Economix Blog: The Benefits of Uncertainty

When people argue that uncertainty about taxation and regulation is freezing corporate decision-making, they are generally arguing that more certainty would be a good thing for the economy. The idea, deemed so self-evident that it sometimes is left unspoken, is that corporations are hesitating to invest in the United States.

But an interesting study flips this story on its head. It finds that manufacturing employment in the United States declined sharply as a direct result of a 2000 government decision to fix in place the level of tariffs on imports from China.

The level of tariffs had remained constant for years, but only because Congress acted each year to extend the status quo. Without that annual vote, tariffs on many goods would have increased, in some cases quite sharply. Then in 2000, Congress granted “permanent normal trade relations” to China. The legislation mostly left the existing tariffs unchanged. What it eliminated was uncertainty about next year.

The result was a burst of corporate decision-making. Newly confident that tariffs on imports would not increase, executives responded by firing workers in the United States and moving production to the other side of the Pacific.

The effect was huge, according to the paper, by Justin R. Pierce, a Federal Reserve economist, and Peter K. Schott, a professor at the Yale School of Management.

“Absent the shift in U.S. policy, U.S. manufacturing employment would have risen nearly 10 percent between 2001 and 2007, versus an actual decline of more than 15 percent,” they wrote – a difference of roughly four million manufacturing jobs.

The analysis is based on the fact that before 2000, in the absence of Congressional action, tariffs on different goods would have increased by different amounts. The larger the potential increase, the greater the weight of uncertainty before 2000 – and, the authors found, the larger the decline in employment after 2000.

There’s an abundance of ancillary evidence, too: imports from China increased in those sectors, as did the number of American companies importing from China and the number of Chinese companies exporting to the United States. And surviving domestic manufacturers invested heavily in technology to remain competitive.

Job losses cause a great deal of pain. But mainstream economists have long maintained that moving manufacturing to China is good for the United States in the long run, because it reduces prices and shifts resources to more productive uses. Even that consolation, however, has lately been called into question by research showing that dreaming up new things is easier if you also are making things. Put differently, the other jobs eventually will follow the manufacturing jobs.

There is some evidence that the worst is over now. Last year was the third straight year of job growth in manufacturing. But the increases are tiny in comparison to the jobs lost since 2000. Manufacturing employment fell from 17.2 million at the end of 2000 to a nadir of 11.5 million in 2009, and has since climbed to 12 million at the end of 2012.

Article source: http://economix.blogs.nytimes.com/2013/01/07/the-benefits-of-uncertainty/?partner=rss&emc=rss