WASHINGTON, Sept. 8 (UPI) -- It was Ross Perot who predicted a "giant sucking sound" of U.S. jobs heading southwards if Congress ratified the North American Free Trade Agreement in 1994. Sophisticated economists derided him. Well, listen up, guys -- since the economy peaked in 2000, and more particularly in 2003, there has indeed been a "giant sucking sound" of U.S. manufacturing jobs disappearing down memory lane.
U.S. manufacturing in August lost 44,000 jobs, and U.S. manufacturing employment has declined by 16 percent since its peak in August 2000. Admittedly, self-employment is up, by 400,000 in 2003, but as I can speak from experience, many of the self-employed may simply be seeking to scratch together an income while they bemoan the loss of full time employment; we are not talking about a dazzling surge in entrepreneurship. The only age cohort of the workforce that has increased its workforce participation rate is the over 55's; of course this owes much to the decline in the stock market and in interest rates since 2000, and the consequent failure of many people's savings to support the lifestyle to which they had been accustomed.
Optimists will respond that the job losses are a result of the fabulous productivity performance of the U.S. economy. Second quarter productivity figures announced Thursday showed a rise in productivity at a 6.8 percent annual rate, a truly staggering level. Once this rise in productivity has been translated into higher production and higher corporate profits, goes the argument, jobs will appear in other sectors of the U.S. economy and the temporarily unemployed will be absorbed.
There are two problems with this analysis: the productivity numbers are not what they seem, and the absorption of the temporarily unemployed into the rest of the U.S. economy isn't happening.
The productivity figures released Thursday showed a significant divergence between the manufacturing and non-manufacturing sectors of the U.S. economy. While overall non-farm productivity growth was revised upwards (from the preliminary release a month ago) from a 5.7 percent rate of increase to 6.8 percent, manufacturing productivity growth was revised downwards, from 4.4 percent to 3.7 percent. Hours worked in manufacturing fell 5.9 percent, while output fell 2.4 percent -- a combination hardly likely to lead to economic nirvana.
As this column has repeatedly warned, the productivity figures released by the Bureau of Labor Statistics are subject to sharp annual revisions, usually announced in August, with the revisions in each of the past several years having been significantly downwards, removing the apparent "productivity miracle" since 1995 that optimistic pundits such as Alan Greenspan still like to claim. This year, the announcement date for the revisions has been seriously delayed, to December 10, and the basis of the statistics will be revised, making them particularly difficult to compare to previous years. The suspicious minded among us will await December's figures, albeit only for years to 2002, with considerable interest, although the basis revision may enable the BLS to hide any substantial downward revisions from the initially announced euphoric numbers.
But make no mistake about it, there will be a revision. Output figures for services and government are notoriously less reliable than those for manufacturing, and in the second quarter of 2003 services and government output growth was particularly prominent, with home sales and mortgage refinancing running at all time record levels, and Federal spending rising sharply. While a single quarter's productivity growth can be faster than a long term trend, it is most unlikely that service productivity, let alone government productivity, is really growing at 7-8 percent, and much more likely that the announced figures are wrong.
As for absorbing the unemployed into the rest of the U.S. economy, this is happening to a lesser degree than at any period since the 1980-82 recession. 22.7 percent of the unemployed have now been out of work for more than 26 weeks, up from 19.0 percent in August 2002 and 12.1 percent in August 2000. That statistic itself does not include the unemployed who have become "discouraged" and ceased to participate in the labor force; the labor force participation rate, at 66.2 percent, is down from 67.4 percent in 2000, reversing a trend towards improved participation dating back to the 1960s. Thus both the duration of unemployment and the percentage of unemployed who have given up altogether have risen sharply, a pretty clear indication that the economy is not functioning in the way it should.
So was Ross Perot right? Is this the fault of NAFTA or, more generally, of the trend in the last 20 years towards globalization? Well, partly.
What does not appear to be happening is a huge drain of labor towards Mexico, as a result of NAFTA. The open unemployment rate in Mexico is only 3.52 percent, but it rose in the second quarter of 2003 from 3.27 percent in the first quarter, while Mexican wage rates are still below their average 1993 level in real terms. This is not an economy that has been pricing the U.S. worker out of his market; which is as one would expect, since there can be no question that the political, economic and labor relations situation in Mexico is far inferior to that of the United States, and is if anything getting worse not better.
However, when the analysis is broadened from Mexico to the developing world as a whole, there does appear to be a case that manufacturing jobs are moving offshore. Treasury Secretary John Snow in China last week pointed out that China had an annual trade surplus of $100 billion with the United States, and called on the country to revalue its currency, which is currently pegged against the dollar. Clearly, if China is absorbing U.S. jobs owing to an undervalued currency, the protectionist case has some merit.
The problem with Snow's analysis is that it is by no means certain that the Chinese yuan is significantly undervalued. China's overall trade position has moved much closer to balance in recent years, with increasing imports from Japan and her other Asian neighbors balancing her trade surplus to the U.S. Moreover, China does not have free movement of capital; the country's huge domestic savings are trapped in its extremely unsound banking system, with bad debts in the system rising close to the country's overall deposit base, and domestic investors being forced to finance unproductive government owned companies through the banking system rather than being allowed to move their money to safer and more profitable havens offshore. Naturally, these prohibitions are widely evaded, and it appears to be the case that as much as 2/3 of China's much vaunted $60 billion of foreign direct investment is no more than its domestic savings exiting the country through Taiwan or Hong Kong and re-entering as "foreign" investment, thus being permitted to finance more productive investments than are available to the domestic saver. Certainly, China's claimed economic growth rate of 8-9 percent per annum is heavily overstated.
There is no question that, with a $500 billion per annum payments deficit, the U.S. currency itself is significantly overvalued, and that a return to more appropriate levels, and a reduction of the payments deficit, will itself improve the outlook for the U.S. manufacturing sector. Of course, such a reduction will, as a mathematical necessity, involve a reduction in the $500 billion per annum foreign financial inflow to the U.S. which must inevitably involve a sharp fall in the U.S. bond market, the U.S. stock market, or most probably both (the bond market has not yet fully reacted to the overwhelming weight of Treasury paper it must absorb in the next several years, while the stock market is overvalued based on current company earnings by any historical standard except those of 1999-2000; both markets have been propped up by the huge volume of foreign portfolio investment, which a decline in the currency must inevitably reverse.)
But that doesn't answer the question of why unemployment has risen so stubbornly, or provide hope for the long term unemployed. If the Chinese exchange rate is not a problem, and the Mexican economic dynamo is not a threat, then why are manufacturing jobs disappearing?
The doctrine of comparative advantage, so beloved by globalisers, states that in a world of free trade, production will move to the location where it can be carried out most efficiently, and wealth in both the country that loses the production and the country that gains it will thereby be maximized. U.S. textile workers have less of a comparative advantage over (say) Pakistani textile workers than U.S. mortgage bankers have over Pakistani mortgage bankers, so if textile import quotas are removed textile manufacturing will move to Pakistan while mortgage origination will stay in the U.S. Overall real wage levels in the U.S. will be maintained, or increase due to cheaper textile and garment imports, while Pakistan should become significantly richer, and enjoy rapid economic growth. It's not a zero sum game.
That's all very well, but it doesn't consider the effects of immigration. A Pakistani textile worker in Pakistan is substantially less productive than a U.S. textile worker in North Carolina, because Pakistan has poor infrastructure, a high cost of capital, avaricious middlemen and substantial political risk. Because of these factors, the U.S. can remain generally competitive, even with wage rates a large multiple of those in Pakistan.
But move the Pakistani textile worker to North Carolina, and the comparison becomes altogether different. The Pakistani textile worker will be happy to move to North Carolina, provided he can get a visa, for say a doubled real wage compared to that available in Pakistan. But even taking account of different living costs between North Carolina and Pakistan, that doubled real wage will still leave him earning maybe a fifth or a tenth of the U.S. textile worker. However, in North Carolina, for unskilled or semi-skilled labor, the productivity differential is very slight; the Pakistani textile worker is at least 80 percent as productive as the U.S. textile worker, and after improving his English and acclimating to local customs he may even be more productive.
Consequently, if Pakistani textile workers move to North Carolina, U.S. textile workers will be laid off. If you allow a high level of immigration from developing countries, all with low wage rates but with a wide range of skills in the unskilled and semi-skilled manufacturing and service sectors, then the result will be both an impoverishment of the U.S. workforce and much higher unemployment among it.
It is thus free immigration, not free trade, that causes workforce impoverishment and unemployment. That's why the Chambers of Commerce and business generally tend to support it -- it increases the profits of business, and allows the gap between top management and the workforce to grow ever greater, as management salaries spiral while workforce wage rates are kept down by the continual pressure of new, youthful and adequately skilled labor from the immigrants. It's not surprising that blue collar wage levels in the U.S. haven't increased since 1973; it was in about 1973 that the existing trickle of Third World immigration to the U.S. became a flood.
It is of course a difficult moral conundrum. As a free market economist would at this point angrily assert, world wealth would be maximized (provided all participants were culturally homogenous "economic men") by completely unrestricted immigration -- but at average income levels far below those currently prevailing in the U.S. and Western Europe. World wealth is significantly increased, even without cultural homogeneity, by rapid immigration into the advanced countries -- the Pakistani textile worker in our example above can double his earnings and still far undercut his North Carolina competitor, which he cannot do by remaining home.
The cognitive elites -- economists, journalists and politicians -- recognize this and therefore favor heavy immigration, believing it to be no threat to their jobs (they may well be wrong, in the long run, in this confidence.) Top management also favors it -- not only do company profits, and therefore its own remuneration increase, but the overall inequality of society also increases -- very desirable indeed if you are among the elite and there is only a limited supply of "positional goods" such as luxury, well located housing, fine restaurants, and marina spaces for your yacht.
But it is the existing U.S. workforce, whose wage levels have not increased in spite of rapid economic growth, whose employment has been rendered uncertain, and whose transition to stable adulthood has been rendered hazardous, that has most votes in U.S. elections. One day, perhaps in 2004, we will get a political candidate who realizes that globalisation, in the sense of increased trade, does not endanger U.S. workers' living standards and may even improve them, but that heavy immigration does endanger those standards, and causes immeasurable economic and social dislocation into the bargain. That candidate, if he puts his message across well, will be a formidable force in both "blue" and "red" states among the great majority of the U.S. electorate. On his past record, it appears unlikely that the successful candidate's name will be George W. Bush.
(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long '90s boom, the proportion of "sell" recommendations put out by Wall Street houses declined from 9 percent of all research reports to 1 percent and has only modestly rebounded since. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)
