THE COST OF FREE TRADE

It’s widely accepted that any economist worth his or her “salt” supports the premise that free trade is one of the driving forces behind the American economy. The societal benefits include lower prices for many imported consumer products; cheaper raw materials and intermediate goods for the manufacturing sector; and the replacement of low skill, labor intensive industries with higher-skilled job sectors.

However, recent media and political attention has been directed to the nation’s declining manufacturing sector with blame given to unrestricted trade policies that promote lower cost, foreign production. The CATO Institute, Center for Trade Policy Studies, counters that the U.S. manufacturing sector is healthier than ever. They cite record levels in 2006 for U.S. manufacturing output, revenues, operating profits, return on equity, and value of exports. Despite the loss of more than 3 million manufacturing jobs during the current decade, the study points to relatively low national unemployment rates. The study concludes “Should we lament the loss of high-paying union jobs when the subsequent output and productivity statistics make clear that those jobs were highly overpaid?”

Perhaps we should. A recent Business Week article “Economists Rethink Free Trade” raises the concern that the gains from free trade are increasingly going to a small group at the top of the wealth spectrum. With the massive job losses in manufacturing, earnings have been stagnant in not only goods producing industries, but also in the service sector. Matthew J. Slaughter, international Dartmouth economist, points out that inflation-adjusted earnings are down in every educational category except for those with doctorate or professional degrees. Are the successes of free trade actually accomplishing the theorized beneficial economic outcomes of replacing low-skilled, declining industry sectors with higher-skilled, better paying jobs? Or are low-skilled, high paying manufacturing jobs being replaced by low-skill, low-paying service sector jobs?

Considering the magnitude of the manufacturing job losses and the stagnation of real earnings, it’s difficult to overlook these variables in any assessment of the benefits of free trade. Although the rate of manufacturing job losses has slowed, employment continues to decline. At what point will the scales tip to the point that the consumption power of the average worker is no longer capable of supporting a thriving service sector? Where will relatively highly paid, low-skilled production workers find employment in the emerging highly skilled job market? With the benefits of free trade in terms of record level operating profits and return on equity accruing to the elite, can the national economy grow with a potentially shrinking middle class wage earner? This may be currently evidenced by the troubles in the housing market. Is the record number of foreclosures mainly a result of mistakes by lenders or a struggling middle class worker or jobseeker?

The reciprocity of the shrinkage of this employment and income base is now showing up in labor market statistics. Michigan which was most significantly impacted by manufacturing job losses has posted a decline in service sector employment for two consecutive years. National statistics show a recent monthly decline in service jobs. Although the decline was marginal, it was still a worrisome indicator. Compounding this problem is the increasing globalization of the service sector. Noted economists point to how high-speed telecommunications make it possible to move more service jobs offshore. Alan S. Blinder, former vice-chairman of the Federal Reserve and member of the Council of Economic Advisors in the Clinton Administration, estimates that eventually up to 40 million service jobs in the U.S. could face competition from workers in India and other low wage nations. Even if this estimate is overstated, the movement to offshore service sector jobs is definitely gaining momentum.

An alternative view is that with a declining manufacturing base, the national economy is merely in a transitional phase similar to moving from an agricultural to industrial base with the result being an overall higher standard of living. It’s certain that our established manufacturing employment base is declining and service jobs are moving offshore in increasing numbers. However, the transition to a super service sector remains a major uncertainty as does the occupational composition and skill sets required for the emerging industries. Furthermore, is it reasonable to assume that we are intellectually situated to have a competitive advantage in a highly skilled service sector and that this sector will be able to provide sufficient employment for all to benefit?

Happy New Year ???

It’s a new year and Michigan is in the early January spotlight. The Michigan Primary was held January 15th and the candidates that visited Michigan commented on the state’s great potential for achieving a thriving economic environment. The domestic auto industry is completing its restructuring and streamlining transition period and is positioned to be more competitive. The publicity surrounding the “2008 Detroit Auto Show” boasts of the “green technology” innovations the auto industry is poised to introduce. Michigan ranks high among states in private research and development investment and favorably in the proportion of scientists and engineers to total employment. Aren’t these among the pieces needed for a more vibrant and innovative state economy?

Perhaps, but the realities of 2007 offer little optimism. For the second consecutive year, Michigan’s unemployment rate led the nation. The state’s jobless rate of just over 7% was well above the 4.6% national average. Once again the state lost a significant number of industry jobs (60,000+) while the nation posted moderate gains. A particularly worrisome development is that the state is now showing net annual job losses in the private service producing sector. This occurred in both 2006 and 2007. Previously, overall employment declines were largely a result of cutbacks in manufacturing, particularly auto and related jobs. Now, however, the secondary effects of a shrinking goods producing sector are of sufficient strength to result in a net negative impact on service consumption. Job losses in real estate; retail trade; and professional and business services are of significant size and overshadow the strong growth trends in areas such as health services. Surprisingly, although Michigan is considered a “high wage” state, per capita personal income of $33,784 is below the national average of $36,629 and ranks 25th among states.

Okay, Michigan’s troubled economy has been exhaustively documented. Many in state government and academia articulate that further pessimism serves no purpose. They propose that Michigan policies to attract business which include job creation tax credits, tax-free renaissance zones, and the “21st Century Job Fund” are working and the state is diversifying its economy by targeting industries such as life sciences, alternative energy, advanced manufacturing, homeland security, and defense. However, based on Michigan’s performance in 2007, results from these initiatives are not apparent. The state’s economy continues to rank among the least diversified in the country.

Business Facilities magazine, which assists companies in evaluating business locations sites and selecting corporate expansion destinations, published in July 2007 an extensive series of state ranking reports. First released, the “U.S. State Biotechnology Rankings” listed the top ten states in overall biotechnology employment and number of establishments with individual rankings in the fields of agricultural, feed, and chemicals; drugs and pharmaceuticals; medical devices and equipment; and research, testing, and medical laboratories. Michigan failed to make the list in each of these categories. In the “Education and Quality of Life” rankings, Michigan was not mentioned in the top 20 states for education climate, most educated workforce, or quality of life. The third set of rankings for which Michigan did not make the top 20 included measures of pro-business climate and favorable cost of labor. The final set of rankings which did not list Michigan evaluated states with respect to manufacturing momentum. The rankings were based on quantitative measures rather than survey results and appeared credible.

Also in 2007, the nonprofit Corporation for Enterprise Development (CFED) released its 20th “Development Report Card for the States”. The study incorporated 67 measures to assess how the economy is performing for citizens and businesses and how well a state is situated for the future. Basically, the state received average grades with a “C” for Performance (the performance of the economy for its citizens), “C” for Business Vitality (business competitiveness and entrepreneurial energy), and “C” for Development Capacity (the positioning of the state for future economic growth). In the Performance category, Michigan received an average grade mainly because favorable rankings for average annual pay and employer-provided health insurance somewhat offset the negative indicators for employment, annual pay growth, net migration, and income distribution. For Business Vitality, high marks for “strength of traded sector” and job creation by start-up businesses were countered by low marks for industrial diversity and change in new companies. In assessing Development Capacity, the state ranked relatively high in innovation measures such as private research and development, royalties and licenses, and patents issued. However, negative rankings were given for infrastructure indicators (highway performance, bridge deficiency, and urban mass transit), federal research and development, and business created via university R&D.

The commonalities evident in the Michigan report card substantiate the continuing powerful impact of the auto industry. Basically the overall “C” grade for Michigan was achieved because the state was able to rank favorably in average annual pay, employer-provided health insurance, strength of the traded sector, and private research and development. These factors are skewed upward mainly because of the wages paid, benefits provided, export revenue, and research and development provided by the motor vehicle industry. If only infrastructure, business climate, industrial diversity, and employment impact of university R&D were considered, Michigan would fail miserably.

A Happy and Prosperous New Year?
The University of Michigan Institute of Labor and Industrial Relations forecasts additional job losses in excess of 50,000 for 2008 and very weak growth in personal income. Manufacturing jobs are expected to continue to decline and GM announced on January 17th, 2008 plans for further cutbacks and possible plant closings.

There are no quick solutions and it’s true that pessimism entrenches negative perceptions regarding the Michigan economy…but aren’t we already there, failing in objective measures published by national media. It appears that the denial is within the state. Our current policies and initiatives for economic growth and diversity don’t seem to be working. Perhaps, continuing to draw attention to the realities of the Michigan economy will lead to a comprehensive evaluation of our current strategies and a realization that the state is facing a crisis that demands full attention.

Notes:

“2007 Business Facilities Ranking Report available at http://www.businessfacilities.com.

“2007 Development Report Card for States available at http://www.cfed.org/go/drc.

Note to Gen X and Gen Y'ers

As you know, the purpose of this blog is to stimulate thought and discussion. So, from time to time, we invite guests to share their thoughts. Let’s welcome John Boyle, II.

John Boyle
P.O. Box 1008, Ann Arbor, Michigan 48106‑1008 · FAX: 734/665-0392 · Phone: 734/665-9514 x-220

Note to Gen X and Gen Y

......and the beat goes on....

In any event, I hope my writings help you Gen Xers and Gen Yers decide the following :

NEVER vote for any ADDITIONAL taxes EVER. If a tax is important, tell the taxing entity to cut from taxes that are NOT important.
Here's where they can cut :
NO government employee should be allowed to retire on the public dole until age 62 at the earliest. Many government employees can retire with full benefits (pensions at 75%+ wage replacement plus gold-plated health insurance for life) at "20 and out" -- by age 38 (e.g., Wayne County, MI; Taylor, MI; City of Detroit police; Tampa, FL; most judges. the U.S. military), most of the remaining employees can retire at "25 and out" - by age 43, and almost all (95%+) can retire at "30 and out" -- by age 48. As I like to point out to the tax-and-spend enthusiasts in Michigan -- if you are 46 and don't have $2.5 million in the bank, you should have been an Ann Arbor Fire Fighter -- as that's the value of each Fire Fighters retirement benefits after 25 years of service.
DEMAND that your U.S. congressional representatives raise the Social-Security retirement age to 72. Nothing less will make the system viable. Remember, when Social Security was commenced in 1936, life expectancy in America was 57 years and unreduced retirement benefits were not available until age 65. Now, life expectancy is 79 and unreduced retirement benefits are available at age 66. It only works if future generations are willing to live in a Third-World environment and work until they drop.
DEMAND that stupid laws designed to fund the coffers of government and to support the lawyer/court/Attorney Generals/prison "complex" (e.g. imprisoning "deadbeat dads" as felons -- 87% of whom (in Michigan) are making less than $10,000 per year -- and sending them to jail so the taxpayers can pay $51,000 per year to support them and guaranteeing that they will be forever unemployable. Same for marijuana users. Same for speed limits of 25 mph on roads that at a minimum support 35-45 mph.).
The impact of these unaffordable programs and laws is discussed in more depth in the speech I gave
last year at the annual dinner for the Libertarian Party of Michigan (also attached).
Finally, try to avoid jobs where your livelihood will require you to be “politically correct”.
Unfortunately, most in my generation (76 million) appear unwilling to fight the horrific battles necessary to save your generation from an unbearable debt load – so you Gen Xers (60 million) and Gen Yers (76 million) will have to join together in a Coalition for Intergenerational Equity and cast your votes for fiscal sanity.
Remember, don't fall into the trap of "I have to vote for someone who will win" -- if that choice will continue to bankrupt you and your country. Vote your conscience -- and, when others follow your lead, fiscal sanity will return to American government.

Take care,

John

Want to know more about John? Please go to: http://www.jlboyleintl.com/
Now, tell us what YOU think.

HIGHER EDUCATION: THE PATH TO ECONOMIC DEVELOPMENT???

The message in the state is clear and it’s been repeated time and again by the governor, state officials, many policymakers, and academia:

GREATER INVESTMENT AND EMPHASIS ON HIGHER EDUCATION ARE NECESSARY TO FACILITATE ECONOMIC GROWTH AND DIVERSIFY THE STATE’S INDUSTRIAL BASE.

They theorize that a highly educated workforce will attract science and technology based industries to the state creating a knowledge-based economy. Michigan’s attractiveness for business retention, start-ups, and relocation will be enhanced because of its superior human capital resource. Consider the logic of the following progression.

- State investment in higher education results in the expected outcome of more Michigan college graduates.

- Michigan gains a competitive advantage in human capital because of its highly educated labor pool.

- Scientific and technology-based industries are drawn to the state to take advantage of its talented labor supply.

- Overall conditions in the state improve with renewed economic growth and a diversified economy.

OR

- State investment in higher education results in the expected outcome of more Michigan college graduates.

- College graduates relocate in states where their skills are in demand rather than amassing an unemployed highly educated labor resource within the state.

- Michigan partially finances the human capital needed in other parts of the country and world.

A recent “Wall Street Journal” article Stopping the Brain Drain (June 11, 2007) cites a study from the University of California that looked at Alabama, West Virginia, and Massachusetts over periods for which they received federal funds for higher education. The results showed that only Massachusetts kept the graduates because of the availability of high technology jobs in the Boston area. The obvious conclusion is that for a state to retain college graduates employment opportunities must exist.

A quantitative econometric study conducted by the “Mackinac Center for Public Policy” in June of 2007 did not show a positive statistical correlation between state and local expenditures on higher education and the rate of economic growth for five, ten, and fifteen year periods. In fact, they found the correlation to be typically negative.

An area’s industrial base dictates the local occupational composition or the types of workers that will be needed in a state or region. Because of the concentration of government and associated jobs located in the nation’s Capitol, the District of Columbia ranks first among the states in the proportion of the population aged 25+ with at least a bachelor’s degree and also first in the percent of workers in professional occupations. As noted earlier, with a significant concentration of technology-based industries, Massachusetts ranks 2nd in both proportion of bachelor’s degrees and professional jobs. New York as expected exhibits the largest proportion of professional workers in the finance industry and likely attracts the most talented MBA’s regardless of where they earned their degree. These are the economic realities that can not be changed by producing more college graduates in any given state.

With 24.7 percent of its 25+ population completing a bachelor’s degree, Michigan ranks 34th in the nation. Michigan continues to rank among the top three states in the proportion of manufacturing jobs to total employment despite huge auto-related losses over the last decade. The large manufacturing component and corresponding job opportunities for those without a college education are consistent with Michigan’s relatively low ranking in college degree attainment. On the positive side for the “knowledge-based” economy, the manufacturing and auto related sector is the state’s most important catalyst for research and technology jobs, as well as engineering, design, and financial services.

Given the mobility of today’s workforce, higher education is basically an import/export industry. With unemployment rates that continually lead the nation, Michigan is a “net importer” of college students, but a “net exporter” of college graduates. This scenario acknowledges the state’s excellent network of universities and colleges and its attractiveness to students. The higher education system is also a significant component of the state’s economic base providing employment and income, conducting and influencing research initiatives, and adding prestige to the state’s image.

However, the model for economic development is complex consisting of multiple variables to create an inviting business climate. Essentially, the model to attract and retain business should address factors affecting profit maximization and creating a pleasant physical environment. It does not appear that an existing highly educated labor pool is a significant variable for economic development, nor does it appear that this goal is obtainable given the export nature of higher education.

With the proposed policy that “higher education is the path to economic growth” receiving much hype and media attention, it seems to be the popular position that receives blind affirmation. Shouldn’t these statements in some way be substantiated? Shouldn’t the reasoning for this conclusion be clearly articulated? Could a supporting study or model be referenced?

Is anyone up to the challenge?

“IN SICKNESS” or “IN HEALTH”

The medical industry and associated occupations have long been publicized as areas of growth and employment opportunities. Demographics certainly substantiate these claims. The need for medical services greatly increases with age. People are living longer and with the aging of the “baby boom” generation, the population aged 65+ is increasing rapidly.

Nevertheless, the affordability of health care and the growing segment of the population without medical insurance may be turning the “health industry” into the “sickness industry”. From 1990 to 2004, the number of individuals nationally with no health insurance has risen by 45.8 million. Obviously, those without health insurance utilize medical services to a lesser extent or when they experience a greater degree of “sickness”.

Also, changes in the nature of private insurance, most significantly the shift to HMO’s, have affected the demand for medical care. HMO’s regulate treatments and access to specialists and hospitals, thereby in many cases limiting consumption. Approximately 25% of the population is now covered by HMO plans.

These factors appear to be slowing job growth in the medical industry. From 2003 through 2006, hospital employment in the U.S. rose 4.0% compared with 5.0% for all private industry jobs. The annual rate of growth of just over one percent was down from 2.4% for the previous three years. Reflecting the shift toward treatment in outpatient settings, the annual rate of employment growth in offices of physicians is still robust but has declined considerably over the last four years.

The recent trend of slower employment growth in the medical industry may be compounded in the future. A growing number of households can no longer budget for rising health insurance premiums. Employers are also restructuring benefit packages to shift the health care burden to the employee.

With the erosion of its manufacturing base, these trends are even more pronounced in Michigan where hospital employment rose only 2% since 2003. Access to medical care is offered to 86% of employees in manufacturing industries compared with only 66% in service industries.

The shortage of medical care workers, particularly nurses is real. However, this shortage is basically an issue of shrinking supply rather than overwhelming demand. Women who comprise the vast majority of the nursing profession are facing many more lucrative career alternatives than in the past. With intensified recruitment efforts, training initiatives, and the scarcity of job opportunities for both men and women in the state; the shortage in the nursing profession will hopefully lessen.
But what’s next? Is the medical industry healthy enough to survive as the panacea for future employment opportunities? Or will the “health industry” evolve into the “sickness industry” when most seek treatment for only catastrophic illnesses because of the unaffordable costs of medical care and insurance?

AN ANALOGY

In what way are the CANE TOAD and “free trade” the same? Well, here’s a hint – Read this to get a clue: http://www.fdrproject.org/pages/toads.htm.

Ok, need another clue? Now read this: http://online.wsj.com/public/article/SB117500805386350446-cRRynUb3zQgR2Yxn8wFOt96EOlE_20070404.html?mod=blogs

Well, as long as it was someone else’s job, who cared? But now when it isn’t just your uneducated neighbor who gets whacked – it’s you; this is a disaster. Right?

After all, the cane toad was just supposed to eat beetles, not kill off “…millions of native animals...” Hmm, so free trade was just supposed to eliminate a bunch of overpriced production workers, not us well educated elite.

What economists like Alan Blinder forgot was that the economy is reciprocal: If enough of my neighbors lose their jobs, it’s going to affect me.

Let’s face it folks, all Legacy Systems in the U.S. are up for grabs – including education and the sickness industry.

Does this spell disaster as some are predicting? Nope. It spells O-P-P-O-R-T-U-N-I-T-Y for forward thinking individuals who are willing to renounce greed and make a strong and consistent commitment to innovation, excellence and genuine concern for one’s neighbor.

YEA !

Many, not all in Michigan live in a state of denial: We are, and always will be, DA MOTOR CAPITAL OF DA WORLD. The fact is, we are not. And that’s OK!

If we are truly concerned about financing our enemies (real and imagined) with oil money; and if we are truly concerned about global warming due to emissions, then maybe, just maybe, it’s time to consider becoming THE MASS TRANSPORTATION CAPITAL OF THE WORLD.

Thirty years ago this would be considered to be pure blasphemy in Metro Detroit – and for that matter, all of Michigan. Of course who, thirty years ago, would think that the “Ruskies,” you know, “The Evil Empire,” would now be considered to be our pals? Times have changed folks.

While many definitions of “The Global Economy” abound, one thing that is certainly an underlying component is that U.S. legacy systems (like transportation) are ALL threatened. But this can spell opportunity.

While overpriced auto executives who made some remarkably bad decisions (like continuing to push production of the Gassasaurus Guzzaloris) go whining to Washington, others, like Megabus.com ...

http://www.detnews.com/apps/pbcs.dll/article?AID=/20070316/METRO05/703160388

are seizing the moment. YEA!!!