How are Swiss workers able to steal so many American jobs?

Many people believe that the Chinese steal lots of American jobs because they have low wages, low environmental standards, and various unfair subsidies.  As far as I know no serious economist holds that view.  But there are very serious economists who believe Chinese policies are costing many American jobs.  For instance, Paul Krugman has argued that China’s large current account surplus ($201.1 billion) effectively steals jobs from American workers.  As anyone who has read Pop Internationalism knows, Krugman doesn’t buy into the vulgar protectionist argument that low wages/government subsidies/weak environmental protections, etc, give countries an unfair advantage.  Indeed he believes that the Chinese current account surplus only costs jobs when US interest rates are at zero, not otherwise.

The Swiss current account surplus ($95.7 billion) is nearly half as large as the Chinese CA surplus, suggesting that the Swiss are stealing about half as many American jobs as the Chinese.  (By the way, bi-lateral imbalances don’t matter in the Krugman model.)  I’ve mentioned this fact before, but today I’d like to address it from a different direction.  What is the intuition here?  When most people visualize the Chinese stealing our jobs, they picture tens of millions of low paid workers slaving away in sweatshops.  But Switzerland has a tiny population, most of whom aren’t even employed in export industries.  The few who are earn wages much higher than those of American factory workers.  So how can Swiss workers be stealing nearly half as many jobs as Chinese workers?

The answer is simple; Chinese workers aren’t stealing jobs for the reasons most Americans imagine.  The real problem with large current account surpluses (in the Krugman model) is that they add a big blob of savings to the global economy, just when we need more “spending,” and less saving.  In other words, they worsen the liquidity trap.  That’s why the Swiss steal so many American jobs.  As do the Norwegians, with their $70.7 billion CA surplus.  And let’s not even talk about Germany ($188.1 billion), they are already being blamed for nearly every problem in Europe.

Now as we all know, this model is wrong.  It predicts that core inflation will plummet steadily lower when in a liquidity trap.  If the Fed is targeting inflation, then there is no liquidity trap, no paradox of thrift, no paradox of toil, no fiscal multiplier, no “Depression economics.”  And as we saw in 2010, when the Fed observes core inflation fall below their 2% target they do policies like QE, and extended promises of low interest rates, in order to raise core inflation back up near 2%.

So the good news (for world peace, love and understanding) is that the Chinese and Swiss workers aren’t stealing any American jobs at all!  We are all in this together, and we all benefit from policies that boost economic growth in any one country.

Planet Earth: it’s a positive sum game.

PS.  The CA data is from the most recent issue of The Economist.  They also report that the consensus forecast for RGDP growth in the US is 2.1% in 2012 and 2.2% in 2013.  Because we are in a recovery, that’s obviously higher than the consensus forecast of trend growth.  In other words, most economists now see the US trend rate of RGDP growth as being something like 1.5%.  After 150 years of 3% trend, that’s a startling downshift.  Tyler Cowen is no longer a contrarian; The Great Stagnation is now conventional wisdom.


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31 Responses to “How are Swiss workers able to steal so many American jobs?”

  1. Gravatar of StatsGuy StatsGuy
    16. March 2012 at 06:34

    “In other words, most economists now see the US trend rate of RGDP growth as being something like 1.5%. After 150 years of 3% trend, that’s a startling downshift.”

    Scott, consider world population growth…

    http://www.vhemt.org/worldgr.gif

    That’s a startling downshift, yes, and it explains a large chunk of the decline in real GDP growth.

  2. Gravatar of StatsGuy StatsGuy
    16. March 2012 at 06:37

    Further adjust by population age distribution, and you see that the growth in the productive population (supply) is even slower than the growth in total population (demand).

    http://wisdom.unu.edu/wp-content/uploads/2008/08/big-population-age-group.gif

    Since the markets are forward looking, expected supply impacts present demand.

  3. Gravatar of dwb dwb
    16. March 2012 at 06:46

    unfortunately i think some of this is simple xenophobia.

  4. Gravatar of Bob Dobalina Bob Dobalina
    16. March 2012 at 06:50

    Statsguy– do those charts really mean that? It looks like the fraction of “productive” population (relative to total population) is rising, not falling.

  5. Gravatar of Cameron Cameron
    16. March 2012 at 07:13

    My guess is that the consensus forecast is much too pessimistic, both in terms of forecasting a recovery and long term economic growth.

    Unless NGDP growth slows, I would be shocked if RGDP growth was less than 3% over the next two years. I also wouldn’t be surprised if GDP numbers were revised upwards. I think many economists are assuming the recovery will be slow (trend growth) because we had a financial crisis.

    As far as long term growth, I think statsguy is right. Productivity growth was terrible in the 70s and 80′s, but looks normal since (2%). Why assume it will fall now?

  6. Gravatar of Andy Harless Andy Harless
    16. March 2012 at 07:14

    We’ve been through this before, I think, but I don’t see how your position is consistent. On the one hand, you say there is nothing special about being at the zero lower bound. On the other hand, you say that central banks are much too tight. But why are central banks so tight? Presumably because they’re at the zero lower bound. Call it a stupidity trap instead of a liquidity trap if you like: the zero lower bound makes central banks stupid and causes them to tighten monetary policy inappropriately.

    If there is a stupidity trap, here’s what I see in the international context of this post. If we could get China, Switzerland, Norway, and Germany to stop running large trade surpluses, the US capital account surplus would disappear. This would put upward pressure on US interest rates, causing the Fed to come off the ZLB. The Fed would then stop being stupid and start a normal monetary policy, which would result in more jobs for Americans. So in that sense, those countries are stealing American jobs.

    Perhaps your position is that there is a discontinuity just when you hit the ZLB, where a single lump of stupidity hits the central bank all at once, but that life within the ZLB is otherwise just like life above the ZLB. In that case, on the margin, the CSNG countries aren’t stealing US jobs, since we’re clearly not just about to rise above the ZLB. I’m not sure I have a logical counterargument, but that position just seems kind of silly. Is it really plausible that that central banks make a quantum shift in their target when they hit the ZLB and then continue with business as usual?

    (I’m trying to come up with a better acronym. Maybe the C-SwiNG countires.)

  7. Gravatar of D R D R
    16. March 2012 at 07:26

    “If we could get China, Switzerland, Norway, and Germany to stop running large trade surpluses…”

    Read: If the dollar fell…

  8. Gravatar of bill woolsey bill woolsey
    16. March 2012 at 07:30

    “They also report that the consensus forecast for RGDP growth in the US is 2.1% in 2012 and 2.2% in 2013. Because we are in a recovery, that’s obviously higher than the consensus forecast of trend growth. In other words, most economists now see the US trend rate of RGDP growth as being something like 1.5%.”

    This doesn’t make any sense. For the economy to be in recoverty, real GDP growth has to be greater than zero. It has nothing to do with trend real GDP growth. It is not the case that recovery means that real GDP is growing faster than trend. Recovery means it is growing and recovery generally lasts until it reaches the previous peak. (Which has been accomplished.)

    Trend real GDP depends on the period over which you find the trend and I think it would take a good may years of less than 3% growth for the trend to fall much below 3%, and if it grows 2% forever, the trend would never go below 2%.

    Of course, if instead of the “trend growth of real GDP” you mean the growth rate of potential output, then that could start growing 1.5%. If it did, then eventually, real GDP would grow 1.5%, and the trend over the last 150 years (or 25 years) would gradually fall to 1.5%.

    Finally, if the real GDP is forcasted to grow 2% for an extended period of time, then the economy would be recovering even if productive capacity were growing 3%, it is just that the output gap would not close.

    If the output gap is forecasted to close (the difference between the level of real GDP and potential GDP) and real GDP is forcasted to be growing 2%, then yes, potential real GDP must be growing less than 2%.

    If you look at the CBO forecast of potential, it is growing closer to 2.5%, and so, we are not closing the gap.

    So, what is this? Are you looking at high employment growth for the last two months? I would wait and see a bit longer. Real GPD has passed its previous peak and employment is way below its previous peak.

    It looks like real GDP was able to grow quite a bit with much less increase in employment. Maybe employment needs to catch up?

  9. Gravatar of ssumner ssumner
    16. March 2012 at 08:18

    statsguy, Nope, it doesn’t explain any of it. What matters is US population growth, not world population. Our growth is little changed from previous decades.

    dwb, Yes.

    Cameron, See my reply to statsguy.

    Andy, It seems to me that you are arguing Krugman is wrong, but that they might cost jobs for other reasons. Krugman assumes that when core inflation falls to 0.6% in 2010, then the Fed won’t do QE2 and raise it back up to 2.2% today. But in fact the Fed did exactly that. So the theoretical model that his claim is based on is false.

    You have another model, which I’ve dubbed the God of the Gaps argument, which I happen to find much more plausible that the Krugman model. We can explore its implications, and there might be an argument there. I still think Chinese currency revaluation right now would be bearish for the world economy, because the income effect of lower Chinese growth would dwarf any impact on US monetary policy by reducing the duration of the zero bound problem. But my point was that Krugman assumed that US monetary policy doesn’t respond at all. I think that might have been true for a few months in 2008-09, but since then the Fed has expected inflation about where they want it. Yes, they’d probably prefer slightly higher inflation, and as you say they might be willing to deliver it if they could do so through lower interest rates rather than QE3, but I see that as a very weak effect, more than offset by the negatives of a tariff war with China, or even the negatives of tighter monetary policy in China (currency revaluation.)

    If Kurgman’s model was correct, the argument for a trade war with China would be much stronger.

    DR, A lower dollar would help us even if it didn’t improve our CA deficit. FDR’s huge devaluation initially worsened the trade balance in 1933, but sharply boosted prices and output.

    Bill, You said;

    “This doesn’t make any sense. For the economy to be in recoverty, real GDP growth has to be greater than zero. It has nothing to do with trend real GDP growth. It is not the case that recovery means that real GDP is growing faster than trend. Recovery means it is growing and recovery generally lasts until it reaches the previous peak. (Which has been accomplished.)”

    I don’t agree, but I think we are just debating terminology, nothing substantive (base don the rest of your comment.) i think “recovery” means higher than trend growth, which I define as potential growth. So if we are recovering, potential or trend growth must be below 2.1%. Maybe my use of “trend” is wrong, but that’s what I meant.

  10. Gravatar of Cameron Cameron
    16. March 2012 at 08:38

    Scott,

    “Nope, it doesn’t explain any of it. What matters is US population growth, not world population. Our growth is little changed from previous decades.”

    Surely it explains at least SOME of the slowdown, as population growth has slowed slightly. More importantly, fewer people are working age as baby boomers retire.

    More importantly, there is no evidence productivity growth has significantly slowed and, as far as I can tell, no reason to believe it will do so. (I’m not actually sure you disagree BTW, you were just citing other economists interpretations) Bad monetary and supply side policy has fooled economists into thinking explanations are more real than they really are.

  11. Gravatar of D R D R
    16. March 2012 at 08:50

    “DR, A lower dollar would help us even if it didn’t improve our CA deficit. FDR’s huge devaluation initially worsened the trade balance in 1933, but sharply boosted prices and output.”

    You don’t think the Fed will tighten in response?

    Seriously, though. Yeah, the balance gets worse in the short run, because producers must adjust.

  12. Gravatar of Andy Harless Andy Harless
    16. March 2012 at 09:04

    Scott,

    OK, reading between the lines, I think what you’re basically saying is that the Fed is following growth rate targeting when it should be following level targeting. In that case a stimulus in the form of reduced C-SwiNG surpluses will only be effective if it happens to coincide with an adverse demand shock that that shifts (or would shift) the Fed’s target path. And indeed Krugman is wrong, except under very special circumstances. I guess that’s plausible.

  13. Gravatar of Andy Harless Andy Harless
    16. March 2012 at 09:50

    Actually, its even worse than I thought for Krugman under growth rate targeting. Under strict growth rate targeting, anticipated AD shocks never affect the target. If the C-SwiNGers had agreed to reduce their trade deficits in 2008, the Fed would have anticipated the result and dragged its feet even more about cutting rates (and done less QE). So we can only say that the C-SwiNGers are stealing US jobs by being open about any favorable changes in their trade policies, when we wish they would secretly reduce their trade deficits (or maybe they’re stealing jobs by secretly increasing their trade deficits relative to what the Fed expects).

    I think you’re not quite fair to Krugman, though. His liquidity trap argument is really about the Fed’s inability to commit. You both agree that temporary monetary injections are ineffective, but you disagree about the conditions under which those injections will prove to be temporary. His argument (in your terms) is that non-monetary stimulus is effective because it commits the Fed to a stronger monetary policy. And in practice, Krugman acknowledges that QE has some effect. I think your difference with him is more about the parameters of the Fed’s reaction function, not about the properties of the underlying model. In other words, I don’t think your distinction between the “God of the gaps” model and Krugman’s “liquidity trap” model is really a valid one. Either way, it’s all about the Fed’s reaction function.

  14. Gravatar of Andy Harless Andy Harless
    16. March 2012 at 09:58

    Krugman assumes that when core inflation falls to 0.6% in 2010, then the Fed won’t do QE2 and raise it back up to 2.2% today.

    I would say Krugman’s position is (was) that the QE2 wouldn’t be sufficiently effective. That position seems to be belied by subsequent experience, but Krguman would probably argue that most of the increase in core inflation was due to supply shocks and that the Fed didn’t ex ante do enough QE2 to raise core inflation back up to 2.2%; it just got “lucky” ex post. (I put “lucky” in quotes, but with the Paradox of Toil, I guess Krugman would say it really was lucky.)

  15. Gravatar of StatsGuy StatsGuy
    16. March 2012 at 10:12

    @ Bob D

    Yes, the charts do mean that – on a forward looking basis, the population is aging. This is actually far more pronounced in the “developed” economies.

    @ Scott

    “What matters is US population growth, not world population.”

    First, if we focus on US population growth, the age distribution is getting much worse than the global age distribution. That’s because countries like Egypt and Iran have large youth populations.

    Second, you are simply wrong about what matters – no insult intended, but the fastest growing area of demand expansion for many large US companies is overseas. This is true even of such formerly US-centric companies as P&G, Kraft, etc. And it’s more true than ever of companies like Boeing and tech/ip companies as well.

    Tyler Cowen, in his argument, has focused substantially on rate of technology advance. There are other factors.

  16. Gravatar of ssumner ssumner
    16. March 2012 at 11:01

    Cameron, You might be right, but obviously most economists disagree. If we gets lots more jobs over the next few years (which almost all economists expect), and only 2.1% RGDP growth, then productivity is obviously slowing sharply.

    BTW, I happen to think RGDP will grow a bit faster than forecast, but the consensus forecast certain agrees with The Great Stagnation.

    DR, No, it gets worse because the income effect is more powerful than the substitution effect (something Krugman forgot.)

    Andy, Yes, I think that is exactly the counterargument Krugman would make. He’s obviously a really smart guy, and I presume he’d have some ways of rebutting my argument. But when I weigh all the various factors, I still think I’m approximately correct, or alternatively the Krugman/Eggesrtsson paradox of toil approach is mostly wrong. But as you say these things are complicated, and a smart person can always find an at least slightly plausible argument for their position.

    And I agree that it’s policy expectations that matter here. I once did a blog post arguing that what Krugman called “Depression Economics” was actually “expected future depression economics” or “expected bad monetary policy economics.”

    Statsguy, Seem my answer to Cameron on the population issue.

    And overseas “demand expansion” makes absolutely no difference for US trend RGDP. It might affect corporate profits, but RGDP measures what’s produced here with American labor, and foreign population growth has no impact on that trend growth rate. Arguably it might impact US AD (although I even doubt that), but AD doesn’t impact trend growth.

  17. Gravatar of David R.Henderson David R.Henderson
    16. March 2012 at 11:54

    See my response to Scott’s P.S. here:
    http://econlog.econlib.org/archives/2012/03/scott_sumner_on_4.html

  18. Gravatar of Morgan Warstler Morgan Warstler
    16. March 2012 at 12:40

    Linked from Memeorandum:

    http://www.memeorandum.com/

    Woolsey is right.

    There’s nothing that would keep us from having 2.5%+ RGDP be the new normal, but we have a shitty Obamacovery and economists aren’t expecting much good news.

    Scott, our bet is whether the current Obama is the new normal.

    And that’s not at all assured.

  19. Gravatar of genauer genauer
    16. March 2012 at 13:22

    the interesting point of the graphic of statsguy is,
    that the absolute number of < 20 year old doesn't increase any more.

    on the overseas demand I clearly side with Scott.

    Productivity is not a result of any macro policies, it goes into the calculations.

    Over the last 200 years we had about 2 % Prod growth in the western world, but half of this was due to one time factors,
    like getting people off the farm, women into the paid (and counted, taxed) workforce, and increase education. All that is mostly finished now, we just keep some 1.0% real productivity growth, and with the number of older people growing, there is 0 % more to distribute.

    People will get used to it, and it is not bad.

  20. Gravatar of Bob Dobalina Bob Dobalina
    16. March 2012 at 14:05

    OK, Statsguy– maybe I have a mental block or something but I think your charts show that the working age population is growing relative to the old and young. That’s why the green part goes 51 -> 54 -> 57. How could you interpret it any other way?

    Can I get a referee in here?

  21. Gravatar of dirk dirk
    16. March 2012 at 14:17

    Here’s a better version of that song:

    http://www.youtube.com/watch?v=2b2ec_Yuy_A

  22. Gravatar of dirk dirk
    16. March 2012 at 14:26

    How is it that a Libertarian economist has managed to become the Dr. Feelgood of the field?

  23. Gravatar of ssumner ssumner
    17. March 2012 at 05:48

    David, Fair enough, I was just thinking about the slower growth aspect.

    Morgan, If the unemployment rate is falling fast, and we still get only 2%, then trend growth has slowed.

    genauer, I completely agree.

    dirk, Well at least you have good taste is film, but don’t mess with my 1970s music (I was born in 55)

    Why do other libertarians always have to sound so gloomy? No wonder they only get 1% of the vote. Morgan brags that his policies will be “brutal.”

  24. Gravatar of Becky Hargrove Becky Hargrove
    17. March 2012 at 10:48

    “Why do other libertarians always have to sound so gloomy?” It’s more fun to be a carrot in a sea of sticks :)

  25. Gravatar of Phil Stephens Phil Stephens
    17. March 2012 at 14:38

    @Scot:

    If I am a company that makes something the world wants, like say ipads, and I make them in america, then more consumers means more labour. As you are so fond of pointing out economics is not a zero sum game. I guess what I am saying is that if trade makes people richer, having more people to trade with must be a good thing.

    A second related point, is that given that R&D for a given advance has a fixed cost, then more potential consumers increases the return and makes innovation more profitable (potentially). An easy example is something like cancer research. If I doubled the population I would double the number of people who have cancer, and probably double the amount of research getting done, so I would double the rate of scientific progress. I would imagine that scientific progress is basically proportional to the number of man hours spent on it, so a large population should improve the rate of innovation even if you dont raise the % gdp spend on it.

    My contention is basically that trend growth for all industrialised countries is basically the same, due to the globalised nature of innovation. It doesnt matter who invents something, every country will share in the benefits of new technology, and its associated productivity growth. Thus basically the whole difference between US growth rates and western European growth rates is population growth.

    Here is

    not sure if that will work, can get the page here
    http://www.google.co.uk/publicdata/explore?ds=d5bncppjof8f9_&ctype=l&strail=false&bcs=d&nselm=h&met_y=sp_pop_grow&scale_y=lin&ind_y=false&rdim=region&idim=country:GBR:USA&ifdim=region&tstart=-309052800000&tend=1300320000000&hl=en&dl=en&icfg

    and so I would expect US trend growth to be approaching western Europe trend growth. If this is borne out I will conclude that population growth+technological innovation account for basically all trend growth, and that redistribution/tax etc basically dont matter for trend growth.

    I digress. Ibasically have two questions: Given that the world is interconnected via trade, such that gdp slowdowns in europe affect the US recovery, and given that European growth rates are, in the long term, strongly affected by population growth, are you really advocating the opinion that world population will not affect US trend growth? That just seems implausible to me.

    Secondly, given that US population growth rates have fallen by nearly 1% in the last 25 or so years, should it not follow that gdp trend growth should fall by a broadly similar amount?

  26. Gravatar of Johannes Johannes
    19. March 2012 at 05:37

    “Planet Earth: it’s a positive sum game”

    Even so that is probably true, you cannot ignore the distribution effects either.

    Assume, Germany is producing so much more goods than they actually consume, that they employ 1,000,000 more people than necessary. Ultimately, the other Euro-zone countries consume more than they produce, hence they employ less labor than they could. Now even if you have huge efficiency gains and the importing countries produce other stuff instead, you will very likely still have less employment than without the imports from Germany.
    If you would be optimistic they would create 500,000 jobs due to German imports, however, they would still loose 500,000.

    You cannot just ignore these 500,000 “stolen” jobs which are more likely to be even more in the medium and short run.

    Or let me try another example.
    If an American is buying an Audi instead of a Crysler, do you really believe that the USA will produce something of equal or higher value instead?
    It is hard to find something with higher productivity than manufacturing, so I would argue it is very unlikely.

  27. Gravatar of Johannes Johannes
    20. March 2012 at 00:11

    Dani Rodrik recently made a comparable point.

    http://www.project-syndicate.org/commentary/free-trade-blinders

  28. Gravatar of ssumner ssumner
    22. March 2012 at 17:11

    Phil Way too much to address, and somewhat off topic, but I’ll try.

    1. Yes, all countries tend to grow at the same rate (per capita) in the long run.

    2. No, US population growth hasn’t slowed over the past 25 years, it’s stayed around 1%.

    3. No, doubling population doesn’t come close to doubling rate of scientific progress. There are other inputs and hence diminishing returns.

    4. A slowdown in Europe affects the US recovery only if the Fed lets it.

    Johannes, You said;

    “Ultimately, the other Euro-zone countries consume more than they produce, hence they employ less labor than they could.”

    That’s a complete non-sequitor. How much labor is employed has nothing to do with trade balances.

  29. Gravatar of Johannes Johannes
    24. March 2012 at 09:36

    “That’s a complete non-sequitor. How much labor is employed has nothing to do with trade balances.”

    If that is so obvious and clear, why this article? I guess you just wanted to point out the inconclusivness of the China-bashers… However, the main response there is also clear. If it comes to competitevness, it is not the absolute wages which matter, but the unit labour costs.

    I understand that the relation between trade balance and unemployment is fuzzy since you can export capital intensive and import labour intensive. Also you have all kind of other effects playing a role (e.g. in the non-tradables sector). But in times of high unemployment in many countries it sounds unrealistic to me that high trade imbalances have no employment effects.

  30. Gravatar of D R D R
    24. March 2012 at 10:09

    “‘Why do other libertarians always have to sound so gloomy?’ It’s more fun to be a carrot in a sea of sticks”

    You know the carrot and stick must work together, right? No stick, and the donkey doesn’t see the carrot. The donkey doesn’t see the carrot, and the donkey doesn’t walk toward the carrot. The donkey doesn’t walk toward the carrot, and you get to carry your own stuff.

  31. Gravatar of Thomas Thomas
    31. July 2012 at 12:27

    Germany Export Sector is Responsible for almost 50% of their GDP. Norway, Switzerland, Northern Italy, Northern Spain, Eastern France, Czech Republic, Slovakia, Hungary, Sweden, Belgium, Netherlands,Denmark and Finland also have very large Export Sectors (manufacturing, High End Services) which Pay very very high wages and Benefits and also allows Social Democracy to Exist for these Countries. Northern Europe has a 500 billion dollar Current Account Surplus yearly. And also they purchase many foreign assets with money they earn off Trade. Northern Europe are the largest Holders of Foriegn Assets in the World, While Japan is Second and China is Third. Not only does these Creditor Nation make wealth off their domestic exports/Economic Production but also the Trillions of dollars of Hard Assets owned around the Globe.

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