Fiction Made in America

by Don Boudreaux on November 1, 2011

in Myths and Fallacies, Seen and Unseen, Trade

Here’s a letter to the editorial-page editor of the Washington Times:

Mr. Brett Decker, Editorial-Page Editor
The Washington Times

Dear Mr. Decker:

In your uncritical review of Pat Buchanan’s new book – which expresses his hysterical fear that the American economy will be shattered if nothing more is done to block Americans’ access to inexpensive goods from abroad (and especially from China) – you assert that “It doesn’t matter what you want; almost every consumer product on U.S. store shelves is made overseas, especially in China.  It doesn’t matter how much you want to find it; almost nothing you need is made in the USA” (“Buchanan: Take the China Test,” Oct. 30).

Wrong.  According to an August 2011 report by the San Francisco Fed, the percent of Americans’ personal consumption expenditures used to buy Chinese-made goods and services in 2010 was 2.7 percent.  And if we exclude expenditures on food and energy, the percent of our 2010 personal consumption expenditures spent on goods and services from China rises to only 3.1 percent.

In contrast, the percent of Americans’ personal consumption expenditures spent on goods and services made in America in 2010 was 88.5 (and 88.0 percent if we look at personal consumption expenditures excluding those on food and energy).*

Surveying the “Made in” labels on goods sold at Wal-Mart and Costco, while perhaps a cheap source of anecdotal fodder for fear-mongering protectionists, is not rigorous economic research.

Sincerely,
Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA 22030

(HT Erin Ennis for the S.F. Fed report.)

Be Sociable, Share!

Comments

comments

55 comments    Share Share    Print    Email

{ 55 comments }

V.A. Luttrell November 1, 2011 at 12:24 pm

Doesn’t including services in that figure skew the number quite a bit? How many Americans get services from China when they live in the U.S.? It’s impractical to seek services elsewhere. Additionally, it seems as if Pat Buchanan, however unscientific his “study” might have been, only looks at goods. So too, any data given to counter his should just include goods, also. Otherwise, it’s comparing apples and oranges.

Ken November 1, 2011 at 12:31 pm

VA Luttrell,

It’s impractical to seek services elsewhere.

Is it? What about google or Microsoft? What about customer service (I’m sure you’ve talked with a person sitting in an Indian call center)? What about using Deutche Bank to service your loans? What about Swiss Re?

In short, many modern services can be supplied by anyone with an internet connection.

Regards,
Ken

Don Boudreaux November 1, 2011 at 12:32 pm

Part of the whole point is that services are just as much a source of prosperity – and employment – as are goods. What difference does it make if Jones in Jacksonville chooses to spend his $$ buying restaurant meals or groceries so that he can cook at home? He’ll choose whichever makes him better off, and whatever he chooses will create economic opportunity for some Americans.

James Reade November 1, 2011 at 12:30 pm

There’s nothing like a bit of hypocrisy. Someone who spends most of his time criticising central banks (and in particular their lack of requisite knowledge to do anything) and macroeconomic statistics making use of them when he needs to…

Don Boudreaux November 1, 2011 at 12:35 pm

Do you have a substantive criticism of the point I make? Do you have reason to believe that the data reported are inaccurate?

My criticism of central banks has nothing to do with the ability of their staffs of economists to do research; these economists do research just about as well as do non-Fed economists. (Indeed, I suspect that such research is a tad bit better than is usually done in the academy.) But ability to do such research, and to do it passably well, doesn’t remotely translate into ability and knowledge to centrally plan and adjust the supply of money.

muirgeo November 1, 2011 at 1:21 pm

Don’t bother James… he doesn’t care about substantial critism. See my note below. The numbers are flawed.

http://www.businessweek.com/magazine/content/07_25/b4039001.htm

Don’t you just love the disconnet in the line “…the American economy will be shattered if…” referred to as “hysterical ” as if the eocnomy is all peaches and cream.

Also, they are supporting protectionist and merchantilist policies as long as the production occurs overseas in American factories…whatever that is. It’s all very “Twilight Zonish” .

But the key point James is that the manufacturing numbers are rigged.

dsylexic November 2, 2011 at 4:28 am

rigged? rigged by the same govt you want to give more power to. *pacefalm*

Nikolai Luzhin, Eastern Promises November 3, 2011 at 1:26 pm

muirgeo

this is a great link, great insight

why are you are inconsistent?

Stone Glasgow November 1, 2011 at 12:41 pm

Additionally, goods “made in China” are often only assembled in China.

muirgeo November 1, 2011 at 1:09 pm

“But new evidence suggests that shifting production overseas has inflicted worse damage on the U.S. economy than the numbers show. BusinessWeek has learned of a gaping flaw in the way statistics treat offshoring, with serious economic and political implications. Top government statisticians now acknowledge that the problem exists, and say it could prove to be significant.

The short explanation is that the growth of domestic manufacturing has been substantially overstated in recent years. That means productivity gains and overall economic growth have been overstated as well. And that raises questions about U.S. competitiveness and “helps explain why wage growth for most American workers has been weak,” says Susan N. Houseman, an economist at the W.E. Upjohn Institute for Employment Research who identifies the distorting effects of offshoring in a soon-to-be-published paper. ”

http://www.businessweek.com/magazine/content/07_25/b4039001.htm

Richard W. Fulmer November 1, 2011 at 1:30 pm

Muirgeo
It would not be at all surprising to learn that the country’s production statistics are incorrect. Data are being adjusted all the time. How often have we learned that a previous quarter’s GDP numbers have had to be adjusted?

Sometimes we don’t even know just what it is that we should be measuring. For example, should the Fed base its decisions on M1, M2, MZM, CPI, the price of gold, unemployment numbers, nominal wages, or real interest rates?

And what about the lag between the time that the Fed makes an adjustment to the discount or reserve rates and the impact is felt in the economy? A year may pass before the results are seen. In the meantime, millions of other events have occurred. Did prices rise or fall because of the Fed’s action or because of productivity changes or because oil prices rose or fell?

Given the unknowns and uncertainties, don’t we have to admit that we simply don’t have enough information to centrally control an economy? Control is impossible without a reliable feedback loop, and the economy’s feedback loops are hopelessly unreliable. Attempts to “fine tune” the economy under such circumstances is far more likely to make things worse than they are to make them better.

nailheadtom November 1, 2011 at 10:25 pm

We’d be better off if the Fed didn’t make decisions or adjustments.

Dan J November 2, 2011 at 1:11 am

All the numbers are written in pencil, as they are all adjusted later for revision. Do they ever remain the same as first reported? From GDP to unemployment, the stats are always revised. Most people only ever hear the first reported numbers, and is in best interest of whichever politicians stand to gain from tweaking the numbers to reflect something less negative and adjust them later.

Fred November 1, 2011 at 1:52 pm

When a factory in the states moves to automation so it can increase efficiency while shedding employees, does manufacturing rise or fall?

When a factory in the states installs robots that work five times as fast, make no mistakes, and do not tire, does manufacturing rise or fall?

When total output increases while total employment decreases, does manufacturing rise or fall?

Jon November 1, 2011 at 2:15 pm

Look, Muirego, we all know how this is going to go:

We’re all going to make various arguments refuting that article. You’ll throw it up again (’cause Lord knows, the more you repeat something the more true it becomes, regardless of facts). We’ll make further arguments against that point. You’ll accuse one (or all) of us of being a shill for the Kochs, and nothing will be accomplished. Let’s just cut to the chase? Will you please make your response to this comment an accusation that I work for the Kochs so we can all move on with this post?

muirgeo November 1, 2011 at 3:43 pm

Jon,
How about we just have a common sense discussion about the facts and the things we do know.

Does it make sense to give a tax incentive to offshore our production? Is that even fair? Doesn’t that in effect create a tariff or a protectionist policy that benifits some firms over others.

Does it make sense to count as American production that which is made in factories in China that happen to be American factories even though all the labor is done by nationals of that country?

Do you realize that some 40% of our imports are actully products made by American firms in offshore factories.

Is it not protectionism if American factories are located overseas and are protected by the tariffs and monetary polices of that country.

Does being hypocritical and inconsistent matter to you guys? Because I think I’ve clearly made some valid points suggesting you are just that.

I’m not going to accuse you of anything. I have NO idea what you stand for because your words and actions are often so completely at odds.

And finally. Is it really me who is being bizzarre suggesting, based on the current state of the economy, that 15 years of “free trade” may have not been so good for our economy?

Ken November 1, 2011 at 4:25 pm

Does it make sense to give a tax incentive to offshore our production?

Like minimum wage, payroll taxes, and SS taxes?

Does it make sense to count as American production that which is made in factories in China that happen to be American factories even though all the labor is done by nationals of that country?

Does this mean that US GDP numbers should not include the VW, Honda, Hyundai, Fujitsu, Siemens, Schlumberger, etc (all foreign companies) made in the US?

Regards,
Ken

Slappy McFee November 1, 2011 at 4:52 pm

What exactly is an American company?

muirgeo November 1, 2011 at 8:55 pm

That’s a good question. My answer would be one that doesn’t, for instance, hide behind the protectionism of the Communist Chinese government.

How would you define it.
Anticipating some of your likely answers… What is a communist country? What Is a free country. Is there a difference between the American government and the Chinese government?

Slappy McFee November 1, 2011 at 4:55 pm

“And finally. Is it really me who is being bizzarre suggesting, based on the current state of the economy, that 15 years of “free trade” may have not been so good for our economy?”

This comment is truly confusing. You posted two links to the same story that is all about goverments mismeasuring economic statistics. Tell me good doctor, just how are you able to come to a conclusion regarding the current state of the economy if you do not trust the data?

Ken November 1, 2011 at 4:58 pm

Slappy,

muirgeo considers that passage of NAFTA to have heralded in an age of free trade. He has made the claim that before this no free trade existed, And despite the many other barriers erected to stifle free trade since the passage of NAFTA and that NAFTA doesn’t affect trade with China, he still claims that NAFTA is the end all be all of free trade.

Regards,
Ken

Ken November 1, 2011 at 4:59 pm

Edit: He has made the claim that before this no free trade existed before NAFTA.

muirgeo November 1, 2011 at 9:05 pm

The link on productivity gives a pretty good explanation of why the manufacturing numbers are suspect. The evidence of the state of our economy is visible on the streets and the employment numbers if anything are under-estimating the situation.

I don’t know why I bother. You aren’t interested in serious discussion. Just because one number or data source from the government is suspect then you conclude I should have concluded that ALL government numbers are suspect. REALLY? Seriously grow up and get back with me when you want to be serious.

Fred November 2, 2011 at 8:08 am

“The evidence of the state of our economy is visible on the streets and the employment numbers if anything are under-estimating the situation.”

The subject was manufacturing output.

There is absolutely no correlation between the number of people employed in manufacturing, and the amount of goods manufactured.

None.

A plant that employs a hundred people in a labor intensive process might have a fraction of the output of a plant that employs ten people to tend machines.

An argument can be made that there are fewer people employed in manufacturing in this country than in the past, but that has nothing to do with total goods manufactured.

CalgaryGuy November 1, 2011 at 10:07 pm

muirgeo,

No, it doesn’t make sense for the U.S. to give a tax incentive to offshore production, but I’m not sure how that is being done currently, can you explain?

If an American company develops and sells a product for $100, of which $10 is paid for offshore labor and transportation, what percentage do you think so be counted as American production? Does the fact that it was simply assembled overseas mean none of it is American?

No, it is not American protectionism if American factories are located overseas and protected by the tariffs and monetary policies of that country. If China wants to make something artificially cheaper than it otherwise would be, most people would consider that a gift to the American people. If you want to feign concern for residents of China, my question to you would be why the distinction between not caring about taking away THEIR jobs (by promoting American protection) but care about their taxes.

Dan J November 2, 2011 at 1:18 am

Didn’t Econtalk just have discussion on the big negative effects of increased taxation? A multiplier effect of -2.5 to -3 ?
So, Muirgeo, wouldn’t it be more prudent to remove obstructionist legislation that impedes domestic production, rather than tack on more and more and more costs to final product?
Adding on more costs for consumer to eat does not and will not help. More money attributed to obtaining of products means less purchasing and less disposable income spent on other items….. Meaning less GDP and lowered employment.

Nikolai Luzhin, Eastern Promises November 3, 2011 at 1:27 pm

you work for the Kochs tells me what I need to know

Randy November 1, 2011 at 2:43 pm

It occurs to me that I’ve been listening to this same argument since the late 70s. First it was aimed at the Japanese, then the Mexicans, now the Chinese. So, I think its safe to conclude that the politicians don’t actually want to stop it – not even the Democrats. So, bad news for Don – there’s really nothing to defend here. And bad news for the progressives on this site – you’ve been played.

Dan Phillips November 2, 2011 at 2:17 pm

Randy, that’s the best comment so far! Good job!

SmoledMan November 1, 2011 at 3:13 pm

We do bulid things in this country. Autos, steel, buildings, datacenters!

CalgaryGuy November 1, 2011 at 9:53 pm

“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.”

“But the new numbers also require a reassessment of productivity and wages that could add fire to the national debate over the true performance of the economy in President Bush’s second term. The official statistics show that productivity, or output per hour, grew at a 1.8% rate over the past three years. But taking the phantom GDP effect into account, the actual rate of productivity growth might be closer to 1.6%–about what it was in the 1980s.”

Just so I’m clear muirgeo, this article, in your opinion, proves that globalization is the downfall of America, right? I’ll grant that the article makes a solid case for the overstatement of growth but my elementary math tells me that even if you “wipe out as much as 40% of the gains” that still means that 60% of the gains are there and that 1.6% productivity growth is still growth . So, your proof essentially states that while the numbers aren’t as good as some make it out to be, even with globalization and free trade, the U.S. still had gains.

Dan J November 2, 2011 at 1:24 am

If you want to see more domestic capital expenditures and investment, then shift legislation and policy to reflect less inhibitors of domestic investment. The inhibitors are not competition from another region and/or their incentives but the disincentives to domestic investments.
Have you been outside of the tourist areas of China? I have not. I can only provide anecdotal evidence from four sources, who claim the disgusting nitemare of being outside of ‘Shangrila’ of tourist China.

Hasdrubal November 2, 2011 at 10:27 am

“JUNE 18, 2007″

Businessweek was quoting the director of the BEA at the time and a former head of the Council of Economic Advisors.

So where’s the followup? That was 4 years ago, there certainly has been time to follow up and verify the numbers that Businessweek was throwing around, so where is it?

Ocaine November 1, 2011 at 1:41 pm

It would be interesting to know the same stat for American good sold in China.

SmoledMan November 1, 2011 at 3:39 pm

They like Buicks in China.

Krishnan November 1, 2011 at 9:11 pm

The problem (as has been stated so many times) is NOT “trade deficit” – So, we buy from them in return for our money which they can invest in our country – the problem is that our Government SPENDS money it does not have or take from the system – and so the money held by Chinese (or Japanese or British or …) goes to buy Treasuries instead of being invested in the economy through factories, machines … If our Government spends what it takes in, any/all of the monies that leaves the US for goods made/bought elsewhere will come back as investment – for goods/things made here – we all benefit …

but yea, as many have noted, today it is the Chinese – just a few years ago, it was the Japanese – tomorrow it will be some other country – And when some politician is mad at Canada, they can say “Well, they sell us more bacon than we sell them chicken” – “We cannot have a trade deficit in bacon” “TIme for tarrifs on bacon” (or whatever nonsense someone will say)

Nikolai Luzhin, Eastern Promises November 1, 2011 at 10:04 pm

don’t know what is in Buchanan’s book, don’t care

what I do not is that the statistics cited are meaningless.

the question is jobs—how many American jobs have been relocated to China, by any means or method, direct or indirect—that is what matters.

An american factory that built for export which is dismantled and shipped to China, that is what concerns me. About as import are parts factories shipped to China, with parts being shipped back to the US for assembly

CalgaryGuy November 1, 2011 at 10:15 pm

Yeah, and what happened to all those American agricultural jobs? There was a time when 70-80 percent of the U.S. population was employed in agriculture. Nowadays, it’s only 2-3 percent. Americans need to stop buying food from others and start growing their own. Think of all the jobs that will create. Is it bizarre to suggest that, bases on the current state of the U.S. economy, that 140 years of “free trade” in food may have not been so good for your economy?

JWH November 1, 2011 at 11:05 pm

If all we want is to create jobs, just outlaw farm machinery, and we can put 10′s of millions to work. Surprised some politician hasn’t suggested this goofy idea.

Dan J November 2, 2011 at 1:25 am

Spoons for everyone…… Wheelbarrows ….. Quills……

Mark Maresca November 2, 2011 at 10:21 am

Between stints of walking on water and restoring sight to the blind, our President hinted at this…

http://www.youtube.com/watch?v=-75KJkJiVRo

nailheadtom November 1, 2011 at 10:20 pm

If I’m a manufacturer with a plant and employees in Skowhegan, Maine and a competitor in some other location takes our business away and forces our plant to close, what difference does it make to us if the competitor is in Liberal, Kansas or Peking, China?

Jon Murphy November 1, 2011 at 10:58 pm

The biggest criticism I have seen here of open trade (I hesitate to use “free trade” as we still have tariffs and the like) is the impact on jobs. That is a legitimate concern.

However, it is the wrong place to focus.

Of course trade costs jobs. That doesn’t matter who or what is traded. When the US became the world producer of textiles, it cost Britons jobs. But the Americans could produce textiles better, faster, and cheaper than the Britons; they had the cotton, the mills, the infrastructure, and the labor required to do so. Therefore, Britain benefited with cheaper clothing and the US benefited with jobs and British imports (tea, for example).

Let’s fast forward. Moving some manufacturing (I do emphasis some, as the US is still the single largest manufacturer (by value) in the world) to other nations does cost jobs. No one will argue that point. But, instead, it allows the highly educated and skilled American worker to work elsewhere. America is an amazingly well-educated population. We have some of the best universities in the world and some ridiculous percentage of our adult population has at least a bachelor’s degree. Does it make sense, then, for our people to be making frisbees, or shoes, or widgets? Or does it make more sense for our people to be making solar panels, super computer chips, rocket ships, wind turbines, and the lot?

Likewise, America is moving towards a more service based economy. We have a great deal of innovation here. After all, aren’t we the nation that revolutionized the entertainment industry with the iPod?

These transitions are painful; most economic changes are. They cost jobs: the automobiles killed the horse-and-buggy industry. Video killed the radio star. Who goes to vaudeville shows any more? Who uses a slide-rule? Hybrid and electric cars are killing oil driller jobs. Do we halt progress because of this? Or do we do what America has always been good at: adapt and change? People will lose jobs, yes, but more opportunities will come along as long as this economy remains dynamic.

A final note on this (an anecdote, so take it for what it’s worth). In my line of work, I have the great privilege of meeting many different people from many different industries. I meet many manufacturers. I was shocked to hear, when asked what their biggest issue was, that their issue was the inability to find labor. Even in this economy. They are desperate to find people, but workers either will not relocate or are unwilling to learn new techniques. I asked them about competition from overseas-they replied it’s no issue: the Chinese workers are not as skilled as US so many of our high tech jobs will not be going over there. Again, take this story for what it’s worth.

As for the GDP argument, well…many of us have argued against GDP as an indicator for reasons mentioned in other posts. I won’t address them here (as it has been done ad nauseum). The underlying logic behind this article makes me wince. It’s often used to make a point, but it’s really nothing more than linguistic smoke and mirrors. The argument is that America may have lost as much as 1% of GDP because these actions are taken. That statement is completely able to verify. It’s similar to Boston Mayor Tom Menino saying “We spent $1billion on a new stadium for the Red Sox and they won 15 more games this year than the would have.” It is impossible to prove this statement one way or the other. Therefore, this argument is weak, at best and erroneous at worst. The math behind it is suspect, too: “Assuming offshoring cost productivity, how much productivity did it cost?” Are they doing real science, or confirming their bias? I’ll let you, as finders of fact, decide.

The fact is, trade, when voluntary and open, benefits all parties involved. If you want proof, read Mankiw, read Krugman, read Hayek, read Keynes, read Roberts, read Smith, read history, read anything. The record is crystal clear and economists of all stripes agree: protectionism is terrible. I will not go into detail here. I’ll let you judge for yourself.

Dan J November 2, 2011 at 1:31 am

The great philanthropist Muirgeo would doom the poor Chinese to further abject poverty and lack of progress to force pencils to be made in the US at higher prices which would cause a disparate impact upon the ’poor’ in US who cannot afford computers and Internet connections? What a tangled web.

muirgeo November 2, 2011 at 9:28 am

No Dan you would doom the American worker to the standards of the communist Chinese worker.

I’d like to see the Chinese worker and their people brought up to our standards not us brought down to theirs. But the big corporations and their CEO’s get almost ALL of the benefit of America while by-passing the rules that made us great and in the process impoverishing both nations citizens.

I’m not the one holding the positions that are clearly contradictory to my supposed beliefs. You guys are so often logically inconsistent that it appears it takes no moral gumption to call yourself a libertarian. It’s really just a hillbilly attempt to justify uncontrolled self greed as good.

Fred November 2, 2011 at 10:26 am

The CEO of my employer was paid in the neighborhood of $3.8 million last year.

Divide that among the company’s 60K employees and that amounts to a whopping sixty three bucks per employee.

His salary cost me a tank an a half of gas.

Big whoop.

Dan J November 3, 2011 at 3:29 pm

Indeed, the salary he earns is respective of the responsibility he bears. Often, the salary is respective of the sacrifices made to accomplish his/her job.
Was muirgeo, while on backpacking vacation in Alaska prepared to abandon his trip at moments notice to return for job responsibilities or worked while on ‘vacation ‘?

Jon Murphy November 2, 2011 at 10:27 am

If you want to see the Chinese workers brought up to our standards, why do you oppose trade with China? Chinese wages have risen as well as the standard of living in China since the Great Opening in the 70′s. Likewise, American standards have increased as well.

By closing off Chinese trade, you would harm the very people you want to help.

brotio November 4, 2011 at 12:17 am

Don’t let our Dear Ducktor fool you. It’s not the communist part that offends him, it’s the Chinese. Like all Franklinistas, he’s mad at the Chinese for straying from Uncle Joe’s Soviet model.

CalgaryGuy November 2, 2011 at 12:43 pm

So muirgeo, with respect to trade with China, please share your non-contradictory belief. What is the ideal in your opinion?

How are those of us who believe in free trade being contradictory by NOT wanting U.S. imposed tariffs/restrictions?

dsylexic November 2, 2011 at 4:36 am

those who blame international trade for job losses should blame themselves when they buy colgate instead of pepsodent .by choosing one over the other,you are rejecting one ,putting them at risk of losing jobs.shame on you

Stephen November 2, 2011 at 7:47 am

This study is represented in dollars. What about quantity of items? At the consumer retail level, we could buy much more (toasters, rugs, apparel, candy, etc) and hence, we are exposed to much more items, so the anecdotal perception is created. I believe Americans tend to make more expensive items such as machinery, cars, solid oak furniture, etc.

Think also of a company spending its capital expenditure budget. I make purchases in the thousands, where a larger company would buy in the millions. Let’s say that most of those products are made overseas. What about the retail staff employed? Isn’t that a company purchasing labor? Marketing? R&D? And at one time the profits used to reside here, as well.

Jon Murphy November 2, 2011 at 1:51 pm

I think, if you were to look at quantity, you’d find the numbers in favor of China. But I’m not sure that would give you the real picture. I mean, what’s worth more, one supercomputer or one shoe? One automobile or one shirt?

steve November 2, 2011 at 2:18 pm

Michael Mandel wrote a nice piece on the Fed study. It has some problems. It looks at dollar values and not quantities. It also does not look at whether or not the imports are end user products or just intermediate inputs. It appears that we do not survey for that.

http://innovationandgrowth.wordpress.com/2011/08/15/china-imports-sf-fed-research-misses-the-point/

Steve

Invisible Backhand November 4, 2011 at 12:04 pm

This is too good not to share:

“They say that Congress should actually give them more tax incentives to move operations and jobs overseas, because that will retain a handful of executive and research jobs in the United States to support those overseas operations. We are not making this up.

Even worse, we’re not making up the fact that virtually all congressional Republicans and many Democrats think this argument makes sense.”

http://www.ctj.org/corporatetaxdodgers/CorporateTaxDodgersReport.pdf

Previous post:

Next post: