Obama Administration makes crucial pivot on trade and jobs.

Moving into the 2012 election season, the Obama Administration is making a critical  pivot in its political and economic narrative on trade and jobs. During his Midwest trip this summer,  Obama extolled American workers as the most productive in the world,  and talked about free trade treaties as the solution to the job problem. The implication was that nothing was wrong, and the return of jobs was only a matter of time.

But the White House has just issued a new report entitled “Investing in America: Building an Economy That Lasts”  that tells a very different story. The new report starts by saying:

Over the past decade, real business investment in production capacity stagnated.     Economic growth in the U.S. relied far too heavily on an unsustainable boom in residential and commercial real estate fueled by an unchecked financial sector.    The bubble created by this boom distorted our economy and undercut the international competitiveness of our products and services.    Companies increasingly chased low‐cost labor outside of the U.S., moving their manufacturing production, and some of their services, like call centers and software development, abroad.

The report points to the stagnation in business investment, the rising trade deficit, and falling manufacturing employment as real problems.

The dramatic decline in the level of manufacturing employment after 2000 signaled that something fundamental had change

This is an extremely important report, both politically and economically. Economically it points to trade as a major reason for job loss. In particular, it makes the point that the boom pushed up production costs above sustainable levels.

Politically, the report positions Obama in favor of  taking effective steps to bring jobs back to the country. This is a much better stance to run against a Republican like Mitt Romney, since one way that private equity firms cut costs is by outsourcing production overseas.

To me, this report appears to reflect the influence of the new CEA head, Alan Krueger. Krueger, a labor economist, has a realistic idea of how trade has affected the U.S. labor market.

I would suggest that for its next step, the White House should support the idea of a Competitiveness Audit, which identifies the industries where insourcing makes sense, and points out places where more work needs to be done. This would be relatively cheap way of improving the speed of insourcing, and getting more jobs created here more quickly.

Can Insourcing Be A Major Source of Job Creation?

Can insourcing  be a major source of job creation for the U.S.?  The answer is yes, with a caveat. Widespread insourcing–or import recapture, as I like to call it–won’t happen without some help from government policy.  In particular, the main role of the government is to provide better data about the relative cost of insourcing vs outsourcing.

Why would better statistics help create new jobs in the U.S. and accelerate insourcing?  The reason is hysteresis. Hysteresis is defined as  a “lag in response”  when the forces acting on a situation have changed.  Originally hysteresis worked in favor of keeping jobs in this country, because businesses didn’t want to switch their production to a country thousands of miles away, even if it might be cheaper.But now, with production firmly established in China, India, Mexico, and other low-cost countries,  hysteresis is working against the U.S.

As a result,  even if production costs have converged, there are three big obstacles to bringing  jobs back to the U.S.

First, it is expensive to switch suppliers, especially for noncommodity purchases. Contracts have to be negotiated, the quality of the product has to be checked,  suppliers have to be integrated into a supply chain.  Wal-mart would rather work with suppliers that it already has been doing business with.

Second,  it may be expensive and time-consuming to recreate a production ecosystem here in the U.S., especially if an industry has been hollowed out.   That is,  if you want to start making shoes in the U.S.,  it’s easier if you have a repairman in the area who knows have to fix shoe manufacturing machinery.

Third, it may be expensive for small and medium-size companies to determine if switching suppliers will raise or lower costs. That’s especially true if all of their current suppliers are in one country.   Big multinationals can afford to run studies on relative costs of the different countries, but small and medium businesses cannot.

One cheap way of boost insourcing is for the Bureau of Labor Statistics to provide better data about the relative costs of production in the U.S. versus production overseas. The BLS already collects information on import prices and domestic production prices, but it doesn’t compare the two.

Assuming that production costs really are converging,  better information would make it easier for companies to justify the decision to bring jobs back to this country. Right now the safe decision for executives is to continue sourcing from China and India, since they are generally accepted to be ‘low-cost’ countries.  It’s like they used to say, you can’t get fired for buying from IBM.  It’s the same today–execs can’t get fired for buying from China and India, because everyone assumes that prices are lower there.

In November 2011 PPI proposed a Competitiveness Audit, to be done by the BLS, to help boost insourcing of jobs.  For each industry, the Competitiveness Audit would compare import and domestic prices, and give a sense about the size of the gap and whether it was widening or narrowing.  This information would be crucial for identifyng the industries where insourcing makes sense. The Competitiveness Audit would also give executives a sense of security that they were making the right decision by bringing back jobs.

A Competitiveness Audit is a good way of accelerating the rate of insourcing. The goal here is to overcome hysteresis and inertia, and create a sort of bandwagon effect of jobs moving back to this country.  Better information is essential to create new jobs.

Why Obama Needs A Competitiveness Audit

President Obama is talking about ‘insourcing’…bringing jobs back into this country again. That’s great.

But can insourcing really create enough jobs to make a difference? That depends on how on whether  the U.S. is becoming competitive in a  broad range of industries, or whether it’s a limited phenomenon.

That’s why PPI has proposed a Competitiveness Audit as an essential part of a job-creation strategy.

The Competitiveness Audit will compare the price of selected imports with the comparable domestically produced goods and services. That will tell us the size of the ‘price gap’ between imports and domestic production.

The initial results of the Competitiveness Audit will enable us to identify industries that are globally competitive (domestic prices are below import prices, so the price gap is negative); industries that are currently uncompetitive (domestic prices are significantly above import prices); and industries that are ‘near-competitive’ (domestic prices only slightly above import prices).

The results of the Competitiveness Audit will enable businesses and economic development agencies to target their insourcing efforts to industries that are ‘near competitive’, where a bit of government help could make a big difference.

Why We Need A Competitiveness Audit

In a new PPI policy brief, Diana Carew and I have proposed that the government undertake a ‘Competitiveness Audit’:

In this global economy, we need to know which industries are internationally competitive, which ones aren’t, and whether the gaps are closing or widening. Unfortunately, the reality is this data currently does not exist. And what we don’t know hurts us, because it prevents us from pursuing effective strategies for boosting US jobs.

Although the government collects reams of economic data, it doesn’t measure what’s most vital to our ability to reverse America’s jobs decline: how our goods and services stack up against those of China and other competitors in terms of price.

You can’t fix what you can’t measure. We need a new national jobs strategy that begins with an accurate way of measuring America’s competitive prowess, on an industry-by-industry basis.

We suggest that at a relatively low cost, a Competitiveness Audit can be used as the basic of a carefully targeted job strategy on both the national and regional levels. If we know what industries are ‘near-competitive’, those are the ones where targeted government help can have the biggest bang for the buck.

Glass more than half empty

From the BLS, a chart showing the number of unemployed workers per job opening.

Unemployed workers per job openings is clearly trending downward, which is good news. But at about 4 unemployed workers per opening, the labor market is still far more difficult than it was at the end of 2007, when the recession started. That’s bad news. The glass is more than half empty.

Countercyclical Regulatory Policy Gains Momentum

The Economist has a nice piece about countercyclical regulatory policy here. The piece ends with:

Just as fiscal and monetary policy vary according to the economic cycle, so perhaps should regulatory policy: lighter when unemployment is high, heavier when it is low. The economics of incorporating employment considerations into regulatory policy is in its infancy. Mr Sunstein calls it a “frontiers question”. Given the sorry state of America’s job market, it is worth answering.

Unemployment Rate of Young College Grads

This post is part of  “the state of the young college grad” series that I’m doing. Today it’s time for unemployment.

In the 12 months ending September 2011, the unemployment rate of young college grads was 4.4%. That’s double what it was four years ago (2.2% in the 12 months ending September 2007).  (These figures include everyone aged 25-34 with a bachelor’s degree or more).

Still, young college grads are doing much better than their less-educated counterparts. Take a look at this chart:

 

While the unemployment rate for young college grads doubled, the unemployment rate for everyone else more than doubled. For example, the unemployment rate for young high school grads went from 6.1% to 13.4% over the same period.

Next I’m going to look at the employment patterns of young college grads.

Occupy Wall Street and Career Paths

I’ve been writing about the decline of real wages for young college grads, which is helping provide much of the fuel for Occupy Wall Street. Along the same lines, here’s an excellent article on Occupy Wall Street from a career perspective, written by Damian Ghigliotty, the former chief correspondent for Visible Economy LLC. Damian writes:

The last thing 32-year-old Mandy Henk expected from volunteering at the Occupy Wall Street library was an invitation to speak at the American Library Association’s 2012 Midwinter Conference in Dallas, Texas. ….Henk, a certified librarian who handles circulation, reserves and interlibrary loans at DePauw University in Greencastle, Ind., joined the movement in late September and rediscovered the role she cares most about — connecting people with information.

Take a look.

Plunge in Performing Arts Jobs

Up to now, paid employment at performing arts companies has held up pretty well in the downturn. In 2010 the number of jobs at music, theater, dance, and similar groups was only about 6% below the 2007 level, a decent performance considering the depth of the downturn.

But in the last few months cuts in funding seem to have finally hit hard. Over the past year, employment at  performing arts companies has dropped  a sharp 16%,  according to today’s figures from the BLS. Performing arts employment is now at the lowest level since 1990.  

The chart below shows the year over year change in performing arts employment, based on a 3-month moving average.

In all likelihood, this will not be the end of the decline, since funding is still being cut.For example, the Alabama State Council on the Arts has cut its grants to state arts groups by 25% for the next fiscal year. For the performing arts, this is the moment where recession turns into depression.

The State of Young College Grads 2011

I started writing about tough times for young college grads in 2006, when I was at BusinessWeek. Seems like a different day and age, doesn’t it?  Since then things have only gotten much much worse.  By my latest calculations:

  • Real earnings for young male college grads are down 19% since their peak in 2000.
  • Real earnings for young female college grads are down 16% since their peak in 2003.

These figures are for full-time workers, ages 25-34, with a bachelor’s degree only. See the charts below.

I want to ask an economic question, a political question, and a policy question.  First, no one has given me a good explanation yet of why young American college grads should have been hit so hard. Is there increased competition with young college grads around the world?  Are new college grads lower quality than their predecessors? Has information technology reduced the need for young grads? I really would like to know.

Politically, Obama captured the imagination of this group in 2008. Are young college graduates going to sit out the next presidential election in disgust?  Is there any candidate that can excite them?

Finally, if  we were going to design some economic policies to help young college grads, what would they be?

 

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