Outsourcing, Trade Agreements and Employment: Lame Duck or Just Plain Lame?

Gerald Epstein

The Obama plan for employment generation has now come down to this: trickle-down stimulus tax cuts and a pledge to double exports in five years’ time. The first plan was passed during a lame duck session of Congress, while the second is pretty lame, plain and simple.

Taking a page out of the Clinton playbook, the Obama administration is now touting free trade agreements and the restoration of American competitiveness as a key solution to our economic and employment problems. Yet despite soaring rhetoric about the need to invest in America and to create 21st century jobs here at home, the administration is pushing so-called “Free Trade” agreements that, despite some improvement in labor protections,  are really “Free Investment” agreements that help open up developing countries to foreign direct investment by US multinational corporations and financial risk taking and speculation by U.S. banks and other financial institutions like those that led us down the primrose path to financial crisis.

This strategy fails to acknowledge the employment losses in the US that have already been caused by outsourcing of products abroad and that are likely to be replicated or worsened by future agreements such as those pursued by the Obama administration. In a recent paper, James Burke, Seung-Yun Oh and I estimated the job losses that occurred in US manufacturing due to foreign outsourcing during the period of 1990 – 2005. We measure outsourcing as imports of intermediate products such as machinery, steel and other products that go into the production of manufacturing goods.

First off, are some well known but stark facts: Manufacturing employment in the US peaked at 19.4 million workers in 1979 and by 2009 had fallen to just below 12 million workers. The most rapid job loss has taken place in the last ten years or so: between 1999 and 2009 the manufacturing workforce contracted by 31 percent with a loss of almost five and a half million jobs. The current economic crisis has had an especially harsh impact on the manufacturing sector – employment in manufacturing fell by nearly three times the rate of employment decline in the economy as a whole between the end of 2007 and 2009.

Our results show that outsourcing has taken a significant toll on employment in manufacturing. We find that about 17 percent – or about 1 out of every 6 jobs lost –  of the total drop in manufacturing employment of 3.5 million can be accounted for by an increase in outsourcing.

Still, Obama has a point. Foreign demand for US manufacturing exports can have a significant impact on manufacturing employment: Growth in foreign demand for manufacturing exports between 1990 and 2005 contributed between 3 and 4.7 percent to total manufacturing employment growth over this period. But promoting free investment agreements that do nothing to expand the exports of US-based firms, or enhance the ability of US-based multinational companies to engage in more outsourcing of products imported into the US will do nothing but harm US manufacturing employment.

Our study also confirms what economists have known – or should have known – at least since the time of Keynes: A key contributor to employment growth is the growth of domestic demand. Our study indicates that the growth of domestic demand is just as powerful in creating employment in manufacturing as is export growth: the growth of domestic demand added about 4 percent to total manufacturing sector employment during the 1990 – 2005 period.

More to the point, increasing domestic demand is much more straightforward than promoting exports. To his credit, President Obama has been touting infrastructure investment – a domestic demand and supply creator – especially in green technology, as an employment generator at home. Obama’s just released budget calls for : Rebuilding the nation’s infrastructure with a substantial infusion of federal funds into high-speed rail, nationwide wireless;  the creation of a National Infrastructure Bank;  and a $28.6 billion (68 percent) increase in highway planning and construction; and promoting clean energy technology with the goal of one million electric vehicles on the road by 2015. (See National Priorities Project for analysis)

Such public investment – along with continued spending to prevent states and localities from slashing pensions and essential state services – seems to be a much more certain mechanism for employment growth than “free investment pacts” that will only lead to more outsourcing, or iffy attempts to get the Chinese to revalue their currency with uncertain impacts on US employment growth.

Robert Pollin, among others, has convincingly argued for the employment creation benefits of “green investments” and investment in education. James Heintz, of the Political Economy Research Institute (PERI), has calculated the substantial productivity and employment benefits of investments in infrastructure. For example, Heintz estimates that a program of infrastructure investment creates about 18,000 jobs for every $1 billion in new investment. By contrast, a tax cut, like those implemented in the lame duck session, will only generate 14,000 jobs and at the end will likely leave the country with substantially less productive capital to enhance productivity and development than will infrastructure spending. For example, an investment program of $87 billion dollars per year would generate 1.6 million new jobs within the US.

“Free investment” agreements cannot come close to this.  And pipe dreams of doubling exports in five years might not quack like a duck, but as an employment generating policy, they are pretty lame.

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