Apple, China, and the class war

By R.A. | WASHINGTON

OVER at Ezra Klein's blog, Karl Smith has been doing some very interesting blogging on the compositional effects of the recession in America. He concludes a post documenting the dramatic decline in manufacturing employment over the past decade by writing:

The lesson is that it seems unlikely this trend was caused solely by the financial crisis or housing collapse. The job loss that began in 1999 has continued at a greater or lesser pace ever since. More likely this is the result of globalization.

It's anathema in many economics circles to speak ill of international trade. Indeed, I am not even willing to go that far. What I am saying is that the story of this recession is a part of the larger story of globalization and its effects on the U.S. labor market.

He elaborates here:

Suppose that I have a factory with 1,000 workers who produce $1 million worth of goods. Now, suppose I restructure my factory so that I outsource half the work to China or India. I keep my 500 most skilled employees and have them focus on the most value-intensive work.

My new reorganized factory produces $1.5 million in output, of which $500,000 comes from outsourced workers. The value added by my factory is still $1.5 million – $500,000 or $1 million. However, since I have 500 workers, average worker productivity has doubled.

If you were to simply read the statistics, you might say, well, trade contributed somewhat to those 500 job losses, but it looks like the real driver was an increase in worker productivity. Yet, it is trade that facilitated that increase in worker productivity. It was trade that allowed me to fire a bunch of my regular line staff and keep my engineers and highly skilled machine operators.

Mr Smith suggests that in the long run, this may well be for the best, but in the short run there are significant dislocations that cause real economic pain. Is this how the economy functions in the real world? A new paper in the Journal of International Commerce and Economics says that, yes, it is:

Globalization skeptics argue that the benefits of globalization, such as lower consumer prices, are outweighed by job losses, lower earnings for U.S. workers, and a potential loss of technology to foreign rivals. To shed light on the jobs issue, we analyze the iPod, which is manufactured offshore using mostly foreign-made components. In terms of headcount, we estimate that, in 2006, the iPod supported nearly twice as many jobs offshore as in the United States. Yet the total wages paid in the United States amounted to more than twice as much as those paid overseas. Driving this result is the fact that Apple keeps most of its research and development (R&D) and corporate support functions in the United States, providing thousands of high-paid professional and engineering jobs that can be attributed to the success of the iPod. This case provides evidence that innovation by a U.S. company at the head of a global value chain can benefit both the company and U.S. workers.

This will be cold comfort to many American workers, for a couple of reasons. First, Chinese officials are very interested in moving up the value chain and developing their R&D and support service capabilities. These sectors are already blossoming, albeit with a focus on domestic industry. It won't be long, however, before they're able to compete internationally. And second, wage gains that accrue to top engineers and financiers in Silicon Valley and New York City mean very little to the median income earner in Cleveland or Phoenix.

When pressed for responses to this dynamic, economists tend to argue for measures designed to help American workers prosper in the marketplace. That means an emphasis on training and education, infrastructure investment, and improvement of the regulatory climate. Those are all good things to do, but they're unlikely to make much of a dent in what is obviously a significant shift in the pattern of global production and employment. And so we shouldn't be surprised to see growing interest in greater government support for industry and protectionism (Donald Trump may be a buffoon, but "slap tariffs on China" is a popular policy in America). Against those options, one Chinese solution—provide a lot of direct public service employment for displaced workers—doesn't seem that terrible an idea.