11 January 2012

The Problem with Anti-Globalization as Innovation Policy

Writing in The Washington Monthly, Michael Mandel of the Progressive Policy Institute has an essay on innovation and productivity provocatively titled "The Myth of American Productivity." Here I critique the argument in the article made by Mandel, specifically his argument that "supply chain innovation" is somehow a bad thing whereas what he calls "domestic innovation" is a good thing. I disagree.

First, here is Mandel's core argument in his own words, in which he argues that increasing agricultural productivity is fundamentally different than increasing productivity in manufacturing:
Consider, for a moment, what a farmer has to do to improve the yield of a corn or wheat field in Kansas or Nebraska. Machinery has to be purchased to plant and harvest the crops. Pesticides and herbicides have to be applied to fight bugs and weeds. Irrigation has to be used appropriately to make sure the crops mature as desired.

In a very real sense, agricultural productivity is intrinsically rooted in American soil. Yes, the tractor might be imported from Japan. But a farmer cannot plant crops in Iowa and then outsource the harvesting to Vietnam. Pesticides have to be sprayed on American bugs, and crops have to be irrigated with American water. Most of the value created by agriculture is made in America.

By contrast, most manufactured goods these days are the product of global supply chains, which may include multiple countries and border crossings. Your smartphone, for example, is assembled from components that were manufactured all over the world. On a less high-tech note, the cedar hangers that organically keep your suits and dresses free of pests may be made of wood grown in the U.S., shipped to China for manufacture, and then shipped back to the U.S. again.
Mandel argues that with respect to productivity gains, it is important to distinguish between "domestic productivity improvements" and "global supply chain management." Mandel argues that the former is to be preferred -- it is a more sophisticated way of saying "Buy American."

Imagine if you will a big factory building.  Let's say that it has two big doors, one on the front market "Inputs" and one on the back market "Outputs." The company produces Widgets which are sold in the marketplace. Employees, raw materials, tools, machines, processes and techniques are brought in through the Inputs door, and Widgets emerge from the Outputs door.

Let's say that the factory employs 100 people. Consider a first case in which a newfangled machine in brought into the factory which increases efficiencies in the production of Widget components and lowers costs, meaning that the company can now produce the same amount of widgets with only 90 employees. This then would be an example of a productivity gain. Now consider a second case, in which a different machine is brought into the factory, with the key difference being that the new machine is actually a transporter device (a la Star Trek 1967) that can beam in from overseas Widget components and lowers costs, meaning that the company can now produce the same amount of widgets with only 90 employees. This too would be scored as a productivity gain.

Under Madel's argument the first machine would be preferred to the transporter, even though they both have exactly the same effect on productivity and number of jobs. However, the different technologies might have profound effects on the kind of jobs that the factory employs, and it is this effect which Mandel notes and disapproves of:
If companies reconfigure themselves to better scour the globe for the lowest-priced goods and services, then their essential personnel are multilingual business school graduates with the ability to parachute into Shanghai or Bangalore and negotiate the best deals with suppliers, logistics experts who can keep the goods flowing, marketers to sell the goods, and software engineers to program the computers that communicate with the suppliers. In other words, the bulk of the company’s own workers essentially perform a creative or coordinating function, rather than a manufacturing one.
One might wonder what is wrong with multilingual business school graduates, logistics experts, marketers and software engineers, especially if such jobs are higher paying than the low value manufacturing jobs that have been displaced. This is of course not a happy situation for those whose manufacturing jobs actually have been displaced, just as it was for farmers a century ago. Hence, in the context of growth in productivity it is essential that the workforce implications of the effects of such growth be addressed proactively. Efforts to freeze in place a particular economic configuration are certainly doomed as strategy.

Mandel actually hits on what really matters but quickly glosses over it:
Without innovation, a supply chain strategy fails over time.
Of course, without innovation a "domestic productivity improvement" strategy falls over also -- productivity improvements are actually the quantified definition of innovation! The focus thus should be on innovation and how to manage it -- both its positives and negatives -- rather than trying to protect certain American jobs from the consequences of innovation.

Mandel confuses "competitiveness" with "protectionism" and sees barriers to trade (or perhaps more accurately, incentives not to trade) as a key to improving American job prospects. The results of the policies that Mandel proposes might actually to make the American economy less competitive and less innovative.

Just as was the case in agriculture a century ago, efforts to prop up a part of the economy that is fundamentally and globally in decline as a proportion of economic activity is a losing strategy. Mandel is certainly correct that the policies proposed by both political parties leave much to be desired, but calling for a new version of anti-globalization or trade protectionism (whether soft or hard) is not the right way to go either.

The key to economic growth, jobs and competitiveness in the United States lies in enhancing productivity, where ever opportunities exist, while at the same time managing the consequences (which can be profound and negative for some) of success in that endeavor.

33 comments:

  1. Let's add pollution as a variable. Is more pollution created shipping raw materials (cedar) from the US to China to be made into hangers and then shipped back to the US (where the raw material originated) versus keeping the raw material in the US and making the hangers here closer to market?
    Are Chinese coal burning power plants as clean as US coal burning power plants? Are Chinese manufacturing plants as energy efficient? Production costs may be lower due to lower wages but are they as energy efficient?

    I am willing to purchase US made goods for a higher cost if less pollution is a benefit.

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  2. "What business?" asked Sir Henry sharply. "It seems to me that all you gentlemen know a great deal more than I do about my own affairs."

    "You shall share our knowledge before you leave this room, Sir Henry. I promise you that," said Sherlock Holmes. "We will confine ourselves for the present with your permission to this very interesting document, which must have been put together and posted yesterday evening. Have you yesterday's Times, Watson?"

    "It is here in the corner."

    "Might I trouble you for it—the inside page, please, with the leading articles?" He glanced swiftly over it, running his eyes up and down the columns. "Capital article this on free trade. Permit me to give you an extract from it.

    'You may be cajoled into imagining that your own special trade or your own industry will be encouraged by a protective tariff, but it stands to reason that such legislation must in the long run keep away wealth from the country, diminish the value of our imports, and lower the general conditions of life in this island.'

    "What do you think of that, Watson?" cried Holmes in high glee, rubbing his hands together with satisfaction. "Don't you think that is an admirable sentiment?"

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  3. "One might wonder what is wrong with multilingual business school graduates, logistics experts, marketers and software engineers, especially if such jobs are higher paying than the low value manufacturing jobs that have been displaced. "

    Leaving aside the other aspects of your disagreement - in this statement it seems to me that you fail to recognize another component: rates of income inequality. In one scenario, given the realities of who is most likely to attain the multilingual business school diplomas, you have a greater concentration of wealth among those who are already above a certain income standard. In the other scenario, you have more class/social mobility. Arguments about the impact of income equality aside, to be comprehensive it seems you need to address that variable. The best predictor of higher education in this country is the income level of the family people are born into. Recognizing that fact, and the related impact on the overall economy and on the living standards of individuals, is not necessarily the same thing as advocating protectionism.

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  4. -3-Joshua

    Thanks, but not sure I get your point .. are you suggesting that a mechanism of dealing with income inequality (a topic I blogged on recently as worth our attention) is to somehow preference low paying jobs over higher paying jobs? If so, good luck with that ;-)

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  5. "Thanks, but not sure I get your point .. are you suggesting that a mechanism of dealing with income inequality (a topic I blogged on recently as worth our attention) is to somehow preference low paying jobs over higher paying jobs? If so, good luck with that ;-) "


    Your utter lack of interest in those people who once had the 'low paying jobs' - which they relied on to support themselves and their families - is remarkable. The day they start outsourcing college instruction, I have a feeling you'll have a very different view of the matter.

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  6. -5-Mark B.

    Thanks, but please read the actual post:

    "This is of course not a happy situation for those whose manufacturing jobs actually have been displaced, just as it was for farmers a century ago. Hence, in the context of growth in productivity it is essential that the workforce implications of the effects of such growth be addressed proactively."

    and

    "The key to economic growth, jobs and competitiveness in the United States lies in enhancing productivity, where ever opportunities exist, while at the same time managing the consequences (which can be profound and negative for some) of success in that endeavor."

    Thanks!

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  7. - 4 - Roger

    ***

    "Thanks, but not sure I get your point .. are you suggesting that a mechanism of dealing with income inequality (a topic I blogged on recently as worth our attention) is to somehow preference low paying jobs over higher paying jobs? If so, good luck with that "

    ***

    No.

    I'm not suggesting that you are indifferent to the problems of income inequality. I'm suggesting that they necessarily are part of the discussion - and while you alluded to them indirectly in your post, they need to be a primary component and addressed more comprehensively and explicitly - otherwise an analysis suffers. And your second point seems contradictory to that goal. To wit:


    ***
    Hence, in the context of growth in productivity it is essential that the workforce implications of the effects of such growth be addressed proactively."
    ***

    I agree.


    ***
    "The key to economic growth, jobs and competitiveness in the United States lies in enhancing productivity, where ever opportunities exist,.."
    ***

    I don't agree.

    "Productivity," depending on how it is measured, is not necessarily an unmitigated good if you consider the demerits of income inequality.

    If you, say, included effective workforce training into how you calculate productivity, then it would begin to address questions of economic growth and competitiveness more comprehensively.

    If, say, you compare a return on investment ion early childhood education as compared to simply spending to increase corporate "productivity," (say building better roads or more efficient ports) would you achieve better outcomes not only in GDP but also in addressing problems inherent to income inequality?

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  8. -7-Joshua

    Thanks ...

    Productivity is the efficiency with which you get outputs from inputs. Society is better off if we can get more from less. Period.

    At the same time, the distribution of benefits and the consequences of change are of course critically (and perhaps equally) important.

    But in my view you will not well address those distributive and disruptive effects of innovation by trying to limit or redefine productivity. They deserve to be addressed explicitly and on their own merits.

    I'll be blogging more about the disruptive and distributive effects of innovation in the future. Thanks!

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  9. - 7 - Roger

    ***
    Productivity is the efficiency with which you get outputs from inputs. Society is better off if we can get more from less. Period.
    ***

    Well, sure. But how are you measuring outputs and inputs? The amount of consumer goods produced per # of hours worked?

    Would workforce training or early childhood education necessarily be registered as an increase in productivity according to how you've been measuring it?

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  10. -9-Joshua

    Thanks ... you ask,

    "But how are you measuring outputs and inputs?"

    The short answer is -- it depends. There is no single answer to how to measure productivity.

    In the context of the Mandel article we see several measures: agricultural productivity (which is typically measured in terms of crop yield), manufacturing productivity (measured in terms of value added) and overall economic productivity (measured in terms of economic activity).

    To have a meaningful conversation about productivity probably requires setting a specific context.

    You ask, "Would workforce training or early childhood education necessarily be registered as an increase in productivity according to how you've been measuring it?"

    Workforce training and early childhood education are probably both best considers as inputs to some desired output (e.g., jobs, salaries, employment, growth etc.) and as such may indeed be key factors in stimulating productivity. They may also have non-productivity related benefits (e.g., being skilled or knowledgeable).

    Thanks!

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  11. .

    Just a comment. Income inequality is no more or no less of a problem than is eye color inequality. The world would not be a better place if Bill Gates and Steve Jobs earned less or produced less.

    .

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    Replies
    1. - #10 - Abdul

      Obviously, I disagree with that opinion (see Mike's comments) - but at least it would be consistent with the idea that economic growth is a direct function of "productivity" as Roger has been using the term. The problem there is that I surmise that Roger doesn't agree with you either.

      Delete
  12. - 1- Roger -

    ***

    To have a meaningful conversation about productivity probably requires setting a specific context.

    ***

    And if your specific context leaves out important measures of productivity that may be considered as functions of income inequality, then your definition of productivity moves towards irrelevancy.

    We have had higher "productivity" contemporaneous with higher unemployment, higher mortgage default rates, higher numbers of bankruptcies, etc.

    I'm not saying that productivity as how you're measuring it is irrelevant - but that when you try to generalize that definition of productivity as a direct measure of the country's economic status, you run into trouble.

    To wit:

    ***
    The key to economic growth, jobs and competitiveness in the United States lies in enhancing productivity,...
    ***

    You seem to be reducing "economic growth" to the change in one variable, and in that, you seem to be defining that variable in a very restricted manner.

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  13. I think one thing is missing from Rogers economic model. If imported goods cause unemployment this triggers transfer payments (unemployment checks, Medicaid, etc). Since the payment of this money creates no wealth i.e. no product was made it is an added cost to these imported goods. There are probably other hidden social costs such as increased crime etc.

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  14. -13-Mike McHenry

    Thanks, and no doubt ... but the circumstances that you described are better addressed through social policies, not policies to modulate productivity ...

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  15. 14- Roger
    If the real cost of goods are higher as a result of what I laid out than the productivity gain needs to be recalculated. That is it's smaller. I know that free trade has become dogma among economists. Given the challenges the country faces maybe some of the assumptions need to be challenged.

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  16. We should recognize that economic exchange cannot be conducted in a free market with others who do not maintain parity. For example: the Chinese neither regulate their producers nor preserve the dignity of their workers in equal measure to Americans. This is a designed feature of their system which fundamentally undermines the sustainability of this desirable practice.

    We would also be well advised to consider that not everyone wants to be a scientist, an engineer, an accountant, etc. There are people who want to be skilled laborers and reject any value -- other than increased financial compensation -- attributed to celebrity or academic ventures. Furthermore, we must recognize there are individuals who choose to fail, and have been conditioned to believe that involuntary exploitation of others will compensate them for their disinterest.

    These are at least two areas where our policies have failed in both theory and practice. And with the second, it has actually sabotaged character development and promoted extended infancy in otherwise aged individuals, while breeding resentment among people who have been forced to subsidize them. If it were not for the generally high standard of living in America, those policies would have had disastrous consequences a long time ago. Unfortunately, the conditions they have established are generational and cumulative. The corruption that they breed is similarly progressive.

    I would consider America, and any nation, as an administrative district, which is set up to exploit the natural and human resources on its land in order to promote the general welfare of the latter. In this model, it is indeed the priority to develop domestically, and through voluntary economic exchange improve the welfare of our citizens first, contribute to the welfare of our neighbors second, and to others thereafter. It is also imperative to end the policies which promote converged migration and immigration, especially unmeasured illegal immigration. It it the last in particular which has placed an unpredictable stress on communities' infrastructure, and resulted in the displacement of American men, women, and children at work, at school, etc, and has necessarily increased the incidence of involuntary exploitation in America. This is particularly a problem when the immigrants originate from a culture which is incompatible with our own.

    The point is that the problems facing our nation are comprehensive. There are certain common causal factors, and we should begin our recovery with addressing them rather than the symptoms as our government and affiliated private businesses have profited from doing.

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  17. There are several issues here that require clarification.

    First, that farmer in Mandel's example is producing foodstuffs that will be sold for prices determined by the worldwide market. Today’s farmer finances his operation through futures markets that trade globally by locking in prices for a portion or even all of his crop. He’ll also vary the crops he plants based on futures pricing of what his land can produce. Any innovation he introduces will be in response to worldwide demand for his product and the costs he’ll incur for fuel, labor, capital, and other inputs.

    When natural gas prices in the US skyrocketed in 2005-2006 (the price for natural gas is still primarily locally determine because of the difficulty and expense of transporting it), pesticide, chemical, and fertilizer production shifted from the US gulf-coast region to Indonesia. Why did DuPont and other greedy companies move the associated well-paying jobs offshore? So that they could provide cheaper products to farmers and manufacturers. As is the case with many products, the cost of raw materials and their handling / transport is the driving factor with chemicals. My main point is that agriculture operates in a global market with global inputs. BTW, Mandel’s foreign tractor probably came from India (Mahindra), not Japan…

    Next, income inequality is neither good nor bad when the determining factor is productivity because those who contribute more to overall revenue should receive commensurate compensation. For a good example, pick a professional sport. The salaries and incentives are based on production (or prevention) of points. The calculus is complex, but fans generally favor productive (and good defensive) players and show that directly through ticket sales and indirectly by purchasing products a player endorses. Where’s the unfairness there? Should every soccer, baseball, football, or lacrosse player be paid the same? Most folks would find that silly.

    In like manner, private enterprises attempt to set compensation at levels reflecting each employee’s contribution to overall revenue. It’s a complex exercise, easy to screw up, but must be done correctly if the enterprise is to survive. Some positions will have set salaries, others a set hourly rate, still others may have a low base salary but include a commission based on sales. And then there are unions…

    One may try to reduce income inequality though laws like the minimum wage, but one Dr. Thomas Sowell can explain why such laws merelyincrease the unemployment rate of young black males.

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  18. Hi Roger,

    If you don't get MIT's Technology Review magazine, you might think about it.

    The latest month's issue (or maybe it's already a month out of date) was about manufacturing in the U.S.

    Their point (I'm not through the article or the issue) was somewhat like Mandel's. They said that it's hard to innovate about products if one doesn't manufacture them. They also claimed that total world innovation goes down when the U.S. doesn't innovate, because it doesn't manufacture.

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    Replies
    1. Thanks Mark, I saw it, but thought was a bit equivocal for blogging purposes.

      Delete
  19. "Your utter lack of interest in those people who once had the 'low paying jobs' - which they relied on to support themselves and their families - is remarkable."

    If you're really interested in people with "low paying jobs", the mainland Chinese have a lot lower paying jobs than people here in the U.S.

    It's interesting how people who claim to be very interested in reducing income inequality often don't seem to be interested in reducing worldwide income inequality by buying things from very poor countries like mainland China.

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  20. -20- Mark,

    Indeed. This is almost exactly my thought when protectionism is justified with income inequality arguments. Of course, once we protect the US from China, why not protect NY from Texas? The choice of the national border seems somewhat (though not completely, of course) arbitrary as the designated place to discourage trade.

    And as n.n. said, part of the problem with some of those at the bottom is that they're not really interested (or able?) in doing anything productive to move themselves up the ladder. That is a scary thought, but the alternative seems worse.

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  21. The real problem with globalization is that it creates an unstable economy. The 1930s recession was the first recession due to the oversimplification of global trading. The current recession is the second. The optimal global economy consists of many independent economies moderately trading with each other.

    See The future of globalization

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  22. Mark:

    The issue is not protectionism, but establishing parity between competing interests. The Chinese do not regulate their producers and do not preserve the dignity of their workers to the same extent as Americans. This is undermines the self-correcting nature of the market, defers accountability in the developing economy, and sabotages sustainability of the developed economy.

    There is no value to sacrifice one nation, people, or individual, in order to help another. This will provide instant gratification and a good feeling and profit for the moderator, but it is not a long term solution nor does it address underlying causes to any material differences.

    As for the "scary thought", all people are able to do something. The distinction does not lie there, but with jobs people would prefer to do, and the compensation they would prefer to receive.

    Ostensibly, this is the justification offered to explain the continued illegal entry of over 1 million aliens into this nation annually, and why a similar number are permitted entry in the same period.

    The alternative is indeed worse. Our policies have fostered the sabotage of character development, and normalized a perpetual, involuntary redistribution scheme at the expense of our most productive citizens. They have corrupted individuals, our government, and private affiliates. They have also encouraged corruption in the nations (e.g. Mexico) where the conditions would justify the departure of their citizens.

    John:

    Exactly. A nation is a mostly artificial construct which defines an administrative district. It serves to facilitate and focus resource -- natural and human -- development in order to promote the general welfare of its inhabitants. This division serves three purposes:

    1. It localizes governance and therefore enables the people to better hold their leaders accountable.

    2. It explicitly recognizes that there are finitely accessible resources and an associated carrying capacity.

    3. It is largely defined around people with similar and compatible perceptions of reality and treatment of one another. This is the reason why nations and similar constructs are established through force. Yet, while all nations share similar birthing pains, they clearly do not develop with equal potential and ambition.

    This, incidentally, is why policies which promote converged migration and immigration (especially unmeasured illegal immigration) are so harmful to a community, society, and nation. They not only serve to displace existing residents and distort the local economy, but also to obfuscate causal factors, which would encourage people to leave their homeland at great risk to themselves.

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  23. Roger,
    I agree that trade overall is a positive development.
    However, I disagree that it is uniformly good. One particular area which is not well addressed in the economics field is the overall societal contribution of a job.
    The factory with black box inputs and outputs is a poor analogy because it assumes that all inputs are quantified by wages and resources going in with products coming out. In this context of course there is no difference between the creation in the factory and the energy-less, lossless transport of goods from another factory into this US sited one.
    However, in reality as we are seeing with Detroit and Flint, there are definitely societal impacts to loss of jobs.
    And again, I'm not advocating protectionism per se.
    My point is that since we fail to take into account the full societal impact, the existing framework of regulatory, tax, and commerce is also not accounting for these differences.
    A simple example: Company A has its factory in the US, Company B has its factory in China. The employees of Company A pay taxes in the US on their income and via sales taxes, equally company A pays corporate taxes. Company B only pays corporate taxes, and that assumes they don't use transfer pricing to remove all or part of their corporate tax.
    Is it fair to say that company A and company B have equal societal impact?

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  24. -25c1ue

    Thanks, I agree with your point on the differential societal impact 100%.

    I am arguing that if it is societal impact that you are worried about then it should be dealt with via social policies not productivity policies.

    Now, together social policies and productivity policies may together form something like a unified innovation policy, but I'd recommend against confusing the two, lest you arrive at outcomes like trying to limit productivity to protect jobs and such.

    Thanks!

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  25. Roger,

    I understand what you are trying to say with regards to social policies, but my point was that productivity measurement itself is flawed if what is examined is not the full picture.

    The taxation example I gave shows this: domestic Company A should have an additional factor of productivity arising from its greater taxation contribution than Company B. While I don't assume that tax revenue automatically equates to productivity, at the same time tax revenues have at least some measurable effect on infrastructure and all the productive functions which government operates.

    This certainly doesn't excuse protectionism, I'm merely pointing out that at least part of the problem is lack of rigor in the measurement process, which in turn points to yet another failure of the existing economics establishment.

    Examination of these types of interactions theoretically should be exactly what that profession should be doing.

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  26. Roger,

    "productivity improvements are actually the quantified definition of innovation!"

    I'm not sure this is accurate, and I think you are missing an important part of Mandel's argument. As Mandel writes, measured productivity can increase either by improving domestic production processes to reduce the number of inputs necessary for a given industrial output, or by sourcing cheaper inputs from abroad.

    Both of these show up as productivity gains in the economic statistics, but as of now there is no way of knowing which productivity--domestic or supply chain--accounts for the gain. As both you and Mandel note, the type of productivity gain has profound implications for which workers gain from productivity increases.

    But I think what you are missing is that the type of productivity gain also has profound implications for the economy overall. The first productivity gain comes about through an improvement in technology, which can improve the skills and wages of production workers, and can potentially spill over to other industries in the domestic economy. The second type of productivity gain could come about without any technological innovation.

    Therefore I think that your thought experiment is inaccurate. In the first case workers create a new machine that improves productivity and reduces costs, in the second case, contrary to your example, no machine is produced. Instead, we just get cheaper inputs from abroad, perhaps even ones that were produced with older and less productive machines.

    Also, I take issue with your characterization of Mandel's argument as "anti-globalization" or otherwise "protectionist." It appears to me that Mandel is arguing that we need to better understand the impact of globalization on the U.S. economy, and for that we need to have better statistics that illuminate the extent to which productivity gains have been driven by offshoring.

    One of Mandel's recommendations is a "Competitiveness Audit" that seeks to understand different prices of similar goods in the U.S. and foreign countries, so that we can know where we are uncompetitive or where we are nearly competitive, and thus which sectors could expand with strategic investments.

    I don't see anything in his piece about erecting trade barriers or instituting "Buy American" policies that force U.S. firms to source domestically. I do see him worrying about the effects of offshoring on future U.S. (and global) innovation, and valuing U.S. production as a result.

    We should recognize that productivity is not the same thing as technology, and that the difference is important.

    Sorry for the long reply, and thanks for highlighting these important issues on your blog.

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  27. -28-Devon Swezey

    Thanks for the thoughtful comment, a few replies ...

    Innovation (like productivity) is not just about technology or machines. Innovation in the supply chain can certainly lead to gains in productivity, You will not have a productivity gain without the presence of innovation of some sort somewhere along the line, it need not be technological, but it does have to be innovation.

    If it is cheaper to source an input from outside the US, what alternative is there other than to substitute a more expensive domestic input? Isn't that the same as "Buy American"? Or did you mean something else by "valuing US production"?

    Thanks much!

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  28. Thanks, Roger.

    I of course agree that innovation is not just about technology or machines, and that supply chain innovation can improve productivity.

    I'm arguing that different types of innovation have different impacts on the economy and future prosperity. It seems to me that a technological innovation that leads to improved manufacturing processes, or to the creation of new products or industries, is different from identifying a firm that supplies today's widget at a lower cost.

    Mandel's point is that much of the measured productivity gains are due to outsourcing and are captured by foreign workers, rather than being the result of technological improvements in the domestic economy.

    Indeed, it seems plausible that by relying on outsourcing, we could actually be stunting technology innovation, as there is less of an incentive to develop labor-saving technological innovations if we have access to cheap foreign labor. If outsourcing leads to less technological innovation in the United States, that would be undesirable.

    You ask: "If it is cheaper to source an input from outside the US, what alternative is there other than to substitute a more expensive domestic input?"

    Two answers: 1) Create a technology that economizes on the input or makes it unnecessary. 2) Make the domestic input cost the same or less than the foreign input.

    A Competitiveness Audit would be used to determine whether (2) is feasible. What is the price difference between the foreign and domestic input, and what accounts for the difference? Is it cheaper labor? Lower land prices? Electricity costs? Taxes? Government subsidy?

    You could then determine whether targeted policy could improve the marginal competitiveness of an industry such that foreign sourcing is no longer cheaper. This could reduce imports and boost domestic jobs and growth.

    Again, apologies for the length of the response...

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  29. -30-Devon Swezey

    Thanks ... a quick reply, you write:

    "You could then determine whether targeted policy could improve the marginal competitiveness of an industry such that foreign sourcing is no longer cheaper. This could reduce imports and boost domestic jobs and growth."

    How about a tariff? ;-)

    I am not optimistic that various factors that contribute to productivity growth can be easily teased apart. That said, government policy to foster innovation does indeed make sense, but the goal from my perspective would be on improving productivity, not protecting certain jobs (as discussed above). There might not be a significant difference between them, of course, but if your goal is to protect jobs, you'll find policies like tariffs (sugar, anyone?) entering the discussion, which you wouldn't if the goal is to enhance productivity.

    If you misdefine the problem, you'll more easily get bad solutions in response.

    Thanks!

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  30. Roger,

    Quick comments:

    "How about a tariff? ;-)"

    Tariffs would of course raise the price of the foreign good to equal the domestic good, rather than lower the price of the domestic good to equal the foreign good, as I write above.

    "I am not optimistic that various factors that contribute to productivity growth can be easily teased apart."

    This is a main point of the Mandel article. Right now we can't, but if we had better data on product prices for equivalent U.S. and foreign goods, we would be able to better tease apart productivity gains from offshoring with domestic productivity improvements.

    "the goal from my perspective would be on improving productivity, not protecting certain jobs (as discussed above)"

    I agree, and that's my point. Upgrading worker skills, investing in manufacturing process improvements, creating new technology, could improve productivity and tip the balance between foreign and domestic production in certain industries. This would create jobs, not protect them.

    Other policies, like reducing corporate taxes or otherwise improving the business climate, could also help, even if they aren't directly targeted at productivity. I'd call this competing in the global economy, not protectionism.

    Thanks for the fun exchange, and have a great weekend!

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  31. -32-Devon

    Thanks ... boy, I'd have a laundry list of objections:

    comparative advantage
    picking winners
    technological forecasting

    Broad based government support for supporting innovation makes sense, but surgical, targeted support for particular industries based on assessments of their ripeness for innovation? I'm highly doubtful ...

    Have a nice weekend yourself! Thanks ...

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