Job Losses and Gains

I am learning about economics from the Investors Insight e-letters. One subject we've recently touched on here was covered the the most recent e-mail. It makes one realize that politicians over-simplify economic issues to gain votes and in fact probably don't understand them very well.

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Where Have All the Jobs Gone?
By John Mauldin

I am waiting for the politician who will stand up and finger the real culprit for the loss of manufacturing jobs: worker productivity. Where are the calls for legislation demanding we do something to make the manufacturing base of this country less productive, so we will need to hire more workers?

Here are a few facts, conveniently brought to us by Martin Wolfe in the London Financial Times. First, American manufacturer employment has dropped 2.6 million jobs between March of 2001 and January of 2004. By January of 2004, employment in manufacturing was 17% below what it was in June of 2000, the peak month for manufactured output in the last cycle.

Outsourcing? Offshore manufacturing? On the surface, it seems to be the culprit. It makes for good copy, as it is easy to see a manufacturing plant closing in Wisconsin and opening in Shanghai. But it is not that simple. If we look at the numbers, I think we can find another perpetrator. There was a 17% rise in worker productivity over the same periods noted above, with just a 3% drop in production. We are producing roughly the same amount of "stuff" with a lot fewer workers. We produce almost twice as much as we did just 24 years ago.

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He goes on to quote Thomas Sowell:

"It is no coincidence that manufacturing employment declined 17% while productivity rose 17%. Let me put this another way: if manufacturing productivity had not risen as much as it had, unemployment would be far worse. Why? Because more jobs would have been moved to lower cost production centers. It is only because we are becoming more productive that we keep the manufacturing base we have. But of course, being more productive means we need fewer workers for "unit of output."

As the dollar drifts lower against Asian currencies, it will help restore some balance to international labor advantages. Fewer jobs will leave the US because of lower foreign wages. But will that make us better off? No, as the products and services we buy from foreign nations will cost us more.

Think we would be better off with a little less free trade? Only ten years ago, US exports supported 7 million workers. Today US exports count for 20 million workers. (Source: WSJ) Take away those 13 million jobs and imagine the chaos in the US. Without free trade, those jobs would not exist. Further, realize this happened even as the dollar was rising dramatically in value, making our exports cost more to the world.

A rational policy would be pushing for more free trade, as it has clearly been to our national benefit, even while it causes local and individual suffering. But rational policies and politics sadly rarely mix.

"Demagoguery beats data in the making of public policy," noted my former congressman and majority leader Dick Armey. Speaking in front of a plant dependent upon export, where jobs have been growing, does not draw nearly the national media attention as touring shuttered plants which have been closed.

Politicians do not create jobs or wealth....

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He goes on to talk about how much government regulation costs companies, and how big companies do not create jobs but actually are poised to decline. He quotes Tom Peters who shows how job creation is led by entrepreneurs, and how deregulating gives those small businesses more capital for hiring and investing.

Economics is far more complicated than political figures make it seem! I am fascinated by all the interwoven causes and effects. It's amazing that human behavior can be so statistically predictable. And how much politics has to do with human psychology! As he writes:

"All this is well and good rhetoric, but it is hard for the person to deal with who is at the end of his unemployment line, after watching his job of 30 years go to China. It is nice to quote Joseph Schumpeter, "The proper role of a healthily functioning economy is to destroy jobs and put labor to use elsewhere. Despite this truth, layoffs and firings will always sting, as if the invisible hand of enterprise has slapped workers in the face." It is also somewhat callous.

"Thus, when Bush's chief economic advisor tries to explain the theories of David Ricardo (another dead economist) as to why labor movement is a good thing in the long run, it falls on deaf ears.

"You can talk as long as you want about all the wonderful jobs that free trade has created in the US, and how labor movement theory says we are al going to be better off in the long run, but that does not make the person who has just lost his job feel any better. He feels, as Schumpeter noted, as if free trade has slapped him in the face. It doesn't feel good, and he wants someone to make it feel better."