Different River

”You can never step in the same river twice.” –Heraclitus

August 12, 2005

Job Growth, Job Loss, and NAFTA

Filed under: — Different River @ 4:21 am

You might recall NAFTA, the North American Free Trade Agreement, which negotiated by George H.W. Bush in 1991-92, submitted to the Senate by Bill Clinton and ratified in 1993, to the vociferous dismay of isolationists of both parties (Dick Gephardt for the Democrats and Pat Buchanan [remember when he was a Republican?] for the Republicans) . The anti-NAFTA argument was that it would destroy American jobs by increasing opportunities for Mexicans; the pro-NAFTA argument was that it would create American jobs by increasing opportunities to export to Mexico and Canada (somehow the anti-NAFTA crowd was never bothered by losing jobs to Canadians, and the pro-NAFTA crowd never pointed out the racism of this.)

Of course, the real pro-NAFTA argument, which wasn’t made by anybody, is that free trade makes goods cheaper for consumers, and consumers are people too!

Anyway, there is a new report out from Economic Policy Institute on NAFTA after 12 years, which makes the customary error of economic illiteracy of looking at only one side of the coin — they claim to be able to count the jobs lost as a result of NAFTA (1,015,291 U.S. jobs! Exactly!), but they don’t even attempt to count the number of jobs gained as a result of NAFTA — not to mention the gains to U.S. consumer in lower prices. This is akin to when you quit one job to take another, that you are unemployed.

GMU Economics Professor Russell Roberts takes on this report, and adds the following brilliant point:

The US economy added 207,000 jobs in July, based on data from the establishment survey. That is, the government surveys different businesses to estimate total payroll employment and found the number of jobs climbed by 207,000 in July.

This is the 27th consecutive month of job growth. …

As a side note, the Economic Policy Institute has a new study that finds that NAFTA has resulted in 1 million lost jobs since 1993. There isn’t a phrase to describe the intellectual dishonesty of this assessment. When you overstate something, it’s sometimes a result of double-counting. This is half-counting–looking only at jobs that have been lost to displaced production and ignoring jobs created because of expanded opportunities due to producing goods more efficiently.

But even though this number is flawed, it’s still remarkably unremarkable. NAFTA has been in effect for just over eleven and a half years. According to the absurdly [one-sided] assessment of the EPI, NAFTA has destroyed about 87,000 jobs a year. The US economy added more than twice that number in a single month and even that increase of 207,000 is a net number—an increase above and beyond job losses.

(Emphasis added.)

One basic but apparently little-known fact about jobs is that jobs are created and destroyed at phenomenal rates — for manufacturing jobs, about 10% are created and destroyed each year. And as economists Steven Davis, John Haltiwanger, and Scott Schuh have demonstrated (see their book Job Creation and Destruction), jobs are created at phenomenal rates even during recessions. Basically, recessions are characterized by a substantial increase in the rate of job destruction and a mild (or no) decrease in job creation.

2 Responses to “Job Growth, Job Loss, and NAFTA”

  1. ollie Says:

    Actually, Buckley makes the “cheaper goods for the consumer” argument.
    As far as these free trade treaties, I honestly don’t know where I stand. I don’t want
    to see good “blue collar” jobs go away; I have social considerations and I think that we
    need to continue to have a US market for the goods that we produce.

    On the other hand, it sure helps to have markets for our goods as well; this is one issue that
    I just don’t have a good enough handle on to have an intelligent opinion.

    Of course the cynic might say that none of my opinions are intelligent..:)

  2. Different River Says:

    Why do we need specifically a “US market” for US goods? Why isn’t any market good enough? Are you somehow prejudiced against non-Americans?

    Look at it this way: I have a huge trade deficit with the grocery store near my house: I import lots of food from them, and I don’t sell them anything from my garden. (As a percentage, my trade deficit with them approaches infinite percent as my exports to them approach zero!) Is that a bad thing? Of course not.

    On the other hand, I have no local market in my neighborhood for my economist services. However, through my employer, I sell (export) those services to organizations and companies all over the country and even all over the world. Is it any problem that my next-door neighbors have no use for an economist? Of course not — it just matters that somebody does.

    To claim that it is somehow more moral to buy a product from, or sell a product to, someone based on whether he or she is on one side of the other of what is essentially (and in the case of Mexico, quite literally) an imaginary line in the sand is nothing short of xenophobia.

    From an economic point of view, I can’t do better than David Friedman’s example of the “Iowa Car Crop,” conveniently typed up by Kevin Law:

    Economically, trade is no different than other technologies. Economist David Friedman of Santa Clara University puts it most succinctly: there are two ways to make a car — you can either make it in Detroit or grow it in Iowa. You already know how to make it in Detroit. You get a bunch of iron ore, smelt it into steel, and have an assembly line of robots and workers shape it into a finished vehicle.

    To grow it in Iowa, you plant car seeds in the ground (also known as “wheat”), wait until they sprout, and harvest them. Take the harvest and put it into a big boat marked “to Japan” and let it sail off. A few months later a brand new car comes back.

    As far as the economy is concerned, it has exactly the same effect on workers and consumers if we use a boat marked “to Japan” or a fantastic new technology invented in Silicon Valley called the “wheat-to-car-converter”. Either way, if it takes you less effort to grow wheat into a car than it does to make it in Detroit, then you should grow wheat. Either way, jobs in Detroit would be lost, and either way people get cheaper cars. Trade is just another technology.

    By the way, I first read that explanation in Steven Landsburg’s superb book, The Armchair Economist. It’s an excellent book, which I recommend to basically everybody. Ollie, I think you would especially enjoy it.

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