Wednesday :: Jun 27, 2007

Offshoring's Real Damage

by Steve

Those of us who have our suspicions about job offshoring will want to read this. Business Week, not exactly a liberal rag, has looked closely at the way the federal government accounts for offshoring and worker productivity since 2003. And their preliminary conclusion is that the Bureau of Labor Statistics may not be calculating the impact of job offshoring accurately. Worse yet, the BLS doesn’t dispute this.

The underlying problem is located in an obscure statistic: the import price data published monthly by the Bureau of Labor Statistics (BLS). Because of it, many of the cost cuts and product innovations being made overseas by global companies and foreign suppliers aren't being counted properly. And that spells trouble because, surprisingly, the government uses the erroneous import price data directly and indirectly as part of its calculation for many other major economic statistics, including productivity, the output of the manufacturing sector, and real gross domestic product (GDP), which is supposed to be the inflation-adjusted value of all the goods and services produced inside the U.S.
The result? BusinessWeek's analysis of the import price data reveals offshoring to low-cost countries is in fact creating "phantom GDP"--reported gains in GDP that don't correspond to any actual domestic production. The only question is the magnitude of the disconnect. "There's something real here, but we don't know how much," says J. Steven Landefeld, director of the Bureau of Economic Analysis (BEA), which puts together the GDP figures. Adds Matthew J. Slaughter, an economist at the Amos Tuck School of Business at Dartmouth College who until last February was on President George W. Bush's Council of Economic Advisers: "There are potentially big implications. I worry about how pervasive this is."
By BusinessWeek's admittedly rough estimate, offshoring may have created about $66 billion in phantom GDP gains since 2003. That would lower real GDP today by about half of 1%, which is substantial but not huge. But put another way, $66 billion would wipe out as much as 40% of the gains in manufacturing output over the same period.

As Business Week notes, a phantom GDP of $66 billion in the overall economy is very small, but it obliterates a large amount of our purported gains in domestic manufacturing since 2003. The net effect is that the Bush Administration has papered over the damage being done to our domestic manufacturing base with faulty reports on domestic productivty. And this damage is seemingly the result of a flood of offshoring taking place during the Bush Administration since 2003, from mainly two countries: China and India.

The effects of phantom GDP seem to be mostly concentrated in the past three years, when offshoring has accelerated. Indeed, the first time the term appeared in BusinessWeek was in 2003. Before then, China and India in particular were much smaller exporters to the U.S.
What does phantom GDP mean for policymakers? For one thing, it calls into question the economic statistics that the Federal Reserve uses to guide monetary policy. If domestic productivity growth has been overstated for the past few years, that suggests the nation's long-term sustainable growth rate may be lower than thought, and the Fed may have less leeway to cut rates.
In terms of trade policy, the new perspective suggests the U.S. may have a worse competitiveness problem than most people realized. It was easy to downplay the huge trade deficit as long as it seemed as though domestic growth was strong. But if the import boom is actually creating only a facade of growth, that's a different story.

There already is a bipartisan concern that offshoring companies are abusing the L visa process to dump American workers and then replace them by importing cheaper replacements into the states from India. India has the gall to tell Dick Durbin and Chuck Grassley that they can’t mess with them through immigration legislation, and that only the WTO and Bush’s trade agreements cover them. But if it is true that the administration has downplayed the damage done to our manufacturing base and enabled the slaughter through these trade agreements, then Democrats should be ready to jump on this for next year.

Steve :: 4:50 PM :: Comments (2) :: Digg It!