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?

Is a Recovery Strategy Based on Exports and Manufacturing Jobs Realistic?

In President Obama's speech in Japan over the weekend, he stressed the need to increase US manufacturing exports in order to create new, well-paying American jobs:

[T]his new strategy will mean saving more and spending less, reforming our financial system and reducing our long-term deficit. It will also mean a greater emphasis on exports that we can build, produce, and sell all over the world. For America, this is a jobs strategy. Right now, our exports support millions upon millions of well-paying American jobs. Increasing those exports by just a small amount has the potential to create millions more. These are jobs making everything from wind turbines and solar panels to the technology you use every day.

The Japan speech was not the first time that Obama mentioned exports as a key to future American job growth. Just two weeks ago at a meeting of his Economic Recovery Advisory Board, he spoke about "export-driven growth, manufacturing growth, growth that pays high wages and provides high living standards for a broad-based middle class."

Clearly, exports, and the manufacturing jobs they create, are an integral part of the administration's jobs strategy. But is that a wise approach? The facts seem to say "no."

First, let's make clear that there is very little connection between manufacturing output and those "high wage, middle class" manufacturing jobs that the President lauds. As Cato's Dan Ikenson pointed out in a recent op-ed, "American real manufacturing value-added — the market value of manufactured goods, over and above the costs that went into their production — reached a record-high level in 2007 (the last year for which final data are available), breaking the record set in 2006, which broke the record set in 2005, which broke the record set in 2004."  Yet over that same period (2004-2007), the US lost about 100,000 manufacturing jobs per year. (As an aside, let's just note again that the US remains the world's largest manufacturer - about 2.5 times more than China, by value.)

Second, it's important to understand that the disappearance of manufacturing jobs is not an America-specific phenomenon.  As this awesome chart derived from Bureau of Labor Statistics employment data readily indicates (h/t ToGetRichIsGlorious), developed countries - the US included - have been hemorrhaging manufacturing jobs for decades:

The chart also makes clear that America's "consumption culture" can't be blamed for the loss of manufacturing jobs.  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 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 increasing - or even retaining - manufacturing jobs.

The Congressional Research Service also made the latter point (on trade balances and employment) in a June 2009 report on China's currency policy when it said:

[A]n undervalued yuan neither increases nor decreases aggregate demand in the United States. Rather, it leads to a compositional shift in U.S. production, away from U.S. exporters and import-competing firms toward the firms that benefit from Chinese capital flows. Thus, it is expected to have no medium or long run effect on aggregate U.S. employment or unemployment. As evidence, one can consider that the U.S. had a historically large and growing trade deficit throughout the 1990s at a time when unemployment reached a three-decade low. However, the gains and losses in employment and production caused by the trade deficit will not be dispersed evenly across regions and sectors of the economy: on balance, some areas will gain while others will lose. And by shifting the composition of U.S. output to a higher capital base, the size of the economy would be larger in the long run as a result of the capital inflow/trade deficit.

In other words, altering the trade deficit would not affect employment and might actually lead to a decrease in GDP.

Third, and before any of you start shouting that it's the nefarious China that's stealing all of those good-paying manufacturing jobs, they're bleeding these jobs too!  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."

The reason for this is simple: the world's manufacturers keep getting more productive and thus need fewer man-hours to produce more stuff.  Here's Williams again:

According to a report given by Dr. William Strauss, senior economist for the Federal Reserve Bank of Chicago, titled "Is U.S. Losing Its Manufacturing Base?" the answer is no.  In each of the past 60 years, U.S. manufacturing output growth has averaged 4 percent and productivity growth has averaged 3 percent. Manufacturing is going through the same process as agriculture. In 1900, 41 percent of American workers were employed in agriculture; today, only 2 percent are and agricultural output is greater. In 1940, 35 percent of workers were employed in manufacturing jobs; today, it's about 10 percent. Again, because of huge productivity gains, manufacturing output is greater.

Since the beginning of the current recession in December 2007, the United States has lost 8.2 million jobs.  And while I appreciate (really!) the White House's newfound attention to exports (and, by extension, international trade), all of the above data strongly caution against a modern US jobs program that is based, in whole or significant part, upon boosting manufacturing exports. To add millions of jobs under such a plan would defy almost all recent economic experience - in developed, developing, consuming and exporting countries alike.

So I sure hope the President and his crack team of economic geniuses have more up their sleeves than a strategy of "exports, manufacturing, and wind turbines."  Because it sure looks like they're gonna need it.