Tag: unemployment

Are U.S. Multinationals to Blame for High Unemployment?

Many Americans believe the unemployment rate remains stubbornly high because U.S. multinational companies have been outsourcing and offshoring jobs to low-wage countries at the expense of jobs at home. And they believe this in part because politicians and the media tell them it’s so, even though it isn’t.

Consider this story today from the Associated Press under the provocative headline, “Where are the jobs? For many companies, overseas.”

Corporate profits are up. Stock prices are up. So why isn’t anyone hiring?

Actually, many American companies are–just maybe not in your town. They’re hiring overseas, where sales are surging and the pipeline of orders is fat.

More than half of the 15,000 people that Caterpillar Inc. has hired this year were outside the U.S. UPS is also hiring at a faster clip overseas. For both companies, sales in international markets are growing at least twice as fast as domestically.

The trend helps explain why unemployment remains high in the United States, edging up to 9.8 percent last month, even though companies are performing well: All but 4 percent of the top 500 U.S. corporations reported profits this year, and the stock market is close to its highest point since the 2008 financial meltdown.

But the jobs are going elsewhere. The Economic Policy Institute, a Washington think tank, says American companies have created 1.4 million jobs overseas this year, compared with less than 1 million in the U.S. The additional 1.4 million jobs would have lowered the U.S. unemployment rate to 8.9 percent, says Robert Scott, the institute’s senior international economist.

Where to start? First, look back at the reference to Caterpillar, the quintessential U.S. multinational company. If more than half of the employees the company has hired this year are outside the United States, doesn’t that imply that the company also hired workers within the United States, perhaps several thousand?

In fact, as I noted on p. 101 of my Cato book Mad about Trade, Caterpillar and other U.S. multinationals tend to hire workers at home when they are hiring workers abroad. When global business is good, employment tends to ramp up throughout a multinational company’s operations, whether in the United States or abroad. (Earlier this month the Dayton (Ohio) Daily News ran a story about Caterpillar hiring 600 new workers at a local distribution center.)

It is simply false to argue that, if U.S. multinationals did not add jobs to their operations abroad, those jobs would be created at home. The opposite is much closer to the truth. Over the past 30 years, the change in employment of U.S. multinationals in their U.S. parent operations and in their affiliates abroad has been positively and strongly correlated. When hiring grows abroad, it grows at home, and when it lags at home, it lags abroad.

And when U.S. companies do hire abroad, their aim is not typically to cut wage costs but to reach new customers (as I explained in an earlier op-ed). That’s why U.S. multinationals employ far more workers in high-wage Europe than in low-wage countries such as India and China. In fact,  according to the most recent numbers from the U.S. Commerce Department, U.S. multinationals employed five times as many workers in Europe (4.82 million) in 2008 than they did in China (950,000).

If U.S. companies are forced to reduce their operations abroad in the name of fighting unemployment at home, they will be less able to compete in global markets and less able to expand production and employment in their domestic operations.

Is There an Inflation-Unemployment Trade-off?

Much of what drives the policy choices of Ben Bernanke and the Federal Reserve is a belief in the ability to trade higher inflation for lower unemployment, known within the economics profession as the “Phillips curve.”   But does this trade-off actually exist? 

While its true that many have found a negative correlation between inflation and unemployment prior to 1960, looking at U.S. data, this relationship appears to have broken down in the mid-1960s, just about the time policy-makers thought they could exploit it (Lucas critique anyone?).

It is hard, looking at the graph, which displays the annual change in consumer prices over the previous year and unemployment, to see much of a relationship.  In fact, since 1960, the correlation between changes in CPI and unemployment has been positive.  We have generally seen rising unemployment along with rising inflation.  Of course, one might be concerned that the stagflation of the 1970s is driving this result. But looking at the data since 1980, there still remains a positive correlation between inflation and unemployment.  While I am not arguing that inflation causes unemployment (after all, correlation is not causation), it should be clear from the data that there is not some exploitable trade-off that policymakers get to choose.

The Richmond Fed also has a great history of the Phillips curve that is well worth the read.  Perhaps Fed President Jeff Lacker should bring copies to the next FOMC meeting.

How’s that Stimulus Working, Mr. President?

The Bureau of Labor Statistics announced this morning that the unemployment rate jumped to 9.8 percent last month. As you can see from the chart, the White House claimed that if we enacted the so-called stimulus, the unemployment rate today would be about 7 percent today.

It’s never wise to over-interpret the meaning on a single month’s data, and it’s also a mistake to credit or blame any one policy for the economy’s performance. But it certainly does seem that the combination of bigger government and more intervention is not a recipe for growth.

Maybe the President should reverse course and try free markets and smaller government. After the jump is a helpful six-minute tutorial.

Fed Can’t Serve Two Masters

Last week Congressman Pence and Senator Corker announced a bill to end the Federal Reserve’s dual mandate of price stability and maximum employment.  Before getting into why this is a good start, what exactly is the dual mandate?  Section 2a of the Federal Reserve Act, which sets the Fed’s monetary policy objectives, directs the Fed to:

maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

Building upon the notion of the Phillips curve, which suggests an historical relation between inflation and unemployment, some have read 2a as implying that the Fed should pick an inflation-unemployment trade-off that improves social welfare.  It is this perceived “trade-off” that dominates the current actions of the Federal Reserve. Quite simply, Fed leaders, such as Bernanke, believe with a little extra inflation we can get more employment.

The problem is that this isn’t so.  As soon as policymakers tried to exploit this trade-off, in the 1960s and 1970s, it disappeared.  From about 1961 to 1966, it did indeed appear that one could choose a mix of inflation and unemployment.  But from 1966 until 1980, when Volcker moved to bring down inflation, inflation and unemployment were positively correlated.  It appeared that all we got was more inflation and more unemployment.

Despite the painful experiences of the 1970s, Bernanke seems intent on repeating those mistakes.  Which gets to me to the point of removing the dual mandate.  It forces the Fed to focus on the only thing it really has any influence over: inflation.  It also removes the temptation to exploit an inflation-unemployment trade-off that never existed in the first place. 

Now given Bernanke’s views on price stability, eliminating the dual mandate can only be a first step.  We ultimately need to remove the discretion of the government to indulge in the Phillips curve fantasy.

The GM ‘Turnaround’ in Bastiat’s View

GM’s long-rumored initial public stock offering will take place Thursday and self-anointed savior of the U.S. auto industry, Steven Rattner, is pretty bullish about the prospect of investors turning out in droves. 

I’ve been saying for a while that I thought the government’s exposure [euphemism for taxpayer losses] in the auto bailout was in the $10-billion to $20-billion range.

But since investor interest has pushed the initial price up from the $26-to-$29 per share range to the $32-$33 range, Rattner now believes:

[T]his exposure is in the single-digit billion range, and arguably potentially better.

I won’t argue with Rattner’s numbers.  After all, they affirm one of my many criticisms of the bailout: that taxpayers would never recoup the value of their “investment.”  My bigger problem is with Rattner’s cavalier disregard for the other enduring—and arguably more significant—costs of the auto bailouts.

Rattner is like the foil in Frederic Bastiat’s excellent, but not-famous-enough, 1850 parable, That Which is Seen and That Which is Unseen.    Rattner touts what is seen, namely that GM and Chrysler still exist.  And they exist because of his and his colleagues’ commitment to a plan to ensure their survival, along with the hundreds of thousands (if not millions, as some “estimates” had it) of jobs that were imperiled had those companies vanished.  (For starters, I very much question even what is seen here. I am skeptical of the counterfactual that GM and Chrysler would have disappeared and that there would have been significantly more job loss in the industry than there actually was during the recession and restructuring.  But I’ll grant his view of what is seen because, frankly, the specifics are irrelevant in the final analysis).

For what is seen, Rattner admirably admits of a cost.  And that cost is not insignificant.  It is anywhere from $65 billion to $82 billion (the range of the cost of the bailout) minus what is being paid back and what investors are willing to pay for GM shares—in the “single-digit billion range,” as Rattner says.  But Rattner is willing to stand by that trade-off, claiming his efforts and the billions in “government exposure” were a small price to pay for saving the U.S. auto industry, as it were.  It’s merely a difference in philosophy or compassion that animates bailout critics, according to this position.

No.  Not so fast.  All along (quite contemptuously in this op-ed, which I criticized here) Rattner has been unwilling to acknowledge the costs that are unseen.  Those unseen costs include:

  • the added uncertainty that pervades the private sector and assigns higher risks and thus higher costs to investing and hiring (whom might government favor or punish next?);
  • the diversion of resources from productive to political purposes in the business community (instead of buying that machinery to churn out better or more lawn mower engines, better to hire lobbyists to keep Washington apprised of how important we are or how this or that policy might be beneficial to the national employment picture!);
  • excessive risk-taking and other uneconomic behavior that falls under the rubric of moral hazard from entities that might consider themselves too-big-to-fail (perhaps, even, the New GM!);
  • growing aversion to—and rising cost of—corporate debt (don’t forget what happened to Chrysler’s “preferred” bondholders in the bankruptcy process!);
  • the sales and market share that should have gone to Ford or Honda or VW as part of the evolutionary market process;
  • the fruitful R&D expenditures of those more disciplined companies;
  • the expansion of job opportunities at those companies and their suppliers;
  • productivity gains passed on to workers in the form of higher wages or to consumers as lower prices;
  • the diminution of the credibility needed to discourage foreign governments from meddling in markets, often to the detriment of U.S. enterprises.

 The list goes on.

 Yet, Rattner, seemingly oblivious to the fact that the economy remains stuck in the mire, speaks triumphantly of the successful auto bailout.  But nobody ever doubted that taxpayer resources in the hands of policymakers willing to push the bounds of legality could “rescue” GM from a fate it deserved.  The concern was that policymakers would do just that, leaving behind wreckage to our institutions not immediately discernible.  But anemic economic activity, 9.6 percent unemployment, and a private sector unwilling to invest is pretty darn discernible at this point.

Rattner should take off the tails, put down the champagne flute, and acknowledge what was originally unseen.

Obama’s Job-Killing Policies: A Picture Says a Thousand Words

The new unemployment data have been released and they don’t paint a pretty picture – literally and figuratively.

The figure below is all we need to know about the success of President Obama’s big-government policies. The lower, solid line is from a White House report in early 2009 and it shows the level of unemployment the Administration said we would experience if the so-called stimulus was adopted. The darker dots show the actual monthly unemployment rate. At what point will the beltway politicians concede that making government bigger is not a recipe for prosperity?

They say the definition of insanity is doing the same thing over and over again while expecting a different result. The Obama White House imposed an $800-billion plus faux stimulus on the economy (actually more than $1 trillion if additional interest costs are included). They’ve also passed all sorts of additional legislation, most of which have been referred to as jobs bills. Yet the unemployment situation is stagnant and the economy is far weaker than is normally the case when pulling out of a downturn.

But don’t worry, Nancy Pelosi said that unemployment benefits are stimulative!

Pro-War, Anti-Immigration Folks Are Confused

USA Today runs an interesting article about the DREAM Act, which Senate Republicans torpedoed this week, and which would have paved the way for many illegal immigrants to become legal.

As journalist Alan Gomez notes, the “less publicized part of the [DREAM Act] is that the Pentagon is pushing for it as a means to staff the armed forces.”

When the Department of Defense published its three-year strategic plan, it listed the DREAM Act as a way it could replenish its ranks.

“If we needed to expand the pool of eligible youth, the (DREAM) initiative would be one of several ways to do it,” spokeswoman Eileen Lainez said in an e-mail.

Retired Army lieutenant colonel Margaret Stock says a “crisis in military manpower” is looming as the population ages and the economy improves. She says the military struggled to recruit enough people when the economy was booming just a few years ago because people had more employment options.

“DREAM would give us the ability to tap into a huge number of people who grew up in the United States, were educated here, they talk like Americans, they look like Americans and their loyalty lies with America,” says Stock, a former West Point professor who teaches political science at the University of Alaska-Anchorage.

[…]

The military part of the act worries Jorge Mariscal, director of Latino studies at the University of California-San Diego.

He says many illegal immigrant families are too poor to pay for college.

“Our concern is that people are just going to get trapped for economic reasons into the military,” says Mariscal, who otherwise supports the DREAM Act.

A few thoughts on this: First, we might be experiencing a “crisis in military manpower” because we’re fighting too many wars and trying to do too much abroad, rather than as a necessary consequence of our aging population.

Second, Mariscal’s concern about illegal immigrants joining the military out of financial considerations rather than support for the nation’s wars makes them…a lot like the people who are in the military already.  In a poll of active-duty military personnel published in the April 12, 2010 Defense News, responses to the question “What are the three most important reasons you would stay in the military?” were as follows:

  • Job security (50%)
  • Pension (49%)
  • Patriotism (48%)
  • Health care for my family and me (42%)
  • Career satisfaction (32%)
  • Pay (31%)
  • Educational opportunities (21%)
  • Travel, adventure (16%)
  • Wars in Afghanistan and Iraq (11%)
Credit: Jamie Rose for The New York Times

 
Finally, those in Congress who support American militarism but oppose immigration have a few contradictions to reconcile.  The late Samuel Huntington, whose last book was searingly unpersuasive and draped a veneer of scholarly credibility over rank nativism, nonetheless got it right when he wrote that

[W]ars have furthered assimilation of immigrants not only by reducing their numbers but also by giving them the opportunity and the impetus to demonstrate their loyalty to America.  Readiness to fight and if necessary die in war cemented their attachment to their new home and made it difficult if not impossible for nativist, anti-immigrant groups to oppose their full membership in American society.

So if you’re in any way interested in “assimilation,” getting people into the military is one of the best ways to do it.

Further, when you have DOD pushing for a bill on the grounds that it provides for a future where the nation’s armed forces can be fully staffed, and congressional war hawks spiking it because–well, for whatever variety of reasons they might have–it raises the question what the pro-war, anti-immgration folks’ plan is for perpetuating American hegemony while keeping immigrants out of the armed forces.  Keeping unemployment at 10%?  Cranking up pay and benefits even faster, making the military budget even less sustainable?

Actually, one additional point: Mark Haas wrote an interesting article a few years back positing a “geriatric peace” on the grounds that large and powerful countries may age so fast that they may not have concentrations of young men (or women) needed to fight and die in war.  In that article, Haas wrote that

The United States is currently the youngest of all the Group of Eight nations.  Because it has the highest fertility and immigration rates of all these countries, it will maintain, even strengthen, this position in coming decades.

[…]

Both the opportunities and challenges for U.S. security in an aging world are substantial. The United States’ aging crisis is less acute than in the other great powers, and its ability to pay the costs associated with this phenomenon is significantly better than most of these states. These facts, however, should not disguise the magnitude of these costs for the United States nor lull U.S. leaders into inaction on this critical issue. The more the United States maintains its enviable demographic position (compared with the other great powers) and relatively superior ability to pay for  the costs of its elderly population, the more it will be able both to preserve its own position of international power dominance and to help other states address their aging (and other) problems when it is in U.S. interests to do so. A critical implication of these facts is that such domestic policies as means-testing Social Security and Medicare payments, raising the retirement age to reflect increases in life expectancies, maintaining  largely open immigration policies to help keep the United States’ median age relatively low, encouraging individual behaviors that result in better personal health, and perhaps above all restraining the rising costs of its health-care system are critical international security concerns.  A defining political question of the twenty-first century for U.S. international interests is whether U.S. leaders have sufficient political  will and wisdom to implement these and related policies. The more proactive U.S. leaders are in minimizing the scope of its aging population and the costs associated with it, the more protected U.S. international interests will be. To ignore these costs, or even to delay implementing various reforms designed to limit their size, will jeopardize the level of global influence and security that the United States enjoys today.

Food for thought.