Another Year, Another Bogus China Study

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.

But you know what else plummeted in 2009?  Oh, right, total US employment:

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.

More on Our Horribly Burdensome Business Tax System

A few days ago, I examined how America's byzantine tax code retards domestic job creation by imposing immense burdens on US businesses (particularly relative to other countries), and how the recent proposals of President Obama and congressional Democrats to extend several temporary, targeted tax breaks would do nothing to solve these problems.  On the latter point, I noted that such tax measures--

don't improve America's business climate because (i) prohibit long-term business planning; (ii) increase tax complexity (which disproportionately hurts small businesses that can't afford armies of lawyers and accountants); and (iii) encourage system-gaming and outright fraud, while discouraging business growth (i.e., small businesses becoming larger businesses and thus outgrowing their eligibility for the tax breaks).

Today comes an excellent new story from the Wall Street Journal that provides tons of statistical and anecdotal support for my (admittedly unoriginal) conclusions and shows just how badly our elected officials have failed in reforming the US tax code and creating a business climate that is ripe for job creation.  The entire article is well worth your time, but here are the highlights:

Both [parties] agree the code's complexity is unfair: While small and medium-size companies such as Raine forgo the headaches and the tax savings, bigger companies can more easily afford the specialized accountants and lawyers needed to claim the best breaks and gain a cost advantage...

Complexity is costly. Compliance costs for U.S. businesses and individuals have been rising, and now reach at least 1% of GDP, or about $150 billion last year, and possibly much more, according to congressional researchers.

The Byzantine nature of the tax code also adds to concerns about U.S. competitiveness in a global economy in which many other countries have eased tax rates and rules in recent years....

Tax consultants estimate that eligible businesses obtain as little as 5% of the main domestic tax breaks that they are entitled to claim. That means firms are leaving tens of billions of dollars on the table every year. Out of 1.78 million corporate tax returns in the U.S., only about 20,000 claimed any of the three dozen main business tax credits in the code, according to IRS estimates.

One example of the tough-to-take breaks is the federal Work Opportunity credit. It was designed to reward companies for hiring workers from several disadvantaged groups, including welfare and food stamp recipients, youths seeking summer jobs and ex-felons. The break typically lowers a company's taxes by up to $2,400 per employee. For businesses hiring unemployed veterans, it can be worth as much as $9,600 per worker.

The credit frequently goes unclaimed, largely because it is such a hassle. It requires extensive paperwork for each worker for whom it is claimed and the paperwork can often take a year or more to process. Sarah Hamersma, a University of Florida professor, estimates that companies claim the credit for just 20% to 35% of all eligible workers....

In the latest global rankings of national tax systems by the World Bank and PricewaterhouseCoopers, the U.S. came in 142nd out of 183 countries for the time it takes a hypothetical small manufacturer to calculate its corporate income tax (the higher the rank, the more time it takes)....

The tax thicket has been growing for years. In 1987, there were 128 major tax breaks for both individuals and companies, of which about 100 survive now. Another 100 or so have been created since then.

Many tax breaks, including the Work Opportunity credit, have recently expired but tax experts expect Congress to renew them retroactively by the end of the year, as it has in the past. Meantime, companies are unsure whether they can plan on it.

Another targeted break, the tax deduction for energy-efficient buildings, often requires computer modeling costing as much as $50,000. That leaves business owners weighing whether the credit is worth the expense....

One reason government officials favor the breaks is that they are a politically expedient way to pursue policy goals—and potentially less trouble than a fundamental easing of business tax rates and rules. Because of political pressure to hold down budget deficits, U.S. lawmakers often design tax breaks in ways intended to narrow the number of beneficiaries.

"The more complicated it is…the more [businesses] are going to say it's not worth the candle" to apply, said Dean Zerbe, a former Senate staffer who is now national managing director of alliantgroup, a tax consulting firm.

Because of low subscription rates for many tax breaks, a cottage industry of tax-credit consultants such as alliantgroup has sprung up. Fees tend to range from 15% to 30% of savings, according to consultants, but can be lower for large deals and occasionally higher.

But even with the availability of outside help, many businesses hesitate....

A tax credit that Congress enacted in 2010—for small businesses providing health-care coverage—was claimed by only about 170,300 employers, out of an eligible pool of between 1.4 million and four million businesses, according to the Government Accountability Office.

"The calculation was ridiculous," says Barbara Webber, property manager for Presidential Estates in Quincy, Mass., an owner of apartment complexes. Despite an accounting background, she said, "I struggled with it." In the end, she says, she didn't qualify due to IRS wage restrictions....

While many companies say it is too complicated to claim tax breaks, the ones who try can find themselves embroiled in complex disputes with the Internal Revenue Service.

One source of increasing contention is the federal research credit. Critics say the IRS sometimes demands more documentation than the rules require, and more than most corporate accounting systems can readily provide, in part because of overly aggressive claims by some firms in the 1990s. The result is sometimes lengthy litigation.

Bayer Corp., the U.S. unit of Germany's Bayer AG, BAYN 0.00% finds itself in just such a morass. In a dispute playing out in federal court in Pittsburgh, the IRS has disallowed 17 years worth of Bayer Corp.'s claims for the research credit—$175 million in all—on the grounds that Bayer hasn't adequately documented its expenditures or tied them to specific innovations.

Bayer said in court that it has provided adequate documentation and has gone to great lengths to gather the extra documentation that the government is demanding, but that it will take many years to fully comply with the IRS demand.

The dispute dates back to 1998. As it drags on, company officials worry it is leading their German parent to look elsewhere to conduct new research projects at a time when global competition for research and development, or R&D, dollars is heating up, according to court testimony....

Just a reminder: according the aforementioned World Bank study (also mentioned in my earlier blog post) the United States ranks 72nd in the world in terms of total business tax burden - two spots worse than last year.  And when the President and his party had total control of the US government in 2009 and 2010, they did absolutely nothing to reform the tax code and instead increased tax complexity and imposed new taxes via Obamacare.  Thus, it appears that the only jobs created by the Democrats' tax policies are for tax lawyers and consultants - not exactly an efficient use of finite resources (no offense, tax lawyers).

And yet we're talking about Bain Capital pushing US companies and jobs offshore?  Really?

Huge New Report Further Crushes Protectionist Myths about Trade, Jobs & Outsourcing

The OECD recently concluded a giant new report on the effects of open markets on employment, and the consensus conclusion couldn't be any clearer: free trade is awesome.  In the process of coming to that (admittedly broad and obvious) conclusion, the authors of the myriad studies included in the final OECD Report also debunk a whole host of protectionist myths still floating around out there about imports, jobs and outsourcing (President Obama, please take note).  Here's the press release announcing the new Report (emphasis mine):

Governments that foster open markets and resist protectionism have the best chance of stimulating inclusive economic growth and creating high-value jobs, according to a new study from 10 international organisations presented in Paris.

Policy Priorities for International Trade and Jobs, launched by OECD Secretary General Angel Gurria during the annual OECD Forum, shows that protectionist and discriminatory trade measures do not protect or preserve jobs. On the contrary, closing markets is actually more likely to stifle growth and put additional pressure on labour markets.

The report, a product of the International Collaborative Initiative on Trade and Employment (ICITE)*, analyses the complex interactions between globalisation, trade and labour markets. Drawing on numerous studies covering different parts of the globe and countries at very different levels of development, the report highlights the powerful role trade can play in driving growth and improving employment.

Of the 14 main studies undertaken since 2000 reviewed in the report, all 14 have concluded that trade plays an independent and positive role in raising incomes.
Through its impact on productivity, trade also raises average wages. Over the 1970-2000 period, manufacturing workers in open economies benefitted from pay rates that were between 3 and 9 times greater than those in closed economies, depending on the region. In Chile, workers in the most open sectors earned on average 25% more in 2008 than those in low-openness sectors.

Fears of the impact of offshoring may be exaggerated. Studies for the United Kingdom, United States, Germany and Italy demonstrate that off-shoring of intermediate goods has either no impact or, if any, a positive effect on both employment and wages.

The report also shows, however, that openness to trade is not enough. Complementary policies – such as sound macroeconomic policies, a positive investment climate, flexible labour markets and adequate social safety nets – are needed to realise the full benefits of trade....

The ICITE report debunks the principal argument against freeing up trade – the supposed impact of imports on jobs. The report says that there is no systematic link between imports and unemployment. Instead, evidence shows that in country after country, both exports and imports push productivity growth upward while helping create better skilled and higher paying jobs.

Offshoring and outsourcing by developed countries – two commonly-cited negative aspects of globalisation – often complement, rather than replace domestic jobs, while creating new, higher-wage opportunities in developing countries, according to the report.

There is enough in this report to keep even the nerdiest of trade nerds busy for a long while.  I especially like the part about the necessity of "complementary policies" to realize the full benefits of free trade.  That's something I've been arguing here for a while now - open markets are awesome, but their benefits are seriously undermined unless they're accompanied by sound fiscal policies (especially tax policies), a streamlined, predictable regulatory environment and a dynamic labor market.  Without these things, all the trade in the world won't fix what ails the US and other struggling economies.

But all the trade stuff's important too, particularly during yet-another-election-season featuring scores of US politicians spewing populist nonsense about the allegedly horrible effects of imports and outsourcing on American jobs.  At the risk of sounding like a broken record, isn't it about time we stopped listening to these people?

"Export-Oriented America"

GMU's Tyler Cowen has a new article in the American Interest that explores a lot of the issues that I've been covering here for the last few years.  Cowen first provides three reasons to think that the United States could become an export powerhouse in the next few years (hint: none of them involve China's currency or President Obama's National Export Initiative):

First, artificial intelligence and computing power are the future, or even the present, for much of manufacturing.... Factory floors these days are nearly empty of people because software-driven machines are doing most of the work....

The more the world relies on smart machines, the more domestic wage rates become irrelevant for export prowess. That will help the wealthier countries, most of all America. This logic works on both sides. America is using less labor in manufacturing, but China is too, even as its manufacturing output is rising. The fact that Chinese manufacturing employment is falling along with ours means that both our higher wages and their lower wages are becoming less relevant for the location of manufacturing decisions. The less manufacturing has to do with labor costs and relative wage levels, the greater the comparative advantage of the United States....

The second force behind export growth will be the recent discoveries of very large shale oil and natural gas deposits in the United States. Come 2030, the United States may well be the new Saudi Arabia of energy markets. We have new fossil fuel discoveries to draw upon, enough to fuel this country for decades, and there is plenty of foreign demand for those resources....

[T]he third reason why America is likely to return as a dominant export power: demand from the rapidly developing countries, and not just or even mainly demand for fossil fuel. As the developing world becomes wealthier, demand for American exports will grow. (Mexico, which is already geared to a U.S.-dominated global economy, is likely to be another big winner, but that is a story for another day.)

In the early stages of growth in developing nations, importers buy timber, copper, nickel and resources linked to construction and infrastructure development. Those have not been U.S. export specialties, and so a lot of the gains from these countries’ growth so far have gone to Canada, Australia and Chile. Usually American outputs are geared toward wealthier consumers and higher-quality outputs, which is what you would expect from the world’s wealthiest and most technologically advanced home market. To put it simply, the closer other nations come to our economic level, the more they will want to buy our stuff. Indeed most of those nations are growing rapidly, so we can expect their attentions to shift toward American exporters. The leading categories of American exports today—civilian aircraft, semiconductors, cars, pharmaceuticals, machinery and equipment, automobile accessories, and entertainment—are going to be in the sweet spot of growing demand in what we now call the developing world....

Just as Canada and Australia have prospered over the past ten years because their specialties matched Chinese demands, the United States is likely to be the bigger winner in the next ten years as Chinese (and other) demands mature. It’s a trend that has clearly already begun. In 2010, for instance, American exports to China rose by 32 percent, according to a 2011 report by the U.S.-China Business Council. Furthermore, American companies, with their practicality and marketing expertise, will be well positioned to convert scientific innovations from Chinese labs into new commercial products once such innovations start to arrive in large numbers.

So far, so good. Cowen goes on to explain that America's new export strength "will resurrect the United States as a dominant global economic power," helping to resolve the United States budget, trade and diplomatic problems.  I especially like Cowen's optimism that "[t]he opposition to free trade as it existed during the 1980s, and which led even Ronald Reagan into auto protectionism, is almost gone, and these pro-export developments mean that it won’t come back anytime soon."  I wonder, however, whether this new US support for free trade could be undermined as US exports are increasingly subject to trade remedies actions in key foreign markets like China - ironic, considering that the United States has always been one of the biggest users (and defenders) of trade remedies to curb foreign imports.  On the other hand, maybe it will result in a significant change in US trade remedies policies in forums like the WTO, seeking to impose, rather than rebuff, more stringent disciplines on nations' application of trade remedies measures.

That interesting hypothetical aside, Cowen goes on to explain the big downside to the United States big export surge:

The new export-based prosperity may not translate into higher wages for everyone, or even most people, in the United States. Skilled laborers who work with smart machines or even hold advanced managerial jobs will continue to make big gains, as the numbers have been showing for some time. Capital will do well too, especially if it is geared toward export success.... [S]ignificant segments of the American workforce are likely to continue suffering falling real wages, even in a time of rising export prowess.

As the number of American jobs in manufacturing has fallen dramatically, it is often forgotten that American manufacturing output has continued to rise, even during some slow times. In the past decade, the flow of goods coming from U.S. factories has gone up by a third as capital has increasingly become a greater share of input over labor....

[W]e’ll probably see a lot of the American workforce accept lower wages. A lot of American exporters are already experimenting with a two-tiered wage structure, with significantly lower wages for incoming workers....

To some extent, these trends resonate with the old saying, “Live by the sword, die by the sword.” Jobs in the export sector face intense competition, precisely because U.S. companies are increasingly selling into a global market, and that means wages in this sector cannot be guaranteed to rise. They might, and they might not, depending on how creative, efficient and well managed we are. Services, in contrast, are often produced inefficiently, but the jobs are more extensively cocooned within a protected domestic market, often based on government privileges and market-distorting third-party payment schemes.

Although I agree (and have argued for a long while now) that US manufacturing exports are not some magic bullet for the US labor market, I'm inclined to quibble a bit with Cowen's repeated characterization of the US services sector as "cocooned within a protected domestic market."  While that's certainly true for government jobs and certain health care and education jobs, it's definitely not the case for an increasing number of services jobs - for example in medicine, engineering, IT and, yes, even law (trust me) - that totally dominate in the face of real and growing global competition (precisely because US services providers are much more "creative, efficient and well managed" than their global counterparts).  Cowen seems to imply later (see below) that a such a dynamic services sector is to be expected in the coming years; I'd argue that, in this respect, the future is indeed now (and it's not nearly as dystopian as Cowen makes it out to be).

Nevertheless, Cowen next explains that even his overly-bad news comes with a silver lining:

There is the prospect of a better career path, accompanying future export gains, that stands a chance of making life less grim for the working class. Some of the new technological and export-related breakthroughs will consist of making education and health care more affordable, often through software and smart machines that bypass the current credentialized control of those fields. Imagine getting an online medical diagnosis from a smart machine like IBM’s Watson, or learning mathematics from an online MITx program or one of its successors. The American poor and lower middle class will have considerably greater opportunities, at least if they are savvy with information technology and disciplined enough to take advantage of these new free or cheaper goods. Of course, this will not come close to helping everybody. These internet tools reward the self-motivated, who will be disproportionately well educated, even if their parents lack higher education, wealth and connections. Many of the rest will still fall by the wayside.

Even American earners who must cope with stagnant wages will probably reap big gains from new opportunities to lower their basic living expenses. Imagine a family earning $37,000 per year that has much cheaper education and health care costs, thanks to government benefits and internet-based innovation. No one will be tempted to call such households wealthy, but they won’t fit the standard measure of poverty either. They will have positive experiences in their lives and lots of free and nearly free goods....

The internet will continue to make it easier for small businesses to export, but many of the growth areas, including fossil fuels, heavy equipment and cars and other high-tech items will remain the province of big business. America will likely see a new age of corporate titans selling their products and services to the entire world, and the world as a whole will be far wealthier than in times past. The wealthiest American earners will be very wealthy indeed, even by current standards. Due to their export activities, they will take an increasingly global perspective, and they will give away lots of their money, just as Bill Gates has expanded his philanthropy abroad.

Cowen concludes by predicting that the growing divide between the hyper-productive and over-protected will grow to dominate our society and our politics:

These days, this old portrait of the two-tiered economy, originally applicable to a developing economy, may be re-emerging for the United States. We had not thought through seriously enough the possibility that the world’s most technologically advanced economy would, over time, develop persistent and indeed growing productivity differentials across sectors. It clearly has, and the social and political frictions this has caused now dominate our politics—or soon will.

One way to understand this is to note a neglected implication of Moore’s Law for computer processing speed, namely that its use in the value-added process benefits some economic sectors much more than others. In this case the static sector consists of the protected services (a big chunk of health care, education and government jobs), and the dynamic sector is heavily represented in U.S. exports, often consisting of goods and services rooted in tech, connected to tech, or made much more productive by tech innovations. Piece by piece, bit by bit, we Americans are replicating the two-tiered developing economy model, albeit from a much higher base level of wealth and productivity.

A battle between the "static sector" (e.g., public sector and industrial unions) and the "dynamic sector" (e.g., industrialists, non-union workers and professional services)?  Is this really, as Cowen contends, the distant future of American politics?

Or is "the future" right now?

Manufacturing Jobs Won't Save Labor Market Says... US Labor Department?

Reuters published a great analysis last week of the future of the US labor market, and the report's main conclusion shouldn't surprise anyone who's followed this blog for a while: the US manufacturing sector will experience a renaissance of sorts and may even see a near-term uptick in jobs, but longstanding, systemic factors - mainly continuing improvements in productivity - will prevent manufacturing jobs from keying a long-term recovery in the struggling US labor market.  What is surprising, however, is that the latest data come from President Obama's own Department of Labor:

U.S. manufacturers are hiring at the fastest pace in more than a decade to keep up with new orders but sweeping technological advances could cost thousands of factory workers their jobs in years to come.... 

Last year, factories added 237,000 jobs - the most since 1997 - and that burst in hiring is seen stretching into this year as the economy recovers from the 2007-09 recession. 

But a renaissance for industrial employment is unlikely. Over the long term, factory job creation looks destined to stagnate as technology advances, and manufacturers' role in the labor market will likely continue a decades-long decline. 

A Labor Department report published on February 1 projected factory employment will drop to 11.5 million workers by 2020 - down from 11.9 million in January - despite expectations production will increase in coming years....  

Even though the United States remains a pre-eminent manufacturing power, accounting for about a fifth of global factory output, only 9 percent of its workforce is engaged in factory activity, and that percentage is falling. Manufacturers' share of the labor market will likely drop to 7 percent by the end of the decade, according to the government projections, down from nearly a third in the 1950s when unskilled workers played a bigger role....

The Labor Department's new report is available here.  Almost all of the topline conclusions are important, but here are a few of the most telling:

• The health care and social assistance sector is projected to gain the most jobs (5.6 million), followed by professional and business services (3.8 million), and construction (1.8 million).

• About 5.0 million new jobs--25 percent of all new jobs--are expected in the three detailed industries projected to add the most jobs: construction, retail trade, and offices of health practitioners. Seven of the 20 industries gaining the most jobs are in the health care and social assistance sector, and five are in the professional and business services sector.

• The 20 detailed industries projected to lose the largest numbers of jobs are primarily in the manufacturing sector (11 industries) and the federal government (3 industries).

• Of the 22 major occupational groups, employment in healthcare support occupations is expected to grow most rapidly (34.5 percent), followed by personal care and services occupations (26.8 percent), and healthcare practitioners and technical occupations (25.9 percent). However, the office and administrative support occupations group, with projected slower than average growth of 10.3 percent, is expected to add the largest number of new jobs (2.3 million).

• One-third of the projected fastest growing occupations are related to health care, reflecting expected increases in demand as the population ages and the health care and social assistance industry grows.

• Occupations that typically need some type of postsecondary education for entry are projected to grow the fastest during the 2010-20 decade. Occupations classified as needing a master’s degree are projected to grow by 21.7 percent, followed by doctoral or professional degree occupations at 19.9 percent, and associate’s degree occupations at 18.0 percent.

• Of the 30 detailed occupations projected to have the fastest employment growth, 17 typically need some type of postsecondary education for entry into the occupation.

• Two-thirds of the 30 occupations projected to have the largest number of new jobs typically require less than a postsecondary education, no related work experience, and short- or moderate-term on- the-job training.

• Only 3 of the 30 detailed occupations projected to have the largest employment declines are classified as needing postsecondary education for entry.

So what do these numbers tell us?  Well, first and most obviously, manufacturing employment will continue its decades-long decline in the United States, particularly as a share of GDP.  Of course, as I've repeatedly mentioned, the long-term decline is not just an "American" phenomenon - it's happening pretty much everywhere in the world:

And before you ask, yes, it's also happening in China.  For example, Chinese manufacturing giant Foxconn announced recently that it plans to replace 500,000 workers with robots over the next few years.  And it's certainly not alone.

However, the outlook for US manufacturing in every area other than employment is quite good.  Reuters notes that the United States will continue to be a global manufacturing powerhouse, and, interestingly, we have China (in part) to thank for that:

[A]nalysts say much of the recent hiring spurt is just a temporary rebound from the recession, when manufacturing output fell about 20 percent and factories laid off 2 million people. Still, there are factors supporting the sector.... 

After a decade of heightened competition with China, which devastated American industries like clothing makers, the U.S. factories that remain are more high-tech and less likely to be undercut on labor costs. 

Moreover, wages in China are rising much faster than in the United States, reducing the incentive to offshore production, while the recession itself raised pressure on U.S. companies to embrace more cost-saving measures, like automation. 

S & S Hinge Company, for example, has retooled its plant in Bloomingdale, Illinois, since the recession. A pair of computers runs its newest production line, which makes hinges 50 percent faster than older lines. That is helping the firm meet rising orders for parts that go into pickup truck toolboxes while reducing the need for more staff. 

"We've upgraded our factory. We actually put in a new operating system. So it has cut the need for more bodies," said Richard Sade, the company's chief operating officer.

Fascinating stuff.

Second, the Labor Department report shows just how helpful a good education will be for finding and keeping a job in the 21st century American labor market.  Most of the fastest growing job sectors require post-secondary education, while almost none of the shrinking sectors do.  However, all is not lost for less-educated Americans, as the numbers make clear that there will still be plenty of jobs out there for them too (although not in manufacturing, it seems).

And that brings me to the third big takeaway from the DoL report: clearly the most promising sectors for jobs in America are almost all in services, especially health care.  Again, this is not surprising.  Services' share of the US labor force and GDP has been climbing for years now, and it's where the United States is globally dominant.  Reuters again:

As grim as that sounds for many workers, a future with fewer factory jobs isn't necessarily bad for the economy. 

Part of the drive to be more efficient has led factories to outsource more work, contracting services from accounting firms, consultancies and other companies.

Even though the number of workers in U.S. factories today is roughly the same as 70 years ago, jobs in business services, a sector that includes many people working indirectly for manufacturers, have grown eight-fold. The Labor Department expects business services will be one of the top job-creating industries in coming years.

As I noted a couple months ago, the often-maligned services sector has plenty of room for growth and produces tons of high-paying, globally-competitive jobs.

But it's this obvious fact that has me calling the Labor Department report "surprising."  President Obama has spent the last few months touring the US factories and touting a labor market recovery based seemingly on only American manufacturing.  And his budget and tax proposals are all biased in favor of manufacturing (and thus inherently biased against services).  This makes absolutely no sense, as Reuters politely notes:

[The services boom] makes plans by Obama to give manufacturers special treatment - or to penalize them for offshoring jobs - wrongheaded, says Jagdish Bhagwati, an economist at Columbia University.

Obama last week proposed new tax breaks for manufacturers, but many economists view the decline in factory employment as a normal part of the economy's development.

Very normal... and happening here in the United States for a very long time now.  So long that even the US Department of Labor has caught on.

So when it comes to fixing the American jobs market, maybe the President should - and I can't believe I'm about to say this- chat more with the Labor Department and less with his political staff next time.

(Okay, stop laughing.)

Right Now

There's an old joke that the definition of "chutzpah" is when a man kills his parents and then pleads for mercy on the grounds that he's an orphan. (Ba-dum-cha!)  Well, after President Obama's speech this morning on the dismal June jobs numbers, I think we have a new definition: when a President and his political party do everything in their power to stall four-year old US trade agreements and then publicly grouse about the deals' still-pending status.

In trying to deflect blame for the United States' continued inability to escape the doldrums of the 2009 recession (the worst "recovery" ever, by the way), the President stated today:

There are a few things that we can and should do, right now, to redouble our efforts on behalf of the American people.... Let me give you some examples.... Today, Congress can advance trade agreements that will help businesses sell more American-made goods and services to Asia and South America, supporting thousands of jobs here at home. That could be done right now.

Actually, Mr. President, that could have been done in 2008, had then-Speaker Pelosi (D-CA) not rewritten the longstanding congressional-executive agreement on Trade Promotion Authority (and "fast track" before that) when President Bush tried to implement the US-Colombia FTA.

And that could have been done in 2009, had you not shelved the FTAs in order to placate your party's protectionist wing.

And that could have been done in 2010, had you not demanded that each one be renegotiated in order to further stall the agreements and to pay off powerful domestic constituencies.

And that could have been done earlier this year, had you simply submitted the renegotiated FTAs' implementing legislation to a Republican-controlled House of Representatives that was literally begging for you to do so.

And that even could have been done last week, had you not attached a "poison pill" to the US-Korea FTA in the form of an expensive and highly controversial Trade Adjustment Assistance (TAA) expansion that congressional Republicans had already voted down in February and had repeatedly warned would be deal-killer.

And, despite all of this, Mr. President, you and Congress could still implement these FTAs right now if you would just submit clean FTA implementing legislation to the House and Senate pursuant to TPA.

So, what do you say, Mr. President?  How about we get on this?

Right now.

Protectionists Must Have Nightmares about the iPod

From Mark Perry comes even more proof that the iPod is a protectionist's worst nightmare.  I've already documented the growing number of iPod (and iPhone) studies which show that the modern global economy isn't, as our President and many other politicians claim, some sort of ruthless, zero-sum, "us versus them" competition among nations.  (Think Thunderdome without the bungee cords.)  The earlier "iPod studies" analyzed the iPod's and iPhone's global design and manufacturing processes and showed how, even though the gadgets say "Made in China," it's America, not China, that gets most of the profits from their sale.  The studies thereby demonstrated how modern global supply chains (i) have turned bilateral trade statistics into worthless measures of trade policy and (ii) can provide huge benefits for Americans beyond the obvious cost savings, even when the product at issue is wholly assembled abroad.

Now comes a new study published in the Journal of International Commerce and Economics which shows the dramatic benefits that the iPod's global manufacturing process - and American innovation more generally - deliver to the American workforce.  The abstract gives the study's basics:

Globalization skeptics argue that the benefits of globalization, such as lower consumer prices, are outweighed by job losses, lower earnings for U.S. workers, and a potential loss of technology to foreign rivals. To shed light on the jobs issue, we analyze the iPod, which is manufactured offshore using mostly foreign-made components. In terms of headcount, we estimate that, in 2006, the iPod supported nearly twice as many jobs offshore (27,250, see chart above) as in the United States (13,920). Yet the total wages paid in the United States ($746 million, see chart above) amounted to more than twice as much as those paid overseas ($318 million). Driving this result is the fact that Apple keeps most of its research and development (R&D) and corporate support functions in the United States, providing thousands of high-paid professional and engineering jobs that can be attributed to the success of the iPod. This case provides evidence that innovation by a U.S. company at the head of a global value chain can benefit both the company and U.S. workers.

Cool.  Perry also provides a great table to demonstrate the authors' topline data point:

The study's authors then conclude:

When innovative products are designed and marketed by U.S. companies, they can create valuable jobs for American workers even if the products are manufactured offshore. Apple’s tremendous success with the iPod and other innovative products in recent years has driven growth in U.S. employment, even though these products are made offshore. These jobs pay well and employ people with college degrees. They are at the high end of what might be considered middle class jobs and appear to be less at risk of vanishing from the United States than production jobs.

In short, even when an American-designed product is made overseas, it can - and often does - support tens of thousands of American jobs at pretty great pay.  And, oh, yeah, other countries benefit too.  Very, very cool.

So much for that ruthless competition, eh?

p.s. For those of you who might claim that we could have even more jobs if we lobbied the US government to force Apple to produce and assemble their gadgets in the United States, you'd be wrong: the devices would necessarily cost more to produce - maybe a lot more.  Thus, these "American iPods" would, at best, result in fewer sales and fewer support jobs (and R&D into new, supercool Apple stuff), and, at worst, they wouldn't exist at all when priced entirely out of the market.

New Study: More Trade = More Jobs

One of the big problems with the political debate over US trade policy is that politicians and much of the American public demand that trade policies be sold in terms of jobs, regardless of whether good data tying trade to employment actually exist.  Free traders typically refuse to speak of trade in terms of net-jobs-created because they know that basic economics teaches us that trade liberalization is really about better jobs, not necessarily more jobs.  Protectionists, on the other hand, rarely display such, ahem, economic limitations and are thus all too eager to cite bogus studies tying free trade policies to ridiculously specific numbers of lost American jobs.  (For a great example of this unfairly tilted political playing field, check out this classic column by AEI's Phil Levy on protectionists' absurd claims about supposed US job-losses caused by NAFTA.)

Thus, the typical exchange at a Congressional hearing (or your local watering hole) goes something like this:

Congressman/Bartender: Want to me to support this FTA?  Well, then tell me how many jobs it's going to bring to my district/town.

Naive free trader: Well, sir, free trade really isn't about creating more jobs, it's about productivity gains, creative destruction and better jobs, and, of course, it's about expanding the freedom of the American people to choose how and with whom they do business, rather than forcibly limiting that freedom in order to benefit a select group of well-connected producers and unions.

Angry Protectionist: The FTA will destroy 734.6 jobs.

Seriously, is it any wonder why the poll numbers on trade routinely stink?  Unfortunately, today's economic environment has exponentially increased the political pressure to tie trade (or any other) policies to specific job numbers, so the disadvantage that free traders face in the political arena is even more acute than ever.

That's why a new study in the European Economic Review called "Trade and Unemployment: What Do the Data Say?" could be a really great new resource for those seeking to advocate free trade policies using intellectually honest arguments.  According to the study's authors, there is strong empirical evidence that nations that trade more - through exports and imports - have lower long-term unemployment.  Here's the paper's abstract (emphasis mine):

This paper documents a robust empirical regularity: in the long-run, higher trade openness is associated with a lower structural rate of unemployment. We establish this fact using: (i) panel data from 20 OECD countries, (ii) cross-sectional data on a larger set of countries. The time structure of the panel data allows us to control for unobserved heterogeneity, whereas cross-sectional data make it possible to instrument openness by its geographical component. In both setups, we purge the data of business cycle effects, include a host of institutional and geographical variables, and control for within-country trade. Our main finding is robust to various definitions of unemployment rates and openness measures. Our benchmark specification suggests that a 10 percentage point increase in total trade openness reduces aggregate unemployment by about three quarters of one percentage point.

Did you get that?  Ok, me neither.  Fortunately, Reason Magazine's Ronald Bailey translates this nerdspeak into regular English for us regular folk:

[The study] forthrightly asks the question: Does exposure to international trade create or destroy jobs? Their answer strongly backs the observation made by Franklin more than 230 years ago. “A 10 percent increase in total trade openness reduces aggregate unemployment by about three quarters of one percentage point,” they conclude. To be a bit more precise, they find, “A 10 percentage point increase lowers the equilibrium rate of unemployment by about 0.76 percentage points.” Trade creates jobs.

In general, the higher a country’s volume of international trade, the higher is its degree of openness. Trade openness is generally measured by adding together the value of both exports and imports and dividing that sum by total gross domestic product (GDP). Crudely, let’s say an economy imports $10 billion annually and exports $10 billion annually and has a total GDP of $100 billion. That would yield a trade openness index figure of 20 percent. Another country with a GDP of $100 billion exports $15 billion and imports $15 billion, yielding a trade openness index of 30 percent.

Roughly speaking, U.S. GDP was $15 trillion in 2010, and exports and imports combined totaled just over $4 trillion, yielding a trade openness index figure of 27 percent. Without going into detail, the European economists derive a real trade openness index by taking differing price levels among countries into account.

The researchers then compare the relative trade openness of 20 developed countries in the Organization for Economic Cooperation and Development with their unemployment rates over time. They take into account other factors such as union membership, national employment protection policies, tax rates on wages, and the generosity of unemployment insurance....

The researchers go on to analyze the effect of freer trade on a selection of 62 developing countries. They take into account features like the size of the black market economy and whether a country is landlocked or not. Again, they find that openness to trade boosts employment, concluding that “the effect of a 10 percentage point increase in openness lowers unemployment by about 1 percentage point.”

So why does free trade create more jobs? The study suggests that freer trade boosts overall productivity, enabling companies to hire more workers. Trade enhances competition which weeds out inefficient firms and allows more productive ones to expand. As the average efficiency of firms in a country increases, they can earn more revenues by boosting production. And that leads to hiring additional workers.

In short, the study's authors have demonstrated through oodles of hard data that all the increased productivity and long-term economic growth caused by trade ends up eventually translating into not only better jobs, but also more jobs.  (And please note that trade deficits and surpluses don't matter - what does matter is total trade, regardless of the "balance.")

Pretty cool, huh?  Actually, it's more than cool - it's a very, very helpful little nugget for the upcoming congressional debate over pending US trade agreements with Korea, Colombia and Panama, which will doubtlessly increase total trade by eliminating barriers on goods and services traded between the countries involved.

Now, let's go back to our earlier hypothetical:

Congressman/Bartender: Want to me to support this FTA?  Well, then tell me how many jobs it's going to bring to my district/town.

Emboldened free trader: Well, sir, countries that trade more have significantly lower unemployment than those that don't, and this FTA will inevitably increase US trade with Korea/Colombia/Panama.  And, of course, free trade is also about expanding the freedom of the American people to choose how and with whom they do business, rather than forcibly limiting that freedom in order to benefit a select group of well-connected producers and unions.

Angry Protectionist: The FTA will, umm, destroy 734.6 jobs.  Hey, stop laughing at me.  Seriously, stop.  That's not cool.

Much, much better.

UPDATE: In a case of crazy coincidence, Cato's Dan Griswold just published a new blog post on the latest bogus "jobs" study.

Tuesday Quick Hits

Since I was traveling last week, you might be behind on your reading. Here are some headlines to catch you up:

• NC State University Report: North Carolina ports support more than 65,000 jobs across the state and provide an economic impact of $7.5 billion.

• Doing business in China can really stink for US companies; investor/buyer/seller beware.

• GMU's Russ Roberts absolutely dismantles Paul Krugman's (and others') latest nonsense about the omnipotence of America's "rich".

• Geithner: Chinese inflation is driving the real US-China exchange rate and altering companies' business decisions.  (Yes, this should all sound very familiar.)

• Hyundai and Kia are dominating in Alabama and Georgia, respectively, and bringing American manufacturing jobs with them.  (And Cafe Hayek's Don Boudreaux provides some great additional commentary.)

• In the Solyndra debacle comes further proof that the US government's record on "investing" in green manufacturing is abysmal, and that private (aka "real") investment and government (aka fake) "investment" are two very different things.

• EU-Korea FTA clears its final hurdle in Europe.

• US to China: invest in our debt, not our companies.

• Ikenson: Tony Soprano meets the US antidumping law.  And Simon Lester adds some helpful anonymous commentary. 

Enjoy.

Tuesday Quick Hits

A few interesting items worth a brief mention tonight:

• The amazing potential of logistics improvements in developing countries.  Back in January, I opined on what free traders (and companies seeking or reliant upon expanded trade) could do instead of just sitting around lobbying a disinterested Obama administration for action on FTAs, the Doha Round, etc.  My main suggestion was for private in investment in, and development of, developing countries logistics.  My reasoning: "the potential returns on private logistics investment - significant improvements in economic development and trade - could be worth the costs to US and other companies with a big stake in increased economic engagement with the developing world, i.e., trade in their goods and services."  Well, today's Financial Times has a neat story on Colombia that provides a fantastic real world example of what I was thinking.  My favorite stat: "Until five years ago, only 15 per cent of Colombia's roads were paved, most of them single lane. In a country where some 70 per cent of cargo is hauled by truck, that made high transport costs a regular burden.  'It costs me as much to ship goods from China to Colombia's main Pacific port, as it does from the Pacific coast up to Bogotá,' says one businessman."  The solution to this problem has been a massive influx of public and private investment in Colombian infrastructure and logistics that will create massive gains in trade and economic growth.  Very cool. 

• Pols v. Robots.  Mark Perry has a fantastic blog entry today on manufacturing jobs, productivity and trade.  The whole thing is worth reading, but I especially enjoyed his "honest re-write" of recent statements by everyone's favorite protectionist, Sen. Chuck Schumer (D-Campaigning), on trade with China and manufacturing job losses.  Perry's rewrite exchanges protectionist myth with economic reality, and the result is the good Senator "getting tough" with technology (as the true driver of job losses) in order to bolster American industrial employment.  As of the time of printing, the robots were unavailable for comment. 

• Can this White House get any worse on trade?  Umm, maybe.  Apparently, Larry Summers is leaving his post as director of the National Economic Council.  Now, it's not like Summers, a strong historical advocate for free trade, was really dictating White House US trade policy over the last 14 months, but still, it's never good to lose a loud voice for economic sanity in a place already dominated by politicos Rahm, Axe and Val.   Blech.

That's all for now.

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), 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.

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.

America's Development History

Courtesy of Cafe Hayek's Russ Roberts comes a fantastic lesson from NPR (of all places) about creative destructon and American wealth and innovation: "The Jobs Of Yesteryear: Obsolete Occupations." As Roberts notes, the slideshow, which includes supporting text and audio, demonstrates how most of America's jobs of yesteryear were "lost" because of technological advances, not foreign competition.

I'd add that the slideshow provides a few other good lessons. First, and as a corollary to Roberts' point, the realities of how many jobs really are "destroyed" in America - i.e., by becoming obsolete - shows that one can't focus only (or mainly) the sheer number of jobs created, but also the quality of those jobs. America could add a million jobs tomorrow by mandating the use of typists or elevator operators, but would we really be any better off? (If only someone would ask this question to the state of New Jersey, which still mandates that all gas stations be full service only!)

Second, the photo gallery shows just how predominant child labor was during America's years as a "developing country." Indeed, several of the jobs highlighted - copy boys, pinsetters, switchboard operators (before the kids' pranks became unbearable) - were done mostly by children. Knowing this reality of American development provides some much-needed context when we hear the loud concerns and judgments about child labor in places like India and China coming from people in advanced developed economies that had very similar labor practices during their development. Now, I'm not saying that such concerns/judgments are always insincere or unnecessary - that's obviously untrue - but they do require this historical context. (A point Mark Perry also makes today in discussing a very cool news story about China's workers.)

Finally, and on a more humorous note, it's quite telling that the job of "Lector" - basically a guy who would read the news aloud while people rolled cigars - hasn't been used in the United States for 100 years but, as the NPR slideshow notes, is still being used in Cuba. Ahh, Cuba: socialist paradise!

Protectionist Campaigning for Dummies, ctd. (and a Quick Note re: My Comments Policy)

Before I get to the substance of today's entry, please indulge a quick introductory remark about my "comments policy" for this blog. (I promise that this entry is worth reading in full, so just bear with me.)  I manually publish or reject all comments and have a general rule that I'll publish any comment that is (a) complimentary/supportive of the blog in general or the entry in particular; (b) contradictory yet honest and worth my response; and/or (c) otherwise harmless.  On the other hand, I won't publish a comment that is (a) spam/profane/incendiary; (b) laden with factual errors that I don't have to the time to refute (especially when I've already refuted them elsewhere on the blog); and/or (c) appears to be sent by someone who has an obvious personal or professional bias against what I'm saying.  On that last point, it's typically pretty easy for me to determine "bias" when I look at my blog's visitor log and check out a commenter's IP address, location and/or place of business (behold, technology!).  For example, if I write about sugar subsidies and then see that someone from the sugar industry logged on and tried to paste some counterfactual propaganda in a comment, I'll reject the comment.  Pretty simple.

This longwinded-but-necessary introduction leads me to my blog post from Friday, in which I opined on the possible political motivations behind new protectionist legislation from Congressman Gene Taylor (D-MS) that would force the United States to withdraw from NAFTA.  One of my main conclusions was that Taylor's legislation, which (i) was based on a classic protectionist myth about free trade and US manufacturing job losses and (ii) would never, ever become law, was probably little more than a cynical way for the Congressman to grub some free campaign advertising, even though the protectionist myths propagated by the legislation could, if followed, actually end up harming many of his trade-dependent constituents (Taylor represents a district in Mississippi with three international ports).

On Sunday, I received a rather detailed and disgruntled comment from the anonymously-named "Researcher" that appeared to meet both "reject criteria" (b) and (c) mentioned above.  On the former criterion, the comment itself was a longwinded defense of Congressman Taylor's protectionism that relied on several of the myths that I've repeatedly debunked on this site.  (And yes, I was just heartbroken that Researcher wasn't familiar with my work!) On the latter criterion, a quick glance at my visitor log indicated that "Researcher" lived in Washington, DC and was Googling "'gene-taylor' NAFTA" on a Sunday afternoon - thus setting off my spidey-senses that perhaps "Researcher" had a personal stake in this debate (or was just really, really bored).  For these reasons, I chose not to publish Researcher's comment, and figured that was the end of the story.

I was incorrect.

Yesterday, the same "Dummies" blog post received another, more confrontational comment from Researcher that said, in what I imagined to be his/her best Jack Nicholson voice, "Why did you delete my comment? Can't handle the truth?"  The gauntlet, as they say, had been thrown.  Normally, I'd still ignore such puerile taunting, but because there are a few things in Researcher's original comment that I really haven't covered before, and because the comment itself provides some very valuable and relevant insights, I think that a response would actually provide everyone with a great "teachable moment," as the kids like to say.  So I've decided to take Researcher's bait and to respond in full to his/her original comment... in (what I hope to be) excruciatingly embarrassing detail.

I've now posted each of the comments at issue in the comments section of the original blog post, but for ease of reference, here's the first comment in full:

Taylor is senior Member of the House Armed Services Committee and has seen all the evidence that you deny of the economic inefficiency and the threat to national security from the rapid decline of our manufacturing workforce and industrial base. It took years to build MRAPs to save the lives of soldiers and Marines from roadside bombs in Iraq because we no longer have the industrial capacity to respond quickly to a surge in demand. The cost to taxpayers was very high because we did not have the domestic capacity for the parts and supplies for efficient manufacture of thousands of new vehicles. The United States is losing the ability to be self sufficient when necessary and that is a significant loss.

The jobs data is very clear. Since we went all-in for free trade, whenever we have a recession (2000-01, 2008-09) we lose millions of jobs in the U.S. and most of the manufacturing jobs do not come back after the economy improves. Companies do not invest in new plants or substantial expansion of existing plants except in industries where buy-American policies require it, such as defense production, or where we have informal protectionist agreements, such as the voluntary deal with Japan automakers that encourages them to make their cheaper cars in the U.S.

So there you go.  Readers of this blog will immediately recognize that Researcher's comments rely on several classic "protectionist myths."  I'll dismantle each of these one-by-one (not in order), and then I'll hit on a few specific points that are unique to the comment above.  Finally, I'll discuss some very interesting and ironic things I've discovered about Researcher and his/her comment.

Myth #1: The US manufacturing sector ("our industrial base") is "rapidly declining."  As I've noted many, many times, tall tales about the demise of US manufacturing are probably the most prevalent, and misguided protectionist myth out there.  First, until the onset of the latest recession, the US manufacturing sector was setting all kinds of performance records.  As noted in my Cato Institute paper last year: "According to nearly every financial statistic that is relevant to evaluating the health of the manufacturing sector, it was unequivocally thriving until the onset of the recent US financial crisis and recession.  In 2006, US manufacturing achieved record highs for output, revenues, profits, investment returns, exports, and imports.... [I]n 2007 new records were set for output, revenues, value added, and exports in the manufacturing sector." (See paper for footnotes, but don't bother: it's all government data.)  During this same period ('06-'07), do you know what else was setting records?  Yep: imports.  Of course, the strong, positive relationship between imports and US manufacturing success makes total sense when you consider that almost 60% of all imports into the United States are capital goods and equipment - things that American manufacturers rely on to produce their globally competitive products (in record amounts).

Oh, and just so we're totally clear, the US manufacturing sector was, and remains, the world's largest: according to the United Nations Industrial Development Organization, US factories are the world’s most productive, accounting for 25 percent of global manufacturing value-added.  By comparison, Chinese factories account for only 10.6 percent. (But don't just take my, or the UN's, word for it: the White House's 2009 "Manufacturing Framework" also made America's manufacturing dominance crystal clear.)

Second, while the current recession certainly put a damper on the US manufacturing sector (and every other sector), our "rapidly declining industrial base" is actually leading the economy into recovery: just yesterday the Institute for Supply Management released its monthly "factory index," a widely accepted metric of manufacturing health, which showed that US manufacturers had increased production and employment in February - the seventh straight month of expansion - thus "signaling [that] factories are leading the nation out of recession as the new year begins."  So not only are Researcher's claims about the demise of the US manufacturing sector without merit, but so are his/her additional claims that recessions somehow accelerate American deindustrialization and discourage manufacturing investment.

And one final point here, I find it hilarious that someone would cite "Buy American" provisions as the gold standard of manufacturing efficiency and productivity.  As I've already noted, the Stimulus* Bill's Buy American provisions have been an abject disaster - harming many US companies and literally causing the destruction of perfectly good raw materials out of fears that they didn't comply with a unnavigable labyrinth of bureaucratic regulations.  And the GAO recently found that these same Buy American rules were creating massive inefficiencies in construction and manufacturing projects across the country.  Awful.

Myth #2: Imports destroy US manufacturing jobs.  Researcher is undoubtedly correct about one thing: the number of manufacturing jobs is decreasing in the United States.  However, this has absolutely nothing to do with imports or free trade (or, as shown above, the state of the US manufacturing sector).  Indeed, as noted in the aforementioned Cato Institute paper, total US manufacturing jobs peaked in 1979 "and started to decline well before trade accounted for even a fraction of GDP."  And NAFTA certainly had nothing to do with it: "Between 1979 and 2007 the number of US manufacturing jobs declined from 19.4 million to 13.9 million, or by 196,429 per year.  In the 14 years between 1979 and the launch of NAFTA, the U.S. manufacturing sector shed 2.7 million jobs. In the 14 years between the launch of NAFTA and 2007, the sector shed an almost identical 2.8 million jobs."  So much for that nefarious job-destroyer that is NAFTA, huh?

The truth is that developed countries around the world have been steadily losing manufacturing jobs since the 1950s, and this trend is due to rapidly increasing productivity, technology gains and changing consumer tastes, not free trade. According to the CIA's World Factbook, Germany, the United States, Japan, Italy, France, the Netherlands and the UK are all among the world's top ten merchandise exporters; according to the OECD, some are net importers, and others are net exporters.  Yet the long-term industrial employment trend for each country is decidedly downward (but for a few random upticks).  So neither a country's total exports output nor its trade balance is a magical recipe for retaining manufacturing jobs.

Heck, even those awful, currency-manipulating Chinese (/sarcasm) are losing manufacturing jobs: According to a recent op-ed by GMU's Walter Williams, China has lost over 4.5 million manufacturing jobs since 2000 - a lot more, by the way, than the United States (about 3.3 million, according to the BLS).  Williams helpfully adds, "In fact, nine of the top 10 manufacturing countries, which produce 75 percent of the world's manufacturing output (the U.S., Japan, Germany, China, Britain, France, Italy, Korea, Canada, and Mexico), have lost manufacturing jobs but their manufacturing output has risen."

So, Researcher, if you just have to blame something for American manufacturing job losses, blame the robots, not NAFTA or free trade.  (Cafe Hayek's Don Boudreaux has even more on NAFTA, trade and job losses here, if you're interested.)

One final note for anyone still not convinced: recent government statistics show that 2009 witnessed a very significant contraction in US imports, total US trade (exports and imports), and the US trade deficit.  And do you know what else characterized 2009?  Cripplingly high unemployment!  Enough said.

Myth #3: Imports and "free trade" threaten national security.  Protectionists love to scare the bejeebus out of people by claiming that without widespread protectionism, America's manufacturing sector - and thus its national security - is gravely at risk.  I've already detailed above how manufacturing fearmongering is routinely, ahem, manufactured, but national security fearmongering, while despicable, is also par for the protectionists' course.  Here's Cato's Dan Ikenson refuting (unsurprisingly) the United Steelworkers union back in 2001:

U.S. military accounted for less than 0.1 percent of industry deliveries in 2000. During the Vietnam War, steel deliveries to the military accounted for 1.9 percent of the total market. This confirms that U.S. steel capacity and production so exceed military demand that even massive production cutbacks have no security implications. There are no legitimate shortage concerns--only hypocrisy.  The industry warns of shortages while seeking to curtail supply.

Sounds familiar, does it not?  And, let's keep in mind that the stats above are from 2000 - back when the now-vibrant US Steel Industry was a complete mess.

Clearly, the broader protectionist claims about free trade undermining national security by accelerating American deindustrialization are completely false, but what about the discrete claims - about procurement problems during the US military's production of MRAPs (Mine Resistant Ambush Protected vehicles) - that Researcher brings up?  Well, they also appear to be flimsy.  According to 2009 Testimony by the GAO on Rapid Acquisition of MRAP Vehicles, "DOD use of a tailored acquisition approach to rapidly acquire and field MRAP vehicles was successful" (emphasis mine).  GAO also found that one of the reasons that the MRAP "rapid acquisition" program was so successful was because of expanded trade: "The Secretary of the Army waived a restriction on armor plate steel, which expanded the countries from which DOD could procure steel." In other words, eliminating restrictive procurement rules allowed the government to produce MRAPs even more quickly. Shocking, I know.

But let's ignore all of these facts and assume arguendo (lawyer word!) that the MRAP program demonstrates a weakness in the US industrial base which requires some form of discrete protectionism (admittedly, there is some vague reference to this issue on page 4 of the GAO Report).  Although my earlier points make clear that "free trade" didn't possibly cause US manufacturing weakness, such "national security protectionism" is perfectly in line with current free trade theory and practice.  Indeed, even Milton Friedman himself once wrote that "it cannot be denied that on occasion [national security] might justify the maintenance of otherwise uneconomical productive facilities."  Moreover, all US free trade agreements contain express exceptions for military procurement (e.g., NAFTA Article 1018) and for trade restrictions based on national security concerns (e.g., GATT Article XXI and NAFTA Article 2102).  So to claim that NAFTA or "free trade" theoretically or legally undermines US national security is just plain wrong.

More importantly, Researcher's (and Rep. Taylor's) grand solution - completely dissolving NAFTA to justify some form of extremely limited national security protectionism - is a classic case of "throwing the baby out with the bath water."  While the United States government might possibly have a direct and identifiable national security interest in protecting certain domestic MRAP suppliers, it has no such interests in also protecting domestic producers of tomatoes or t-shirts or footwear or lumber or televisions or automobiles (and so on).  Yet Taylor's anti-NAFTA legislation (and other broad protectionist strokes like it) would do just that - and thus destroy all of the awesome benefits (totally unrelated to MRAPs or any other discrete military procurement) that free trade provides American businesses and families (especially those with lower incomes), while also unnecessarily and unfairly restricting every American citizen's right to engage in voluntary, mutually beneficial transactions with whomever he or she so chooses.  As such, Researcher's and Taylor's protectionist dreams, if enacted, would impose an immoral, unnecessary and regressive tax on basic necessities, industrial inputs, consumer products and luxury items. 

In short: such proposals are as immoral as they are absurd.

With that, I think I've totally overdone itadequately disposed of Researcher's original comment about NAFTA, US manufacturing, national security and even MRAPs.  Of course, if Researcher had just spent 20 minutes poking around my blog, he/she would have known this already and could have saved us all some time.  I guess that makes Researcher's pseudonym rather ironic, huh? (Zing!)

And speaking of irony...

You might recall that I said at the beginning of this novella that it wasn't just the factual misrepresentations in Researcher's original comment (or his/her subsequent taunt) that warranted this blog entry, but also that the comment itself was actually quite noteworthy.  Well, that's because it turns out that "Researcher" appears to work in the U.S. House of Representatives and has a history of commenting on blog entries about Congressman Taylor or Mississippi politics more generally.  According to my visitor log (and yes, I have PDFs of all of these log entries), Researcher filed his/her Monday "taunt" from a computer with the IP Address 143.231.249.141 ("U.S. House of Representatives," Washington, D.C.) around 2:00p after (again) using Google to search the blogs for "'Gene Taylor NAFTA."  I think this makes it pretty clear where Researcher works and what Researcher was doing last Sunday, and therein lies the very thick irony.  As I mentioned above, the main point of my original post was that elected officials often use anti-trade legislation to do little more than get free press during an election cycle and further reinforce the widespread myths that justify their protectionist politics.  And here, in the case of "Researcher," we very likely have a congressional employee checking the internet for news and blog reports on a Congressman's new anti-trade legislation, and then taking to the web to further propagate the protectionist myths that justify the aforementioned Congressman's protectionist positions.  In other words, by trying to debunk my original blog post, Researcher pretty much proved it all to be true.

You cannot make this stuff up.

One final closing note: I must admit that I'm dismayed, although probably not surprised, to learn that federal employees appear to be surfing the web and anonymously commenting on blog entries in which they have a personal or professional interest - sometimes on the taxpayer's dime.  While I seriously doubt that such behavior is illegal or anything, I find it rather troubling that someone employed by the United States Congress is using anonymity and the internet to mask obvious and important biases and thus unduly influence public policy debates.  Such actions hardly seem to be a model for good government, and they certainly make me wonder just how prevalent anonymous government commenting practices are.

Indeed, just how many "Researchers" are out there?