issue: Trade

Manufacturing in the App Economy

Posted on by The Progressive Policy Institute

We live in a world where the communications sector is driving the recovery and receiving much attention. We believe that this is the most important ongoing development in the American economy, offering the potential for long-term transformation.

But while very important, a boom in communications isn’t enough, alone, to achieve balanced and sustainable growth. We need every sector of the economy, including manufacturing, to contribute. With this in mind, the Obama Administration has taken the positive step of proposing a series of policy measures that would encourage domestic manufacturing.

In this spirit, we undertake an audacious question: In this era of apps and social media, what is a reasonable long-term goal for manufacturing employment?

We first show that manufacturing has larger job spillovers than commonly thought, based on new calculations. Next, we estimate the employment consequences of eliminating the trade gap in manufactured non-oil goods, a desirable long-term goal, without reducing our standard of living.

Assuming such a balancing, we find that the U.S. should aim to add roughly 3.5-4 million direct and indirect manufacturing jobs over the long run, raising total manufacturing employment to about 15.5-16 million, or 2001 levels. This bold effort would ease the job drought and offer millions of Americans a path to the middle class. What’s more, we would be producing more at home, while borrowing less from the rest of the world.

Achieving this admittedly aspirational goal would come at a relatively small price: we calculate that overall economy-wide prices would have a one-time rise of only 1.8-2.0%, spread out over the time it takes to close the trade gap. To put this in context, the inflation rate for gross domestic purchases has averaged well over 2% annually over the past ten years. So closing the trade gap would raise prices by less than one-year’s inflation.

Read the entire report here

Measuring the Real Impact of Imports on Jobs

Posted on by The Progressive Policy Institute

When it comes to manufacturing, most politicians, economists, and journalists agree: the millions of manufacturing jobs lost in recent years are mostly not coming back. Looking at the official data, it’s easy to understand why. Productivity in the sector has continued to climb even as jobs dwindled, so it must be the case that these jobs were lost to good old human ingenuity.

But this conclusion is derived from faulty official data. Indeed, a closer look at the numbers reveals an entirely different history on what happened to U.S. manufacturing.

Specifically, this paper shows that rising imports play a much larger role in the loss of jobs since 2007 than official data suggests. In fact, we estimate that rising real imports are responsible for approximately 1.3 million of the jobs lost between 2007 and 2011, or almost one-third of total private non-construction job loss.

We reached the estimate of 1.3 million jobs through a process that adjusts for for measurement problems in the official statistics. This adjustment is based on a concept called the “import price bias,” which causes the government to undercount the growth of low-cost imports from countries such as China. After adjusting for the import price bias, our analysis suggests that the import growth of goods, adjusted for price changes, have been underestimated by roughly $117 billion since 2007 (in 2011 dollars).

Moreover, we find undercounting real imports leads to a distortion in most of the official statistics that keep track of economic activity, including real GDP, which was overstated during the Great Recession and subsequent recovery by 0.8%. Our analysis suggests imports of low-cost goods continued to expand their presence in U.S. markets during this period, a phenomenon that likely started in the early 2000’s when developing countries such as China significantly boosted their exporting presence.

In this paper we also discuss how these revised statistics might affect the economic and political landscape going into the 2012 election. Specifically, President Obama’s recently announced “insourcing” initiative has the potential to recover some portion of the 1.3 million jobs lost to rising imports. By comparison, current policies like the payroll tax break are more likely to leak overseas than we realize instead of stimulating demand at home.

Understanding the true effect of rising imports on jobs better explains the everyday reality of Americans who are struggling through a weak job market and stagnant real wages. This is especially true in key states such as Ohio, North Carolina and Pennsylvania, where voters know that jobs have been lost to foreign competition.

In the end, sustainable economic growth and the creation of tomorrow’s jobs cannot be achieved through the consumption, debt driven economy of the past few decades. Instead, we advocate more of the pro-investment, pro-manufacturing policies recently introduced by the Obama Administration, such policies shift America toward a “Production Economy” which emphasizes investment in physical, human, and knowledge capital. Understanding the true role of imports in the U.S. economy, we can design better, more targeted economic policies.

The Most Important Sentence in Obama’s Speech

Posted on by The Progressive Policy Institute

The AtlanticIn the Atlantic, PPI Chief Economic Strategist Michael Mandel explains why President Obama needed to start in the middle of his speech and focus on the competitiveness and production narrative:

“We now live in a world where technology has made it possible for companies to take their business anywhere.”

President Obama needs to give his jobs speech again. This time he should start in the middle.

To addressing the American people’s concerns and to win in 2012, the President needs a narrative–a story that explains how and why we got into this mess, what he has done to help so far, and how his latest proposals might help get the economy out of a ditch.

The good news: Thursday’s jobs speech contained the beginnings of a powerful story about the need to restore U.S. competitiveness. As Obama said:

“We now live in a world where technology has made it possible for companies to take their business anywhere. If we want them to start here and stay here and hire here, we have to be able to out-build, and out-educate, and out-innovate every other country on Earth.”

The bad news: Obama buried this nascent narrative in the second half of the speech. What’s more, most of his proposals last night–including the payroll tax cut–did not directly attack the competitiveness problem he identified.

Obama must do better than that. He should be telling the story of how America got distracted–by 9/11, by political infighting, and by excessive confidence. He should be explaining how we allowed ourselves to emphasize consumption and the present, rather than production and the future. And he should link each of his policy proposals to the idea of rebuilding the production economy.

Read the entire article.

Why America Needs a New Deal for Labor and Business

Posted on by The Progressive Policy Institute

Just before Labor Day, PPI’s President Will Marshall had an opinion piece in The Atlantic, in which he proposed reorienting the relationship of organized labor. Rather than adversaries, they should be partners. Here’s an excerpt:

President Obama is cobbling together a new jobs package for September, but it won’t be enough to revive the economy. Instead of offering another grab-bag of micro-initiatives, the administration needs to embrace a different model for growth that stimulates production rather than consumption, saving rather than borrowing and exports rather than imports.

This strategy emphasizes investment in the nation’s physical, human and knowledge capital–infrastructure, skilled workers and new technology. That’s a better way to raise U.S. wages and living standards than a new jolt of fiscal stimulus.

Getting consumers spending again will boost demand, but much of it will leak overseas via rising imports, stimulating foreign rather than U.S. production. In a world awash with cheap labor, where technology gaps are narrowing rapidly, a wealthy society like ours can thrive only by speeding the pace of economic innovation and capturing its value in jobs that stay in America.

The shift from a consumer-oriented to a producer-centered society won’t happen without a new partnership between labor and business–and a shift in outlook among workers themselves. Organized or not, U.S. workers should think of themselves first and foremost as producers rather than consumers. They have a compelling interest in keeping the companies they work for competitive, and in supporting a new economic policy framework that enables investment, entrepreneurship and domestic production. This reality points to new relations between workers and companies, and new political alliances.

A GRAND BARGAIN FOR LABOR

In the post-war compact of the 1950s and 1960s, workers offered loyalty and labor offered peace to companies in return for stable jobs with decent pay and benefits. But the deal between labor and capital changed as globalization took hold. Workers gave up job security; in return, they got low consumer prices and access to easy credit. Despite access to cheap foreign goods, however, real incomes fell for most households, as real wages dropped and job growth in most parts of the private sector virtually disappeared. Easy credit was used to fund consumption rather than investment in human capital.

Now, at a time when America’s economic preeminence cannot be taken for granted, the interests of workers are converging with those of companies, foreign and domestic, that want to invest in the U.S. economy. In a new compact for competitiveness, workers would pay more attention to innovation, workplace flexibility and productivity gains. Companies would invest more in upgrading workers’ skills, help them balance the pressures of work and family, and pay them middle class wages and benefits.

Two unions are pointing the way toward such a bargain: the United Auto Workers (UAW) and the Communications Workers of America (CWA).

Read the rest by clicking here to find out how. Read Marshall’s full policy briefing on the subject by clicking here.

Where Americans Can Cut Back

Posted on by The Progressive Policy Institute

Dollar billWhere can Americans cut back if the economy slips back into recession again? After all the talk about the “new frugality” and the deepest recession in 75 years, it might seem like households have tightened their belts as much as possible.

Surprisingly, however, the economic figures show several key areas where Americans have actually increased consumption compared to 2006, the year when housing prices peaked. Judge for yourself whether we can cut back more or not. (Note: all consumption changes are measured in inflation-adjusted 2005 dollars, comparing the 2nd quarter of 2011 with the second quarter of 2006)

1. Clothing — Consumption: + 8.9% since 2006

Despite the economic weakness, Americans spent on clothing at an almost $350 billon annual rate in the second quarter of 2011. Nothing seems to stop the waves of inexpensive shirts, dresses, and coats coming from overseas. Clothing imports from China, especially, are up 37 percent since 2006, and Americans are snapping them up. Perhaps we could buy a a few less t-shirts with funny sayings on them?

2. Personal care products — Consumption: +14.4% since 2006

We like to look our best, even in a recession. Perfume, makeup, shampoo, shaving cream and razors, body gels–Americans spend about $100 billion a year on these personal care items. Not only that, we’re spending more on imported cosmetics, which are up 26 percent since 2006. Are all those goos and gels really necessary?

3. Televisions — Consumption: +287.4% since 2006

No, that’s not a misprint. The government adjusts for the size of the television, among other things, and the average size screen has soared since 2006. If we don’t adjust for size and other variables, Americans are spending 12.7% more on televisions today compared to 2006. Total personal consumption outlays on televisions, according to the BEA: About $40 billion, pretty much all imported. Do you really need an even bigger TV?

4. Alcoholic Beverages (off-premises) — Consumption: +10.7% since 2006

Perhaps it’s not surprising that Americans need an extra drink these days. Still, the total home spending on alcoholic beverages is about $110 billion, at annual rates, according to the Bureau of Economic Analysis. A few less glasses might put a few extra dollars in the pocket.

Remember, all these figures apply to Americans in the aggregate. Those people who have been out of work for months or years don’t have room to cut back at all.

And remember–when journalists write that “consumer spending is 70 percent of economic activity,” they are completely wrong. What the U.S. economy needs is more production, not more consumption–and in a globalized economy, the two are not synonymous at all. And that, my friends, will be the subject of tomorrow’s post.

Photo credit: iChaz.

Gas vs. Gasoline

Posted on by The Progressive Policy Institute

America has a serious oil deficit. We consume almost three times as much oil as we produce. As a result, we send more than $250 billion a year offshore (mostly to our enemies and other bad guys) to import oil so we can keep our trains, planes, and automobiles running.

On the other hand, America now has a huge surplus of natural gas, enough to last us for 100 years or more. If we replaced the oil we import with domestic gas, we could end our energy dependence and stop enriching U.S. adversaries. But rather than convert from oil to gas, plans are afoot to export the gas!

The economics of importing oil and exporting gas make no sense. We currently pay about $100 to import a barrel of oil. We are exporting natural gas at a price that has the energy equivalence of about $25 a barrel. That’s right, we are buying energy as oil for $100, selling the same amount of energy as gas for $25.

Buying high and selling low – this is what passes for national energy policy today. Our leaders should be embarrassed.

In addition to the economics, the strategic implications of converting from oil to gas are huge.

About two-thirds of the oil we use is for transportation. Converting our transportation fleet to natural gas would almost eliminate the need to import oil. Our trade deficit would be cut in half, petro-despots would be deprived of their largest revenue source, and our economy would get a $250 billion shot in the arm – every year.

So why aren’t we doing it? Converting gasoline and diesel engines to gas is relatively easy and very safe. The challenge is the infrastructure – a national network of filling stations that need to be in place before people will convert their cars and trucks to gas. Building that infrastructure requires such a huge effort and coordination among so many actors that it is unlikely that the private sector can or will make the switch by itself. Among other things, investors will worry that OPEC will defensively collapse the price of oil as they did in the ’70s. Given these market realities, the only way this switch can possibly happen will be if the government steps up to catalyze and help underwrite the effort. 150 years ago the government made a similar commitment to enable the trans-continental railroad – which ushered in America’s great industrial expansion. Converting to natural gas could bring about a similar economic boom.

Installing the required new fueling infrastructure for gas-propelled vehicles would be a tremendous generator of new jobs. There are few other investments the nation could make with as large a payoff across so many areas of national concern.

For those interested in the math:

One barrel of oil = about 5.6 million BTU. One Mcf of natural gas = about 1.02 million BTU. (The actual energy content varies slightly depending on the grade of the oil or gas. These are industry averages.)

Energy equivalence: The BTUs in 1 bbl. oil = The BTUs in 5.6 Mcf natural gas.

1 bbl oil costs $96.75 and the same amount of energy in gas costs $25.59 (5.6Mcf x $4.57),

The energy cost ratio between oil and gas is roughly 4 ($100/$25).

That means we’re paying 4 times as much for an oil BTU as we get when we sell a gas BTU.

It also means that once we have completed the conversion, operating on gas instead of gasoline will reduce our transportation energy costs by almost 75 percent.

Photo Credit: Arimoore

Real Trade Deficits in Capital and Consumer Goods Near New (Negative) Record

Posted on by The Progressive Policy Institute

Many economists are racing to declare a ‘manufacturing revival.’ The latest to join the bandwagon is Paul Krugman. In his latest column, Krugman writes (my emphasis added)

Manufacturing is one of the bright spots of a generally disappointing recovery…..Crucially, the manufacturing trade deficit seems to be coming down. At this point, it’s only about half as large as a share of G.D.P. as it was at the peak of the housing bubble, and further improvements are in the pipeline…one piece of good news is that Americans are, once again, starting to actually make things.

Oh, how I wish Paul was right. Unfortunately, I still don’t see it in the trade numbers. In fact, the real trade deficits in capital and consumer goods are both nearing all-time (negative) records. Meanwhile, the real trade deficit for industrial supplies and materials has improved in large part because of an enormous surge in real exports of energy products, including coal, fuel oil, and other petroleum products (yes you read that right) and a sharp decline in imports of building materials. I don’t find either of these convincing proof of a resurgence of manufacturing.

As you might expect, time for some charts. Here’s a chart (below) of the real trade balance in capital goods in billions of 2005 dollars, calculated on a 12-month basis.

Capital goods include computers, telecom gear, machinery, aircraft, medical equipment–the heart of U.S. advanced manufacturing. Within a couple of months, if current trends continue, the capital goods trade deficit will be at a record level. What’s more, there’s no sign of any great domestic capital spending boom that could suck in imports.

And not to digress, these figures probably substantially underestimate the deterioration of the capital goods trade balance because of the import price bias effect , where the government statisticians do not correctly adjust for rapid changes in sourcing from high-cost countries such as the U.S. and Japan to low-cost countries such as China and Mexico (for a good reference see the new paper “Offshoring Bias in U.S. Manufacturing” by Susan Houseman, Christopher Kurz, Paul Lengermann, and Benjamin Mandel in the latest issue of the Journal of Economic Perspectives) .

Now let’s turn to consumer goods. Here’s the chart (right) of the real trade balance in consumer goods, in 2005 dollars.

No sign of any real improvement here either, I’m afraid. The trade balance retreated a bit during the recession, but since then has surged back. Once again, there’s no sign of a sustainable improvement in the trade balance.

The situation with motor vehicles is a bit more ambiguous. As the chart to the left shows, clearly there has been some gains in the motor vehicles and parts trade balance. However, it has started deteriorating again.

Finally, we come to the one area, industrial supplies and materials, where there has been a clear improvement in the real trade balance. Industrial supplies and materials includes fuel imports and exports; steel and other metals; building materials; chemicals; and a grab bag of other things including newsprint, audio tapes, and hair.

Since 2006, there has been roughly a $150 billion improvement in the industrial supplies and materials trade deficit, measured in 2005 dollars (I say roughly because this is one case where the chain-weighted procedures used to construct the figures gives quirky answers that aren’t additive. So when I give the following numbers, please please don’t divide them into $150 billion to get a share of the improvement). Part of that is a decline in real imports of crude oil, which fell by roughly $30 billion (measured from 2006 to the 12 months ending in March 2011). But another $30 billion, more or less, came from an increase in real exports of petroleum products such as fuel oil and lubricants. I’m not sure whether a gain in exports of fuel oil really tells us much about the fortunes of manufacturing overall.

Another contributor to the improved trade balance is a decline in the imports of building materials. Once again, not a sign of strength.

So I see no sign in the trade data of a great manufacturing revival. The topline improvement in the real trade deficit has mostly come from industrial materials and supplies, and within that from a swing in the energy sector imports and exports.

Let me finish with a quote from a piece that Paul Krugman wrote back in 1994. In that piece, he scoffed at worries that foreign competition was hurting U.S. manufacturing. He argued that

A growing body of evidence contradicts the popular view that international competition is central to U.S. economic problems. In fact, international factors have played a surprisingly small role in the country’s economic difficulties…. recent analyses indicate that growing international trade does not bear significant responsibility even for the declining real wages of less educated U.S. workers.

I wonder if he still believes that today.

Crossposted from Innovation and Growth.

The Fiscal Debate Is Missing Half the Picture – An Economic Perspective

Posted on by The Progressive Policy Institute

The following is an anonymous piece by an economist at an international financial institution. The views expressed here are solely those of the author.

Despite what politicians across the political spectrum will scream at you, the United States’ screwed up finances haven’t yet reached the level of an existential debt crisis.

To be clear, America must get its fiscal house in order, and ongoing debates and collaboration across the legislative and executive branches are important to righting America’s budgetary ship over the next few years. But let us dispel the notion that unduly draconian debt-reduction measures–that only touch the discretionary budget no less–must be enacted yesterday. Big picture reform of entitlement spending, increasing federal revenue, and scrutinizing the Pentagon’s budget must, and will, happen. However, the shrill, mostly right-wing political calls to cast ideologically-motivated yet relatively tiny budget cuts as the solution to a spending emergency will not solve the debt crisis and could create a culture that chokes off needed investment in critical areas. As any CEO will tell you, a certain level of borrowing to fund strategic investment is a critical component to reaping higher future returns. The same is true of public borrowing to support America’s long-term economic growth.

Here are three unique reasons why the U.S. continues to be in a position to borrow:

(1) Liquid financial markets and the reserve characteristics of the U.S. dollar create a nearly inexhaustible supply of creditors for our public debt. In plain English, this means that U.S. dollar assets are the safest global investment and savings vehicle and are easily accessible, keeping the federal government’s cost of borrowing relatively low (i.e., the US can harness global, not just national savings).

(2) Confidence in our monetary system to keep a lid on inflation will preserve U.S. Treasuries as desirable assets. Fear of inflation stoked by printing money to finance deficits is a primary fear of investors and not concern for the U.S. due to an independent Federal Reserve. The Fed appears to be aware and prepared for potential inflationary risks, and its track record, through several business cycles, has been praiseworthy as inflation, measured by the consumer price index, averaged 3.1 percent between 1982 and 2011.

(3) We are saving more domestically and could replace external demand for US dollar assets. A surprisingly large percentage of U.S. Treasuries remained in the hands of U.S. residents as of December 2010, and with the household savings rate doubling since its trough in 2005, the capacity to fund our public liabilities domestically will improve.

Long-term economic growth constraints erode debt sustainability in the US

The resulting ongoing and outlandishly panicked fiscal debate ignores a critical measurement of the nation’s economic health: our long-term economic growth potential. Not only is it a source of wealth and power, it is a major component of assessing our level of sustainable debt. Nominal economic growth – a function of increases to our stock of labor and capital — reflects a nation’s capacity to repay debt. When it is faster than the growth of new net borrowing then there is no problem. In other words, if your family’s income is growing faster than the amount you are borrowing, then your indebtedness is declining – a good thing! This is the dual assessment employed by international investors and rating agencies.

Borrowing to fund investment is critical to fostering future economic growth. By ignoring crucial investments in the nation’s stock of capital and labor, our politicians are mortgaging our future. Investment in public infrastructure, education, and immigration reform foster more rapid growth as they increase our stock of capital and labor, expanding economic capacity and productivity. By failing to be cognizant of the basic investment needs to maintain and expand our growth potential, our political leaders are just making political hay.

Hence, the fiscal debate on the Hill, which ignores economic growth potential, could ironically contribute to long-term market insecurity by raising our interest costs, and possibly lead to a greater debt crisis. What’s needed is a balanced approach, one that puts our long-term fiscal policy on a sustainable path through a combination of controlled spending, entitlement reform, revenue increases and with a contribution from the Pentagon, while committing to invest in our future.

Here are three critical areas of investment where the United States is failing to maximize growth potential by under-investing in capital stock and labor:

Public infrastructure: The United States’ capital stock is suffering from decades of neglect, increasing the cost of doing business and decreasing our competitiveness. The 2009 American Society of Civil Engineers infrastructure report card gave us a grade of “D”. Compared to some of our competitors — who are investing in high-speed rail, clean energy production, and smart grids – we may appear to be standing still. For example, Europe invests 5 percent of GDP in infrastructure while the United States spends less than 2.4 percent.

 

Educating our future workforce: Sadly, our secondary education system compares poorly internationally and, while our universities are the envy of the world, we manifest an artificial brain-drain as we expel U.S.-educated, non-citizens to the benefit of our international competitors. Our education system is one of the most expensive but yields only average results. According to the OECD, the United States spent 7.6 percent of GDP on all levels of education in 2007, almost 2 percentage points above the OECD average, but secondary and tertiary completion rates remained below the average of other advanced countries.

Immigration: Immigration reform can and should be viewed through this economic lens – we must create a reliable system of immigration to expand our future labor pool, increase economic growth, and produce the resources we need to help finance unfunded public liabilities.

Our political class will continue to yell at one another on CNN and Fox, but keep in mind that all spending is not the same, and that there are sound economic arguments to support crucial investment in these discreet areas for the long-term economic health of the country.

A Milestone in Trade

Posted on by The Progressive Policy Institute

In 1987 the G6 countries (Canada, France, Germany, Italy, Japan, and the UK) accounted for 55 percent of U.S. goods imports. That same year, China, Mexico and Brazil only accounted for 8 percent of imports.

In 2010 the U.S. reached a milestone–for the first time, imports from China/Mexico/Brazil exceeded imports from the G6 countries. In the year ending March 2011, imports from China/Mexico/Brazil equaled 32 percent of goods imports, compared to 31 percent for the G6 countries. Here’s another way of seeing the same thing. Please note that OPEC’s share, and the share of “all other countries,” don’t change very much. It’s really the G6 versus a handful of low-cost importers.

One final note. The shift in sourcing is most likely happening because the goods made in China/Mexico/Brazil are less expensive than the same goods made in France/Germany/UK. Unfortunately, the BLS import price statistics are not able to pick up the price drops from shifts in country sourcing.

Suppose for example that goods made in China are sold for one-third less than the same goods made in Japan. Then for the same physical quantity of imports, that shift in sourcing will cause the nominal value of imports to be one-third lower. This imparts a significant downward bias to the import penetration ratio.

Crossposted from Mandel on Innovation and Growth.

New Manufacturing Data Show Weaker Factory Recovery, Deeper Recession

Posted on by The Progressive Policy Institute

There’s been a lot of happy talk recently about the revival of U.S. manufacturing . According to an article in the New York Times, “manufacturing has been one of the surprising pillars of the recovery. “ In a Forbes.com column entitled “Manufacturing Stages A Comeback,” well-known geographer Joel Kotkin talks about “the revival of the country’s long distressed industrial sector.” The Economist writes that “against all the odds, American factories are coming back to life.”*

Truly, I’d like to believe in the revival of manufacturing as much as the next person. Manufacturing, in the broadest sense, is an essential part of the U.S. economy, and any good news would be welcome.

Unfortunately, the latest figures do not back up the cheerful rhetoric.

Newly-released data suggest that the manufacturing recession was deeper than previously thought, and the factory recovery has been weaker. On May 13 the Census Bureau issued revised numbers for factory shipments, incorporating the results of the 2009 Annual Survey of Manufacturers. The chart belows shows the comparison between the original data and the revised data (three-month moving averages):

The decline in shipments from the second quarter of 2008 to the second quarter of 2009 is now 25%, rather than 22%. And the current level of shipments in the first quarter of 2011 is now 9% below the second quarter of 2008, rather than only 5%. In other words, the new data shows that factory shipments, in dollars, are still well below their peak level.

The manufacturing recovery looks even more tepid when we adjust shipments for changes in price. Here are real shipments in manufacturing, deflated by the appropriate producer price indexes.**

Now that hardly looks like a recovery at all, does it? Real shipments plummeted 22% from the peak in the fourth quarter of 2007 to the second quarter of 2009. As of the first quarter of 2011, real shipments are still 15% below their peak. To put it another way, manufacturers have made back only about one-third of the decline from the financial crisis.

And while U.S. manufacturers have struggled, imports have coming roaring back. Here’s a comparison of real imports (data taken directly from this Census table) and real U.S. factory shipments (my construction, using Census and BLS data).

This chart shows that imports have recovered far faster and more completely than domestic manufacturing. Goods imports, adjusted for inflation, are only about 1% below their peak. That’s according to the official data. If we factored in the import price bias, we would see that real imports are likely above their peak (I’ll do that in a different post).

In other words, this so-called ’revival of U.S. manufacturing’ seems to involve losing even more ground to imports. That doesn’t strike me as much of a revival.

 

P.S. Oh, oh, what about all those manufacturing jobs that Obama’s economists are so proud of? This chart plots aggregate hours of manufacturing workers against aggregate hours in the private sector overall (the last point is the average for the three months ending April 2011).

What we see is that the decline in hours in manufacturing was deeper than the rest of the private sector, and the recovery has really not made up that much ground. Over the past year, aggregate hours in the private sector have risen 2.3%, while aggregate hours in manufacturing have risen 2.9%. That’s not much of a difference. In fact, probably the best we can say is that manufacturing has not held back the overall recovery.

*An important exception to the happy talk has been the recent report from the Information Technology and Innovation Foundation, entitled The Case for a National Manufacturing Strategy.

**For those of you interested in technical details, I used the producer price indexes for 2-digit manufacturing industries, as reported by the BLS. Could these estimates be improved on? Probably–but they are good enough to get the overall picture.

Crossposted from Mandel on Innovation and Growth.

Why Budget Line Items Don’t Die

Posted on by The Progressive Policy Institute

In today’s Washington Post, David A. Fahrentold marvels at what he calls the “Line Items That Won’t Die” – federal programs that benefit narrow interests, but somehow manage to keep getting funded: “One spends federal money to store cotton bales. Another offers scholars a chance to study Asian-American relations. Two others pay to market U.S. oranges in Asia and clean up abandoned coal mines.”

Fahrenthold attributes their success to having Congressional champions. The study of Asian-American relations, for example, takes place at a Honolulu nonprofit called the East-West Center, and enjoys the support of Sen. Daniel Inouye (D-Hawaii), who also happens to be chairman of the Senate Appropriations Committee.

But there’s also a broader story: the simple fact that when a government program benefits a narrow constituency, it’s very easy for that constituency to organize and make demands on legislators about why this program is worth keeping. The larger public, meanwhile is rarely aware, and even if it were aware, is unlikely to do anything.

Take the Market Access Program discussed in the article, which helps promote U.S. agricultural products abroad. A coalition of agricultural interests benefit greatly from this, and they are organized to advocate fiercely for its continuance and threaten to punish any Senator or Congressman who would vote against the program by withdrawing votes and campaign contributions. Nobody in the general public, however, is likely to care about or vote based solely on this single issue.

This is the difference in what congressional scholar R. Douglas Arnold has called “attentive publics” and “inattentive publics.” Attentive publics are the small groups that care deeply about particular policies, and as a result, are likely to be more influential because they care so intensely about that one issue. Inattentive publics are everyone else. The public might be outraged after reading about the Market Access Program, but the likelihood of most people following up are small. Think of it this way: If 1,000 people want money from you, but only one bothers to keep calling you up telling you why he’s so deserving and threatens to punch you in the face if you don’t give him the money, you’re probably going to give that one person money, especially if it’s likely the other 999 will not even notice or if they do, won’t remember.

Another way to think about it (borrowing from James Q. Wilson) is in terms of distributed costs and concentrated benefits. The benefits of a program that pays peanut and cotton farmers to store their bales and bushels in warehouses are solidly concentrated among peanut and cotton farmers. The costs are distributed to everybody else. But the cost per taxpayer is so small that it’s hard to imagine any group getting organized to fight this particular program. Whereas the farmers – well, they’re damn certain to do fight any cuts to the program. What results is what Wilson calls “client politics” – where small narrow interests work with the relevant congressional committee and executive agency staff to build a usually impenetrable consensus around the importance of a single program.

The challenge for governing is that the federal budget and tax code and regulatory apparatus are filled with thousands upon thousands of these programs, each protected by a small consensus, and without any public coverage. One only need to scroll through the Federal Register to see all the small issues that could potentially benefit small attentive publics at the expense of everyone else. Or better yet, look through the tax code to find all the little credits and deductions for very narrow benefits. It’s enough to make your head spin round and round and round. Jonathan Rauch has pessimistically called this condition “Government’s End.”

I don’t really have a solution. In part, this is the nature of our current system of government and the size and complexity of our economy. But the point is, these programs are very difficult to kill, and Fahrenthold’s story is just the tip of the iceberg.

Stop Dithering on Colombia Free Trade Agreement

Posted on by The Progressive Policy Institute

First on South Korea, now on Colombia, President Obama has been working assiduously to make trade agreements palatable to skeptics within his own party. By negotiating an “action plan” with Colombia on labor rights, he has removed any reasonable pretext for opposing a pact that has languished in Congress for five years.

It’s not clear, however, whether the anti-trade coalition of organized labor and Congressional liberals will take “yes” for an answer. Rep. Louise Slaughter (D-NY), ranking Democrat on the powerful House Rules Committee, vowed Wednesday to continue blocking the treaty. The pact, negotiated by the Bush administration, “turns a blind eye to rampant human rights violations and anti-labor practices of Colombia, where merely joining a union or advocating for workers rights can be a death sentence,” she said.

In fact, anti-union violence in Colombia has waned in recent years and there’s little evidence that the national government is implicated in it. Nonetheless, to allay Congressional criticism, Colombia pledges more vigorous action to protect union leaders as well as legal reforms to strengthen unions. Obama meets today at the White House with Colombian President Juan Manuel Santos to formalize the plan.

The free trade deal would lower Colombia’s high tariffs on U.S. agricultural and manufactured goods. The International Trade Commission estimates the U.S. exports to Colombia would increase by $1 billion if the treaty is approved (Colombia’s GDP in 2010 was $283 billion, and has been growing solidly for years). As Washington struggles to cut trillion-dollar deficits, that may not seem like much. But boosting U.S. exports – Obama has pledged to double them – is integral to bringing unemployment rates down.

While Washington has dithered, other countries have rushed into the breach. Colombia has been signing trade agreements with countries in Europe and Asia, and China is now its second-largest trading partner. It’s a vivid illustration of how U.S. policymakers’ inability to forge consensus on opening foreign markets is undermining our global competitiveness.

The political case for the free trade pact is even stronger. Colombia is one of America’s closest partners in South America. In a region rife with populist demagogues – the loudest being Venezuela’s virulently anti-American Hugo Chavez – Colombia stands out for its steady march in a liberal democratic direction.

And for its resilience. Nearly engulfed by drug cartels and narco-terrorism in the 1990s, Colombia, with America’s help, managed to defeat them while also strengthening the rule of law. The United States invested $8 billion over a decade in Plan Colombia, which now offers Mexico a model for its struggle against hyper-violent drug gangs that have overwhelmed civil authorities and killed over 30,000 people in recent years.

Congress’s refusal to approve the U.S.-Colombia free trade agreement is no way to treat a friend. It also puts the parochial interests of organized labor over the nation’s interest in opening markets to U.S. exports. The moderate House New Democrat Coalition has endorsed Obama’s efforts to smooth the way toward passage of the pact. It’s time for liberals to stop making excuses and let the deal get done.

The New Centrism

Posted on by The Progressive Policy Institute

I don’t do much politics, but I feel like I have to say something about the demise of the Democratic Leadership Council, which helped bring Bill Clinton to the Presidency in the early 1990s. A lot of writers have interpreted the end of the DLC as the end of centrism, and a sign that Washington has become completely polarized.

My take is different. To me, we’re moving into a new era of centrist ideas, based around the importance of innovation and investment, creative thinking about regulation and jobs, and a greater appreciation of a global economy built around cross-border collaboration rather than “you-me” economic nationalism.

Rather than the center disappearing, I think we’re going to start seeing both left and right start drawing on ‘new centrist’ ideas. Let me just give a few of them:

*The importance of innovation for driving economic and job growth. When businesses try and innovate, we should reward rather than punish them, especially given the innovation shortfall of the past decade.

*The need to  think about investment in broad terms, including human capital and knowledge capital. Our conventional economic statistics, which measure only physical investment, are giving us a misleading view of the economy.

*The need to understand the true nature of the long-term fiscal and entitlement problem: The long-term rise in medical spending is a total reflection of falling or flat productivity in the healthcare sector. If we can fix that–through a combination of techological advances and institutional change–we can in effect grow our way out of the entitlement problem.

*The importance of rising real wages for young educated workers as a sign of the health of the economy. Real wages for young college grads have been falling since 2000–we cannot operate a modern economy this way, because our young people can no longer afford to pay for the education they need.

*The need to find some way to lessen the burden of regulation without losing touch with our social values. We need a systematic process for examining the thousands of regulations and carefully adjusting or removing the ones that slow down growth, while protecting public health, safety, and the environment.

*The need to think about the global economy in terms of supply chains which cross national borders. The U.S. needs to make sure that we are part of global supply chains and that we are getting our fair share of the benefits.  And we need new measures of competitiveness that take account of the new world.

This piece is cross-posted at Mandel on Innovation and Growth

Why The Middle East Needs Economic Opportunity

Posted on by The Progressive Policy Institute

Uprisings across the Middle East have exposed the futility of America’s Faustian bargain with “moderate” Arab despots. Whatever happens in Egypt, it’s time for the United States to switch course and throw its weight unequivocally behind popular aspirations throughout the region for political freedom and economic opportunity.

No doubt this will be risky: If friendly autocrats go down, who knows what will take their place? Already there’s chortling in Tehran, because the fall of pro-western rulers could tilt the regional balance of power toward Iran and its satraps, weakening U.S. influence and further isolating Israel. For American strategists, however, such risks must be measured against the enormous costs of perpetuating a rotten status quo in the Middle East.

U.S.-backed regimes are far from the region’s worst, but they have contributed to the dismal conditions – stunted political and economic development, systematic abuse of human rights, endemic nepotism and corruption – that breed popular discontent and, at the extreme, the violent ideology of radical Islam. Washington’s support for authoritarian rulers has yielded neither lasting stability nor moderation, though it has compromised our own liberal values and engendered anti-American sentiment on the street.

Now, amid rising popular demands for change, America should aim not at stability, but at transformation in the Middle East. We should side with the young, civic activists and political reformers who want to throw off strongman rule; knock corrupt elites from their privileged perch; bypass central bureaucracies that stifle enterprise and dole out economic favors as a means of social control; empower civil society and women; and, in general, open Arab and Muslim societies to the modern, interconnected world.

Given our embrace of realpolitik in the Middle East, America doesn’t have a lot of credibility in the eyes of people now protesting in the streets of Cairo and other Arab capitals. But while our influence on political developments may be limited, there’s nothing to prevent the United States from addressing the economic frustrations that feed today’s revolts.

As PPI has documented in a series of policy reports (see here and here), the Middle East is the great outlier in today’s system of economic globalization. If you take out oil, the region’s share of world trade has remained strikingly small (about two percent of farm and manufacturing products), even as its population has nearly doubled over the past three decades. Exports are up in some countries, including Egypt and Pakistan, but the region as a whole attracts very little foreign investment. Poverty rates remain high – in Egypt, just under half the population is poor – and, according to the International Labor Organization, the Middle East has world’s highest unemployment rate: 10.3 percent compared to a global average of 6.2 percent.

This picture of economic stagnation is particularly grim for the young. Fully a quarter of them can’t find work. Little wonder that, as young men pour out of schools and universities into barren job markets each year, some are susceptible to Islamist extremists who offer them not only pay and adventure, but also a compellingly simple account of who is to blame for their misery – corrupt rulers in cahoots with the infidel West.

One practical way the United States can counter the radical narrative is to champion economic freedom and prosperity in the Middle East. The principle instrument here is trade and investment, rather than development aid. What these countries need is economic reforms that facilitate their integration into global markets, not wealth transfers from rich countries that end up lining the pockets of corrupt elites. To spur reform and growth, President Obama should ask Congress to pass a massive tariff-reduction bill based on the successful precedent of the Africa and Caribbean free trade agreement. A Greater Middle East Trade Initiative would provide the levers for lowering barriers to trade and investment in the region, promoting financial transparency, encouraging all countries to join the World Trade Organization, and removing obstacles to individual enterprise.

The nexus between trade and investment and economic reform is critical. As Peruvian economist Hernando De Soto has shown, massive state bureaucracies and bad laws smother entrepreneurship and drive a lot of economic activity underground. In Egypt, more people work in the underground economy than in either the private or public sectors. His studies also show that a low-income entrepreneur has to negotiate with scores of government agencies to start a business, and it years to get clear title to land.

Of course, Washington should press harder for political reforms and fair elections in the Middle East as well. But many in the region simply don’t trust Washington to embrace democracy if it produces outcomes we don’t like. By focusing on poverty, unemployment and jobs, the United States can work around such suspicions. Making life better for ordinary people is the best way to advance U.S. interests in the Middle East.

Import Recapture Strategy

Posted on by The Progressive Policy Institute

From the NYT, on rising Chinese export prices:

Markups of 20 to 50 percent on products like leather shoes and polo shirts have sent Western buyers scrambling for alternate suppliers…..Already, the slowdown in American orders has forced some container shipping lines to cancel up to a quarter of their trips to the United States this spring from Hong Kong and other Chinese ports.

It’s time for state and local economic development agencies to start honing their import recapture strategies. By ‘import recapture strategy’, I mean the judicious use of loans and other aid to help rebuild and restart manufacturing production and jobs that were lost to foreign factories.*

Yes, I know that sounds weird after all the manufacturing jobs that have been lost.  Anecdotally, the price differential between China and the U.S. was on the order of 35%.  Given the price jumps in the pipeline, all of a sudden the cost of U.S. production might be in spitting distance for some industries.That’s especially true since domestic manufacturers have the advantage of being close and flexible.

I’m talking here both high- and low-tech production here. The question is which industries are ripe for import recapture, and how many jobs could be created. Here I’m going to tell you an important  little secret–you cannot rely on the BLS import price data to tell you where the gap has closed between import and domestic prices. Two reasons:

* The BLS does not measure the difference between the price of imports and the price of the comparable domestic goods.   Just doesn’t.  Never has. It’s a gaping hole in the data.

*The BLS  does measure changes in import prices–but very very badly (see here and the conference proceedings here). To understand how badly, take a look at this chart, which supposedly tracks the price of Chinese imports.

If you believe this data, the price of Chinese imports into the U.S. has been effectively flat (plus or minus no more than 4%) for the past seven years, through the biggest import boom in U.S. history, the biggest financial crisis in75 years, and a 25% appreciation of the Chinese yuan against the dollar.  As the saying goes, “this does not make sense.”

This piece is cross-posted at Mandel on Innovation and Growth

Chinese-U.S. Exchange Rates and Knowledge Capital Flows: Why We Feel Poorer

Posted on by The Progressive Policy Institute

The short summary:   The Chinese policy of buying dollars can be best understood as an indirect purchase of U.S. knowledge capital–technology and business know-how.  That, in a nutshell, is why we feel poorer today. Unless the Obama Administration understands the link between the undervalued yuan and the global  flows of knowledge capital,  negotiations with China are doomed to fail.

Viewed in the usual economic light, Chinese exchange rate policy in recent years looks like a gift to the U.S..   By buying up dollars to keep the yuan low, China–still a poor country– is effectively lending money to the U.S.–still a rich country–to buy Chinese products.  According to the official statistics, the U.S. has run a cumulative $1.4 trillion trade deficit with China since 2005. But over the same period, Chinese ownership of  dollar-denominated financial assets in the U.S. has risen by $1.3 trillion.

To put it another way, the conventional statistics seem to be saying that  the U.S. is getting $350+ billion a year in cheap clothing, electronics products, and toys at no real cost today.  What’s not to like?

But if this explanation was really correct–if  that purchase of dollars  was a gift from China–the U.S. would  be feeling happy and prosperous right now.  We have received all of these cheap goods and services, without having to give up very many of our own resources.

But of course, the U.S. doesn’t feel rich and happy right now–we feel poorer, while the Chinese are feeling more prosperous. How can we explain this?

The  reason why the Chinese purchase of dollars seems like a gift is  because we have a 20th century statistical system trying to track a 21st century  global economy. We can do a decent job tracking the flows of goods and services and a passable job tracking financial flows.  But there is no statistical agency tracking global knowledge capital flows–and that’s where the real story is. Take a look at this diagram.

The first three boxes represent the conventional view: The U.S. gets cheap goods and services, and then pays for them by selling financial  assets.

But that leaves out the  the transfer of knowledge capital  from the U.S. to China. In effect, the Chinese purchase of dollars is a mammoth subsidy for the transfer of technology and business-know into China.

Consider this. When China keeps the yuan low, that’s an inducement for U.S.-based companies to set up factories and research facilities in China, both for sale in China and for imports back to the U.S. .  And that, in turn, requires a transfer of  technology and business know-how from the U.S. to China.

My favorite example is furniture makers.  Over the years, U.S. furniture makers had accumulated this vast storehouse of knowledge–for example, how to make  coatings on dining room tables that are less likely to chip or discolor from heat or liquids. That’s one of the differences between a low-quality and a high-quality table.

As the manufacturing of furniture was offshored to China, the knowledge capital had to be transferred as well.   And that, in turn, helped turn the Chinese furniture industry into a global exporting powerhouse.

Now, let’s stop and make  three points here. First, we need to compliment China. It is not easy to absorb knowledge capital from the outside and make good use of it.  Frankly, all sorts of other countries could have tried the same exchange rate trick, and it wouldn’t have worked for them.

Second, the transfer of knowledge capital to China doesn’t mean that the same knowledge capital  disappears in the U.S. However, our knowledge capital  does become less valuable because there is more global competition–and that’s why we feel poorer. (see my earlier post on the writedown of knowledge capital)

Third, what’s needed from Washington is a sophisticated  response that both focuses on rebuilding our own knowledge capital, while at the same time slowing down the exchange-rate knowledge capital pump. More to come on this.

crossposted at Mandel on Innovation and Growth