Where Did All The Jobs Go?

Obama spoke the other night about the need to create jobs. I’ve got bad news for him: something has gone wrong with the US economy -- 15 million jobs are “missing,” and nothing he’s proposing will help bring those back. There is an answer, but it's not one people are talking about.

For some time now, economists have been trying to figure out why the US economy isn’t producing jobs. If you look at US job growth by decade, there isn’t a single decade since records began in the 1930s where the number of jobs in the US didn’t grow by at least 20%. . . . with one glaring exception: the 2000s. That decade saw a paltry 5% growth (actually 0% after the 2009 recession). And if you subtract the number of jobs created from the number of jobs that should have been created, you will find that at least 15 million jobs are missing from our economy.

So where did they go? Let me dispel the usual suspects first:

1. Taxes: Could it be that our taxes are so high that they caused the 15 million jobs to vanish? That’s unlikely. While taxes were higher in this decade than in the 1990s, they were much lower than they were in the 1950s - 1980s. I’m not saying taxes didn’t hurt, but they don’t explain anything of this magnitude.

2. Over-Regulation: The 2000s saw the full force of ridiculous regulations. The Americans With Disabilities Act caused confusion everywhere, the Family Medical Leave Act made employees much more expensive, and the EPA got to the point that common household spills now needed superfund clean ups. There is no doubt this cost large numbers of jobs. But these regulations are not nearly as intrusive as the creation of OSHA, Affirmative Action, and the EPA, and other similar regulatory burdens of the 1960s and 1970s -- not to mention that most of the economy was denationalized in the 1980s. So again, this doesn’t explain the missing jobs.

3. Inflation: The government claims there is no inflation, but anyone who buys food or gas knows that’s wrong. But today’s inflation is nothing compared to the hyperinflation of the 1970s and early 1980s.

4. Education: Liberals complain that American students aren’t prepared for the modern economy. But that's wrong. Vastly more people go to college today than at any time before, and American colleges dominate the list of the best in the world. Moreover, Americans are learning excellent skills, as shown by our high productivity numbers.

5. War: Some suggest this decade was particularly harsh because of 9/11 and the wars in Iraq and Afghanistan. But that doesn’t make sense either. The number of Americans called up for World War II, Korea, Vietnam, and to face down the Soviets in the 1980s were much larger than anything done during the 2000s, as was military spending.

So what is the cause? I think the answer is our trade policy.

Experience has shown that Adam Smith's theory was right: free trade leads to huge benefits for all concerned. By providing only the products and services for which you have a comparative economic advantage, and then trading, all sides benefit. But what happens when trade is not free? What happens when the comparative economic advantage is distorted? What happens when one side engages in free trade and the other uses trade as an economic weapon? Consider these factors:

1. Distorted Currencies: For decades now, China and others have exaggerated (or created) their comparative advantages by keeping the value of their currency artificially low. This is like subsidizing Chinese goods and offering a subsidy to American companies to ship their factories to China. Thus, many jobs that should have stayed in America under free trade ended up being shipped to China because China’s artificially cheap currency made it artificially cheaper to export to the US from China.

2. Tax Law Distortions: American businesses can actually deduct the cost of moving jobs overseas. Moreover, once overseas, they can play games with inventory values to reduce their tax burdens. Thus, our government is encouraging them to ship jobs overseas.

3. Blind Eye To Corporate Espionage: Our government and “our” multinational companies have turned a blind eye to corporate espionage. Where did China get the skills to make advanced factories? Western companies shipped those factories to China, knowing the Chinese would pirate the entire process. China (and others) also engaged heavily in computer hacking and other assaults on Western data, which they used to improve their own businesses. It’s hard to hold a comparative advantage in a “knowledge-based” economy when foreign governments steal your data and give it to your competitors.

4. Unfair Competition: Many of the companies that compete with US companies are owned directly or indirectly by the Chinese government or Chinese military. These companies have an unlimited ability to obtain funding on favorable terms, to lie on their balance sheets, and to get regulations put into place that stop their competitors in their tracks. And through these governmental-corporations, the Chinese have managed to wipe out numerous American and European companies, leaving the Chinese to dominate the field.

All of this has caused a cascade failure. First, we lost factory jobs we shouldn’t have because overseas factories were unfairly subsidized. But don’t worry, we were told, we would still have the high-tech jobs. . . the jobs foreigners could not do, like making computers. But as they stole American secrets, they started getting these jobs too. Don’t worry, we were told again, we’ll hire them to make cell phones, but Americans will always design the cell phones. Only now Apple and others are hiring Indian engineers to design their newest products. Tech support, accounting, legal, etc. -- all things we were told could never be done overseas -- are all following. In effect, American companies are emigrating.

By allowing foreign countries to subsidize their companies, to steal and use our data, and by actually making it cheaper for American companies to shift their operations overseas, we have allowed foreign countries to systematically gut the American economy to the tune of 15 million jobs that should have been created here.

So how do we fix this? For one thing, it’s time to demand that anyone who wants to deal with America let their currency float fully, and we need to impose severe tariffs on the products of government-owned firms. Secondly, it’s time to eliminate deductions for overseas expenses; why should we subsidize the shipping of jobs overseas. Third, it’s time that we bar products made with stolen American technology or data. And fourth, we need to get our own regulatory and tax schemes under control. I say eliminate the corporate income tax entirely, switch to a sales tax or an equivalent import tariff, and let’s see what Issa comes up with on cutting regulations.

Free trade is great, but playing the sucker is stupid. So long as we let foreign governments distort the market to make their firms more competitive, and so long as we provide incentives for American companies to flee the country, we will never get those 15 million jobs back, and we're going to lose another 15 million and another and another.

If we don’t fix this, we really are in danger of breaking our economy. And no amount of stimulus spending is going to change that.