BuckeyeBlog

The Columbus Dispatch ran a front page story by Dan Gearino today on a report being released by the Economic Policy Institute:

The trade deficit with China has cost Ohio more than 100,000 jobs since 2001, and the greatest losses have been in manufacturing, according to a study being issued today.

The report by the Economic Policy Institute, an advocacy group in Washington, D.C., was timed for release days before China hosts the Summer Olympics in Beijing.

The report’s sponsors want to call attention to what they say has been a devastating trade relationship. The cost to the United States has been 2.3 million jobs lost and $19.4 billion in wages lost when those workers took lower-paying jobs, the study says.

While I have not had the opportunity to read the institute’s actual report, there are some rather disturbing economic errors made just in the summary and quotes provided to the Dispatch, errors made even more disturbing by the fact that the report was completed by a so-called economic think tank.  Here is one example:

Robert Scott, the report’s author and the advocacy group’s senior international economist, said he based the national jobs number on guidelines from the U.S. Bureau of Labor Statistics. He based the state numbers on each state’s employment levels in the affected industries.

“It’s a pretty straightforward approach,” he said.

“Fatally simplistic” might be a better way to describe it.  This approach commits a basic economic oversight in failing to account for what Frederic Bastiat referred to as “the things unseen” (mentioned in a recent post)  The U.S. Bureau of Labor Statistics figures only show the number of jobs lost in a certain industry.  But many of those jobs are replaced by other jobs in other sectors, the creation of which is only made possible due to the increased wealth resulting from more efficient production of goods.  Shifting manufacturing of goods to China is more efficient, as labor rates are more competitive.  This allows Ohioans to buy more for less, driving up aggregate demand in the market.  This effect, however, is much more difficult to quantify, which is why the Bureau of Labor Statistics does not attempt to account for it.  Regardless of the difficulty of quantifying this effect, any economics think tank that does not even acknowledge its weight deserves some critical scrutiny into their academic rigor and/or motives.

These shifts in employment also allow investors to send important signals through the market.  The shift in manufacturing jobs from Ohio to other places in the world sends the signal that investors no longer believe Ohio has a comparative advantage in this area.  Whether we want this shift of comparative advantage to occur is a normative question that the science of economics cannot answer.  What economics can answer is the question of who is playing what role in causing these shifts.  In Ohio’s case, China is not the cause of this employment shift but merely the vessel by which it is effected.  Why this is the case and who causes Ohio’s employment shifts are subjects for another day.

The dispatch admits that “the report was financed by the Alliance of American Manufacturing, an advocacy group whose sponsors include the United Steelworkers.”  This definitely provides an incentive to the Economic Policy Institute to develop conclusions favorable to AAM’s needs, however dishonest such a method would be.  Even an OSU economics professor who agrees philosophically with the findings of the report questions whether EPI understands the difference between correlation and causation, another basic principle any economist should comprehend.  Which is better–an economics think tank that purposefully overlooks economics principles to favor their sponsors, or an economics think tank that doesn’t understand basic economics principles?

Tags: economics, Jobs, Jobs and Prosperity, Labor, Trade

This entry was posted on Wednesday, July 30th, 2008 at 10:43 am and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.