SPINNING YARNS WITH GREG MANKIW (AND JUST SPINNING WITH ROBERT ZOELLICK)

Brace yourself, this is a long post. I've been chewing on this one for a few days. Feel free to bookmark this one and come back later...

Busy day at work, what with the Economic Report of the President out earlier this week. CEA Chairman Greg Mankiw made quite a gaff in a press conference Monday afternoon:

"Outsourcing is a growing phenomenon, but it's something that we should realize is probably a plus for the economy in the long run...[just the] latest manifestation of the gains from trade that economists have talked about for centuries."

Oops! That may very well be what orthodox trade theory says, but damn...you say that in an election year--or at all--in politics.

This little gem is merely one among many in this year's ERP. I'll paraphrase two others:

1. The loss of manufacturing jobs is due to a cyclical downturn, productivity growth and a statistical anamoly that counts some service workers as manufacturing workers--not from offshoring.

2. Thought the trade deficit with China is growing, it has no effect on the overall trade deficit.

These two points, when viewed in context of Mankiw's statement, foreshadow the climax of Presdient Bush's 471 page novel of economic fiction at the end of the report: an outline of the Bush administration's international trade liberalization agenda. What's not on the agenda is perhaps more interesting than what is on the agenda--manufacturing.

The ERP's treatment of manufacturing jobs is rather misleading. The demise of manufacturing predated the onset of economic recession by two and a half years, amid the strongest economic expansion (fueled by massive investments in business IT equipment), when financial crisis enveloped Asia in April 1998, sending a flood of devalued imports our way.

Yes, manufacturing productivity is consistently higher than productivity in other (service) sectors of the economy (that's why so many people are concerned about keeping a mfg industry in the US--lose the productivity, lose the prosperity). Productivity comes from learning to do things more efficiently, or by applying new technology. Productivity can also come from reducing labor costs by producing things offshore, thereby reducing the number of hours it takes to produce the same output (someone else is making the input, though their hours don't count in the tally because one firm buys them from another firm).

The trend toward manufacturing firms outsourcing business services is true enough. Employment statistics comiled from the BLS's establishment survey makes it difficult to tell how much this is true. The BLS survey classifies workers by the industry in which they work, not by the occupation. So a lawyer working for Kubota tractors in Dearborne, MI is a manufacturing worker, and so on. Firms can focus on their core manufacturing competencies and simply contract out for all the other business functions that need to get done. By the ERP's argument, the total number of jobs remains relatively constant, although the mix between those classified as manufacturing and those as services are shifting. So don't worry about. (There is also a discussion of more manufacturing work being done by temporary workers--which is a service categroy--like that's good news for the economic security of American workers).

But wait, it turns out those service sector jobs being outsourced by manufacturing firms are actually geographically tied to manufacturing activities (called aglommeration economies). That is, without the manufacturing there is no need to have manufacturing services. This makes sense, why hire a firm to run your payroll when you have no employees?

On the issue of China trade, the ERP admits that China's share of the US trade deficit is rising, up to 22% in 2002 and going higher (the 2003 # comes out on Friday morning). But not due to offshoring? Over 47 percent of imports from China in 2002 was trade between "related parties"--that is between a multinational corporation and its subsidiary. In 1998, less than 18 percent of imports from China were between related parties. So you would have to be on crack to say that the increase inthe trade deficit with China has nothing to do with outsourcing.

But hold these thoughts for a moment.

While Mankiw was giving poetry readings over at the JEC , the White House dispatched Robert Zoellick, the USTR, over to the Pacific Rim for a little song and dance. On Sunday/Monday, the USTR announced completion of a new trade deal with Australia. The trade deal didn't make much of a splash--Australia has as good or better labor and environmental standards than the US. Who's to complain?

The USTR won't take any chances, though. They were touting: "More than 99 percent of U.S.
manufactured goods exports to Australia will become duty-free immediately upon entry into
force of the Agreement." Big deal. Exports to Australia are a whopping $13 billion, imports $6.5 billion. Tariffs were already wicked low. If anything, proximity to East and Southeast Asia might make Australia a major export platform for China, et. al.

So what did the US get, then? American pharmaceutical companies got a commitment that Australia wouldn't re-export to the US at below market prices prescription drugs purchased in bulk by its Pharmaceuticals Benefits Scheme (a la Canada). American investors will get new protections that make NAFTA's Chapter 11 look like a jaywalking ticket. Australia agreed to "state-of-the-art" intellectual property rights (here's a great article by Joe Stiglitz on IPRs and trade) that among other things will allow intellectual properties to trump internet domain name ownership rights (so if you owned the site www.disney.au, your're screwed).

Then why do it? For one, that's all that the Bush administration is trying to get out of international trade deals, which is made abundantly clear in Chapter 12 of the ERP. Another reason is that Zoellick needed a win, big time.

Brief digression on the role of the USTR:

The USTR's job is to negotiate trade agreements. Period. And their success is measured purely by the number and size of the agreements that are negotiated. The more trade agreements, the better--irrespective of any economic consequences.

Also, the USTR is notoriously riddled with conflicts of interest. Since the dawn of time (weell, the dawn of the USTR), the USTR was a key post for industry and foreign government lobbyists to do the work of their clients from within the walls of government. The smart USTRs even created cottage industries for themselves. Carla Hills, Papa Bush's USTR wrote Chapter 11 into NAFTA, and then set up a law firm to sue the US, Mexican and Canadian governments under Chapter 11 on behalf of big corporations who don't want to be bothered with public health, environmental and anti-trust laws.

Charles Lewis of the Center for Public Integrity has written an excellent history of conflicting interests in the USTR (America's frontline trade officials : Office of the United States Trade Representative, 1990), but this really pre-dates the era of big trade deals and the hijacking of the democratic process for making trade policy by moneyed interests.

Enter Robert Zoellick, the economic technocrat and Republican apparatchik who rode out the Clinton years by bouncing around a host of corporate and corporate-funded academic posts, a natural choice for the Bush administration's point man on trade. Zoellick epitomizes what is wrong with the governance of trade. Registered with the Department of Justice as a foreign agent to represent the interests of foreign governments and businesses before the U.S. government and consultant to major multinational corporations (including Enron), Zoellick is on the cutting edge of technocratic elites who waft between public service and private plundering.

Which brings us back to Australia, manufacturing and the economic fiction of the ERP. While the Bush administration is arguing that manufacturing is a dinosaur industry and that government should not pick winning industries. Instead, the Bush administration will pick fights at the behest of their patrons, at the expense of broader American economic interests.