Productivity, GDP, jobs and outsourcing

You see the headlines, you see the cheers. Don't you know the recession is over! Graphs, statistics, tables abound. People argue over margin of error, data points, and debate the great mystery of increased unemployment statistics, then quickly dismiss them as a lagging economic indicator.

But you, down on the ground with the rest of us, say hell no, all of my friends are broke, I can't find a job, I'm in debt, this talk of recovery is bullshit!

You might very well be right and the problem is current statistics appear not to be capturing the true state of GDP, Productivity and thus jobs (in the United States).

The Altanta Fed blog has noted some macro economic predictors seemingly skewed as well as noted the anomaly in unemployment rate. Indeed, midtowng overviewed unemployment statistics and indicating the economy is not in recovery.

So how could this be? We're all told GDP will move into the positive, productivity couldn't be higher and of course pure denial that increases in productivity could not be attributed to anything but technological advances.

GDP in a nutshell estimates The total spending on all final goods and services (Consumption goods and services (C) + Gross Investments (I) + Government Purchases (G) + (Exports (X) - Imports (M))

Labor productivity in it's most simplistic form is output divided by hours worked.

So what's the problem? The problem is accurately calculating what is an import and what price and quantity are those imports.

In the abstract Outsourcing, Offshoring, and Productivity Measurement in U.S. Manufacturing, by Susan Houseman (WP06-130), 2006, Houseman goes through the statistics and methodology on productivity and comes up with some surprising results.

I discuss reasons why manufacturing productivity statistics should be interpreted with caution in light of the recent growth of domestic and foreign outsourcing and offshoring.

First, outsourcing and offshoring are poorly measured in U.S. statistics, and poor measurement may impart a significant bias to manufacturing and, where offshoring is involved, aggregate productivity statistics.

Second, companies often outsource or offshore work to take advantage of cheap (relative to their output) labor, and such cost savings are counted as productivity gains, even in multifactor productivity calculations.

This fact has potentially important implications for the interpretation of productivity statistics. Whether, for instance, productivity growth derives from a better-educated, more efficient U.S. workforce, from investment in capital equipment in U.S. establishments, or from the use of cheap foreign labor affects how productivity gains are distributed among workers and firms in the short term and undoubtedly matters for U.S. industrial competitiveness and living standards in the long term.

Although it is impossible to fully assess the impact that mismeasurement and cost savings from outsourcing and offshoring have had on measured productivity growth in manufacturing, I point to several pieces of evidence that suggest it is significant, and I argue that these issues warrant serious attention.

The Business Week Article The Real Cost Of Offshoring gives a rough estimate, from 2007, on just how much GDP is skewed due to inaccurate import accounting:

By BusinessWeek's admittedly rough estimate, offshoring may have created about $66 billion in phantom GDP gains since 2003 (page 31). 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.

Recently Economist Mandel dove further on misleading economic indicators. Growth: Why the Stats Are Misleading shows how productivity is miscalculated, which is attributed to two areas, financial sector growth was built on a lot of fiction (as we've covered on EP exensively) and import-price statistics.

First, the economy was lifted by two financial bubbles in a row—the stock market bubble followed by the credit bubble—leading to excess growth of finance and real estate. "The financial sector contributed substantially to the surge in productivity growth," says Martin Baily, a Brookings Institution productivity expert. "Some of the financial innovation has turned out not to generate real benefits."

Second, new research by Emi Nakamura and Jón Steinsson of Columbia University suggests pervasive problems with the government's import-price statistics.

Like a slow water leak that eventually erodes the foundation of a house, these apparently arcane import-price problems mean that the real growth of imports has been significantly underestimated for goods such as computers that have rapid model changes. That in turn distorts the productivity and growth stats, making them look a lot better than they really are.

So, how we must ask, just how much are economic indicators skewed? Well, from the unemployment rate it appears quite a bit!

In Manufacturing key to recovery, Alan Tonelson touched on how productivity is being miscalculated in manufacturing.

The productivity story has been unraveling as well. In particular, the government's main productivity statistics have overlooked increased manufacturing offshoring. The growing foreign labor content of U.S. manufactures is simply not counted in the calculations purporting to show how many workers are producing given levels of output. Thus when American industry replaces domestic workers with foreign workers, the Bureau of Labor Statistics simply assumes that the overall headcount has shrunk - and that new technological or managerial wizardry is the reason.

New Commerce Department data show just how inadequate manufacturing output has become. From 1997 (when the government's main system for slicing and dicing the economy was introduced) through 2008, annual U.S. manufacturing grew by only 29.8 percent in inflation-adjusted terms, despite all the bubbles and stimulus. Last year, moreover, was especially discouraging. Even though the overall economy eked out 0.74 percent real growth, manufacturing output declined by 2.74 percent.

Tonelson also points to health care profits as another misleading economic growth statistic:

The new data point to other trade-related problems. For example, although the sectors of the economy most heavily affected by the global economy (agriculture and mining, along with manufacturing) shrank by a combined 2.48 percent last year in real terms, much U.S. growth was generated by sectors virtually unaffected by that global economy - like health care (up 4.57 percent last year) and government itself (up 1.90 percent) These patterns held for most of the last decade as well.

Again from Mandel in The Failed Promise of Innovation

surges of imports and borrowing also distorted economic statistics so that growth from 1998 to 2007, rather than averaging 2.7% per year, may have been closer to 2.3% per year.

So, as one can see, we can assuredly say that a 0.5% GDP growth number might mean in reality there is no growth in the U.S. economy. Then, due to expanding population and other factors, a certain amount of GDP growth is required (est. about 1.5-2%) just to maintain the status quo. But what if this number of Phantom GDP is even larger? What if the obvious oxymoron jobless recovery is just that and even worse, it is not even acknowledged due to skewed economic analysis and statistics which do not incorporate globalization and it's effects?



A visual that proves the point.


and why NDD did not post it here is truly beyond me.

That said, while NDD points to there is a problem, and points to the trade deficit as well as uses some of the same data I saw from the Atlanta Fed, I'm writing about the discoveries themselves, from Academia, as well as written up very nicely by the main economist at Business week, as to what specifically is going on to skew the GDP and productivity statistics.

Different angles, same topic....i.e. finding proof as to why the U.S. is hemorrhaging jobs, which so many others try to repress and ignore.

Great column, but

I think that dailykos article is rather trivial and belabors the obvious - which is why a political economist like Krugman is slow on the uptake (and whose remarks are remarkably similar to another political economist, back in the '90s, named Robert Reich).

Sometimes it is so simple and fundamental that resorting to equations and graphs is almost nonsensical: 73% of the uppermost American corporations and American-based multinationals don't pay federal taxes (due to "profit laundering" via offshore finance centers - primarily owned by the banksters), while the tax base made up of American workers is rapidly shrinking due to excessive jobs offshoring and foreign jobs creation (multinationals creating jobs offshore as opposed to creating jobs locally with that federal stimulus money); ergo, the multiplier and cascading loss effect goes into overdrive with resultant loss of tax revenues, statewide, countywide and citywide.

As the American economy has been consumer-driven since the 1920s, dramatic devastation must be the order of the day!

Alan Blinder, one of those pseudo-economists (at Princeton, I believe) who has always been part of the problem and not any part of the solution, not too long ago stated that his research (glaringly obvious to the rest of us) indicated massive jobs offshoring by 2010-2012 (I think that's a rather late estimate), with horrendous economic consequences to the American worker.

Of course, wanting to keep his position at Princeton, Blinder claimed there is nothing we can do about this as it's all about globalization!


Firstly, putting together unemployment, income and connecting it to offshore outsourcing, trade is actually very difficult and part of the reason are the issues, and reference papers I point to in my post, but also there is no direct data. Various congress reps. have tried to get data on this and corporate lobbyists fight it every step of the way.

So, one needs to do an indirect analysis and extract, which almost no one does.

For example, in unemployment statistics, they refuse to capture citizenship status or underemployment statistics. Then there not even a survey to track on the number of jobs offshored or even track how many U.S. corporations created jobs in other countries, plants, R&D facilites, etc. in other countries...instead of the United States.

Trying to obtain accurate data on this means one has to turn into their own data collector and in a national with thousands of companies, millions of workers, that is non-trivial, esp. trying to track all of the offshored investment, jobs around the globe.

Blinder isn' a pseudo economist, he actually wrote a very good paper on the potential for offshoring. I think it can be argued that economists are also political and if you go against the "status quo" you might be kicked out of the club.

So, the claim there is "nothing we can do" is complete BS and assuredly there are many of us who know of specific policy adjustments which would "do something".

But to say that detailed economic analysis, yes with charts and graphs is trivial is really out of line. Remember, EP is supposed to be reality based, but more importantly is an "all things econ" site, and these analysis give a lot of answers.


I'm not saying charts and graphs are normally trivial, just in relation to that dailykos article. And I believe if you read everything Blinder has written, going back to his support for NAFTA, you'll find I'm in the right.

yeah and I'm saying

it's not a trivial post, in fact it's a dynamite analysis, firstly because it's extracting data indirectly and secondly...because you rarely see anyone correlating unemployment stats to the trade deficit.

Blinder, yeah, this is what I mean why we have to be able to read the mathematics, be critical readers of Academic research/papers/studies and take each one on it's own merits.

Some of the assumptions, flaws, mistakes are so glaringly obvious, but you can only see them by reading the actual paper.

This is especially true of think tank "studies" and of course those "studies" go flying onto Congressional Staffers desks and then, of course, those staffers don't have time to read them, they simply take those "conclusions" as fact, when the paper itself is so flawed you scream how in God's name did this person get awarded a PhD????

At least that's what I say to myself.

Inflation coming?

With all of the bailouts and Fed efforts I would think that massive inflation is coming to the US and the rest of the world, but the recent action in the gold price does not seem to indicate that, as described here: