“We are working to meet President Obama’s National Export Initiative goal of doubling exports by the end of 2014. I’m pleased to report our efforts are getting results. Exports were up 17 percent last year. Increased exports have contributed to 13 straight months of overall private-sector job growth, which has added a total of 1.8 million overall private-sector jobs.”
— U.S. Trade Representative Ron Kirk, April 28
With great fanfare in his 2010 State of the Union speech, President Obama announced that he was starting a new initiative to double the nation’s exports within five years.
But on the very day that U.S. Trade Representative Ron Kirk declared progress on the president’s pledge, in a speech to the Washington International Trade Association, the Commerce Department reported disappointing growth in the overall U.S. economy, in part because net export growth was essentially flat.
So what’s going on here? (Warning: Lots of numbers ahead.)
Economics is not an exact science. But certain principles hold true over the years. We headed to the basement to pull off the shelf an economics text from graduate school, “Understanding International Economics: Theory and Practice,” by J. David Richardson (1980). There, on page 243, was the following statement:
“Somewhat crudely, exports generate employment and upward pressure on prices; imports take away employment but hold down prices.”
Now, to be fair, some experts might argue that both exports and imports — i.e., all international trade — boost U.S. job growth. But generally, most economists would say that exports create jobs at home and imports create jobs abroad. If exports and imports move in tandem in response to demand, then the net effect on jobs is likely to be minimal. This is especially the case today, when globalization has resulted in a worldwide division of labor, with different countries producing parts and building products depending on which can do the job most effectively and at the lowest cost.
This basic rule of economics was demonstrated on Thursday with the release of the first-quarter report on gross domestic product. The GDP is the broadest measure of the U.S. economy. Dig into the report — which showed the economy growing at a rate of 1.8 percent, compared with a rate of 3.1 percent in the fourth quarter — and here’s what you will find: “Real exports of goods and services increased 4.9 percent in the first quarter, compared with an increase of 8.6 percent in the fourth. Real imports of goods and services increased 4.4 percent, in contrast to a decrease of 12.6 percent.”
As even a high school student might know, the basic formula for measuring the GDP is C + I + G + (X –M), meaning consumption plus investment plus government spending plus (eXports minus iMports). Imports had fallen in the fourth quarter, boosting the GDP, but in the first quarter they had caught up to exports.
In other words, a major contributing factor to the tepid rate of growth was that net export growth was essentially flat. The Commerce Department, in fact, put this shift first on the list of reasons for disappointing GDP result: “Imports turned up strongly, and exports slowed.”
Obama’s export initiative, while laudable on its face, ignores these fundamentals of economics. By some estimates, every $1 billion in U.S. exports leads to at least 6,000 new jobs. But although it is all well and good to brag about a 17 percent growth in exports, as Kirk does, that’s only half the picture. It’s a lot like claiming your income went up 17 percent without mentioning that your expenses (food, housing expenses, taxes) also went up as well. You have more money only if the increase in income exceeds the increase in expenses.
It is also worth noting that much of what the United States exports are parts for the assembly of products that are then shipped to this country, such as engines to Mexico that are assembled into cars. Some of the exports also include inputs that were produced in other countries. So these are examples of “exports” that don’t necessarily add many U.S. jobs.
Moreover, the 17 percent growth in exports Kirk touted is mostly making up lost ground from the recession. (Obama conveniently began his export initiative after exports had fallen 15 percent.) Export growth is actually negative if you measure it from 2008, although the net difference between exports and imports has narrowed somewhat.
Throwing in a reference to 1.8 million new private-sector jobs, as Kirk does, also gilds the lily. By the administration’s own math, exports support just 6.9 percent of all jobs. Exports, however, did increase faster in 2010 than the GDP, so it is possible that the percentage of jobs created by exports was slightly higher last year.
Carol Guthrie, a spokeswoman for Kirk, said that nothing in his statement was inaccurate.
“Ambassador Kirk’s emphasis on the president’s export program and on the continued ability of that program to meet its targets — something that we have been clear about and repeated often — does not become misleading because GDP was reported on the same day that we reiterated another long-standing metric,” Guthrie said. She noted that the GDP release was preliminary and could be revised with updated trade data.
Guthrie added: “We have always been clear that we were talking about the increase in both exports and export jobs from 2009, our base year. We have said from the beginning of this effort that we know exports (and export-supported jobs) tend to rebound following a recession, and so we are aware that we are recovering ground and that has been part of our intention. It’s hardly fair to discount this growth in export-supported jobs as ‘merely’ recovering ground; each job is an added job that certainly counts to the American now employed in it.”
Guthrie also argued that the relationship between imports and U.S. jobs is more complex than the relationship between exports and jobs. “Imports are often either inputs, commodities or things we don’t typically make here,” she said. “So while some imports displace jobs, some have no effect on jobs and some are even used by our domestic economy to create or support U.S. jobs. . . . It’s just not one for one as in a GDP accounting sense.”
The Pinocchio Test
We gave Guthrie a fair amount of space to make her case because economics is an inexact science with many points of view. (This is why every presidential candidate has been able to line up Nobel Prize-winning economists to support his economic plan.) But we stand by our general description of the economic rules involving exports and imports.
By that measure, Kirk’s statement claiming the administration is “getting results” is incomplete. The real measure of success is net export growth, preferably from 2008, not raw figures off an artificially low base generated by the recession. It was especially strange to brag about success on the very day the latest GDP report showed that export growth had slowed.