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May 09, 2006

Who's a No-Think Economist?

Don Boudreaux

Paul Craig Roberts is at it again, predicting that America will soon be a “Nation of Waitresses and Bartenders.”

Roberts’ mode of argument is so disingenuous, his name-calling and innuendo so unscholarly, and his economics so madcap, that I’m tempted to ignore him in much the same way that I ignore the antics of Lyndon LaRouche, Louis Farrakhan, and others who scream from the fringes.

But I resist the temptation.

First a sample of Roberts’ disingenuousness; here’s the second paragraph of his latest shriek:

Most of the April job gain --72%--is in domestic services, with education and health services (primarily health care and social assistance) and waitresses and bartenders accounting for 55,000 jobs or 42% of the total job gain. Financial activities added 26,000 jobs and professional and business services added 28,000. Retail trade lost 36,000 jobs.

He doesn’t say what he means by “domestic services,” even though the term is a synonym in the modern American language for maid and other household services. Clearly, he wants his readers to worry that nearly three-quarters of the jobs created in April are low-paying, dead-end, “domestic service” jobs such as waiting tables and schlepping drinks.

But because "domestic service" jobs sound so lamentable, Roberts -- who for several years now has predicted that free trade is impoverishing America -- wants to report that a large percentage of newly created jobs are in "domestic services."  To achieve this gloomy-sounding result, Roberts classifies jobs in education and health-care as domestic-service jobs – so careers such as teaching computer science at MIT and working as an anesthesiologist at the Mayo Clinic are in “domestic service.”

I’m sure he’d defend his use of the term “domestic service” by saying that he means jobs in which services are provided domestically – face-to-face, mostly. And to this defense, I’d respond “So what?” So what if most jobs created are in services?

Service-sector jobs are the most desirable. Until his retirement, my dad had a manufacturing job: he worked as a welder in a shipyard. Like most parents, his dream was for his children to become doctors or lawyers and the like -- that is, he longed for his children to work in the service sector.  Ever hear a parent say “I want my boy to grow up to be a pipe-fitter!” or “My dream is for little Suzy one day to operate her very own sewing machine in a clothing factory!”?

But to read Roberts’ disjointed hysterics you’d guess that manufacturing jobs are the ones that people long for, jobs that we should try to keep, jobs that are much, much better than icky and lowly service-sector jobs such as are held by physicians, lawyers, architects, college professors, accountants, bond traders, marketing executives, and professional pundits.

Moving on....

Not surprisingly, Roberts misunderstands the trade deficit, saying that the U.S.

pays its current account deficit by giving up ownership of its existing assets or wealth. Foreigners don't simply hold the $800 billion in cash. They use it to acquire US equities, real estate, bonds, and entire companies.

Well now. First, it’s not true that when the U.S. current-account deficit grows that Americans necessarily give up ownership of existing assets or wealth. New assets or wealth might well be created. Suppose that Mr. Chang in China earns $1M by selling clothing to Americans. Further suppose that Mr. Chang invests this $1M by building a new R&D facility in Texas.  America's current-account deficit would increase as a result of this transaction no less than it would increase if Mr. Chang spent his $1M buying shares of Gillette Corp. from Warren Buffett. But Mr. Chang’s investment in an R&D facility in Texas creates an asset – it brings into existence an asset that never before existed. No American lost an asset as a result.

Second, even if foreigners are spending their dollars only “to acquire US equities, real estate, bonds, and entire companies” – as Roberts says – then Roberts’ fear that capital is fleeing America for low-wage countries is exposed as baseless. His fear, remember, is that

[w]ith first world technology, capital, and business know how crowding into China, virtually free Chinese labor is as productive as US labor. This should make it obvious to anyone who claims to be an economist that offshore production of goods and services is an example of capital seeking absolute advantage in lowest factor cost, not a case of free trade based on comparative advantage.

Overlook the meaningless talk about absolute advantage, and focus on Roberts’ insistence that capital is fleeing to places, such as China, where wage rates are much lower than in America.  If capital is fleeing so eagerly to China, why is it also flowing so eagerly into the U.S. – as Roberts himself (correctly) says it is?!

One problem (although hardly the only one) with Roberts’ twisted, internally inconsistent analysis is that he assumes that the amount of capital in the world is fixed.

Posted by Don Boudreaux in Trade | Permalink

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I posted last year about this widespread cargo cult which elevated manufacturing jobs above all. Don Boudreaux has a great post over at Café Hayek on this very topic and I think this particular quote really nails it: Service-sector jobs [Read More]

Tracked on May 9, 2006 6:06:23 PM

Comments

What a silly, biased analysis by Paul Craig Roberts!

Anyone examining the BLS April data can see the sectors with the most job growth:

Financial services: +26K, or 0.31%
Health care: +23K, or 0.19%
Professional/tech svcs: +21K, or 0.29%
Manufacturing: +19K, or 0.13%

And discover the slowest growing sectors:

Retail trade: -36K, or -0.25%
Admin/waste svcs: 5K, or 0.05%
Government: 7K, or 0.03%

At least for one month, highly skilled sectors outpaced McJobs. Not surprising that PCR would ignore that.

Posted by: John Dewey | May 9, 2006 2:49:57 PM

PCR's fixed-wealth-pie of capital mentality wouldn't matter so much if he professed to love all of humanity, not just the blokes who's mothers water broke in a certain geographic location delineated with imaginary lines on a piece of paper.

Posted by: iceberg | May 9, 2006 3:42:04 PM

No question that writing such as Roberts' helps no one, and perhaps even does harm, to intelligent discussion on the nation's economy. However, simply regurgitaing the notion that GDP and Productivity data as provided by the Bureau of Labor Statistics is equally worthless.

Unless and until the correct impact of offshore outsourcing in the Productivity and GDP data is known, we will have nothing but unsupported theorizing on all sides of the issues.

Some 14 million manufacturing jobs have disappeared in the last decade and a half. How much is due to flawed economic policy? "All of it screams," Roberts. "None of it," the conservatives shout in reply, "It's all due to productivity."

When the import data that goes into calculating GDP is a fraction of what other countries say they exported to the U.S.; and when the BLS openly acknowledges that manufacturing outsourcing is included in the Productivity calculation - but they don't know how much - then both sides are making much noise with little meaningful effect.

Posted by: Bill Waddell | May 9, 2006 4:37:48 PM

Bill Waddell:
"Some 14 million manufacturing jobs have disappeared in the last decade and a half."

I don't understand this number, Bill. Certainly the net change in manufacturing jobs is not a minus 14 million. According to the BLS, total manufacturing jobs declined only 3.5 million the past 15 years:

U.S. manufacturing jobs

1990 17.70 million
2005 14.23 million

At the same time, total nonfarm jobs increased by 24 million:

1990 109.49 million
2005 133.46 million

You may call this "simply regurgitaing GDP and Productivity data" if you wish. But the detail BLS data tells me a lot. It's very clear that blue-collar manufacturing jobs have been more than replaced by additions in professional services, financial services, information services, and health care. These additions were not McJobs, but rather skilled professional career positions.

Posted by: John Dewey | May 9, 2006 5:49:16 PM

Manufacturing jobs will continue to disappear. Did you know that *China* lost 15 million manufacturing jobs since 1985? But of course what matters is how much is produced, and the idea is to produce more with fewer workers. Or did you want to lament the loss of all the farm jobs that we had 150 years ago?

Posted by: bbartlog | May 9, 2006 11:31:53 PM

Financial services and health care are both benefitting from massive, intervention-based inflation.

Their last gasp of growth doesn't comfort me at all.

Posted by: Aaron Krowne | May 10, 2006 12:52:43 AM

Aaron,

Boomers are just now entering their sixties. They should fuel health care growth for at least 30 years. Many Boomers will finally become empty-nesters the next 15 years. That's when retirement savings - and demand for financial services - should peak.

Posted by: JohnDewey | May 10, 2006 7:25:43 AM

PCR gives a perfect description of the "rustbelt," although it is clear the federal government is willing to sacrifice the rustbelt for the great good of whoever (please, no snarky comments about protecting buggy whip manufacturers).

If you think being a nurse aide in a nursing home is a great job you are welcome to try it, low pay, back injuries and all.

And bank tellers are a part of financial services, hey what a great career.

Why is anyone who dares questions any little part of the trade orthodoxy subject to ad hominem attacks? Are you afraid of the discussion?

Posted by: save_the_rustbelt | May 10, 2006 10:19:58 AM

In fact, China did not lose 15,000,000 manufacturing jobs. The debate does not take on merit unless and until people start using valid data.

I suggest you put away the often cited analysis by the guy at Clemson, replete with its assumptions, averages and implied data, and read the report commissioned by the Bureau of Labor Statistics:

http://www.bls.gov/fls/chinareport.pdf

The debate and its repurcussions are far too important to be conducted based on data that came from some guy who found it on the internet who picked it up from someone who wrote a research paper base on something he found in a magazine ......

I Further suggest that before anyone argues too strenuously that the loss of manufacturing jobs is the product of whopping productivity improvements based on some vague utilization of whiz bang technology, they read the fine print in the BLS Productivity arithmetic:

"Conceptually, the impact of offshoring is more pronounced in manufacturing measures than in the business sector measures, provided the domestic manufacturer is purchasing the offshored goods or services as inputs. (As with the business sector, the complete loss of manufacturing production to an importer of finished goods leaves productivity largely unchanged.) If a domestic computer manufacturer switches from domestic to foreign suppliers of intermediate inputs such as computer memory chips or call center services, real manufacturing sectoral output is unchanged. Because U.S. jobs are lost (all other things unchanged), labor productivity will rise. If the U.S. manufacturer switches most of its production to off-shore facilities, labor productivity might rise substantially."

So, "conceptually" every foreign component of everything that is packaged in the US is called a "Productivity" improvement - "conceptually", that is. So "conceptually", a guy gets laid off in Ohio and the work is sent to China, and "conceptually", he takes a job making 4% commission in the Sears Lawn and Garden Center instead of the $20 an hour he made at the factory, and "conceptually" we say that the lower pay and increase in trade deficit is a productivity gain - the result of American innovation and the wonders of modern technology. Only, "conceptually", we are flat wrong.

I am not suggesting that the work should not have been sent to China. What I am suggesting is that the root causes of flat or declining real wages, loss of manufacturing jobs and increasing trade deficits can not be addressed if the experts continue to blather about non-existent productivity gains, rather than facts.

I have nothing against free trade, but I cannot understand how anyone with integrity can willfully ignore accurate data. If someone believes that the current trade policies of the United States are good for the economy, they should be reluctant to dig up accurate data and trust that, when laid out on the table for all to see, it will prove that point.

Posted by: Bill Waddell | May 10, 2006 11:18:44 AM

rustbelt,

Low skilled jobs in financial services continue to be automated. Growth occurs in the skilled professions. Examples for just the five years ended 2004:

- loan officers, +105K
- accountants, +164K
- claims adjustors, +91K

Health services employs twice as many professional workers as low-skilled aides. Though both are growing, more professional jobs are being added. Examples from 1999 to 2004:

- laboratory/radiology technicians, +289K
- registered nurses, +133K
- EMT and paramedics, +19K

These are all well-paying and satisfying careers.

Please reconsider your opinion about tellers and health care aides. Not everyone possesses the ability to do professional work. For some people, low-skilled jobs that involve extensive human contact can be emotionally rewarding.

My wife has supervised dozens of nurses's aides who are pleased to show up everyday to assist her. That's because Joanna always treats them with respect and always acknowledges their contribution.

Posted by: John Dewey | May 10, 2006 11:28:25 AM

Bill Waddell:
"I have nothing against free trade, but I cannot understand how anyone with integrity can willfully ignore accurate data."

Is the BLS data I provided inaccurate? It showed me the manufacturing job decline - 3.5 million since 1990 - was a very small part of the overall U.S. economy.

Bill, I just don't understand what's so bad about letting that small amount of work be outsourced. We've enjoyed 15 years of prosperity. Everyone who wants to work can do so. Many of us believed in the strength of the U.S. economy, and invested heavily since 1990. As a result, we're much more wealthy. Other than uncontrolled government spending, where are the problems?

Posted by: John Dewey | May 10, 2006 12:02:01 PM

You are correct - I misstated the job figures. Total manufacturing jobs are at about 14 million, down 3.5 million since 1998.

By what measure is the economy doing well? GDP? That number does not distinguish between American manufactured content or imported content either. Trade deficit? Budget deficit?

A widening income gap is a very real problem, and the if the conservatives in economics and politics continue to ignore it, blindly attributing the gap to 'productivity' there is very likely to be a political backlash that puts Hillary in the White House. Then watch what happens to the economy.

Factories are closing down - 4,500 Whirlpool jobs today, and the conservatives insist there is no problem. The think tankers, academics and inside-the-beltway crowd can wax philosophically about the service sector, and the high wages and redeeming value of the upper end of service sector jobs, but none of the 4,500 who got pink slips from Whirlpool are going to hang out their shingles as lawyers, doctors, investment analysts or the like. They are many things, but they were not replaced by technology, and they know it, and their income is going to drop significantly, and they know that, and they vote.

Regardless, I am sure everyone would agree that manufacturing jobs are good to have. Ideally, we would have both manufacturing and service jobs. The fundamenatl question is why we have lost 3.5 million manufacturing jobs. Because of cheaper labor? Then how do we explain the growing Chinese investment in manufacturing in the U.S.? More important, how do we explain the manufacturing success of all Japanese automakers in their U.S. plants compared to the dismal performance of all U.S. automakers? Why is it that the manufacturing job loss is almost entirely attributable to the publicly held manufacturers, while the privately held manufacturers are generally doing well?

The greatest impplication of free trade on manufacturing have not been greater access to cheap labor and emerging markets. It has been to expose the deplorable weakness in the American manufacturing financial model.

I will be interested in hearing the name of one old line, major American publicly traded manufacturing company that has demonstrated that it can compete globally? Haul out a Fortune 500 list from 1970 or 1980 and see if you can find one that is still a manufacturer and is making money.

GM, Ford, GE, IBM, NCR, etc... everyone of them either gone, dying, or bailing out of manufacturing as fast as they can. A case can be made the Caterpillar is succeeding as a true manufacturer, but that's about it.

The bottom line:

20% of the U.S. manufacturing jobs have been lost in the last 8 years, and not as a result of productivity improvements, but as a result of the flawed business model cobbled together by business, Wall Street and the government. Closing plants and running to cheap labor is an act of desperation by the big publicly traded companies.

The economy is doing OK - not great

Polarized economists, with guys like Roberts at one extreme, and Walter Williams, et al at the other are not contributing to the solution.

Posted by: Bill Waddell | May 10, 2006 1:07:02 PM

Neither are you.

Posted by: Henri Hein | May 10, 2006 1:30:51 PM

All I did was point out that the BLS productivity data, by their own addmission, is actually the sum of productivity and offshore outsourcing, and that the GDP data does not accurately account for imports; and suggest that productive economic discussion and sound policy requires knowing the true figures.

And you have a problem with that?

Far better to be an ostrich and keep your head buried in the sand and not even look for the truth than to risk having your beautiful theories.

Have at it and watch the red states turn blue in two years while you are still telling the world that the GDP is humming and productivity is breaking records.

Posted by: Bill Waddell | May 10, 2006 2:28:45 PM

>So, "conceptually" every foreign component of everything that is packaged in the US is called a "Productivity" improvement - "conceptually", that is.

Bill Waddel,

I think you should re-read the fineprint you quoted from. It isn't just some made up conceptual notion, it is the only way you can measure a sector.

If an industry imports goods made overseas - and replaces American labor with those goods - then output from the industry will presumably remain about the same (though it will be measured in case it has changed) but less labor will have been used. Hence, labor productivity will have risen (more output for fewer hours) in that industry. That is all they are saying.

And of course it true, and is often reflected in higher wages for other workers or more expansion - presumably the overseas components will be cheaper than the American labor - or some other use of this additional profit.

But it can get confusing - is this good or bad? WIll they add more job that were initially lost? It may take years for expansion and hiring of managers for the new plants to make up for the initial lay offs. However, the additional profits do indicate that the economy will grow - and looking at the economy as a whole, and seeing in which industries we have picked up jobs, and where we have lost them - we can see whether a global economy has been a net plus or a net minus.

Posted by: liberty | May 10, 2006 2:53:36 PM

Please explain that to me

I I have a factory making widgets that take $100 worth of labor, and I shut the factory and lay off all the people, according to the economic stsistics, GDP went down and productivity is unchanged.

However, if I lay off half the people, and have that labor replaced by a comparable number of hours at Chinese wages, and import those half-made widgets from those Chinese workers, and continue to perform the remaining half of the work here in my factory, GDP stays the same, and American productivity doubled.

Please explain the rationale behind the notion that outsourcing half of my work to China doubles productivity, but outsourcing all of it does not increase productivity at all.

Posted by: Bill Waddell | May 10, 2006 3:09:21 PM

John Dewey:

I know well about all the jobs in the both finance and healthcare, and I'm also married to an RN, and know a great many fine nurse aides.

That said, the economy from here is not creating good quality jobs, and creating jobs for RNs is a little problematic since there is a growing shortage. And besides, how do we pay for healthcare? We can only crate jobs we can pay for.

The main point of my post was this:

Why are critics of trade policy slammed out of hand with no real discussion of their issues?

Posted by: save_the_rustbelt | May 10, 2006 3:17:15 PM

>I I have a factory making widgets that take $100 worth of labor, and I shut the factory and lay off all the people, according to the economic stsistics, GDP went down and productivity is unchanged.

Why is productivity unchanged? The number of workers for the amount of output in the industry would change. There is less output and fewer workers, so it might remain unchanged, but if you were very productive (above average) then productivity would go down and if you were very ineffective (below average) it would go up.

>Please explain the rationale behind the notion that outsourcing half of my work to China doubles productivity

Because output remained the same, but you were able to create that output with less labor - your inputs were better. This is the same as if you buy a better factory machine and each worker produces higher output.

Productivity is higher in the latter scenario because you including this higher productivity of these American workers that are not producing more efficiently based on better inputs if you outsourced everything. Perhaps they are producing more effiently overseas and would raise GNP. It makes perfect sense to me.

Posted by: liberty | May 10, 2006 4:03:18 PM

By the way, an experienced pipe fitter can make more than most college professors.

But then illegals are taking over many areas of the construction business, they are cheap and never call OSHA.

Posted by: save_the_rustbelt | May 10, 2006 4:12:46 PM

Because most so many male members of my family worked in a shipyard, I know lots of experienced pipe-fitters. Not one ever earned remotely what I earn as a college professor. Not even close.

Posted by: Don Boudreaux | May 10, 2006 4:43:56 PM

Don't ask me - I'm askiing you why productivity is unchanged. If a product is 100% outsourced, the BLS takes it out of the productivity calculation. Only products completed in the U.S. are included.

So my question remains:

Why is productivity unchanged if I outsource 100% of my production; while productivity doubles if I outsource half of my production?

You fellas are the ones taking the BLS productivity data as gospel - you explain it to me.

For reference, read carefully, here it is again:

"Conceptually, the impact of offshoring is (As with the business sector, the complete loss of manufacturing production to an importer of finished goods leaves productivity largely unchanged.) If a domestic computer manufacturer switches from domestic to foreign suppliers of intermediate inputs such as computer memory chips or call center services, real manufacturing sectoral output is unchanged. Because U.S. jobs are lost (all other things unchanged), labor productivity will rise. If the U.S. manufacturer switches most of its production to off-shore facilities, labor productivity might rise substantially."

Note that ...

"the complete loss of manufacturing production to an importer of finished goods leaves productivity largely unchanged"

and that is how they calculate it. 100% offshore outsourcing turns it into an import, which is excluded from the BLS productivity calculation.

However ...

"If a domestic computer manufacturer switches from domestic to foreign suppliers of intermediate inputs such as computer memory chips or call center services, real manufacturing sectoral output is unchanged. Because U.S. jobs are lost (all other things unchanged), labor productivity will rise. If the U.S. manufacturer switches most of its production to off-shore facilities, labor productivity might rise substantially."

So the entire output stays the same as if it were manufactured entirely in the U.S., but only half the labor was expended in the U.S.

The question remains - what is the ratioaale for this?

Posted by: Bill Waddell | May 10, 2006 4:51:44 PM

>he question remains - what is the ratioaale for this?

I already explained it to you. GO back and read what I wrote. In the part-outsourced scenario, you still have *some* US workers, who now have less to do in order to produce the same output, so they are more productive. Just the same as if you bought them better factory machines, they now have inputs that get part of the job done, so they use less work to produce the same output. Perhaps your complaint is that inputs should not be used to calculate output? You could use a value-added statistic if that is indeed your complaint.

Finally, because the overseas labor is cheaper for the company, they have greater profits and can expand, potentially resulting in what is discussed above - that more jobs are created than lost.

Posted by: liberty | May 10, 2006 5:01:25 PM

I understood your answer. It seems to me that it also applies to freeing up all of my workforce.

According to the BLS, if I lay off half my workforce, productivity doubles. Fine - you have explained that - no need to go through it again.

Why, then, if I lay off ALL of my workforce, does productivity not improve?

Posted by: Bill Waddell | May 10, 2006 5:13:06 PM

>Why, then, if I lay off ALL of my workforce, does productivity not improve?

Productivity of whom, you have no workers?

Again, you can look at GNP if you interesting in a stat that continues to track your output.

But productivity of workers is productivity of workers - you'll have to analyze the productivity of Indian workers (or wherever you outsource) if you want to continue to track labor productivity.

It would be absurd if it counted as higher productivity for American workers to not have any American workers. It makes sense, on the other hand, to note the higher productivity of American workers - even if there are fewr of them - if they are indeed more highly productive.

And, again, if you think it stinks that there are fewer of them working, you must track the whole industry and whole economy over time to see whether more are gained than were lost.

Posted by: liberty | May 10, 2006 5:20:19 PM

Your rationale makes no sense.

Productivity improves when labor is eliminated thorugh better work methods, automation, etc...

To say that replacing 50%, or even 99&, of your workforce with foreign labor represents a productivity improvement is absurd.

To then draw a distinction that says replacing 99 of my 100 workers is a great productivity improvement, but when I replace that last guy, none of the 100 are now a productivity improvement defies all logic and common sense.

Incidentally, the BLS agrees with me. The reason the partial offshore outsourcing is embedded in the productivity numbers is because they don't know how to quantify it and get it out.

My definition of productivity - reducing labor content through improvements in methods or equipment - is the commonly understood one. When everyone from Walter Williams, George Bush, to NAM and Business Week all flaunt the 24% improvement in manufacturing productivity since 1990, they cite advanced technology. Not one of them is so insane as to tell the nation that the biggest part of the manufacturing "productivity improvement" is actually nothing more than offshore outsourcing of components.

Perhaps in Washington all you have said makes sense. Out here in the hinterlands, however, the notion that...

...relacing one Ameriican worker with another American worker at a different plant is NOT a Productivity improvement;

...and replacing a whole plant full of American workers with a whole plant full of Chinese workers is NOT a productivity improvement;

...but replacing one American worker with one Chinese worker IS a productivity improvement;

...is clearly nonsense.

That nonsense is what you have attempted to rationalize to me.

To the extent that the thinkers in Washington fool themselves into believing that anyone out in the hinterlands is buying into the notion that the manufacturing jobs have been lost due to great improvements in productivity, they are sadly mistaken.

Posted by: Bill Waddell | May 10, 2006 5:41:38 PM

>Productivity improves when labor is eliminated thorugh better work methods, automation, etc...
...
>..but replacing one American worker with one Chinese worker IS a productivity improvement;

>...is clearly nonsense.

Do you not see how you have contradicted yourself? If automation improves productivity then it does so whether the automation is with a machine or with an imported good that serves as an input.

Imagine this. You work in a t-shirt factory, and I work in t-shirt factory.

Both of the factories employ 100 low level workers that first make the shirts and then put a logo on them. Then your factory discovers a machine that can make the shirts and buys the machine and lays of 50 workers, keeping the other fifty to print the logo on the shirt. Output is the same - labor productivity has doubled.

At the same time, my factory discovers that for less upfront money than buying the machine that your factory bought, we can outsource the making of the shirts to chine. We also lay off 50 workers and keep the other fifty to print the logos. Output is the same, our productivity has also doubled.

Why does it matter if its a mchine or a chinese worker that makes the American worker more productive?

It is only a measure of how much output a given firm can produce with a given level of input. Your problem is that you are giving to much weight to the measure - as I said, there are alternate measures such as GNP and value-added measure that ,might satisfy your craving for distinguishing between inputs and output and taking into account foreign labor.

Posted by: liberty | May 10, 2006 7:24:03 PM

Perhaps it would help if you thought of production of widgets and production of widget components as two separate manufacturing processes.

I cannot speak for the BLS rationale, but if China is better than the US at producing widget components, and the US is better than China at producing widgets from widget components, then it absolutely makes sense for both countries if China produces all widget components, and the US focuses solely on the final widget.
Real wages and labor will rise in *both* countries from such an arrangement.

http://en.wikipedia.org/wiki/Comparative_advantage

Posted by: Henri Hein | May 10, 2006 7:31:42 PM

"Haul out a Fortune 500 list from 1970 or 1980 and see if you can find one that is still a manufacturer and is making money."

This doesn't tell us anything. Haul out *any* Fortune 500 company from 1970 that is still on the Fortune 500 list. There's a lot of turnover in general on that list, so why should there not be turnover for manufacturing companies?

Posted by: Henri Hein | May 10, 2006 7:36:27 PM

"20% of the U.S. manufacturing jobs have been lost in the last 8 years"

At the same time, manufacturing output has increased. That means productivity has increased. What part about this are you having difficulties with?

Posted by: Henri Hein | May 10, 2006 7:37:52 PM

The part that includes offshore outsourced manufacturing content being counted as an increase in American manufacturing output.

I am baffled by the difficulty you seem to have in understanding that stuff manufactured in China or Malaysia is an increase in Chinese or Malaysian manufacturing output - not American manufacturing output.

Posted by: Bill Waddell | May 10, 2006 8:40:29 PM

A few weeks into my first summer job, I was warned against working too fast; I was beating the quota, I was going to ruin it for everyone else. A few weeks into the job, my main concern should have been worrying about making quota, not avoiding beating it.
Send the machine I worked on to China, and you increase the productivity of some chinese worker manyfold. Send me to a non-union shop to work, and you increase my productivity as well, as the connection between what I produce and what I earn is less confused, at least if the place is intelligently managed.

Posted by: donny | May 10, 2006 9:00:08 PM

I think Bill's point is that the productivity figures ought to be called "productivity for still-employed American workers".

Say you had 100 Americans making and selling $5M worth of widgets before, and now you have 5 Americans selling $5M worth of widgets, 180 Chinese workers making those widgets, and 95 unemployed Americans. The productivity figures for the Americans no longer employed is 0 (more on this below), the figures for those still working is up (more on this below), but the productivity of those original 100 Americans is no different. The Bush Administration is touting the misleading figure of those still working. The productivity for the Chinese workers is probably also up, but I don't know what they were doing before (doesn't matter - it obviously didn't pay as well as this new widget thing).

But Bill - let's say instead of outsourcing to China, you struck widget! Yes, you actually discovered a widget mine that you could operate with those 5 people. Their productivity is up, no question about it, and there is no good reason to keep the other 95 employed if you are already selling all the market will bear (assuming the marginal cost of mining is the same as manufacturing). The assumption that their productivity is necessarily down or even 0 is suspect. The gardening department at Sears is not their only job option - if that were always or even consistently so, then we would see median earnings going down fairly consistently and we would all be making far less than our counterparts 100 years ago. I know several former petroleum engineers who lost their jobs in the shakedown that came after the Saudis made nice w/ President Reagan who are now fiber optics and IT engineers - a much higher value use of their talents. Well, up until recently ;~)

Here's something I don't understand: If I am an engineer in a company that makes, sells, and delivers widgets, and I improve methods so that we can deliver them 5% cheaper, then our productivity figures go up and aggregate manufacturing productivity goes up. However, if I am an engineer at a transportation company, and I figure out ways to cut my customer's delivery costs by 5%, then manufacturing productivity stays the same and the fact that we are now hiring is seen as worthless by the manufacturing-is-everything crowd because I am a service provider (y'know, grouped in there with waitresses, lawn & garden center salesmen, and that lot). Widgets on a loading dock are of less value than widgets in the customer's hands, yet transport is seen as secondary to manufacturing ... *unless* the manufacturer does it themselves. Same with financial services, management, and so on. Healthy workers are more productive, but doctors and nurses don't count for anything because health is a service. These, like manufacturing labor, are all inputs. The real measure of productivity is - what is the total value of output (all goods and services sold) per capita? My guess is that this is up, not down.

Incidentally, ... Bill - neither Don Boudreaux nor most of the people commenting here are "conservatives" (or at least I don't consider myself to be one). I think the correct term that most of us would prefer is "liberal" (in its classical sense).

http://en.wikipedia.org/wiki/Classical_liberal

Posted by: Eric H | May 10, 2006 10:19:29 PM

Eric, I think you it it exactly.

A number based on global output divided by American labor may be a measurement of something, but it does not measure American labor productivity, which is what the number is billed to represent.

Sorry to have misnamed the posse you guys ride with.

Posted by: Bill Waddell | May 10, 2006 11:11:57 PM

Unemployment is low and GDP is rising. To the extent we feel poorer now than ten years ago, I think it's becuase of high gas prices, high commodity prices, the Iraq war and the fear of a war with Iran. If free trade and China are so bad, why do the statistics say we are doing so well?

Posted by: China Law Blog | May 11, 2006 1:05:41 AM

"I am baffled by the difficulty you seem to have in understanding that stuff manufactured in China or Malaysia is an increase in Chinese or Malaysian manufacturing output - not American manufacturing output"

Similarly, I'm baffled that you don't seem able to conceive of the simple notion that productivity is increasing simultaneously in the US and China.

Posted by: Henri Hein | May 11, 2006 1:26:17 AM

"The productivity figures for the Americans no longer employed is 0"

Yes, but that assumes a static view of a dynamic economy. Given rising employment, it's extremely unlikely those workers would remain unemployed for long.

Posted by: Henri Hein | May 11, 2006 1:29:11 AM

Bill,

You talk about integrity, objective data and proof, but you are the one that chooses to ignore the data that disproves your point.

GDP is rising.

Real wages are rising.

Employment is rising.

Unemployment is steady and we are considered at full employment.

Manufacturing output is rising.

Despite all this good news, you spew forth hysteria based on misconceptions. Not only that, you have the gall to do it in a condescending tone.

You are at liberty to spread your nonsense, but please, don't talk to us about looking for truth.

Posted by: Henri Hein | May 11, 2006 1:40:27 AM

Henri,

You went all day long yesterday without addressing the basic question of why foreign output should be included in the numerator when calculating American labor productivity.

I can only imagine the blather I will get in return if I were to upset your world by asking the same question about GDP - why components made in India and Malaysia are included in the Gross Domestic Product of America.

I can almost hear the illogical braying if ask about the increasing wage gap. You would much prefer to keep the discussion centered on means and averages - simple minded, fairly meaningless mathematical measures.

Assailing my integrity, and calling me hysterical and condescending does not change the fact that you cannot come up with a coherent explanation for including foreign output in a measure of American labor productivity.

You just go on and believe what you want. I accomplished my purpose. I delved into the details of the big economic numbers - Productivity, GDP, and real wages - long ago and learned the errors and weaknesses in them. I merely wanted to venture into the belly of the beast and see if there was any more to it - whether the proponents of "manufacturing is fine, the economy is booming, all the big indicators prove it" had any real substance or logic behind them.

I learned that you do not, which is all I need to know. I learned that all you have is the same false mantra - the party line:

"GDP is rising.

Real wages are rising.

Employment is rising.

Unemployment is steady and we are considered at full employment.

Manufacturing output is rising."

... therefore factories closing down across America is not really a problem; and a lot of insulting and name calling for anyone who dares to question it.

I'll be moving along to other forums to continue my education, and will disturb your comfort zone no more. You can go back to the mutual admiration and support effort that seems to characterize this particular forum.

And a final note to Mr. Boudreaux:

As a matter of fact, there are quite a few people who would be proud to see their sons grow up to be pipefitters. Machinists, welders and electricians too. They would be proud to see their son not only become a pipefitter, but to own his own truck and be an independent pipefitting contractor. Same with Suzie and her sewing machine. They would like Suzie to become so good that she someday owns a couple of sewing machines and has a small sewing business. It is decent, honorable work, despite your pompous drivel.

I can only wonder how full of his own superiority a man must be to flush a toilet a time or two, take a shower and have a drink of water, then sit down to write clever throw away lines insulting the people whose pride in their chosen line of work made that possible. You cannot possibly fathom the fact that the pipefitters who make your life comfortable would be ashamed to have their kids grow up to be academic snobs.

Posted by: Bill Waddell | May 11, 2006 9:38:00 AM

>I can only imagine the blather I will get in return if I were to upset your world by asking the same question about GDP - why components made in India and Malaysia are included in the Gross Domestic Product of America.

Well, you never respond to my "blather" very "coherantly", but I will continue. Inputs are included in this measure of output because it isn't a value-added measure; its a measure of total output. If we are able to purchase high quality inputs (whether factories or inputs made by chinese workers via outsourcing) and using those inputs increases our output; well our output is increased, so Gross Domestic Product is higher!

Its as simple as that.

>I can almost hear the illogical braying if ask about the increasing wage gap. You would much prefer to keep the discussion centered on means and averages - simple minded, fairly meaningless mathematical measures.

Ah, but a measure of the difference between two snapshots of wages - one possibly of a 20 year old, the other of a 45 yea old, and describing it as a "wage gap" makes much more sense, huh?

Sorry, but the median wage is a much more accurate look at how the average person is doing - 50% are below that number, not just a few teenagers. Furthermore, the median of certain age groups, as found at census.gov and median within a given state or industry can give you more information. In addition, I like to look at the median of the income quintiles and track mobility over a lifetime between quintiles.

As for the rest of your pomposity and holier-than-thou mantra, that you try to pass off as a working man's tirade against a bunch of snobs; its very weak. I have answered all of your accusations and explained why these indicators are calculated as they are - and you have repeated your short-sighted complaints and continued to rant and accuse others of not paying attention.

Posted by: liberty | May 11, 2006 11:10:41 AM

"You went all day long yesterday without addressing the basic question of why foreign output should be included in the numerator when calculating American labor productivity"

Liberty went all day yesterday trying to explain this to you. Appearently to no avail.

I did post a link to an explanation on comparative advantage, which you chose to ignore. It can be a difficult concept, but if you stick with it, you might one day be able to grasp it.

Posted by: Henri Hein | May 11, 2006 5:40:12 PM

"why components made in India and Malaysia are included in the Gross Domestic Product of America"

It is not. Components made in those countries can be included in the Gross *National* Product, but not in the Gross *Domestic* Product. That's why they call it *Domestic* product.

Posted by: Henri Hein | May 11, 2006 5:42:08 PM

"I'll be moving along to other forums to continue my education"

Good luck.

Posted by: Henri Hein | May 11, 2006 5:43:46 PM

"I merely wanted to venture into the belly of the beast and see if there was any more to it - whether the proponents of "manufacturing is fine, the economy is booming, all the big indicators prove it" had any real substance or logic behind them"

Lots. I suggest you follow Drs Boudreaux and Roberts' blog for a while.

Posted by: Henri Hein | May 11, 2006 5:51:01 PM

>Components made in those countries can be included in the Gross *National* Product, but not in the Gross *Domestic* Product. That's why they call it *Domestic* product.

Actually, I think the outsourcing argument as discussed above does show that inputs obtained through otsource or purchase from abroad do wind up within measures of productivity and GDP here. When the whole company or all labor is abroad, of course they won't. I found the debate interesting, but Bill ultimately didn't take anything away from it because he chose to ignore my major points.

Posted by: liberty | May 11, 2006 6:15:59 PM

"I think the outsourcing argument as discussed above does show that inputs obtained through otsource or purchase from abroad do wind up within measures of productivity and GDP here"

To the extent that the company in question is paying more for intermediate widget components, as opposed to raw widget material, that is a difference not included in GDP. GDP only measures value-added processes domestically.

From econlib's definition of GDP:

"a one-dollar increase in imports necessarily means a one-dollar drop in GDP"
http://www.econlib.org/library/Enc/GrossDomesticProduct.html

"Bill ultimately didn't take anything away from it because he chose to ignore my major points"

I agree, but that's not unusual. It's his attitude that got me bristling.

Posted by: Henri Hein | May 11, 2006 7:14:40 PM

>"a one-dollar increase in imports necessarily means a one-dollar drop in GDP"

Ah. That is what I had thought, but Bill convinced me that the productivity measure's output and GDP were calculated the same (since his complaint was the same). It does seem as if output for measuring productivity is not value-added, according to Bill's quote.

Posted by: liberty | May 11, 2006 7:26:54 PM

I followed all of this and I understood that Bill made the point very well that, to use Liberty's words,

"the productivity measure's output and GDP were calculated the same (since his complaint was the same). It does seem as if output for measuring productivity is not value-added"

If you read most of what is written concerning Productivity and GDP, there is an assumption that they are, in fact, based on value add, when it seems pretty clear that they also include some imported goods and services.

Please read Walter Williams recent article,

http://bookerrising.blogspot.com/2006/05/walter-williams-commentary.html

in which he says,

"U.S. manufacturing productivity, or the amount of goods or services a worker produces in an hour, has soared a dizzying 24 percent. That's 72 percent faster than the average productivity advance during America's four most recent recession-recovery cycles dating back to the 1970s. In short: We're making more stuff with fewer people.' That means rapid economic growth doesn't translate into the kind of manufacturing job creation of earlier periods"

The 24% figure is not an "improvement in the amount of goods or services a worker produces in an hour" Mr Williams article is misleading, if not factually incorrect. To some extent, job creation must be offset by the amount of the "dizzying" growth that is actually offshore outsourcing.

I did not see where Bill provided any support for saying that the GDP calculation includes outsourced goods too, but it seems logical that he is right about that too.

Posted by: Larry Wright | May 11, 2006 8:20:23 PM

'The 24% figure is not an "improvement in the amount of goods or services a worker produces in an hour" '

That's precisely what it is. What's your theory?

"I did not see where Bill provided any support for saying that the GDP calculation includes outsourced goods too, but it seems logical that he is right about that too"

So far, we've seen no substantiation of this.

Posted by: Henri Hein | May 11, 2006 9:09:21 PM

I should qualify my last statement. The GDP calculation does not include outsourced, finished goods.

However, as our trading partners get better at producing the unfinished stuff they sell us, that does potentially improve GDP.

If Canadians can produce more or better lumber for the same price, that impacts the GDP positively. That seems right to me. Since we can buy more, or better, lumber with the same money, we are effectively wealthier.

If we buy the same amount of lumber, but spend less, this will improve the GDP by less write-off in Canadian debits. If we spend the same, we get more lumber, and assuming we use it, produce more goods from it. If we buy more lumber for the same money, and don't use it, the impact is zero.

Bill and Larry seem to have a problem with this calculation, but neither has proposed an alternative. It's not clear how the GDP could more accurately reflect the situation.

Posted by: Henri Hein | May 12, 2006 2:42:51 AM

Henri you seem to be the only one who sees it that way. The BLS agrees completely with Bill and Larry.

The Productivity figures include offshore outsourcing only because the BLS has not been able to find a way to identify it and eliminate it from the equation.

The GDP data is the same. For instance, the 2002 GDP included a deduction for imports from India of a little over $200 Million. Yet the top 5 Indian producers reported shipments to North America of a little over $2.2 Billion.

The BLS openly acknolwedges that the $2 billion gap could not possibly have gone to Canada and Mexico and that the GDP was overstated. They openly acknowledge that there is a hole in the system and they are trying to fix it.

The question is not whether the Productivity and GDP numbers should include offshore outsourced goods and services as you advocate. The BLS has already established that they should not.

The point Bill and Larry are making is that the BLS data is flawed, by BLS' own admission, yet prominent economists continue to cite it as accurate because the flawed data supports their theories.

If you think the Productivity and GDP data should include imports, you need to take that argument to the BLS, not to Bill and Larry, becasue the BLS has always held the opposite point of view from yours.

Posted by: Jim Versteg | May 12, 2006 2:03:23 PM

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