October 2010 Archives

GDP for 3Q 2010

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The GDP number out today of a 2% growth shows an economy growing at a slightly greater than last quarter's 1.7%. But this is still weak relatively weak growth (see stories in the New York Times, Wall Street Journal and Washington Post.

And the numbers are subject to revision as the trade data is a month behind. The advanced estimate assumes a worst trade picture this quarter compared to last quarter. Given the last two months data (see previous postings), that is a safe assumption.

Still, as I've state before, we still have a lot of work to do to improve the numbers (see earlier posting). In the meantime, we should remember that the data always contains an element of uncertain and should be treated accordingly.

Offshoring and manufacturing

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Here is a new paper from the W.E. Upjohn Institute for Employment Research -- Off shoring and the State of American Manufacturing. Written by Susan Houseman of the Upjohn Institute and Christopher Kurz, Paul A. Lengermann and Benjamin Mandel of the staff of the Federal Reserve Board, the paper take a new look at the productivity and output numbers and finds them lacking:

First, the robust output and productivity growth in manufacturing is largely attributable to one industry: computer and electronic products manufacturing. The average annual growth rate of value added in manufacturing excluding computers--which accounted for about 90 percent of manufacturing value added throughout the period--was less than a third of the published growth rate for all manufacturing. As a result, the aggregate numbers do not accurately characterize trends in most of manufacturing.

Second, the price declines associated with the shift to low-cost foreign suppliers generally are not captured in price indexes. The problem is analogous to the widely discussed problem of outlet substitution bias in the literature on the Consumer Price Index (CPI). Just as the CPI fails to capture lower prices for consumers due to the entry and expansion of big-box retailers like Wal-Mart, import price indexes and the intermediate input price indexes based on them do not capture the price drops associated with a shift to new low-cost suppliers in China and other developing countries. A bias to the input price index from offshoring implies that the real growth of imported inputs has been understated. And if input growth is understated, it follows that the growth in MFP and real value added have been overstated.

Bottom line:

These biases have implications not only for the industry statistics, but also for the analyses based on them. Because the growth of these imports will be understated in real terms, offshoring will, at least to some degree, manifest itself as mismeasured productivity gains. As a result, studies that endeavor to assess the impact of low-cost imports on the American economy and its workers may well understate the true effects.

As with our efforts to keep up with measurement of the shift to an intangible economy, so too must we continue to improve our economic statistics on the affects of globalization. Otherwise we will make bad policy decisions.

Describing the transformation

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Tom Friedman's column on Sunday was about the election and economy. But it contains a great description of the transformation. He conceds the point that areas are doing well, such as new technologies.

But not everyone can write iPhone apps. What about your nurse, barber or waiter? Here I think Lawrence Katz, the Harvard University labor economist, has it right. Everyone today, he says, needs to think of himself as an "artisan" -- the term used before mass manufacturing to apply to people who made things or provided services with a distinctive touch in which they took personal pride. Everyone today has to be an artisan and bring something extra to their jobs.

For instance, says Katz, the baby boomers are aging, which will spawn many health care jobs. Those jobs can be done in a low-skilled way by cheap foreign workers and less-educated Americans or they can be done by skilled labor that is trained to give the elderly a better physical and psychological quality of life. The first will earn McWages. The second will be in high demand. The same is true for the salesperson who combines passion with a deep knowledge of fashion trends, the photo-store clerk who can teach you new tricks with your digital camera while the machine prints your film, and the pharmacist who doesn't just sell pills but learns to relate to customer health needs in more compassionate and informative ways. They will all do fine.

But just doing your job in an average way -- in this integrated and automated global economy -- will lead to below-average wages. Sadly, average is over. We're in the age of "extra," and everyone has to figure out what extra they can add to their work to justify being paid more than a computer, a Chinese worker or a day laborer. "People will always need haircuts and health care," says Katz, "and you can do that with low-wage labor or with people who acquire a lot of skills and pride and bring their imagination to do creative and customized things." Their work will be more meaningful and their customers more satisfied.

And so where are the government policies to help bring about this transformation?