I worry a lot about the future facing America’s young adults. Saddled with Dickensian levels of college and grad-school debt, largely unable to find opportunities in their preferred careers, our young fear that they’ll be relegated to work in low-paid, dead-end jobs. They and their parents are rightly concerned that the middle class is disappearing, the gulf between the ultra-rich and the poor is growing, and citizens coming of age today may never achieve the American Dream of economic progress.
The country’s political, labor and business leaders seem to think the solution lies in restoring our nation’s former prominence in manufacturing:
At the Second Annual Conference on the Renaissance of American Manufacturing held in Washington on March 27, speakers from the Obama administration, the Mitt Romney and Rick Santorum presidential campaigns, Republican and Democratic senators, CEOs, and representatives from labor, think tanks and trade associations all agreed: the renewal of American manufacturing should be a top economic priority.
Richard A. McCormack, “Is Momentum Building For Adopting A New Manufacturing Policy Agenda, Or Is The Interest Due Only To The Upcoming Election?” Manufacturing & Technology News, Mar. 30, 2012.
I’m not persuaded. Don’t get me wrong, this native Detroiter was glad when the Obama Administration stepped in to save the U.S. auto industry. Despite the protests of a certain “Son of Detroit,” the de facto GOP nominee for president, who would have “Let Detroit Go Bankrupt,” and now derides the auto bailout as “crony capitalism,” maintaining a base level of domestic manufacturing is an important element of our national security.
But it’s not the key to our economic salvation. Slate‘s Matthew Yglesias makes the point well in “Forget the Factories [-] Obama’s foolish obsession with manufacturing jobs will make America poorer“:
[If] you look at America’s metropolitan areas, it’s clear that manufacturing-oriented places are relatively poor. The wealthy clusters in the United States are built around things like software, biotechnology and medical devices, higher education, finance, and business services. Places like California, Minneapolis, Seattle, and the Northeast corridor are far richer than the factory-oriented Rust Belt and Southeast.
Rather than overemphasize the rebuilding of its industrial base, America should play to its true strengths. We are the “crazy ones” who “think different”, the dreamers (and DREAMers), the visionaries and innovative problem-solvers. Although we’ve fallen behind in the STEM fields, and must therefore refocus our emphasis on math and the sciences, we are blessed as a nation with an abundance of creative savants who color outside the lines. Our technology dazzles and transforms the world as Hollywood entertains it.
These strengths illustrate the fundamental economic principle of comparative advantage — do only what you do best and let others do their own best thing. It works domestically, for example, when companies make the “buy or build” decision and choose to focus on core competencies. It would work as well in the global economy if trade were truly free and fair, protectionism were eliminated, and guarantees of minimum labor standards and trade dislocation payments were universally achieved.
If America played to its strengths, our leaders would promote basic research and development, and generally decline to let government pick winners and losers. They would recognize that service industries today account for almost three-fourths of all American jobs, and that the upside potential for better-paying jobs lies more in services than in manufacturing.
J. Bradford Jensen, professor of economics and international business at Georgetown University, makes the case for increased services trade convincingly in his 2011 book, Global Trade in Services: Fear, Facts, and Offshoring, and in the video below:
Similarly, The New York Times’ Catherine Rampell reported last week:
In the United States, services increasingly dominate the economy. Employment in this sector has risen steadily since the 1960s, with 70 percent of Americans now working in service industries. And America already exports more services than any other country in the world, even more than the next two competitors combined. In 2011, that amounted to $612 billion exported in services, up 10.1 percent from 2009, and up 136 percent since 1991.
Still, there is great untapped potential for more, since all of these exports are being sold from a tiny share of all the American companies that could participate in the global marketplace.
“Some Urge U.S. to Focus on Selling Its Skills Overseas,” April 10, 2012.
What’s stopping us from exporting more services (a market likely to add another $800 billion to our GDP)?
Agricultural subsidies are partly to blame. They are a significant obstacle that discourages developing countries from talking about eliminating trade-in-services barriers. Ag subsidies also create “push” factors, as when many Mexican corn farmers, unable to compete with U.S. agribusiness, abandoned their fields and entered America illegally after Mexico, the U.S. and Canada enacted the North American Free Trade Agreement. As Ron Nixon of The New York Times notes, were we at least to cap artificial farm price supports, we could save billions.
Steel protectionism is another culprit. Our would-be trading partners have seen America (the leading proponent of free trade) as behaving hypocritically when President George W. Bush imposed tariffs on imported steel in 2002 and again when Congress enacted and President Obama signed the American Recovery and Relief Act in 2009 (with its “Buy American” requirements to purchase iron, steel, and manufactured goods for use in public construction and public works projects).
Global trade in steel and farm products are important to be sure. Lowering these trade barriers globally or regionally (while providing trade adjustment assistance and retraining for displaced workers) would be beneficial. It would allow American consumers to purchase more goods at lower cost. The real promise of American prosperity lies, however, not so much in eliminating barriers to trading tangible commodities, but rather in exploiting our lead in the international trade for services.
The primary impediments to the negotiation of liberalized trade-in-services treaties are found among the miserly visa quotas and contrived labor-market-testing provisions codified in the Immigration and Nationality Act, as even more strictly interpreted by anti-free-trade apparatchiks in the executive branch.
Other pernicious immigration laws likewise limit American export of services. There are the U.S.-worker preferences of the 2009 Economic Recovery Act (which I assailed at the time as “Protectionist Turducken, Immigration Style“). There is also the 2010 law imposing extortionate and exorbitant filing fees, to be paid mostly by Indian companies, to fund the sovereign function of border security — imposts that the Indian government is now challenging as illegal trade barriers in its complaint against the U.S. in the World Trade Organization.
The Times‘ Catherine Rampell in sleuthing out the cause for global restraints on trade in services concludes her article by identifying the prime culprit:
Perhaps the most basic constraint is not abroad but here in the United States, which has relatively tight immigration controls. Services often require workers to travel freely across borders. Asking India to allow American consultants to enter and leave Delhi at will is difficult if the United States cannot — or, more accurately, will not — reciprocate. Economists acknowledge concerns about freer trade displacing some American workers. But they say the United States would nonetheless have a net gain in jobs if borders everywhere were more open.
“We need to have a visa policy that allows businesses to operate efficiently at home and abroad, and that allows all professionals to be able to move back and forth between corporate offices,” said Jeffrey J. Schott, a former trade negotiator and now senior fellow at the Peterson Institute. “If we don’t, why would anyone else?”
Perversely, U.S. immigration policies are not just bars to global services trade. They also impair our ability to compete successfully in the world’s marketplace for services. Peter Whoriskey of the Washington Post explains:
If demography is destiny, the U.S. economy may be in the midst of a decades-long slowdown. The U.S. labor force is growing at about half the rate it was 20 years ago; according to recent projections by the Bureau of Labor Statistics, it will continue to expand at a slightly lower pace through 2020. . . .
“In the end, what an economy is depends upon how many bodies you have,” said Anthony Carnevale, an economist and director of the Georgetown University Center on Education and the Workforce.
Carnevale added that if the diagnosis for what ails the economy is the size and quality of the workforce, that may be good news, at least compared to theory that the biggest problem is foreign competition. “To the extent this is a domestic demographic problem, it’s more in our control,” he said. “We can’t blame the Chinese for the quality and quantity of our domestic labor force.”
Indeed, America’s domestic demographic problem is in our control.
The remedy will not be found, however, by rebuilding our manufacturing base to its former glory, or, as some have recently done, by warring with women on family planning decisions.
The U.S. will only correct its trade imbalances, redouble the nation’s sizable lead in the global trade for services, and create high-paying U.S. jobs for present and future generations, by modernizing our creaky, crotchety immigration laws.