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 


The Gingrich Tax Plan

I have a new essay on the Atlantic.com on Gingrich’s tax plan.

Here’s the essay:

“It starts very simply: Taxes, lower taxes.”

That was the first line of Newt Gingrich’s explanation of how he would create jobs, given at the December 10 Republican debate in Iowa. Gingrich talked about his desire to end the capital gains tax and cut the corporate income tax to 12.5%. In addition, Gingrich has proposed a 15% flat tax as an option for all Americans, going further than the 20% flat tax advocated by Rick Perry.

On one level, Gingrich’s intense focus on lower taxes fits current dogma in the Republican party, which puts tax cuts above almost everything else. He is playing to the conservative base, as a way of counteracting some of his other personal liabilities.

If enacted in their entirety, Gingrich’s proposed changes would turn the U.S. tax system from progressive to regressive. Someone earning $40,000 in wages could pay a higher tax rate than another person who made $400,000 a year in capital gains.

This shift from progressive to regressive is not acceptable, of course. The tax system should be a tool for reducing the stresses of inequality in the economy, not increasing it. That’s especially true now, coming out of such a devastating recession where so many American are unemployed or underemployed.

But these tax cuts, which lie at the heart of the Gingrich program, would have another striking implication as well, which has not yet been remarked on. He is targeting precisely those taxes — like the corporate income tax and capital gains tax — that capture the gains from globalization. In other words, Gingrich is waging war on Washington’s ability to tax “globalized” income, which is likely to grow faster than domestic income for the foreseeable future.

What do I mean by “globalized” income? By my definition, globalized income means funds that come directly or indirectly from the operations of U.S. companies in the global economy. The most obvious example of globalized income is the money that companies report as “rest-of-world” or foreign profits. Today, the Bureau of Economic Analysis reports that “rest-of-world” profits are running at a $450 billion annual rate, small potatoes compared to a $15 trillion economy.

However, the category of globalized income includes a lot more than foreign profits. For example, suppose that a U.S-based company is highly profitable in Asia. Even if those profits are not repatriated, the company’s share price is likely to rise. If an American stockholder sells those shares and collects a $5 million capital gain, that gain is reported as domestic income. But in fact, it’s due purely to the operations of that company overseas. Similarly, when the CEO of that company cashes his or her stock options, it’s the same thing. The stock option gains get reported as domestic income, even though they are directly connected to the company’s operations overseas.

Here’s another example. Suppose that a U.S. furniture retailer switches suppliers. Instead of buying from a domestic manufacturer, they now get their furniture from a cheaper foreign manufacturer. Because of this outsourcing, corporate profits rise, and the CEO gets a big bonus. To the government statisticians, that bonus looks like pure domestic wage and salary income. However, it flows purely out of the company’s ability to take advantage of the cheaper prices on the global market place.

Ordinary workers generally don’t have globalized income–their wages and salaries are purely domestic, unless they happen to be working directly on exports. Globalized income flows to those people whose incomes rise when the company as a whole does well–shareholders and high-ranking executives . And those are the people who are affected by capital gain taxes, corporate income taxes, and progressive tax rates on high earners.

And here’s where we get back to Newt Gingrich and his plan. The U.S. population is being separated into two groups: Those people who are benefiting from the increased globalization of the U.S. economy in their work lives, and those who are not. This is the big divide in the economy right now–and we don’t need a tax proposal that just widens the gap.

Import Recapture Strategy

From the NYT, on rising Chinese export prices:

Markups of 20 to 50 percent on products like leather shoes and polo shirts have sent Western buyers scrambling for alternate suppliers…..Already, the slowdown in American orders has forced some container shipping lines to cancel up to a quarter of their trips to the United States this spring from Hong Kong and other Chinese ports.

It’s time for state and local economic development agencies to start honing their import recapture strategies.  By ‘import recapture strategy’, I mean the judicious use of loans and other aid to help rebuild and restart manufacturing production and jobs that were lost to foreign factories.*

Yes, I know that sounds weird after all the manufacturing jobs that have been lost.  Anecdotally, the price differential between China and the U.S. was on the order of 35%.  Given the price jumps in the pipeline, all of a sudden the cost of U.S. production might be in spitting distance for some industries.That’s especially true since domestic manufacturers have the advantage of being close and flexible.

I’m talking here both high- and low-tech production here. The question is which industries are ripe for import recapture, and how many jobs could be created. Here I’m going to tell you an important  little secret–you cannot rely on the BLS import price data to tell you where the gap has closed between import and domestic prices.  Two reasons:

* The BLS does not measure the difference between the price of imports and the price of the comparable domestic goods.   Just doesn’t.  Never has. It’s a gaping hole in the data.

*The BLS  does measure changes in import prices–but very very badly (see here and the conference proceedings here). To understand how badly, take a look at this chart, which supposedly tracks the price of Chinese imports.

If you believe this data, the price of Chinese imports into the U.S. has been effectively flat (plus or minus no more than 4%) for the past seven years, through the biggest import boom in U.S. history, the biggest financial crisis in75 years, and a 25% appreciation of the Chinese yuan against the dollar.  As the saying goes, “this does not make sense.”  

Back again. I’m currently figuring out  how to develop a database of import-domestic price gaps, so we can assess where an import recapture strategy makes sense. If you are interested in working with me on this, drop me a note at mmandel@visibleeconomy.com

Needed: A ‘Global-Compatible’ Tax System

President Obama is thinking about a broad overhaul of the income tax system, closing loopholes and lowering rates. (“Obama Weighs Tax Overhaul in Bid to Address Debt”).

But in today’s global economy, any attempt to ‘fix’ the U.S. income tax system is fundamentally doomed. Financial and product markets are so deeply globally integrated that multinationals and wealthy individuals can easily  recognize their income in lower-tax countries, if they choose.

One simple statistic: In 2009 40% of U.S. imports and exports was ‘related-party trade’ –“trade by U.S. companies with their subsidiaries abroad as well as trade by U.S. subsidiaries of foreign companies with their parent companies.” That means companies are effectively trading with themselves, so they can choose which side of the transaction books the profits.

To put it another way, the global economy is the biggest loophole of all, and it can’t be closed without layer after layer of intrusive rules and regulations.  In a global economy, you can’t have a simple income tax system.

What we need is a ‘global-compatible’ tax system: That is, a tax system which acknowledges the existence of a global economy, so it doesn’t continually need to be patched to close loopholes.

The best global-compatible tax system that I know of is the value-added tax. The value-added tax, as the name suggests, taxes the value added in a country, not the income. Equally important, A VAT  taxes imports but not exports.  As a result,  it offers far less chances for gaming the system.

Now, countries can still compete on their level of VAT. Moreover, there are a lot of controversial issues that can seriously affect competitiveness. These include: How to make the VAT progressive; whether medical care and housing should be exempt; how to treat capital investment and R&D spending; and so on. Big important questions, but ultimately solvable.

If you want tax simplicity and fairness, global-compatible is key.

Tax Cuts and Growth

Ezra Klein writes:

If you’re worried about stimulus, joblessness and the working poor, this is probably a better deal than you thought you were going to get.

That’s my feeling too.  My short-term optimism about 2011 has gone up several notches. Klein also notes:

last week, all Washington could talk about was the potential for a deal on deficit reduction. This week, it actually got a big deficit deal — but it was a deficit-expansion deal. In the world that politicians claim they live in — where the deficit is the overriding issue — the deal couldn’t have worked. But we don’t live in that world. In this world, tax cuts, not deficits, are the Republicans’ central concern, and stimulus, not deficits, obsesses the Democrats.

Two responses. First, both parties have the economic literature on their side, which says that deficits don’t have negative consequences  in the short-run as long as they are not “too big.”  The deficit talk was just posturing.

The real issue is not the budget deficit, but rather balancing out  two competing forces:  Having the government intervene where needed to help people while making sure that innovation and growth is not crushed under the weight of excessive regulations.  That’s the debate we should be having.

A Bad Decade: 10-Year Private Income Growth Goes Negative

Each month the BEA releases figures for personal income and disposable personal income. These figures are a mix of private sector income and money received by individuals from the government. These government payments take the form of wages paid to government employees, and social benefits such as Medicare and Medicaid.

So I decided to take a shot at calculating ‘private’ personal income. From personal income I removed government social benefits (about $2.1 trillion in 2009) and wages paid to government employees (about $1.2 trillion). Then I added back in contributions for government social insurance, such as Social Security and Medicare payroll taxes (just under $1 trillion). Finally, I adjusted for inflation and population size to get a figure for real ‘private’ personal income per capita.

Here’s a chart of  the 10-year growth rate of real private personal income per capita (the first quarter figure for 2010 is based on the average of January and February).  

Over the past decade, real private personal income per capita has fallen at a 0.2% annual pace, the first time that has happened since the Great Depression.

Let’s compare this with the usual figure quoted by economists, real disposable income per capita. Real disposable income per capita–which includes government wages and social benefits, and adjusts for tax changes–rose at a 1.2% rate over the past ten years. In other words, when we add in government spending increases and tax cuts, real incomes per capita rose rather than fell.

The logical conclusion is that the private sector has been crapped out for the past ten years. Even before the crisis hit, the main thing that  kept the economy afloat was the succession of Bush tax cuts and the expansion of federal spending which boosted benefits,  particularly in healthcare. 

This was a bad bad decade.


Average U.S. tax burden at 40-year low

I finished up my tax return this weekend.  I did it myself, using Turbo Tax,  and ran it by our new accountant (because I left BusinessWeek in 2009 and started a new business, the return is more complicated than in previous years).

Now that’s done, I can take a look at the bigger tax picture. Just for fun,  I calculated total taxes paid by Americans as a share of national income.  Total taxes includes federal, state, and local income taxes, corporate income taxes, property taxes, sales taxes, social security and medicare taxes, and every other kind of tax (except for the estate tax). 

The top red line tracks total taxes as a share of national income–in effect, the average tax burden for the whole economy. In the fourth quarter of 2009, the average tax burden for the whole economy was 27.5%–the lowest since 1966. That shows the combined effects of the Great Recession and the tax cuts. If we leave out social insurance taxes, the trend is even stronger–the average tax burden, omitting social insurance taxes, is the lowest in the post-war era.

These calculations are similar to the ones done by the Tax Foundation in its calculation of Tax Freedom Day, the day where Americans have “earned enough money to pay this year’s tax obligations at the federal, state and local levels”. Take a look at the Tax Foundation’s chart.    

In fact, Tax Freedom Day is earlier now than it’s been in the past forty years, suggesting that the burden of taxes is lower.  

The question, then, is why is there so much opposition to tax increases.  Part of it is the distributional question–the average tax burden and Tax Freedom Day both measure the average over the whole economy, rather than for any individual.

But more important, I think, is the pervasive weakness in the private economy, which makes the burden of taxes feel heavier. I’m going to write more about this.