Thursday, January 27, 2011

Where Did All The Jobs Go?

Obama spoke the other night about the need to create jobs. I’ve got bad news for him: something has gone wrong with the US economy -- 15 million jobs are “missing,” and nothing he’s proposing will help bring those back. There is an answer, but it's not one people are talking about.

For some time now, economists have been trying to figure out why the US economy isn’t producing jobs. If you look at US job growth by decade, there isn’t a single decade since records began in the 1930s where the number of jobs in the US didn’t grow by at least 20%. . . . with one glaring exception: the 2000s. That decade saw a paltry 5% growth (actually 0% after the 2009 recession). And if you subtract the number of jobs created from the number of jobs that should have been created, you will find that at least 15 million jobs are missing from our economy.

So where did they go? Let me dispel the usual suspects first:

1. Taxes: Could it be that our taxes are so high that they caused the 15 million jobs to vanish? That’s unlikely. While taxes were higher in this decade than in the 1990s, they were much lower than they were in the 1950s - 1980s. I’m not saying taxes didn’t hurt, but they don’t explain anything of this magnitude.

2. Over-Regulation: The 2000s saw the full force of ridiculous regulations. The Americans With Disabilities Act caused confusion everywhere, the Family Medical Leave Act made employees much more expensive, and the EPA got to the point that common household spills now needed superfund clean ups. There is no doubt this cost large numbers of jobs. But these regulations are not nearly as intrusive as the creation of OSHA, Affirmative Action, and the EPA, and other similar regulatory burdens of the 1960s and 1970s -- not to mention that most of the economy was denationalized in the 1980s. So again, this doesn’t explain the missing jobs.

3. Inflation: The government claims there is no inflation, but anyone who buys food or gas knows that’s wrong. But today’s inflation is nothing compared to the hyperinflation of the 1970s and early 1980s.

4. Education: Liberals complain that American students aren’t prepared for the modern economy. But that's wrong. Vastly more people go to college today than at any time before, and American colleges dominate the list of the best in the world. Moreover, Americans are learning excellent skills, as shown by our high productivity numbers.

5. War: Some suggest this decade was particularly harsh because of 9/11 and the wars in Iraq and Afghanistan. But that doesn’t make sense either. The number of Americans called up for World War II, Korea, Vietnam, and to face down the Soviets in the 1980s were much larger than anything done during the 2000s, as was military spending.

So what is the cause? I think the answer is our trade policy.

Experience has shown that Adam Smith's theory was right: free trade leads to huge benefits for all concerned. By providing only the products and services for which you have a comparative economic advantage, and then trading, all sides benefit. But what happens when trade is not free? What happens when the comparative economic advantage is distorted? What happens when one side engages in free trade and the other uses trade as an economic weapon? Consider these factors:

1. Distorted Currencies: For decades now, China and others have exaggerated (or created) their comparative advantages by keeping the value of their currency artificially low. This is like subsidizing Chinese goods and offering a subsidy to American companies to ship their factories to China. Thus, many jobs that should have stayed in America under free trade ended up being shipped to China because China’s artificially cheap currency made it artificially cheaper to export to the US from China.

2. Tax Law Distortions: American businesses can actually deduct the cost of moving jobs overseas. Moreover, once overseas, they can play games with inventory values to reduce their tax burdens. Thus, our government is encouraging them to ship jobs overseas.

3. Blind Eye To Corporate Espionage: Our government and “our” multinational companies have turned a blind eye to corporate espionage. Where did China get the skills to make advanced factories? Western companies shipped those factories to China, knowing the Chinese would pirate the entire process. China (and others) also engaged heavily in computer hacking and other assaults on Western data, which they used to improve their own businesses. It’s hard to hold a comparative advantage in a “knowledge-based” economy when foreign governments steal your data and give it to your competitors.

4. Unfair Competition: Many of the companies that compete with US companies are owned directly or indirectly by the Chinese government or Chinese military. These companies have an unlimited ability to obtain funding on favorable terms, to lie on their balance sheets, and to get regulations put into place that stop their competitors in their tracks. And through these governmental-corporations, the Chinese have managed to wipe out numerous American and European companies, leaving the Chinese to dominate the field.
All of this has caused a cascade failure. First, we lost factory jobs we shouldn’t have because overseas factories were unfairly subsidized. But don’t worry, we were told, we would still have the high-tech jobs. . . the jobs foreigners could not do, like making computers. But as they stole American secrets, they started getting these jobs too. Don’t worry, we were told again, we’ll hire them to make cell phones, but Americans will always design the cell phones. Only now Apple and others are hiring Indian engineers to design their newest products. Tech support, accounting, legal, etc. -- all things we were told could never be done overseas -- are all following. In effect, American companies are emigrating.

By allowing foreign countries to subsidize their companies, to steal and use our data, and by actually making it cheaper for American companies to shift their operations overseas, we have allowed foreign countries to systematically gut the American economy to the tune of 15 million jobs that should have been created here.

So how do we fix this? For one thing, it’s time to demand that anyone who wants to deal with America let their currency float fully, and we need to impose severe tariffs on the products of government-owned firms. Secondly, it’s time to eliminate deductions for overseas expenses; why should we subsidize the shipping of jobs overseas. Third, it’s time that we bar products made with stolen American technology or data. And fourth, we need to get our own regulatory and tax schemes under control. I say eliminate the corporate income tax entirely, switch to a sales tax or an equivalent import tariff, and let’s see what Issa comes up with on cutting regulations.

Free trade is great, but playing the sucker is stupid. So long as we let foreign governments distort the market to make their firms more competitive, and so long as we provide incentives for American companies to flee the country, we will never get those 15 million jobs back, and we're going to lose another 15 million and another and another.

If we don’t fix this, we really are in danger of breaking our economy. And no amount of stimulus spending is going to change that.


T_Rav said...

Andrew, in this respect I think a lot of the fault lies with Nixon and Carter, who decided to recognize the Communist government of China (you know, the one that chased the legitimate government off the mainland) and encourage economic relations with it. In my opinion, we should never have chosen to start treating that regime as though it was just another member of the "world family." It's not.

Tennessee Jed said...

A great post, Andrew. All of those things you mention play a role. I think taxes play a bit more of a role than one might think when put in context. If we want foreign companies to locate here and provide jobs, we need to have a corporate tax policy that is an inducement to do so instead of the opposite. The Fair Tax Book has a good section on that.

It is true we had higher rates in the 50's and '60's than we do now, however I think there was more of a capabilities gap between the U.S.A. and other countries in our manufacturing and other capabilities. Perhaps not so much Germany, but remember both Germany and Japan were coming off total defeat in WWII. Countries like India were not even on the map back then in terms of capabilities.

AndrewPrice said...

T-Rav, I don't think the problem is with trading with them. If we trade with China on equal terms, they are no more dangerous than any other country. But we have let them use trade as a weapon to get American jobs.

Particularly, we've let them keep their currency artificially low for decades now. That makes it a lot cheaper than it should have been to export from China and has cost us a lot of job that we never should have lost. And once our "jobs infrastructure" is gone, it's very hard to get that back.

So I think the problem isn't Nixon or Carter, but Bush/Clinton/Bush/Obama who decided that they would rather let China do this to us than risk angering consumers or China.

AndrewPrice said...

Jed, Thanks!

I think the capabilities gap did give us a lot of leeway that we no longer have today. So I think you're right that taxes are much more important today -- especially where corporations are so mobile.

I think each of these factors matter, but I think none of the first ones I mention alone (or even combined) explain where this mass of jobs disappeared to. I really think it's trade.

And people are waking up to this now that a whole lot of upper-middle-class jobs are starting to disappear to China -- jobs like engineering, accounting, law.... the things our economy was supposed to be turning into when they said we were becoming a "service economy."

I think that unless we fix these issues, we're going to keep losing these jobs and what our economy is likely to see is a crushing disappearance of the middle. You will have rich owners and specialists (like inventors or celebrities), and you will have retail type services. There isn't much else that can't be exported the way things are right now. And that's not a sustainable economy.

Ed said...

Interesting article! I believe in free trade too, but this does seem wrong. It's one thing to lose fair and square, but it's another to stand there doing nothing as the other guy cheats.

What do you say about the idea that mercantilists (like the Chinese) are only robbing their own country?

Unknown said...

They didn't have to steal a lot of our high-tech sector. Our wooly-headed presidents, most particularly Clinton, gladly handed technology over in more of the feel-good diplomacy that bears no relationship to reality. The Chinese barely needed to do anything to get parity on supercomputers, and there are signs that they are now ahead of us in that area.

CrispyRice said...

Interesting stuff, Andrew! I have to agree with you - companies will follow profit. It's not because they're evil, but because it's human nature. And companies don't exist to make life happy for their employees - they exist to make profit for the owners and shareholder, which ultimately makes money for their employees. They do this by providing products that people want to buy.

So who can blame them when their incentives are to chase lower tax burdens in foreign countries, or lower labor costs in foreign countries.

Unlike you, I can't fault companies for building their factories off-shore. They're following cheaper labor, and they're improving life for those people, which will ultimately be good for all people.

Nor can I fault people in 3rd world countries wanting what we take for granted - an abundance of food and consumer products and a cleaner, healthier world. Just because they "stole" it from us instead of re-inventing the wheel themselves doesn't mean they don't have every right to strive to live better.

The problem is as you identified - the incentives in the US are not to invent and come up with the next big thing. We're in a screwed up place right now with no incentives to push ourselves forward.

I'm still ultimately an optimist and think the entire world will come out better - safer, wealthier, cleaner, smarter - in the end, but it's going to be ugly for the USA until we get there.

AndrewPrice said...

Thanks Ed. I think that's right that it's a very bad strategy to let the other guy manipulate your economy.

In terms of the mercantilism issue, I know that the theory says that the mercantile country is only subsidizing the other country, BUT I think the problem is that when the government is involved, it can use this to destroy another economy by basically luring away parts of that economy, and then its very hard for the other economy to recover because of the cost of moving back and forth. So I think this can be an effective strategy, even though the pure theory says it shouldn't be a problem.

AndrewPrice said...

Lawhawk, That's true. In fact, Clinton dropped the export control on a lot of that, including satellite technology. . . and guess who's suddenly building satellite killers, their own GPS and dramatically improving their missiles -- all with US technology that was legally exported because US companies wanted to be able to sell this stuff and had to agree to hand it over as part of that sale.

AndrewPrice said...

Crispy, Don't get me wrong. My concern is not the working of free trade. Free trade has proven it's value over and over. And I certainly don't blame companies for looking for the best deals or countries for looking to attract companies.

What concerns me are practices like stealing technology or keeping currencies artificially cheap so as to attract companies that free trade would not give them. My point is that we need to eliminate that by forcing them to let their currencies float and to stop subsidizing their companies.

DUQ said...

What do you think about this "fair trade" the Democrats keep talking about?

StanH said...

In my almost thirty years in business, I’ve known a dozen companies that have made the jump overseas, the reasons? …all of the above, plus fear of unionization, minimum wage, healthcare. It is a pain in the ass to operate a business in modern America.

In my opinion you want to reverse the giant sucking sound, abolish the tax code replace it with the Fair Tax (you’d have to repeal the 16th amendment), abolish a myriad of alphabet agencies that are used as tools to hassle industry. If we toy around the edges, I fear nothing will change.

With Clinton/Gore, that was Loral Space, who sold the technology to China that they we’re able to us too correct their guidance systems for Chinese ICBMs. The two of them should be sitting in prison over that one.

AndrewPrice said...

DUQ, It's not the same thing. I'm talking about using our market power to level the playing field that they've tilted in their favor.

When the Democrats talk about "fair trade" they're talking about imposing union rules and environmental laws on other countries, they aren't thinking about the rest of it, nor do they understand (or like) free trade. Basically, they want to force other countries to share our handicaps.

I'm talking about making sure that other countries can't cheat.

Think of it like a pizza company. Imagine you are running a pizza company. But your competitor has secret government backing, gets their costs subsidized, and the government steals your recipes and gives them to this company. That's how China (and to a lesser extent India) are acting in international trade. That's what I object to.

The Democrats, on the other hand, are simply demanding that we make China pay their employees exactly what we pay ours.

AndrewPrice said...

Stan, I couldn't agree more about Loral. They should be in jail and so should the Clinton people who made it possible. It is simply stunning that an American company would be allowed (and would willingly) send secrets like that to people who can then use them to threaten Americans.

I agree we need regulatory reform here -- desperately. But we will never get anyone to agree to take out Constitutional amendments or abolish agencies. But we can start leveling the field in many other ways, like the ones I mention here and by what Issa will hopefully come up with.

CrispyRice said...

Ok, whew! I didn't think you were against free trade.

Still, I think the whole world will improve through struggle and through competing with each other. It's not always fair, though.

Ed said...

It sounds kind of like the dumping argument, which a lot of people said was never valid but I think is obviously valid. Dumping works if you have start up costs, and there are definite start up costs with rebuilding an entire industry. I think you're right.

Anonymous said...

Agree, kill the Corporate Income Tax! Time to create jobs, lift wages, lower prices, fix residential housing, improve US stock prices and fix the State/Muni underfunded pension issue.

AndrewPrice said...

Crispy, Nope, I'm a big advocate of free trade. And here, I think what we need to do is to use our market power (which is very considerable) to demand that they play fair. I agree that the world isn't fair, but that doesn't mean we need to let ourselves be taken advantage of.

AndrewPrice said...

Ed, I think it's similar to the dumping argument, except that you're not talking about just one company but a deliberate decision by the government to engage in dumping in various industries.

Think of it this way, suppose we took $200 billion from the Pentagon budget and used that to subsidize our computer factories -- it would be very, very hard (if not impossible) for anyone to compete with our computers then. And once everyone else's computer plants are gone, suddenly we have a great deal more power in the world. That's what's going on here.

AndrewPrice said...

Anon, I think that would go a long way to bringing back businesses to the US, which would fix a lot of our problems.

Interesting site, by the way.

Ed said...

That's exactly what's it's like Andrew! Great analogy. They're fighting a long term trade WAR and we're pretending nothing is happening. Their goal is to steal away American companies and know-how and then one day they'll be miles ahead of us.

Ed said...

Also, did you see the news about that stealth fighter and the Chinese building an aircraft carrier? They are getting their hands on American technology and using it to threaten American lives. That's an outrage!

Dane said...

I don't know if free trade is even good for us. It looks to me like all we do is import goods and export our currency and our jobs.

AndrewPrice said...

Ed, I saw that. I understand they got the technology by collecting the parts from a crashed stealth fighter in Serbia, but even so, they are very good at exploiting American/Western technology and we are stupid enough to keep giving it to them -- look at Loral or Airbus. Watch, in ten years, China will start driving Airbus out of business because those idiots are transferring technology to China in exchange for cheap labor right now. That's a horrible trade off.

Unfortunately, our trade policy is not rational, it's based on whatever lobbyists ask for.

AndrewPrice said...

Dane, Free trade has brought the world a level of prosperity and freedom unlike anything that's ever existed before. Free trade is a good thing. It's letting the other side exploit our desire for free trade that's the problem.

Anonymous said...

We lost a lot of furniture jobs to China and people talk a lot about the exchange rate around here. But nobody in Washington talks about it.

AndrewPrice said...

Anon, You hear it sometimes, but they never do anything about it. Obama claimed to get some deal where China was going to let their currency appreciate, but it was really small.

Anonymous said...

The damage has been done but it is now going to get worst with Obama signing the NAFTA agreement for asia-pacific region.

It is human nature for businesses to move where they gain the most profit.

Its time for Americans to move out of this country too since there is no doubt in my mind that we will become a poverty stricken nation in the near future.

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