That Giant Sucking Sound Isn’t Jobs Leaving

Don Boudreaux drew my attention to an essay in the NYT from a few days ago by Steven Rattner.  There’s a lot in the article, but I want to discuss one thing in particular he gets very wrong:

Then I went rogue and uttered two blasphemous words: “Ross Perot.” He had a point, I said heretically, when he campaigned in 1992 against the landmark North American Free Trade Agreement, saying that it would result in a “giant sucking sound” of jobs headed south to Mexico.



That sounds pretty good, I said, except that employment in the Mexican auto sector rose to 589,000 from 368,000 during the same period, an increase of 60 percent. I’m happy that 221,000 more Mexicans got jobs, but let’s be honest: Absent open borders, many of those jobs would have been in America. [Emphasis mine]

There are several things he gets wrong here.  Not necessarily errors of fact, but rather of cause/effect and reason.

First off, there certainly is a renaissance of “Made in America” going on right now.  Near-shoring is proceeding to a large extent and factories for all kinds of goods and services, from textiles to automobiles, are popping up across the nation.  The difference between these factories and factories in the past is these factories are much more automated.  They’re filled with machines, not men.  Mr. Rattner makes the mistake of confusing inputs (labor) with output (manufactured goods).  He readily dismisses the “made in America” argument because there are less workers in factories.  That is correct, but the US is still a manufacturing powerhouse and, as I mentioned in previous posts, the US still manufactures a lot.  The US has become more efficient in manufacturing, requiring fewer inputs for more output.  To claim US manufacturing is in trouble, or being siphoned off to another country, when only looking at the inputs would be like arguing Americans drive less because our cars use less fuel to go where they need to go.

Second, Mr. Rattner’s argument that, absent open borders, those Mexican jobs would have stayed in America makes several key assumptions that may or may not be true.  It assumes Mexican labor efficiency is equal to US efficiency.  If this is not the case, then in a closed economy, the number of jobs “protected” would be less than then the number of jobs “created” in Mexico (for example: if it takes 3 Mexican workers to build a car, but only 1 American worker, then if a plant were to relocate back to America, only 1 American would have a new job, not 3).  He also assumes that the quantity demanded for good made in Mexico would remain constant should production shift back to the US.  This is likely not the case.  Firms relocate operations in order to keep costs low.  If a firm were forced to produce in the US, when Mexico is the preferable option, then it would likely mean a raise in the price of goods, in turn reducing quantity demanded.

Third (and this is a combination of my first two points), Mr. Rattner assumes that trade is the only way for jobs to be shed.  However, automation is key here.  As I mentioned above, US factories are becoming more automated.  If the US were to repeal NAFTA (which, in the opinion of nearly every economist out there, would be a bad idea), the jobs sent to Mexico wouldn’t just appear back.  The same level of production may be met with robots.  Indeed, that is what we are seeing now in regards to near-shoring.

Is the US losing jobs to international trade?  Not really.  Productivity increases are more the cause.  But the goal of economic progress isn’t to increase or maintain costs, but to maximize benefits.  Having costs as the standard of economic policy, rather than benefits, can lead to horrible, and counterproductive, policy suggestions, like protectionist tariffs r closed borders.

4 thoughts on “That Giant Sucking Sound Isn’t Jobs Leaving

  1. Hearing the name Ross Perot, I’m reminded that as with Trump, being a good businessman doesn’t mean being a good economist.

    What Mr. Rattner and others seem to missing is that the *reason* for the current near,shoring is the same as the previous reason for off-shoring: to reduce costs. And, as you point out, Rattner is assuming some direct relationship between output and jobs.

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  2. Terrific post. I really like this gem: “To claim US manufacturing is in trouble, or being siphoned off to another country, when only looking at the inputs would be like arguing Americans drive less because our cars use less fuel to go where they need to go.”

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