Yesterday the Washington Post had a great piece in the business section entitled “Economists offer more pessimistic view on manufacturing in upcoming report.”
During the 2000s, as U.S. manufacturing was transformed by devastating job losses, prominent economists and presidential advisers offered comforting words.
The paring of the manufacturing workforce, which shrank by a third over the decade, actually represented good news, they said. It meant that U.S. workers and factories had become more efficient and that, as a result, manufacturing companies needed fewer people….
….But a handful of economists are challenging that explanation, chipping away at the long-offered assurances that the state of U.S. manufacturing is not as bad as employment numbers make it look.
Instead, they say, it’s significantly worse.
What caused the job losses, in their view, is less the efficiency of U.S. factories than the failure of those factories to hold their own amid global competition and rising imports. The apparent productivity gains reflected in the official U.S. statistics have been miscalculated and misrepresented, they say, a position that has been at least partially validated by recent research.
Of course, readers of this blog will have guessed that the WaPo article draws heavily on research that I’ve been doing with Sue Houseman. This research was also cited extensively by Rob Atkinson in his new manufacturing report.
The WaPo article was critiqued by Karl Smith on the Modeled Behavior blog, who asked:
…an important point is that while import price bias can produce granular statistics that do not measure what they claim to measure, they must do that at the expense of something else happening.
So, for example, if proper accounting shows that the real value of an IPad is 70% foreign rather than 50% foreign, then something has got to go the other way to explain how 50% of the revenue shows up in Apple’s bank account after supply chain costs.
Karl raises a good point, but the answer is simple. Remember that the BEA divides corporate profits into domestic profits and ‘rest-of-the-world’ profits. Domestic profits are counted as part of domestic income, but ‘rest of the world’ profits are not.
Import price bias causes “too much” of corporate profits to be allocated to domestic income. Suppose that Wal-mart switches from a Japanese supplier to a cheaper Chinese supplier. That drop in import costs shows up as a gain in domestic profits, even though nothing has changed in the domestic economy. Moreover, we get a real gain in domestic profits even after adjusting for price changes, because of the import price bias.
This is a fundamental problem with the economic statistics as they are currently constructed. We are trying to measure a cross-border global supply chain economy with nation-based economic statistics, and it just isn’t working. There is no easy fix.