Unemployment, Imports and Incenting the Right Behaviors

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Global Trade, Macroeconomics

Somebody once taught me, “you get the behavior that you incent to get. If a plant manager has his compensation tied to a reduction in defect rates, decreased warranty claims and fewer returns he will pay more attention to those metrics than say, cost savings.   Much discussion has ensued this past year over job losses and unemployment numbers. Many of these job losses have impacted manufacturing and in turn metal buying organizations. We thought it might make sense to examine some of the data in greater detail and take a look at the incentives the administration has offered (or will offer) corporations to stimulate job growth as well as the [perverse] incentives in place for those currently unemployed.

Let’s turn our attention to some key economic data that helps explain the employment situation. Peter Schiff in a recent article for Resource Investor entitled: Job Losses Demystified examines GDP and productivity. Specifically, he suggests both do not paint an accurate picture as to why we keep losing jobs “even as GDP is apparently expanding. Schiff references a recent New York Times article written by Louis Uchitelle in which he suggests that the way imports are accounted for may actually overstate US growth and productivity. Uchitelle attributes the issue to the following, “The failure to distinguish adequately between what is made in America and what is made abroad falsely inflates the gross domestic product, which sums up all value added within a country. He uses an example of a carburetor to explain the shortcomings. If a carburetor that came from China goes into an American-made car, the statistics show it as a $100 American made part, not a $50 Chinese made part. Obviously, if the part was made in the US but is now made in China, that job is no longer here. But the statistics suggest that productivity has actually improved (a $100 carburetor gets counted against fewer workers). It impacts GDP because we are not accurately accounting for that which is made overseas vs. what is made domestically.

Now let’s turn to the incentives. We had the infamous “Cash for Clunkers program which certainly helped increase automotive sales but it also drove up the trade deficit in September by 18.2%, the biggest gain in ten years, due to the volume of imported parts within a vehicle according to Schiff. We therefore ended up stimulating overseas job growth exactly what we were trying not to do! Other public policy initiatives harm capital formation a necessary and essential ingredient to create job growth:

  1. Deficit spending in which capital leaves the country (otherwise put to capital formation and job creation)
  2. Higher minimum wages
  3. Mandatory health care requirements
  4. Cap and trade (i.e. regulatory burden)

Schiff goes on to explain if a business can’t earn profits, it obviously can’t create new jobs. On top of this, according to a recent article in the New York Post, quoting Obama’s top advisor on economic policy, Larry Summers noted in July, “the unemployment rate over the recession has risen about 1 to 1.5 percentage points more than would normally be attributable to the contraction in GDP.” The article goes on to say, “Summers knows why the US rate is so high. He explained it well in a 1995 paper co-authored with James Poterba of MIT: “Unemployment insurance lengthens unemployment spells.” What was a standard 26 week unemployment benefit, now often extends to 79 weeks. In addition, according to the article, “When the government pays people 50-60 percent of their previous wage to stay home for a year or more, many of them do just that.”

As the saying goes, “you get the behavior you incent to get. Something tells me the employment situation will not improve for a long time to come¦

–Lisa Reisman

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