Monday, June 18, 2007
PHANTON GDP
or why the rich get richer and the poor get poorer.
Steve Dalton sent in a link to an article at the Business Week website which describes the flaw in calculations the government makes of the gross domestic product, and this flaw could help explain why statistics show a rosier picture than actually exists.
As corporations report on their earnings
Pat Byrne, the global managing partner of Accenture Ltd.'s (ACN ) supply-chain management practice, goes even further, suggesting that "at least half of U.S. productivity [growth] has been because of globalization." But quantifying this is tough, he notes, because most companies don't look at how much of their productivity growth is onshore and how much is offshore. "I don't know of any companies or industries that have tried to measure this. Maybe they don't even want to know."
Phantom GDP helps explain why U.S. workers aren't benefiting more as their companies grow ever more efficient. The cost savings that companies are reaping "don't represent increased productivity of American workers producing goods and services in the U.S.," says Houseman. In contrast, compensation of senior executives is typically tied to profits, which have soared alongside offshoring.
IMPORTING EARNINGS
But where are those vigorous corporate profits coming from? The strong earnings growth of U.S.-based corporations is still real, but it may be that fewer of the gains are coming from improvements in domestic productivity. In fact, holding down costs by moving key tasks overseas could be having a greater impact on corporate earnings than anyone guessed--or measured.
There are investing implications, too, although those are harder to quantify. Companies with their primary focus in the U.S. might suddenly seem less attractive, since underlying economic growth is slower here than the numbers show. But if the statistical systems of other developed countries suffer from the same problem--and they might--then growth in Europe and Japan might be overstated, too.
When Houseman first uncovered the problem with the numbers that is created by offshoring, she was primarily focused on manufacturing productivity, where the official stats show a 32% increase since 2000. But while some of the gains may be real, they also include unlikely productivity jumps in heavily outsourced industries (see BusinessWeek.com, 6/2/07, "Overseas Sweatshops Are a U.S. Responsibility") such as furniture and audio and video equipment such as televisions. "In some sectors, productivity growth may be an indicator not of how competitive American workers are in international markets," says Houseman, "but rather of how cost-uncompetitive they are." For example, furniture manufacturing has been transformed by offshoring in recent years. Imports have surged from $17.2 billion in 2000 to $30.3 billion in 2006, with virtually all of that increase coming from low-cost China. And the industry has lost 21% of its jobs during the same period.
Yet Washington's official statistics show that productivity per hour in the furniture industry went up by 23% and output by 3% between 2000 and 2005. Those numbers baffle longtime industry consultant Arthur Raymond of Raleigh, N.C., who has watched factory after factory close. "And we haven't pumped any money into the remaining plants," says Raymond. "How anybody can say that domestic production has stayed level is beyond me."
If the government is using phantom statistics to set government policy on interest rates and taxes, how long will the American economy be able to absorb this discrepancy? Also what is to happen to the American workers who were trained in manufacturing-related tasks and now find themselves unemployable at a job which will pay a living wage?
Does this help explain why many of us ride by housing developments with houses that look like mansions and wonder who can afford to buy these things, while we clearly see the lights on inside and know that someone can afford them, and at the same time know that we never could? And does this make distributivism look more appealing to you?
Read the entire article here.
