September 30, 2010    Volume 17, No. 15

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The Economic Think Tanks Were Wrong: Imports And Offshore Outsourcing Have Destroyed Millions Of American Jobs


By Richard McCormack
richard@manufacturingnews.com

Outsourcing and imports are not only leading to the wide-scale destruction of American jobs, but to substantially lower manufacturing GDP growth over the decade than what has been officially reported. Imports and offshoring have also led to substantial over-reporting of productivity gains.

The problem is one of measuring. In a global economy, the federal government data collection agencies have not kept pace with changes brought about by trade, which now accounts for almost 30 percent of the U.S. economy. Researchers have verified that the U.S. government has not captured the real costs and levels of imports and their impact on the American economy.

This oversight -- involving a small import data collection program run by the Bureau of Labor Statistics -- turns out to be "a big problem," says Susan Houseman of the Upjohn Institute for Employment Research and the national leader in addressing the shortcomings of government statistics.

Houseman and a group of researchers have confirmed that the dollar volume of goods coming into the country is not measured correctly. There has been a substantial under-measurement of imports.

The current import price indexes used by the federal government "fail to capture price declines associated with a shift in sourcing to low-cost suppliers," says a new peer-reviewed research paper on the subject titled "Measurement Issues Arising from the Growth of Globalization." As a result, the real growth in imports "has been understated and domestic productivity and real output growth have been overstated. The increased import penetration in consumer goods and intermediate inputs and the large price differentials between domestic and foreign suppliers have increased the possibility that some economic statistics are significantly biased."

The study, which included representatives from the Bureau of Labor Statistics, the Bureau of Economic Analysis and the Bureau of the Census in its planning group, concludes that the federal government must re-assess the way it measures imports. It recommends that the federal statistical agencies create new data collection programs that capture the true effects of imports and offshore outsourcing both of products and services.

Multifactor and labor productivity measures as well as GDP are now confirmed to have been substantially overstated for the past decade, due to much higher levels of imports than have been measured. A decade of economic and trade policy predicated on the idea that productivity growth and new technology were the reasons for the rapid displacement of American workers has now proven to be wrong.

The problem arises when the government considers the import price of products entering the United States. As currently structured, the federal government compares the change in prices of the same goods that are being imported each month. What is not measured is the difference in the price of an imported product versus the one it replaced that was previously made in the United States.

Based on its current system of data collection, the government has reported that import prices have been increasing, when they should have been going down, reflecting the cost savings of up to 60 percent from buying the same products previously made in the United States from low-cost nations like China, Mexico and India.

"Import price indexes have not accurately captured the lower prices that have prompted many retailers and consumers to shift from domestic to imported goods," says the study. "Similarly, although manufacturers increasingly have been sourcing intermediate inputs from low-cost foreign suppliers, the import materials price deflator has been rising faster than the domestic materials price deflator, indicating that these price indexes often fail to capture the cost savings driving manufacturers' offshoring."

When accounting for this oversight, the value of imports becomes much higher and U.S. output is lower than what has been reported. Houseman estimates that between 1997 and 2007, manufacturing GDP growth has been overestimated by as much as .5 percentage point per year, out of an average annual manufacturing growth rate of 3.0 percent due to the under-pricing of imports.

In addition, the manufacturing GDP growth rate has been widely misinterpreted because the strong growth in the computer industry has dominated the manufacturing numbers, according to the study. Technological improvements in computer capability inflate the overall industrial output numbers. Virtually all of the growth in manufacturing GDP is attributable to computers and electronic product manufacturing. Says Houseman: "Computer price indexes are falling on account of improved technology performance. So while the U.S. is losing market share in global computer shipments, it is still registering phenomenal growth rates to a large degree because of the way the price indexes are constructed for this industry. This drop in prices has nothing to do with the competitiveness of domestic manufacturing. It has nothing to do with workers being more productive. It has everything to do with improvements in the embedded technology."

As such, given the government's measurements, the computer industry has accounted for most of the manufacturing-value added growth during the decade ending 2007. Yet the computer sector accounts for only 10 percent of the total value in manufacturing.

When computers are excluded from the overall production numbers, the annual manufacturing growth rate from 1997 to 2007 declines by 2 percentage points. Added with the adjustment for the import price index, annual manufacturing GDP growth for the remaining 90 percent of manufacturing could be as low as 0.5 percent for the decade ending in 2007.

The computer numbers are also plagued by the same import price index issues. Most computers produced in the United States contain a majority of imported parts, the prices of which are not accounted for in government statistics. "The computers that are exported are more or less trans-shipments," says Houseman. The federal government "needs to net out the import value of exports, which is what should be done with all domestic production, and that makes a big difference."

The offshoring of services is also not being measured correctly. Companies are shifting their service functions overseas because it is a lot cheaper. But the federal government does not measure the prices of imported services versus those they are replacing in the United States. The difference "is even bigger than when you are importing manufactured goods because it's all labor," says Houseman. Currently, data on import and export prices in business services -- which include IT services, engineering services and call centers and represents the most rapidly growing category of services trade -- are not collected at all. "This data gap could result in significant inaccuracies in economic statistics as trade in business services expands," says Houseman. "While the BLS recognizes this is an important gap in the statistics, there is no funding to fill it."

There are other issues associated with offshoring and imports that need to be addressed. The federal government stimulus spending programs and tax breaks are not understood in the new global context. Borrowed money is provided to Americans who use it to buy imports, with little impact on growth and employment.

Obama's goal to double exports is also questionable, since the United States does not know the import content of exported goods. Products that are exported with a high level of imported parts and components do not create many jobs.

Because of the lack of data on imports, do the GDP numbers need to be re-calculated for the past 10 or 15 years, Manufacturing & Technology News asks Houseman. "Ideally, the agencies would do that," she says. "But what they are looking to do now is to fix it moving forward. What they're trying not to do is to guess. There was no data collected on that so there is no good way of going backwards and fixing the problems."

The Bureau of Labor Statistics has proposed a pilot program to collect import price data "and figure out a correction for all of GDP," Houseman says. "The statistical agencies recognize this is a problem and a big enough problem that it is worthy trying to fix." The next step is getting Congress interested enough to provide funding in a tight budgetary environment.

Houseman concludes with this thought: "The majority of Americans in public opinion polls believe that offshoring has been a major factor in the decline in employment and quite specifically in manufacturing, and yet many academic papers and think tanks are saying just the opposite. In this case, the public perception is correct and the data -- and people's interpretation of those data -- are wrong."

The Houseman paper "Offshoring and the State of American Manufacturing," authored with Christopher Kurz, Benjamin Mandel and Paul Lengermann of the Federal Reserve Board, along with the "Conference Summary" from the meeting on "Measurement Issues Arising from the Growth of Globalization," and conference papers on the subjects (all worth reading), are on the Upjohn Institute's Web site, http://www.upjohninst.org/.


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