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Trade nothink
TownHall.com ^ | August 19, 2003 | Paul Craig Roberts

Posted on 08/19/2003 9:49:14 AM PDT by Willie Green

For education and discussion only. Not for commercial use.

Sending me many suggestions, readers have beseeched me to revive the "nothink nation" theme that I developed in six columns during April and May of 2002. I doubt that editors have that big a stomach for the subject, but I will risk one more column.

My target is Bruce Bartlett's syndicated column of Aug. 14, "Manufacturing is not in trouble " (duplicate thread)

Like neocons who label people concerned with the facts of the case for the invasion of Iraq as "anti-American left-wing extremists," Bartlett labels me a protectionist "on the right-wing fringe" for factually reporting the shrinking manufacturing sector of our economy and for asking if the shrinkage is occurring for reasons that have nothing to do with the case for free trade.

Bartlett tells his readers that "manufacturing output is very healthy" because "real goods production as a share of real GDP is close to its all-time high." Here we have a massive confusion. "Real goods production" is NOT "manufacturing output." "Real goods production" includes commercial and residential construction -- a large share of GDP and a non-traded item -- plus agricultural production, plus oil and mineral production, plus manufacturing production.

Obviously, the behavior of "real goods production" can be different from the behavior of manufacturing output.

Another problem overlooked by Bartlett is the well-known problem of measuring constant unit of services.

To understand what is happening to manufacturing, it is necessary to compare, year by year, the share of manufacturing income in current dollars as a percentage of GDP. This measure has no adjustment problems and is independent of manufacturing employment.

The Bureau of Economic Analysis provides such a table. It shows that manufacturing's share of GDP has fallen consistently each year from 19.2 percent in 1988 to 14.1 percent in 2001, a decline of 27 percent over the 14 year period.

If this decline continues, manufacturing output will be hard to find in the GDP.

The question I raise is: What is causing this decline? If we assume that the decline is due to other countries outcompeting us in traded manufactured goods, we can conclude that it is merely the benevolent workings of free trade and that the United States is gaining in some other way that more than compensates for the losses specific to manufacturing.

On the other hand, if the decline is not due to free trade, then perhaps we have a problem.

As Professor Roy J. Ruffin writes, the key assumption of trade theory is "that factors of production must be internationally immobile in order for comparative advantage to reign supreme," as David Ricardo, the discoverer of the principle on which free trade is based, recognized.

If factors of production are internationally mobile, they will flow to countries that have the greatest absolute advantage. These countries will capture all the gains, and the other countries will lose.

In Ricardo's time, agricultural output was a large component of GDP. Advantage lay in climate and geography -- clearly internationally immobile factors of production. With the collapse of world socialism in the 1980s, factors of production -- capital, technology, business know-how -- have become highly mobile. Are these factors of production flowing to countries with the greatest advantage: Asia's low labor costs?

What about labor itself? Have the Internet and offshore production by U.S. firms for their U.S. markets made foreign labor highly mobile to U.S. labor markets, just as if Asians poured across our borders and offered their services at Asian wages in our domestic labor markets?

If the mobility of factors of production is what it appears to be, there is a different explanation for the decline of U.S. manufacturing, one that cannot be dismissed as the benevolent workings of free trade: Mobile factors of production are flowing to the greatest advantage -- cheap Asian labor. When U.S. firms replace their software engineers with foreign engineers and close (or don't build) plants in the United States, locating instead in China, what is being traded? Isn't this merely a direct substitution of foreign labor for U.S. labor in the production functions of U.S. firms? Haven't factors of production flowed to the countries with the greatest absolute advantage?

Free traders need to stop jerking their knees and come to grips with these questions.

Some modern trade theorists take the position that comparative advantage can still operate even if all factors of production are internationally mobile, as long as productive factors are less mobile than traded goods. But even these conditions might no longer be present. Traded goods must be shipped and are, therefore, less mobile than technology, capital, and knowledge-based labor skills, all of which can move with the speed of modern communications. When U.S. firms substitute foreign labor for U.S. labor, the firms have, in effect, made foreign labor mobile to the United States without foreigners having to physically move here.

There is a difference between domestic and foreign labor competing against one another indirectly in the market for traded goods and services, and the direct substitution of foreign labor for domestic labor in the production functions of firms producing for the domestic market.

It is past time for free traders to stop jerking their knees, to put on their thinking caps and to exit their nothink existence.


TOPICS: Business/Economy; Culture/Society; Editorial; Foreign Affairs; Government
KEYWORDS: axisofeeyore; chaineddollars; globalism; manufacturing; paulcraigroberts; thebusheconomy

1 posted on 08/19/2003 9:49:14 AM PDT by Willie Green
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To: Willie Green
This man is sane. He must be crushed before he disturbs the delusions of this nation and the world.
2 posted on 08/19/2003 9:56:42 AM PDT by RLK
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To: RLK
This man is sane. He must be belittled before he crushes the delusions of many on Free Republic.
3 posted on 08/19/2003 10:01:39 AM PDT by warchild9
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To: warchild9
This man is sane. He must be belittled and crushed before he causes politicians to adopt sensible tariffs.


4 posted on 08/19/2003 10:06:25 AM PDT by Lazamataz (I'm pretending I'm pulling in a TROUT! Am I doing it correctly?)
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To: Lazamataz
This man is insane. Look what steel tariffs did for the economy. Watch them go away.
5 posted on 08/19/2003 10:12:16 AM PDT by gcruse (http://gcruse.typepad.com/)
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To: gcruse
You are the odd man out. :o)
6 posted on 08/19/2003 10:14:31 AM PDT by Lazamataz (I'm pretending I'm pulling in a TROUT! Am I doing it correctly?)
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To: Willie Green
How dare this man be so sane as to reason that if things are happenning in a matter other than theory prescribes, then the theory must be wrong ? How dare he notice what is actually happenning to real people in the real world ? How dare he suggest that sometimes the man in the street is right and the expert is wrong ?
7 posted on 08/19/2003 10:20:27 AM PDT by Tokhtamish
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To: gcruse
Steel import tarrifs killed US steel.
8 posted on 08/19/2003 10:34:58 AM PDT by MonroeDNA (No longshoremen were injured to produce this tagline.)
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To: Willie Green
It shows that manufacturing's share of GDP has fallen consistently each year from 19.2 percent in 1988 to 14.1 percent in 2001, a decline of 27 percent over the 14 year period

OK, but what is the significance of that data? We certainly know that many manufacturing jobs no longer exist here in the U.S. And for someone who held one of those jobs, it is certainly a negative event.

But why do we invest so much emotion in the manufacturing sector's numbers as a whole? I hear stories about how the U.S. will lose the ability to make the goods necessary for national security, but that's hogwash. Just because we don't currently make something here doesn't mean we can't resume if necessary. I hear that manufacturing jobs are/were "highly paid" vs. service sector jobs, but how much of those wages were illusory thanks to job killing union demands?

Educate me, Buchananites.

9 posted on 08/19/2003 11:13:34 AM PDT by Mr. Bird
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To: Lazamataz
The Government Education Monopoly continues to imperil our economy by failing miserably at preparing the workforce. Business increasingly looks for talent overseas. The world's greatest concentration of PhD's is in Seoul, Korea and half of Americans can't even find Seoul on a map.

International Test Scores

We think we are competitive...The one score that Americans aced was in "highest self esteem".

10 posted on 08/19/2003 11:16:16 AM PDT by KDD
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To: Tokhtamish
How dare this man be so sane as to reason that if things are happenning in a matter other than theory prescribes, then the theory must be wrong ?

Shhh. Don't question The Religion. The Religion knows all. The Religion sees all. Doubt that and the Inquisition will be sent after you.

11 posted on 08/19/2003 11:19:46 AM PDT by RogueIsland
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To: KDD
The Government Education Monopoly continues to imperil our economy by failing miserably at preparing the workforce. Business increasingly looks for talent overseas

So all those unemployed engineers in the U.S. are just ignorant, poorly educated rubes, that's why their jobs have been shipped to India? I had no idea that schools like Purdue foisted such poor quality engineers on the job market.

12 posted on 08/19/2003 11:23:07 AM PDT by RogueIsland
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To: MonroeDNA
The greed and arrogance of the Steel worker's Union, Killed US Steel.
13 posted on 08/19/2003 11:26:31 AM PDT by F.J. Mitchell (Our enemies within are very slick, but slime is always treacherously slick, isn't it?)
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To: RogueIsland
Look at how our most advanced 12th grade math and science students did in relation to the rest of the world.

LAST!

I had no idea that schools like Purdue foisted such poor quality engineers on the job market.

I had no idea it was so bad either.

14 posted on 08/19/2003 11:34:01 AM PDT by KDD
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To: harpseal
Paul Craig Roberts answers Bruce Bartlett. Links to Bartlett's article and threads provided above.
15 posted on 08/20/2003 8:09:01 AM PDT by LibertyAndJusticeForAll
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