Republican War On Economic Data is Anti-Business and Anti-Growth

The House Republicans appear to be conducting a war on economic data. They seem to think that defunding data collection is all gain and no loss.

In fact, the anti-data Republicans are really  anti-business and anti-growth. Government spending on economic data collection should be thought of as fully equivalent to investment in long-lasting infrastructure. When we build  highways or  airports,  we expect them to be used by the private sector for economically-valuable activities.   Highways facilitate the sale and use of automobiles, the construction of homes, the transportation of goods. Airports make air transportation possible, fostering all sorts of jobs and growth.

Just like spending on highways and airports,  government investment in  economic data collection provides a long-lasting boost to private sector economic activity and to private sector growth. To give one very simple example: Political polling would be much more expensive and less accurate if the pollsters did not have access to government economic and demographic data. The government data enables the pollers to make sure their sample correctly represents the actual population.

Another example:   Many big investors take economic and demographic trends into account when deciding how to allocate their funds.  The foundational data for these trends comes from the federal government. Less  reliable data means more investing mistakes.

Sometimes governments and politicians might rather hide data. The ACS tells businesses which areas of the country are doing well and which are falling behind, helping them make fewer errors in investment.  This is not such good news for the weak areas, but presumably does improve economic efficiency.  A company such as Walt Disney, for example, would rather locate its theme parks in growing, high-income areas (FYI Walt Disney World is located in the Florida district represented by  Daniel Webster, who has been one of the main ACS bashers).

Like highways and trucks, public sector data and  private sector data  are complementary, not substitutes.  A company can invest in as many trucks as it wants, but those investments will be much more valuable if the government has put into place well-maintained highways.  Similarly, private sector data collection and analysis–say, on the state of the computer industry–almost invariably builds on the foundation of the public data.

One of the big economic advantages of the U.S. may be the quality of our economic data, and more generally the transparency of our economic system.  That’s not a competitive edge we should cede easily.

Domestic Computer Manufacturing: A Lot Smaller Than We Thought

The moral of the story: Why we need to spend more money on economic statistics, not less.

For the past couple of years, the BEA and Census Bureau have been reporting an apparently odd fact:  Domestic computer manufacturing was not only alive but growing. To be specific, until last Friday the official numbers were showing that domestic computer makers shipped almost $50 billion worth of computers from U.S. factories in 2011, the highest level since 2001. Final sales of domestic computers, adjusted for price changes, were supposedly up 94% since 2007.

Now, these numbers always seemed a bit suspicious to me. I mean, every computer that I ever picked recently was made overseas. So the idea that domestic computer manufacturing was thriving seemed off.

Now the statistical agencies have finally come to the same conclusion. Based on the results from the 2010 Annual Survey of Manufactures, the Census Bureau on May 18th revised shipments of domestic-made computers down–way down. Shipments of computers from domestic factories in 2011 are now being reported at only $18.5 billion, almost two-thirds less than the previous 2011 figure. Take a look at this chart.

Here’s another way of looking at the revision. The top (red) line tracks domestic computer shipments before revision, and the bottom (blue) line tracks after revision. These numbers are not adjusted for price changes. If I adjusted for the price drop in computers, final sales of domestic computers decline by 28% from 2007 to 2011, rather than rising by 94% like the pre-revision numbers showed.

This is no ordinary revision. The sharp fall in price of computers, combined with the supposed growth of domestic computer shipments, gave computers on outsize influence on both manufacturing stats and the whole economy.

There are four important points here.

1) A big chunk of those computer shipments were supposedly going into domestic nonresidential investment. Post-revision, either the U.S. investment drought was deeper than we thought, or imports of computers were a lot bigger (see the recent PPI piece on Hidden Toll: Imports and Job Loss Since 2007).

2) The U.S. shift from the production of tangibles to the production of intangibles (think the App Economy) has been even sharper and more pronounced than we realized.

3) Budget cutbacks for economic statistics, such as the House Republicans are proposing, would increase the odds of big revisions like this one.

4) Bad data leads to bad policy mistakes, especially at times of turmoil. We need more funding for economics statistics, rather than less.

1.3 million jobs lost to rising imports since 2007

Here’s a quick question. The U.S. has lost 4 million private nonconstruction jobs between 2007 and 2011. The major causes of this job loss include:

A) Weak demand;
B) Strong productivity growth;
C) Rising imports.

Most economists would answer A or B. Imports have not been treated seriously as a cause of job loss during the Great Recession. The reason is simple: According to the official date, real nonpetroleum imports are barely back to their pre-recession levels. You can’t have job loss from imports if imports aren’t rising.

But two new studies from PPI show that the official data is wrong about the behavior of imports. We properly adjust for the economic impact of low-cost imports from countries such as China, and find that real nonpetroleum imports did rise from 2007 to 2011 by some $131 billion (in 2011$), instead of being basically flat.

As a result, we estimate that 1.3 million jobs have been lost to rising imports since 2007. That accounts for almost one-third of the private nonconstruction job loss between 2007 and 2011.

The two studies:

Hidden Toll: Imports and Job Loss Since 2007

 Measuring the real Impact of Imports on Jobs 

 

Washington Post on productivity

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.

 

The Myth of American Productivity

I have a new article in the Washington Monthly entitled The Myth of American Productivity. Take a look.

 

 

December 1 doubleheader…

…let’s play two.

In a miracle of scheduling, I’m going to be speaking at two different events on the morning of December 1 in DC. At 9AM I’ll be the lead-off speaker at a PPI event:

Is Tech Antitrust Off-Target? Debating the impact of high-tech acquisitions

Should be fun.

At noontime I’ll be speaking to the National Economists Club on

“The Cheshire Cat Economy: Why We are Underestimating the Impact of Trade”

‘All right,’ said the Cat; and this time it vanished quite slowly, beginning with the end of the tail, and ending with the grin, which remained some time after the rest of it had gone.

Alice’s Adventures in Wonderland, by Lewis Carroll

Congress and Ostrich Economics

Faced with the need to make policy in a rapidly changing economy, Congress is going absolutely the wrong way by planning to cut funding for the Census Bureau to $888 million next year, down from $1.15 billion.

The cuts are likely to damage the government’s ability to track the economy on a timely basis, including potentially eliminating the Survey of Business Owners, which tracks the very entrepreneurs who create jobs.

To put it another way: If you are steering a car along a dark road at night, you don’t turn off the headlights. Bad data lead to bad policy mistakes.

Indeed, if we want to do a better job of encouraging job creation today, Congress should actually boost spending on data that can help make better policy decisions. PPI has suggested that a small amount of additional money for the Bureau of Labor Statistics could help fund a Competitiveness Audit. Such a program could help identify those domestic industries which are ‘near-competitive’ on global markets, so that a small amount of economic development funds could make a big difference for job creation.

It’s worth noting that the first set of national economic accounts were created during the Great Depression of the 1930s by Simon Kuznets. All sorts of other economic statistics date back to the Great Depression as well, including comprehensive unemployment figures.

The current crisis should be a sign that we need to broaden our understanding of the economy, not narrow it.

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