Carpe Diem


As usual, economist Thomas Sowell has some real gems in his latest commentary “Rescuing the Rust Belt“:

1. Jobs are always disappearing. The big question is why they are not being replaced by new jobs. Rust belt policies that drove out old jobs also keep out new jobs. NAFTA makes it easier for politicians to blame the problem on foreigners. In fact, foreigners make ideal scapegoats for politicians. After all, people in Japan or India can’t vote in American elections.

2. Senator Obama says that he is for free trade, provided it is “fair trade.” That is election year rhetoric at its cleverest. Since “fair” is one of those words that can mean virtually anything to anybody, what this amounts to is that politicians can pile on whatever restrictions they want, in the name of fairness, and still claim to be for “free trade.” Clever.

3. In the short run, you can get away with all sorts of things. But, in the long run, the chickens come home to roost. The rust belt is where those rising costs have come home to roost. While American auto makers are laying off workers by the thousands, Japanese auto makers like Toyota and Honda are hiring thousands of American workers. But they are not hiring them in the rust belts. They are avoiding the rust belts, just as domestic businesses are avoiding the high costs that have been piled on over the years by both unions and governments in the rust belt regions.

Bottom Line: TANSTAAFL

Carpe Diem

NAFTA: No Statistically Significant Effect on Jobs

From a comment from Spencer about this CD post:

“Is this how they teach you do do econmic (sic) analysis at GMU?You should compare the percent increases rather then (sic) the absolute numbers. Take the payroll number you use, for example. You show a gain of 21.4 million in the first period and 25.6 million in the second. The gain in the first period is 24% while the gain in the second period is 13%. That means that job gains after NAFTA were nearly cut in half.”

Actually, using
these payroll data from the BLS (via FRED), the percentage increase from January 1980 (90,800,000) to December 1993 (112,206,000) is 23.57%, and the percentage increase from January 1994 (112,474,000) to December 2007 (138,119,000) is 22.80%, and not 13%! In other words, on a percent change basis, job growth in the 14-year period before NAFTA was almost exactly the same as the 14-year period after NAFTA.

For a more sophisticated statistical analysis, see the chart above with results of a difference-in-means t-test of the null hypothesis that there is no difference in monthly job growth in the pre-NAFTA and post-NAFTA periods. The results suggest that there is no statistical difference in job growth during the 1980-1993 period and the 1994-2007 period. Further, especially for payroll employment, the variability of monthly job growth (measured by the standard deviation) was much lower post-NAFTA (.1300%) than pre-NAFTA (.2152%), suggesting much greater stability in job growth after NAFTA.
Bottom Line: NAFTA had no statistically significant effect on U.S. job growth.
Carpe Diem

Increases in Productivity Have Caused Job Losses

1. According to annual BLS data on manufacturing productivity, there was a 30% increase in productivity from 1993 (before NAFTA passed) to 2005, following a period of flat productivity growth from 1985-1992 (see top chart above, click to enlarge).
2. According to BLS data on manufacturing employment, there was an increase of almost one million manufacturing jobs in the five-year period following NAFTA (see middle chart above).

3. According to Federal Reserve data, manufacturing output increased by almost 60% in the period between 1994 and 2005 (see bottom chart above).

Bottom Line: Despite all of the political rhetoric about NAFTA, free trade and globalization causing U.S. job losses in manufacturing, one of the most significant factors in the recent decline of American manufacturing jobs is the significant increase in productivity of U.S. workers. Manufacturing output and productivity in the U.S. are both at all-time highs – we’re able to produce more and more output with fewer and fewer workers.

Although some manufacturing jobs are gone forever, we’re much better off as a country to be able to get increases in manufactruing output with fewer workers, just like the productivity gains in agriculture that eliminated millions of farming jobs. In the long run, we are much better off with fewer jobs in the farming sector producing an increasing amount of agricultural output, and likewise, we’ll be better off in the long run with fewer workers in the manufacturing sector producing an increasing amount of output.
Carpe Diem

NAFTA Bashing: Pure Politics Unsupported by Data

“We’re going to take a hard look at NAFTA, which has a lot of problems,” Hillary Clinton said. “We’re going to renegotiate it.”

“If you travel through Ohio and you travel through communities in my home state of Illinois, you will see entire cities that have been devastated as a consequence of trade agreements that were not adequately structured to make sure that U.S. workers have a fair deal,” said Senator Obama.

Comment: As the chart above shows, more U.S. jobs have been created in the 14-year period after NAFTA was passed than in the 14-year period before NAFTA. Payroll data from the BLS, via FRED, are available here, and civilian employment data here.
Carpe Diem

Putin’s Rough, Brutal, and Cheerful Capitalism

DMITRI A. MEDVEDEV will be anointed president of Russia today thanks to the political handiwork of Vladimir V. Putin. But maybe the real winner is economic globalization.

From December 1999 to the end of 2007, a period overlapping the presidency of Mr. Putin, the value of Russia’s stock market increased from $60 billion to more than $1 trillion (see chart above).

Most Russians do not love Mr. Putin per se, but they love Mr. Putin’s Russia. They love being middle class. They love planning for the future. It is no comfort to the politically persecuted, but average wages in Russia are leaping 10 percent a year, in real terms.
The growing millions of Russian homeowners, vacationers and investors may seem inclined to authoritarianism or just apolitical. But they certainly value a strong ruble, moderate inflation, affordable mortgages, access to higher education, satellite television, Internet connections, passports, foreign visas and — above all else — no economic shocks.

Continue reading the
NY Times article on Russia here.
Carpe Diem

St. Obama’s Auto Trouble

Henry Payne writing in National Review:

Senator Obama rarely drives himself anywhere, depending instead on a Secret Service-provided fleet of 15 mpg Chevy Suburban SUVs (pictured above).

But now that Chevy is compromising him on the issue of trade.

Campaigning in Ohio this week, Obama folded his standard anti-Detroit message into a larger, anti-NAFTA theme, ripping into the Clinton-signed trade deal that Obama claims has sucked Midwest manufacturing jobs south of the border.

And where is Obama’s Suburban assembled? Silao, Mexico.

Carpe Diem

The Coming Death of Indian Outsourcing?

From Forbes Magazine:

Forbes recently published some scary statistics on wage inflation in India. (See “Indian Employees Enjoying Swift Pay Hikes.”) Salaries rose 15.1% in 2007, up from 14.4% the previous year. The 2008 forecast: 15.2%. This would be the fifth consecutive year of salary growth above 10%.

Add to that the appreciation of the rupee against the weakening dollar (11.5% in 2007), and its impact on the labor arbitrage market.

Is the death of Indian outsourcing all that far off?

Assuming a 15% year-to-year salary hike rate, and a 2007 cost advantage of 1:3 in favor of India, if U.S. wages remain constant, India’s cost advantage disappears by 2015. Then what?

(HT: Mad Toothfish)