story on the Democratic Party's big strategy for winning (or, more accurately, losing less badly) in this November's midterm elections, and you'll never guess the focal point of their big plan. Yep, rampant protectionism:
President Obama and congressional Democrats -- out of options for another quick shot of stimulus spending to revive the sluggish economy -- are shifting toward a longer-term strategy that promises to tackle persistently high unemployment by engineering a renaissance in American manufacturing.
That approach, heralded by Obama last week in Detroit and sketched out in a memo to House Democrats as they headed home for the August break, is still evolving and so far focuses primarily on raising taxes on multinational corporations that Democrats accuse of shipping jobs overseas.
Sigh. Now, I've repeatedly discussed just how wrongheaded this plan is, and several goodfolks stepped up last week to do the same. And for those of you who don't remember, here's a good summary from a recent blog post of mine:
As I've noted here (and here and here and here), this standard trope is complete drivel for (at least) four basic reasons: (i) the idea that hordes of American jobs are being outsourced to Mexico or China or India is a complete economic fiction; (ii) those evil "tax breaks" for US multinational corporations actually increase American jobs; (iii) raising these taxes on American companies would be devastating for the US economy (great WSJ op-ed here on this point); and (iv) the candidates' proposed "solution" - ending tax breaks for companies that ship jobs overseas - is utterly unworkable. In sum: this is hackneyed political demagoguery and little more.
And as Hot Air's Ed Morrissey helpfully reminds us, the Democrats' "strategy" is hardly novel:
Obama and the Democrats plan to take a page out of John Kerry’s playbook from 2004. Remember “Benedict Arnold CEOs,” the companies that moved out of US jurisdiction to save money on taxes and regulation? Even though Kerry did much the same thing with his yacht (and took money from the very same CEOs in that election), he railed against the companies when it was the taxes and regulation that created the situation.
So given that these plans are recycled nonsense that I (and many others) have repeatedly dismantled, why am I talking about it now? Why not just ignore the story and move on? Well, as the Post story makes clear, even Democrats themselves are now acknowledging that their plan is, well, hackneyed political demagoguery and nothing more:
Republicans mock the endeavor, dubbed "Make It in America," as blatantly political, designed primarily to save the jobs of endangered Rust Belt Democrats whose races could determine the balance of power in the November congressional elections. Senior Democrats acknowledge that the strategy emerged after the issue of off-shoring jobs figured prominently in a Pennsylvania special election earlier this year and a recent poll.
Some independent analysts are also skeptical. U.S. manufacturing jobs have been disappearing since 1979, in part because of the heightened productivity of American workers but also because of cheaper labor abroad. During the past decade, the sector lost a third of its workers, falling to 11.7 million last year from 17.3 million people in 1999, according to the most recent figures from the Bureau of Labor Statistics.
Many of the ideas being promoted by Democrats to stop the slide are hardly new. House Republican Whip Eric Cantor (Va.) called the strategy "more meaningless than harmful" after voting for one Democratic proposal, a resolution to encourage packers of domestic fruits and vegetables to display the American flag on their labels....
The seeds of the "Make It in America" campaign were planted earlier this year, when Rep. Mark Critz (D-Pa.) won an unexpectedly large special-election victory by campaigning against tax breaks for companies that move jobs offshore. Then in late June, House Democrats were briefed on a poll conducted this spring for the Alliance for American Manufacturing, which found that voters are anxious about the nation's mounting debt to China. Key voting blocs -- including independents and older people with no college education -- named the loss of manufacturing jobs as a top worry, the survey found.
The poll "crystallized" Democratic thinking, said Rep. Chris Van Hollen (D-Md.), who leads the political committee in charge of electing Democrats to Congress.
In short, Democrats are pursuing these old, bad trade policies not because they'll actually help the struggling US economy, expand our manufacturing sector or lower the unemployment rate, but instead because they poll well. Awesome, huh? (Obvious aside: too bad the Democrats didn't look at the polls when they forced healthcare "reform" down our throats.) But hey, that's just the politicos. I'm sure that liberal bloggers, journalists and wonks are totally on board with the Dems' trade plans, right? Right?
Umm, not so much.
As part of their ongoing (and juicy!) series on the liberal email listserv "JournoList," the Daily Caller released emails documenting a dialog between the White House and JournoList members which clearly demonstrates that most of the Democrats' own supporters oppose their protectionist plans and recognize them as a dishonest political stunt:
Two of the administration’s chief economic advisors, Jared Bernstein, the vice president’s top economist, and Jason Furman, deputy director of the National Economic Council, were members of Journolist until they began working officially for Obama.
Even after the campaign ended, and he had joined the Obama administration, Bernstein continued his contact with the group. In May of 2009, Bernstein contacted Ezra Klein to pass a message along to list members.
“Calling all Journos,” Bernstein wrote in a message relayed by Klein. “I thought we got too little love from progressive types re our tax changes targeted at businesses with overseas operations. We’re maybe going for another bite at the apple this Monday,” he wrote. Bernstein invited members of the list to join him on a conference call on the issue a few days later.
Not everyone was sold. A couple of members on the list, including Greg Anrig of the Century Foundation and Bloomberg’s Ryan Donmoyer, panned the administration’s plan to crack down on offshore tax havens as a misleading political stunt.
Dean Baker, at the time a blogger at the American Prospect, agreed the policy was dishonest, but defended it anyway. “Sure, some of the things they are saying are not true (the jobs story first and foremost),” he wrote, “but the industry groups have this town blanketed with lobbyists and own a large portion of Congress outright. … There has to be some counterforce to the industry groups and that is the populist rabble. It might not be pretty, but that’s Washington.”
In the end, 14 journalists expressed interest in the conference call with Bernstein, including Donmoyer and Washington Post reporter Alec MacGillis. The effort appeared to be wasted on Donmoyer, who in the coming weeks wrote a couple of stories for Bloomberg expressing skepticism about the idea.
Bernstein’s effort did appear to bear fruit elsewhere, however. “I’ve heard that there’s some disappointment in the administration that they haven’t gotten the level of progressive love they feel they deserve for their ambitious proposals to curb abusive corporate tax loopholes,” wrote influential liberal blogger Matt Yglesias the next day. Yglesias went on to attack opponents of the plan, noting “how absurd some of the abuses the administration is trying to curb are.”
Bernstein, as you may know, worked for the union-backed-and-run Economic Policy Institute, a think tank with, ahem, a less-than-stellar track record on trade. And when he approached his fellow travelers seeking support for the administration's "new" protectionist plans, they mostly blew him off and criticized the plans. Good for them, and shame on the White House and congressional Democrats for pursuing trade policies that are, in Dean Baker's own words, based on lies.
Such dishonesty and overt political pandering also raise broader questions about all Democrat trade policies, not just those on multinational taxation. In short: after seeing this, why on earth should we trust anything Democrats say on trade? As I've repeatedly noted, lots of polls show that a majority of Americans are uncertain about (or downright hostile to) free trade. And if polls - rather than economics or a desire to, you know, actually increase American jobs - motivate the Dems' dishonest "Make It in America" plan, then what, pray tell, motivates their opposition to US FTAs with Colombia, Panama and South Korea or their breathless demands about China's currency policies? Those same polls? Or are we to believe that their dishonesty only extends to the tax policies, and that the Dems' other trade policies are as pure as the driven snow?
I don't know about you, but I'm finding the latter option to be increasingly hard to believe.
The last two days have witnessed a dramatic shift in perspective on China - it seems that the voices of the sane have rapidly come out of the woodwork in order to put those recently-omnipresent insane voices back where they belong. I'm quite sure that my months of ranting about Washington's flirtation with China Fever had nothing to do with this change, but still, it's nice to see.
Look Hu's Coming to Washington. The biggest China news of the day today was the announcement that Chinese President Hu Jintao will be coming to DC for the big nuclear security summit in two weeks. The New York Times' Vikas Bajaj explains succinctly why this is big news for the currency debate: "China experts said it was unlikely that China would have agreed to the visit unless there was at least an informal assurance by the Treasury Department that it would not be named a currency manipulator either on or around April 15 — the deadline for the Obama administration to submit one of its twice-a-year reports on foreign exchange to Congress." I think that's exactly right and am looking forward to collecting on a few bets come April 15. Almost as good, Bajaj also goes on to explain - rationally, I might add - that RMB appreciation appears part of China's near-term plan (let's hear it for quiet diplomacy! Woo hoo.), and then provides a rather even-handed look at all of the views (hawkish to dovish) out there on the currency issues. Impressive. Now, I wish I could say that this good news also means that Sens. Schumer and Specter, and their fellow China-bashers in Congress, will now proceed to disappear from the US-China spotlight, but let's get serious: their campaigns aren't over until November, so China could appreciate its currency 1000%, and these guys would still be out their "saving" their constituents from the scary China ghost of their own making. Alas.
Another China journalist does his homework. The NYT (above) isn't the only outfit printing reasonable stuff about China these days. Reuters too has caught the currency sanity bug with this article, "U.S. currency push on China no slam dunk." There, journalist Paul Eckert cites lots of good data and quotes from smart people to explain that "many trade economists and businessmen say that at best, a heavy-handed U.S. approach on currency will fail. At worst, it could backfire, sparking a U.S.-China trade war. Instead, Washington should address the currency and other factors behind global financial imbalances in a multilateral setting." Nice. The article even implicitly debunks the recent "study" by everybody's favorite union-backed fake-stats-factory, the Economic Policy Institute. Indeed, my favorite line of the whole article comes from EPI honcho Robert Scott who, when confronted with the mountains of data-rich criticism of his work, responds with the nonsensical and conclusory defense that China's currency policy has just "got to have an impact on ultimate sales of goods in both countries and ultimately, on jobs." Oh, well, ok then. You're right, Dr. Scott. Why didn't I think of that? I guess I was just too caught up in silly things like "data" and "history" and "logic," and totally forgot about the "it's just gotta" angle. My bad. (<--sarcasm).
Economists: hey, we're not all irrational, fact-ignoring loons. Not content to let all the journalists hog all the sanity, the economists have also gotten in on the action. Goldman Sachs' Jim O'Neill argues in the Financial Times that Congress' overheated rhetoric about China's economy and currency completely ignores the facts on the ground, particularly recent data about Chinese consumption and trade flows. O'Neill even goes so far as to say that, according to their models (which he admits could be inaccurate because of market volatility) the RMB might not actually be undervalued. Be sure to read the whole thing. The data cited are compelling. Yale economist Ray Fair (h/t Tyler Cowen) piles on with an intense new study (PDF) which foecasts that "The estimated effects [of RMB appreciation] on U.S. output and employment are modest." Now where have I heard that before? Oh.Yeah.
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), FactCheck.org (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.
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?
Well, well, well. I guess the Democratic Congressional Campaign Committee (DCCC) has decided that surging Independent Doug Hoffman is such a big threat in next week's NY-23 special elections, that it's time to resort to a classic Democrat dirty trick and label him - GASP! - a free trader.
Here's the DCCC's disgraceful commercial (h/t HotAir):
I haven't donated to Doug Hoffman's campaign, but I certainly enjoy his independent, upstart fiscal conservatism and wish him the best in next week's special election. But even if I didn't, this DCCC commercial is so chock-full of knowingly false statements - and so indicative of your typical DCCC/DNC protectionist fearmongering (see, e.g., here and here) - that it demands a complete and total takedown. So let's do just that, line-by-lying-line:
ALLEGATION (1) "Millionaire Doug Hoffman's policies would send more jobs here to these countries [Graphic: map of India and China]. Hoffman wants to keep tax breaks for companies that want to ship our jobs overseas."
FACTS: First, the idea that hordes of American jobs are being outsourced to China or India is a complete economic fiction. As Cato's Dan Griswold explains:
There is no evidence that expanding employment at U.S.- owned affiliates comes at the expense of overall employment by parent companies back home in the United States. In fact, the evidence and experience of U.S. multinational companies points in the opposite direction: foreign and domestic operations tend to compliment each other and expand together. ...
The fear of manufacturing jobs being shipped to China and Mexico is not supported by the evidence. While U.S. factories were famously shedding those 3 million net jobs between 2000 and 2006, U.S.-owned manufacturing affiliates abroad increased their employment by a modest 128,000 jobs.
Second, what about those evil "tax breaks"? Turns out they actually increase American jobs. Here's Griswold again:
Politicians are not usually specific about exactly what "tax breaks" they want to repeal. The biggest tax exemption for U.S. companies that invest abroad is the deferral of tax payments for "active" income. U.S. corporations are generally liable for tax on their worldwide income, whether it is earned in the United States or abroad. But the relatively high U.S. corporate tax rate is not applied to income earned abroad that is reinvested abroad in productive operations. U.S. multinationals are taxed on foreign income only when they repatriate the earnings to the United States. Not surprisingly, the deferral of active income gives U.S. companies a powerful incentive to reinvest abroad what they earn abroad, but this is hardly an incentive to "ship jobs overseas."
Such deferral may sound like an unjustified tax break to some, but every major industrial country offers at least as favorable treatment of foreign income to their multinational corporations. Indeed, numerous major countries exempt their companies from paying any tax on their foreign business operations. Foreign governments seem to more readily grasp the fact that when corporations have healthy and expanding foreign operations it is good for the parent company and its workers back home.
If President Obama and other leaders in Washington want to encourage more investment in the United States, they should lower the U.S. corporate tax rate, not seek to extend the high U.S. rate to the overseas activities of U.S. companies. Extending high U.S. tax rates to U.S.-owned affiliates abroad would put U.S. companies at a competitive disadvantage as they try to compete to sell their goods and services abroad. Their French and German competitors in third-country markets would continue to pay the lower corporate tax rates applied by the host country, while U.S. companies would be burdened with paying the higher U.S. rate. The result of repealing tax breaks on foreign earnings would be less investment in foreign markets, lost sales, lower profits, and fewer employment and export opportunities for parent companies back on American soil.
Politicians who disparage investment in foreign operations are wedded to an outdated and misguided economic model that glorifies domestic production for export above all other ways for Americans to engage in the global economy. They would deny Americans access to hundreds of millions of foreign customers and access to lower-cost inputs through global supply chains. In short, they would cripple American companies and their American workers as they try to compete in global markets.
Amen and hallelujah!
Third (and economics aside), let's take a practical look at the idea of "ending tax breaks for American companies that ship jobs overseas." How exactly would this policy work? For example, if Boeing fired six people in Washington State and then hired six people in Germany for completely unrelated reasons, would that be "shipping jobs overseas" and cost Boeing billions in taxes? Who would decide? Where's the line? For the DCCC's mythological policy to work, wouldn't the US Government basically need to examine - and judge! - every foreign and domestic employment decision of every company in the country? Wow, that sounds both fantastic and totally doable! Sign me up!
(Oh, and I love that "millionaire" is now a DCCC insult. Speaks volumes that a self-made millionaire CPA is a Democrat bogeyman, doesn't it? But I digress.)
ALLEGATION (2) "New York has lost 50,000 jobs due to bad trade deals." [Source: Economic Policy Institute, 2005]
FACTS: As far as I'm aware, there is only one "think tank" on the planet - the union-funded Economic Policy Institute - that blames FTAs like NAFTA for US job losses and counts the jobs lost. And like clockwork, the EPI's work is cited in the DCCC's commercial (as it always is in fear-mongering protectionist hit-pieces). 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 Griswold (in, among others, 2000, 2001, 2003, 2005, and again in 2007 (PDF)), AEI's Phil Levy (here), the US Chamber of Commerce (here), FactCheck.org (here) and even your humble correspondent (here, with Cato's Dan Ikenson) have completely destroyed EPI's methodology. The basic arguments from Griswold:
To determine the number of jobs or potential jobs "eliminated" by the trade deficit, the EPI model compares actual U.S. employment to what it would supposedly be if the U.S. trade deficit were zero and the economy's overall growth rate unchanged. Fewer imported cars, steel slabs, shoes, toys, shirts, and other goods are then translated into more domestic production of those items and hence more jobs if exports equaled imports. In other words, every widget not imported translates into a widget produced at home and more widget workers employed. Within this model, the rising imports and trade deficits of recent years can only be bad news for output and employment. ...
The attempt to blame trade deficits for a loss of jobs founders in theory and in practice. First, the model ignores the role of international investment flows. The flip side of America's trade deficit is the net inflow of foreign investment. The extra $435 billion that Americans spent on imports over and above exports last year was not stuffed into mattresses overseas. Those dollars quickly returned to the United States to buy U.S. assets, such as stocks, bank deposits, commercial and Treasury bonds, or as direct investment in factories and real estate. A principal reason why the United States runs a trade deficit with the rest of the world year after year is that foreign savers continue to find the U.S. economy an attractive place to invest. The EPI model ignores the growth and jobs created by the offsetting inflow of net foreign investment into the U.S. economy that the trade deficit accommodates. That net surplus of investment capital buys new machinery, expands productive capacity, funds new research and development, and keeps interest rates lower than they would otherwise be. EPI counts the jobs supposedly lost when we import cars but ignores the jobs created when BMW or Toyota builds an automobile factory in the United States that employs thousands of Americans in good-paying jobs. So it is the critics of trade who are guilty of counting the withdrawals but not the deposits in our national balance of payments account.
Second, the central assumption of the EPI model--that rising imports directly displace domestic output--collides headlong with empirical reality. In fact, imports and domestic output typically rise together in response to rising domestic demand. During much of the 1990s, when imports and trade deficits were both rising rapidly, so too was domestic employment and manufacturing output. Between 1994 and 2000, when deficits supposedly claimed a "heavy toll" on U.S. employment, civilian employment in the U.S. economy rose by a net 12 million and the unemployment rate fell from 6.1 percent to 4.0 percent. During that same period, U.S. manufacturing output rose by 40 percent even though the volume of imported manufactured goods doubled. Manufacturing took a nosedive in 2001-2002, but rising imports were not the culprit. While manufacturing output was falling 4.1 percent in 2001 from the year before, real imports of manufactured goods were falling 5.4 percent after four straight years of double-digit increases....
If the trade critics were right, the recent plunge in import growth should have stimulated an increase in domestic output as U.S. factories sought to fill the gap left by the missing imports. According to the EPI model, in other words, the relation should be negative and the trend line should slope downward and not upward. Once again, reality intrudes on the protectionist story. There is no basis, in theory or experience, for the persistent allegation that trade deficits, and more specifically imports, mean fewer jobs in the U.S. economy. The reality is more nearly the opposite. As a reflection of continued domestic demand and the desire of foreign investors to acquire U.S. assets, large trade deficits are typically associated with more output and more jobs. In America today, trade and prosperity are a package deal. The more we trade, the more we prosper, and the more we prosper, the more we trade. By seeking to curb imports of manufactured goods, opponents of trade will only undermine the ability of the U.S. economy to expand output and create jobs.
On my first point (that EPI's numbers defy common sense), just step back and think about EPI's "analysis" for a second. Without counting a single actual job, the EPI study cited in the DCCC commercial showed that by 2005 NAFTA alone had cost the state of New York exactly 51,582 jobs. Not 51,583 or 51,581. Nope. Exactly 51,582 jobs. Eureka! In all seriousness, this kind of pseudo-economics is so ridiculous that it should be rejected on its face, and because most sane people probably would reject their argument if the exact number were used, the DCCC commercial said "50,000 jobs," rather than "51,582 jobs." It sounds more plausible that way, you see? Unfortunately, as the analysis above makes clear, it ain't.
ALLEGATION (3) "Yet Hoffman's biggest backers want more unfair trade deals." [Source: Club for Growth Press Release, 9/28/09].
FACTS: It is true that the Club for Growth vigorously supports Doug Hoffman. And it's also true that the Club is a vigorous supporter of all forms of trade liberalization - including free trade agreements. And why shouldn't they be? Free trade has lifted millions upon millions of people out of abject poverty. It's an economic principle upon which almost every economist on the planet can agree (and that's saying something!). It lowers prices for American families and costs for American businesses (over 50% of all imports are capital goods and equipment, afterall); it provides new markets for American products; and, perhaps most importantly, it is a a critical component of every individual's fundamental right to engage in mutually beneficial transactions with whomever he or she chooses, regardless of the country or countries involved in the transaction. Indeed, even the founding fathers recognized free trade's immense intrinsic value, and understood that protectionism would destroy the union (hence, the Constitution's commerce clause).
Now, grizzled campaign veterans (including, unfortunately, a few that I worked with in 2008) would cite poll after poll to advise that Hoffman and other free trade candidates should avoid the DCCC ad and its ilk because that's just "smart politics." I'd counter that it's only "smart" because conservative (typically GOP) candidates and their handlers let it be. On this issue - and more than almost any other - the "truth" is on the good guys' side, and there's almost no debate that free trade is a very good thing for America. Yet one (wrong) side is playing to people's fears and is literally lying to them, to their extreme detriment, and the other (right) side is staying silent because the issue doesn't poll very well. But if free trade candidates (and elected officials) never attack their opponents' misleading fearmongering, those silly polls will never change, and the painful cycle will continue on and on (and on and on and...). Isn't it about time that free traders - I dunno, maybe "real conservatives" like Doug Hoffman (or libertarians!) - stood up and said "enough!"?
