Saturday, June 9, 2007

Has Moving Jobs Offshore Hurt Our Economy?

The June 18, 2007 issue of Business Week has an interesting cover story titled The Real Cost of Offshoring. The article, written by Business Week economics editor Michael Mandel, has the following byline: Official numbers show that moving jobs overseas hasn't hurt the economy. Here's why those stats are wrong.

The article describes what Mandel refers to as Phantom Gross Domestic Product (GDP) calculations being made by the U.S. Bureau of Labor Statistics (BLS). The article goes on to describe the GDP as the inflation-adjusted value of all the goods and services produced inside the Unites States and goes on to say "Phantom GDP" arises when the real growth rate of imports is understated...... making it appear that more of the goods and services consumed in the U.S. are produced here.

I'm not an economist and I'm not going to pretend to be any kind of expert. I will try and explain and summarize based on the Business Week piece. According to Mandel, "Phantom GDP" happens four ways:

1. Offshoring - The cost of manufacturing most products offshore is commonly cheaper than it is in the U.S. What's kept some of the manufacturing in the U.S. has been reliability. Today foreign manufacturers are becoming more reliable and this increase in reliability is sometimes considered a "Productivity Improvement" by the BLS. So let's consider a U.S. manufacturer that moves production from the U.S. to China. The combined cost decline and increase in productivity, as the result of the offshoring, are sometimes miss-booked as part of the U.S. GDP growth.

2. Intangibles - the article mentions how R&D is also being shifted off shore. Now R&D is an expense that does not result in direct production of product. As R&D is shifted offshore, it is sometimes considered a cost cut by the BLS and may be indicated as an increase in productivity.

3. New Goods - the article mentions consumer electronics (offshored from the U.S. long ago) which typically have short life cycles. Think about just about any electronic device - next generation products are technologically more advanced and typically cheaper than predecessors. These improvements and cost cuts are sometimes credited by the BLS to the U.S. even though the R&D and production are being done offshore.

4. Cross-Country Shifts - Companies are constantly searching for the lowest cost supplier. As production of a product moves from one country to a lower cost country (example: from Mexico to China) there is a decline in cost of that product. Part of that decline in cost can show up in BLS GDP data.
The Business Week article quotes Michael Horrigan, BLS Associate Commissioner as follows:
"Capturing the shift from domestic to foreign production [or vice versa] and its associated impact on prices is at the forefront of methodological challenges we face."
This is an incredibly difficult challenge. Pick up a copy of Business Week if you can - it is a very good read. You can also listen to a podcast of Mandel's cover story here.

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