IS OUR GROSS DOMESTIC PRODUCT WHAT THEY SAY IT IS?

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[We have long wondered whether the GDP might be miscalculated due to the
huge shift in outsourcing and offshoring. But since we don't have an
economics PhD in the office and no one seemed to have a good answer, we
have left the question in the someday file. Now Susan Houseman of the WE
Upjohn Institute raises the issue as does former Reaganite Paul Craig
Roberts]

SUSAN HOUSEMAN, W. E. UPJOHN INSTITUTE FOR EMPLOYMENT RESEARCH -
Employment in U.S. manufacturing began declining steadily in the late
1990s, and the decline accelerated dramatically after 2000.
Manufacturing employment was 19 percent lower in 2005 than in 1998, even
though manufacturing output was 10 percent higher. One bright spot for
U.S. manufacturing has been its extraordinary growth in productivity.
The rate of productivity growth in U.S. manufacturing increased in the
mid-1990s, greatly outpacing that in the services sector and accounting
for most of the overall productivity growth in the U.S. economy. In a
comparison with 14 other industrialized or newly industrialized
countries, manufacturing productivity growth in the United States over
the last decade was greater than that in all but two countries. These
strong productivity statistics have been taken to imply that what
remains of U.S. manufacturing is highly competitive in international
markets and provides a solid basis for improvement of American workers'
living standards.

The drop in manufacturing employment coincided with an increase in
outsourcing to domestic contractors, including staffing services, and an
increase in outsourcing of materials and services inputs to foreign
companies or affiliates, commonly known as offshoring.

Outsourcing and offshoring might plausibly result in higher
productivity. For instance, companies might use staffing agencies to
more closely match worker use with actual production needs  or outsource
non-core functions to domestic or foreign contractors with greater
expertise in these areas. Mann notes that the offshoring of much of the
production in the IT sector resulted in lower prices of high tech
equipment, which, she argues, stimulated the diffusion of high-tech
equipment and the gains in productivity in the U.S. economy. Amiti and
Wei also report evidence of a strong link between services offshoring
and manufacturing productivity growth.

However, the coincidence of U.S. productivity growth with the growth of
outsourcing and offshoring has also raised concerns that strong
productivity growth since the mid-1990s, particularly in manufacturing,
is misleading and its implications misinterpreted. Most analysis focuses
on labor productivity measures, which in U.S. manufacturing are defined
as constant dollar shipments divided by hours worked by manufacturing
employees. When manufacturers outsource or offshore work, labor
productivity increases directly because the outsourced or offshored
labor used to produce the product is no longer employed in the
manufacturing sector and hence is not counted in the denominator of the
labor productivity equation. A 2004 study by the U.S. Bureau of Labor
Statistics sought to allay concerns that the accelerated growth in
manufacturing labor productivity was being driven in a mechanical way by
outsourcing and offshoring. It found that the contribution to
manufacturing productivity growth from purchased services and
materials-input purchases, which include domestic outsourcing and
materials and services offshoring, actually declined over the 1990s. The
study thus concluded that outsourcing and offshoring could account for
none of the acceleration of productivity growth witnessed in the latter
half of the decade. . .

I raise questions about the conclusion of that study. I argue that even
multifactor productivity measures, which were used in the BLS study and
are designed to account for all inputs, should be interpreted with
caution for two fundamental reasons. First, measurement of outsourcing
and offshoring in U.S. statistics is poor. I present evidence that
existing statistics greatly understate outsourcing by U.S. manufacturers
to temporary help and related staffing agencies and thus may have missed
much of manufacturers' extensive outsourcing to this sector in recent
years. Recent government reports have raised similar concerns that data
understate offshoring activities of U.S. companies because of the
difficulty of three accurately measuring the prices and quantities of
imported inputs.

Second, besides greatly complicating the measurement of inputs needed to
compute productivity statistics, outsourcing and offshoring may
significantly alter what is counted as a productivity gain. Companies
often are motivated to outsource to domestic and foreign contractors or
affiliates in order to exploit cheap (relative to their output) labor.
Although such cost savings do not accord with common perceptions of what
constitutes productivity improvements, they are recorded as productivity
gains in multifactor productivity calculations.

Such cost savings likely are increasingly being captured in productivity
statistics, and, with the growth of materials and services offshoring,
affect not just sector but also aggregate productivity statistics.

Yet, this source of productivity growth and its implications are rarely
noted in the productivity literature. The implications for who benefits
from measured productivity growth are obvious and potentially important.
While any cost savings from outsourcing and offshoring are counted as
productivity gains, outsourcing and offshoring simultaneously place
downward pressure on manufacturing workers' wages. Understanding the
source of productivity gains is also important for understanding the
implications of manufacturing productivity statistics for that sector as
well as for the aggregate economy. Whether productivity growth derives,
for instance, from better-educated U.S. workers working more
efficiently, from U.S. companies investing in high-tech capital in U.S.
establishments, or from U.S. companies offshoring materials and services
inputs to exploit cheap foreign labor no doubt matters for the long-term
competitiveness. . . 

Although it is impossible to determine the extent to which
mismeasurement of inputs and these types of labor cost savings from
outsourcing and offshoring have contributed to the recent growth of
measured manufacturing productivity, I point to several pieces of
evidence indicating that these factors are significant:

1) apparent understatement of the contribution of manufacturers'
outsourcing to the staffing sector in previous productivity statistics

2) findings that services offshoring, which is likely to be
significantly underestimated and associated with significant labor cost
savings, accounts for a surprisingly large share of recent manufacturing
multifactor productivity growth

3) the small high-tech sector, which pioneered the development of global
production networks and outsourced much of the work performed
domestically, accounted for about a third of multifactor productivity
growth in the U.S. economy in the late 1990s. Together, this evidence
makes a prima facie case that mismeasurement and labor cost savings from
outsourcing and offshoring have significantly influenced measured
manufacturing and, in the case of offshoring, aggregate productivity
growth.

http://www.upjohninst.org/publications/wp/06-130.pdf

PAUL CRAIG ROBERTS, INFORMATION CLEARING HOUSE - Unfolding economic
events during 2008 are likely to increase fear among the US
population--the fear that comes from recession and indebtedness.

As the German National Socialists said, a fearful population welcomes a
savior.  The Bush Regime has put into place all the necessary pieces for
rule by the executive.

The Greenspan Fed created money and low interest rates to hide the
effect on the US economy of job loss from offshoring. The low prices,
achieved by substituting low-cost Asian labor for American labor, masked
the inflationary impact of the Fed's monetary policy. 

The low interest rates created artificial increases in home prices by
reducing the carrying costs of mortgages. Most people buy according to
monthly payment, not purchase price of the home.

Many homeowners refinanced to capture and spend the rise in home equity
produced by the low interest rates.  This spending and the construction
boom misled people about the strength of the economy.

So did US productivity and GDP statistics. As Susan Houseman has shown,
US statistics have not been adjusted for offshoring and include in US
productivity and GDP growth both the lower labor costs and the real
output of offshored goods that are in fact part of Asian GDP. 

Performance-driven executives at financial institutions were suckered
into purchasing subprime derivatives, which have crashed, leaving the
financial system with serious problems.

Bailouts require yet more liquidity, but the exchange value of the US
dollar has been reeling from US budget and trade deficits. Creating more
dollars makes holding existing dollar assets even less attractive to the
foreigners who finance US deficits. . .

As I have documented repeatedly, job growth in the US has been confined
to domestic nontradeable services. The US is now far more dependent on
imported manufactured goods than it is on imported energy. Offshoring
makes it impossible for the US to balance its trade as offshoring turns
US GDP into imports. 

Offshoring is now reaching beyond manufacturing into high-end service
jobs.  Princeton University economist Alan Blinder, a former vice
chairman of the Federal Reserve, estimates that there are as many as 30
million US service jobs filled by college graduates that are susceptible
to offshoring. 

As long as China continues its currency peg to the dollar, lower prices
from a continuation of offshoring can hide the new round of Fed money
creation.  But can a new round of money creation create enough new
consumer spending by over-indebted consumers to mask the jobs lost to
offshoring with more employment for waitresses and bartenders, or will
the new liquidity be used up in saving the troubled financial
institutions? Access to more credit does not help people who are maxed
out and cannot pay their bills, especially when they are losing their
jobs.

Studies by economists with the Economics Policy Institute report that as
of 2006, the most recent data, the typical American family's income
remained $1,000 below its peak in 2000.  Six years of "economic
recovery" were unable to put the real median family income back to its
previous peak.  The combination of massive indebtedness, offshoring job
loss, and recession is likely to produce further decline in US living
standards.

Last month the Congressional Budget Office released its report on
household incomes.  The CBO data show that 80% of Americans have
experienced a falling share of US income, and that the top 1% of the
income distribution has received almost the entire income gain of the
top 20% of Americans.  Keep in mind that some of this measured income
gain is in reality phantom income according to the research of Susan
Houseman.

http://www.informationclearinghouse.info/article19038.htm