“We have a huge opportunity, at this moment, to bring manufacturing back…but we have to seize it.” With these words in his State of the Union address, President Obama signaled that he is getting serious about recapturing factory jobs that have been lost to imports. Since the speech, the White House has outlined a series of policy measures intended to encourage companies to ‘insource’ jobs from overseas, including changes in the tax code and increasing domestic investment.
True, many economists, both liberal and conservative, are skeptical that much can be done to bring back manufacturing jobs. They argue that American factories have become so efficient that they no longer need to hire many workers. “It’s totally implausible to think that there’s going to be a surge in manufacturing jobs,” Lawrence F. Katz, an economist at Harvard who served in the Clinton Administration, told the New York Times. Christina Romer, former head of Obama’s Council of Economic Advisors, recently wrote in the New York Times that “a persuasive case for a manufacturing policy remains to be made.”
But this skepticism about President Obama’s manufacturing initiative relies on faulty official data. In fact, government statisticians are dramatically undercounting the economic impact of imports from low-cost countries such as China, as we will explain, in this paper and the accompanying policy memo, “Trade-related Jobs Lost During the Great Recession.” The reason for this statistical problem is an important economic concept known as “import price bias.”
After doing a preliminary adjustment for import price bias, we find that 1.3 million jobs have been lost to rising imports since the recession started in 2007, accounting for one-third of the private nonconstruction job loss. Many of these are jobs that could potentially be brought back to this country by appropriate incentives that encourage investment and job creation in the U.S. We therefore conclude that President Obama’s manufacturing initiative, combined with other “pro-production” policies, can potentially be a significant source of domestic jobs.
We arrive at this hefty figure by adjusting the official data on trade and domestic production for low-cost imports, which are incorrectly treated in the national income accounts. Correcting for this import price bias, we find that nonpetroleum imports rose by $131 billion from 2007 to 2011, adjusted for price changes, rather than the meager $14 billion rise in imports that the official data shows (measured in 2011$).
This uncounted import growth helps explain why federal stimulus measures did not generate as many jobs as expected. In fact, a hefty slice of fiscal stimulus—both tax cuts and spending increases—leaked overseas, boosting imports rather than domestic production. This leakage, in turn, explains why Obama’s manufacturing strategy is so necessary. We need to reinforce domestic production in order to reaffirm the strength of the economy.
Let’s be clear here: We are not saying that manufacturing is the only form of production, or that globalization is bad. For example, the immense flowering of the creativity in the wireless/social media/communication sectors are clearly a form of 21st century production. The App Economy—the development and use of apps designed for smartphones and social media—has created nearly 500,000 jobs since the first iPhone came out, and will continue to create more.
Second, we’re also not saying that trade is the only cause of job loss. Clearly one impact of information technology has been to massively transform industries such as retailing, reducing the number of workers needed.
However, the U.S. cannot afford to be in a position of perpetually consuming more than it produces. We need to make the shift from a consumption economy to a production economy in order to assure long-term prosperity.
Related Memo: Measuring the Real Impact of Imports on Jobs
