It was definitely worth the wait.

Thanks for providing some actual numbers to explain what everyone has known intuitively for years. What I'm wondering is how much of the data is being intentionally manipulated in attempts to convince the American public and legislators that this strange thing called free trade really is good for everyone.

I still think free trade is good for everyone, at least everyone who upgrades their skills and adopts new technologies.

I am disappointed in what the story was about, however. I had thought it would have been more optimistic - in a "The Future is Better than You Think" vein.

Great work. I wonder whether there might be a similar statistical weakness in productivity figures because of temporary workers. The Fed did a study in 2000 or 2001, I think, that found that temp workers in manufacturing were counted as service workers and that productivity gains in manufacturing could have been overstated as a result. At that time, something like 7% of high tech manufacturing employment in the US was temp labor. Could that have resulted in a significant mis-counting of productivity then? Has anything changed now?

Let's take an example. A U.S. company sells $1B/yr of Gerbilators, requiring 20 million person-hours of labor to manufacture, with labor costs of $30/hr. The total output per person-hour is $50.00.

Now they move part of the manufacturing process offshore, at a total landed cost of $20/hr equivalent. (This includes transportation and profit/cost of capital for the outsourcing vendor as well as labor costs.) Only 10 million person-hours of work remain in the U.S. So, is the productivity calculation:

1)$1 billion minus $200 million offshoring cost, all divided by 10 million, yielding $80.00 in output per person-hour?

or

2)$1 billion divided by 10 million, yielding $100.00 per person-hour?

or

3)Neither of the above?

Conceptually, I would think that (1), which is a value-added approach, is correct.

Can't say I'm surprised. What I don't understand is why these profits have remained with the companies rather than competition forcing down consumer prices. Competition seems notable by its' absence although businesses never like to compete on price anyway.

This report seems way to ambiguous and full of maybe’s to be of any real value.

The phantom GDP is really just the increased local profit that comes from the transfer of local costs to a lower cost offshore factory.
Our local productivity is then measured to be higher because the GDP per hour of local work is higher – even if nobody is working more efficiently.

Much of the productivity growth is nothing more than this effect. It is a reflection of the law of comparative advantage. We become more productive by focusing on what we are best at and buying other goods from those who can produce them cheaper.

This benefits us whether those cheaper producers are here or across the sea. The money saved by purchasing the lower cost goods is spent on other goods – creating new employment and improving the living standard of the buyer.

Oh My God! We are so screwed. For the longest time, anecdotal evidence had been suggesting that the economic conditons of the avearge day American has been severly deteriorating for the last 15 years. There has never been any official evidence to this fact, but everyday observation of the Middle Class had been very telling.

The trouble with the statistics for the last 15 years, is they have been aggregate numbers....the day to day life of an individual is not accurately reflected in those aggregate averages.

The reason why wages and export items in China is so cheap is because of the excnahge rate, not the sizeable population of abled-bodied workers, less government regulations, etc. China is cheap because of the bogus exchange rate. The remembi (yuan) should appreciate to the dollar and not be set by the Chinese governemnt.

How can anyone in government (elected or a bureaucrat) just stand by and let this error get by while fellow Americans are getting screwed over.

For those of us in the working class, where we earn pennies compared to our CEO's, where we wake up and work a full day everyday, where there are no funny breaks for coffe or whatever like in the movies and TV...in the real fuckin world, we're taking a damn beating. It is not going to Starbucks that is the problem....globilization is lowering wages throughout the world, in Europe, in Mexico and here in the USA.

For anyone making more than $75,000/year things may be great, but for the majority of us Americans who make less than that...we are being screwed. Do you know how many BA/BS are working in retail? Do you know how many BA/BS who are between the ages of 35 and 45 are earning less than $50,000/year? So much for a good education/college education being the answer to any American's economic plight.

What are our CEO's and our elected officials doing to help us?

David,

In your example, the answer is neither. Productivity, as we usually think of it, is the domestic production (in real terms) divided by domestic hours. Outsourcing per se should not raise the real output per worker ($50 per hour), since we haven't changed any of the production processes.

To put it a different way, to get the real domestic output of gerbilators, you need to take our real consumption of gerbilators, and subtract the real imports of gerbilators ('real' meaning inflation-adjusted).

The question then..what is the correct inflation rate for the imported gerbilators, given that they were not being imported before? The fact is, we would have imported them before if they had been cheap enough/reliable enough/high quality enough. So their effective price must have been higher before.

Therefore the effective price of the imported gerbilators must have fallen from the first period to the second period. That makes the real value of the imports in the second period. In fact, when we do the productivity calculation, it should turn out that the remaining workers have a productivity of $50 per hour.

Now comparative advantage may push up productivity a bit as workers get shifted to other industries, but I'm going to do a new post about phantom GDP and comparative advantage.

Ok, Michael, but I think you have shown another great hole in thinking here.

If the US company is taking a profit off its supply chain handling of imported gerbilators, I will just ask you: how is this handled in the calculation of 'productivity'.

Since I think we don't really break this down into 'workers', 'product', and 'time'.

I would like to understand your rationalist economical answer. At the same time, a certain truthometer inside keeps suggesting to me the word (not from you) of 'lies'.

Thanks, from 'old Europe'

Michael --

Could you provide some more detail about how you arrived at the $66 billion figure in your article?

Thanks,
David B.

Michael,

I saw what you had to say on this issue on PBS last night. Bravo to you and the BW crew for taking a long look at this issue. Facinating stuff!

I would like to point out an article from The Economic Policy Institute;
http://www.epi.org/content.cfm/responsetotucker
referenced from Prof. DeLong's website.

That article still heavily relies on the notion that despite other factors in the economy there has been this giant productivity jump in the US.

As we shift production and even research and development costs overseas, we are not just lowering our production costs, we are creating a future competitor that can obviously undercut our development costs. What I see happening is that we are destroying our manufacturing and research and development expertise and becoming a nation of re-marketeers. Evenutally our friendly foreign partners will start to market directly to the consumers including both our domestic and international consumers, and our re-marketing companies will simply collapse. There should be an obvious truth here that when you produce a product you create wealth, when you remarket a product you are simply a middle man with no reason for existance.

Yes, the statistics reveal that the conventional nation-centric view of the US economy is obsolete, but also that as in the case of other intelligence (CIA and FBI) there is no communication between the micro statistics (i.e. the decline in the number of manufacturers in wood products) and the effort to measure productivity in manufacturing.

Still scratching my head. To be charitable, if there is some case to be made here, you did not make it. Few tidbits:

*** 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%" ***

Do you not realize that GDP "since 2003" totals approx $50 trillion? We're talking 4 years of accumulated GDP, right? $66 billion is only .001% of 50 trillion, not half a percent.

As for your note about "import price index for goods coming out of China" ... if I switch buying groceries from Whole Foods to Wal-Mart, I'm going to save a LOT of money over time ... no matter how much inflation or deflation I see at Wal-Mart itself. That seems to undermine your conclusion (and if it doesn't you don't explain why not).

And why would you be surprised that an industry with a declining domestic manufacturing base might show productivity gains? Simple. The most unproductive factories are shut down first, the most overpaid workers are laid off first. I've seen first hand that this is precisely what does happen. The company draws in to its most productive domestic core assets and operations. Maybe your "industry consultant Arthur Raymond" can't figure that one out, but it's not a tough conundrum to crack.

Also, inasmuch as there may be some problems in calculating the price level of imports, we see those same problems in the domestic CPI. What's the price level of iPods over the last 50 years? Recorded music? Cell phone service? Trick questions.

CPI affects any conclusions about both general economic productivity and real wages over time, and I for one am convinced CPI is substantially overstated, meaning even the struggling working class is better off, which I think accords with anecdotal experience I see around me. (SOMEbody's buying all that new stuff.)

In short, your article seems to say that we enjoy an even better deal from imports that we realized, but that's somehow bad for us in a way that you certainly fail to explain. Whatev...

I have analyzed the argument your article in the linked post and came to the conclusion that your argument ultimately fails.

http://stefanmikarlsson.blogspot.com/2007/06/michael-mandels-phantom-phantom-gdp.html

One thing that we haven't considered with outsourcing to foreign nations is the disincentive it creates to produce locally. As a business owner I won't even CONSIDER manufacturing here. The only businesses I operate are those businesses which MUST be operated here. Advice for blue collar high school graduates: be an electrician, plumber, carpenter, UPS/Fedex, housepainter