A Storm Over Offshoring

Our Cover Story sparked a lively debate on measuring domestic growth

In the Cover Story "The Real Cost of Offshoring" (June 18, 2007), I argued that the official statistics understate the impact of offshoring on the U.S. economy. The responses—on our Web site, by e-mail, and across the blogosphere—were roughly balanced between agreement and disagreement. Based on the comments, though, I wonder whether the story's implications could have been expanded a bit.

The story looked inside the statistical machinery and found that import growth, adjusted for inflation, is faster than the official numbers show. That means more of the gain in living standards in recent years has come from cheap imports than we thought, and less from an increase in our own ability to produce things at home. In other words, the reported growth of real gross domestic product (GDP) contains what I called "phantom GDP," which does not correspond to domestic production. Given the importance of offshoring, anything that biases the numbers could be a big deal.

The reaction from economists to the story was split: They generally conceded that the phantom GDP effect existed, but downplayed its importance. "We think the effect identified by BusinessWeek is real," wrote economists at Goldman Sachs & Co. (GS ) "That said, we think the estimated size of the effect, $66 billion in 2006 dollars, is on the high side."

The Bureau of Economic Analysis, which calculates GDP, responded to the story on its Web site. It acknowledged the flaw in the statistics, calling it "a manifestation of an old and difficult problem in price measurement." But the BEA argued that its analysts "do not think that there is a significant bias on measured GDP or productivity growth."

This skepticism is healthy. My reporting and analysis suggests that phantom GDP could be quite important. But the current lack of good data, as noted in the story, makes it hard to know for sure.

More disturbing, several people chastised me for putting a negative spin on a positive story about rising consumption. "Your article seems to say that we enjoy an even better deal from imports than we realized," wrote Kevin Furr of Austin, Tex., in a comment on my blog. "But that's somehow bad for us in a way that you certainly fail to explain."

Viewed from this perspective, the statistical problem identified by BusinessWeek means that the benefits Americans get from trade are actually being understated. A similar sentiment came from Robert E. Hall, a Stanford University economist. "It's just as important to give U.S. consumers access to cheap foreign goods as it is to make real GDP bigger," he wrote in an e-mail.

Hall and the other commenters have a valid point. And it may very well be that real GDP and domestic productivity are no longer the best guide for policy. Still, it's clearly important to measure correctly the growth of our domestic production, which is what GDP represents. Indeed, the sustainable rate of real GDP growth seems to be a top concern of the Federal Reserve.

What I take away from the comments is that I should have explored the broader implications of our greater-than-realized reliance on cheap imports. For example, future gains in U.S. living standards may depend in part on the ability of foreign factories to boost output and cut costs. Tax collections may be less closely tied to the growth of domestic production. And some U.S. workers may be better positioned than others to benefit from the increased importance of global supply chains.

Finally, it is imperative that we track offshoring better. The combined budgets of the BEA and the Bureau of Labor Statistics, which tracks productivity and import prices, have lagged the growth of the domestic and global economies in recent years. Whether you believe in phantom GDP or not, some extra money for better statistics is something we all can agree on.

FEEDBACK:

A recent set of articles in BusinessWeek...suggests that the real cost of offshoring has been understated.... However, analysts at the Bureau of Economic Analysis—who are continuously updating the official estimates to reflect the impact of globalization—do not think that there is a significant bias on measured GDP or productivity growth.... This is a manifestation of an old and difficult problem in price measurement.

Bureau of Economic

Analysis response,

bea.gov

We think the effect identified by BusinessWeek is real.... That said, we think the estimated size of the effect, $66 billion in 2006 dollars, is on the high side.

Goldman Sachs

U.S. Economics Research,

June 11, 2007

This article, and the comments, display an astonishing ignorance of how the U.S. and world economy works.... Innovation, offshoring, outsourcing—they're all part of the continual remaking of our economy and the incredible progress we've made in the past 200 years.

Screen name: Global Fan*

Your article seems to say that we enjoy an even better deal from imports than we realized, but that's somehow bad for us in a way that you certainly fail to explain.

Kevin Furr

Austin, Tex.

(comment on Economics Unbound blog)

The conclusion is straightforward. The state of U.S. manufacturing is worse than we thought, and this means that a lot of other economic indicators are worse than we thought.

Daniel Secrest

Detroit

(comment on Economics Unbound blog)

It seems so obvious our measurement system is broken. In the electronics sector, so much has gone overseas. (I was a manufacturing engineer for 25 years, but recently retrained at 50+ to be a nurse after being laid off three times due to offshoring.).... What worries me the most is that U.S. management does not value the centuries of experience in manufacturing we have given our competitors for free.

Screen name: EngineerTurnedNurse

The real cost of offshoring is the intellectual and material damage caused by the pathetic, ideologically driven, anti-free-trade (anti-globalization) mindset produced on the part of those who have no sense of reality or justice.

Screenname: Jose

I'm very glad you, or any major respected business publication, gave this story its overdue headline coverage. However, I fault you for being so late to the conference. In bits and pieces, these facts have been reported for several years in many different stories.

David Horn Oakland, Calif.

I think the fear of losing their jobs is catching up with BusinessWeek writers.

Screen name: statistician

Sure, let's revise how GDP is computed, but I suspect that this single overall measure of the U.S. economy will only continue to decay into further irrelevance as a "hard" tool for economy policymaking.... The question is how to provide business executives, managers, and investors with information that they can use in their own decision-making.

Jack Krupansky

Bellevue, Wash.

(comment on Economics Unbound blog)

What's so important about national boundaries that would cause a supply chain to notice? And why is an improvement through trade somehow less worthy than improvement through investment? In either case, the jobs are gone and the supply chain is more productive.

John Layden, Indianapolis

* All comments signed by screen names that are not otherwise identified are from BusinessWeek.com.

By Michael Mandel

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