A new paper by Robert J. Gordon and Kenneth Ryu “The Mysterious Disappearance of Productivity Growth in US Manufacturing: Was It the China Shock?” shows that annual U.S. manufacturing productivity growth collapsed on a price-adjusted basis from an average of 5.1% in 1987-2005 to 1.6% in 2005-23, due to the outsourcing mania, mostly to China, in a globalized economy. That matches equivalent data for the British economy in 1873-1914, when growth halved from the previous 40 years and became largely financialized. Both statistics have the same message: the Whig theory of beneficial free trade is twaddle. Outsourcing to low-wage foreigners removes necessary skills and dumbs down the domestic economy, making it a feeble competitor to hungrier overseas nations who avoid this error.

Gordon and Ryu’s figures are a little dodgy; they suffer from the typical academics’ delusion that official inflation figures overstate true inflation, when it is painfully obvious to any careful observer that they understate them. Without their spurious “price correction” (which makes productivity growth rates entirely implausible in the earlier period – even Japan in 1890 was not getting prolonged 5% productivity growth) manufacturing productivity growth has slowed from 3.6% annually in 1987-2010 to minus 0.3% annually in 2010-23 – they have an entirely reasonable point that 2009 was a funny year, distorting the figures, but don’t give unadjusted productivity growth with a 2005 break.

Given the God-awful U.S. economic management of 2010-23, Bernanke, Obama, Biden and all, I would be very surprised if annual manufacturing productivity growth was as high as minus 0.3%, even accounting for Trump’s blessed first term. A blizzard of idiotic “climate change” and other regulations were combining with Ben Bernanke’s ziggurat-encouraging negative real interest rates to make it very difficult to do anything productive at all.

Gordon and Ryu outline several mechanisms by which outsourcing can reduce productivity. Invasions of imports produce stagnation in domestic industry growth, which reduces its margins and starves it of the investment funding needed to modernize and retain its customers. A second mechanism is the outright closure of domestic producers, whose survival is made impossible by foreign competition. A third is the compounding negative effect of reduced investment in firms being subjected to increased foreign competition. Finally, offshoring renders domestic engineers unfamiliar with the manufacturing process, hugely reducing their ability to make improvements through a process about which they lack knowledge.

The Gordon/Ryu thesis makes perfect sense and exposes the fallacy of several myths we have been sold for the last quarter-century. The “Apple Strategy” proclaimed by Tim Cook in 2015 of offshoring all manufacturing, while keeping product development in California is completely idiotic. Once manufacturing is offshore, the product developers in California will know nothing about how products are made or what changes are practical, and so will spend abundantly paid person-centuries debating the color of the next model and dreaming up epic surges of wokery to inflict on the unfortunate buyers of their products. It would make much more sense to return the actual manufacturing to the U.S. and outsource the product developers to some idyllic spot like Democratic Republic of Congo, where they could learn a little about the strictures of real life.

Another disastrous free trade effect, which Gordon/Ryu have not covered, has occurred in the rapidly expanding field of software, which is mostly excluded from manufacturing statistics, being “research and development.” Around 2000, we were told that IBM and other large users of U.S. software could outsource the less complex lower tiers of software development to Bangalore, while keeping the more skilled levels entirely in the U.S. Much was made of David Ricardo’s 1817 Comparative Advantage principle, whereby low-wage countries should produce goods and services for which their comparative advantage was greatest – in Ricardo’s example, Portugal should produce port wine, while Britain should produce cloth, in which its already mechanized industry was more efficient. The example gained additional force from the respective quality of the goods exchanged – have you ever TASTED British port?

We know what happened. Far from low-skill software being confined to India, the Indians both in India and through the damaging H1B visa program in the U.S., swarmed up the value chain and ate American software companies’ breakfast, depressing wages for highly-skilled U.S. computer scientists to a Third World level. This caused all the brightest U.S. students to head to law school, to enter a career where legal barriers made such competition impossible. The result has been a massive U.S. shortage of STEM graduates, caused entirely by insane government policies and the actions of dopey corporate behemoths. Of course, the H1B low-wage-lobby scammers now want to increase the number of H1B visas, to make the problem even worse.

This miserable chain of events has happened before – in 19th century Britain, which abolished tariffs unilaterally in 1846-60 and to everyone’s surprise watched Britain’s industrial lead disappear as if by evil magic, while the British workforce after 1870 or so watched its wages steadily descend down the international comparisons. Also like today, late 19th century Britons were subjected to spurious environmental homilies from William Jevons about how their coal was about to run out and unpleasant moral lectures from William Gladstone and others claiming that, however damaging free trade appeared to be to their welfare, it was for Britons’ moral good.

The fact that this has happened twice, in two different countries more than a century apart, indicates that these are not random examples, but represent a firm economic law, one of the many so far undiscovered by the conformist and socialist-oriented economics profession. Free trade only works between countries of roughly similar wage and technological levels; outsourcing large portions of manufacture, software or any other high-skill activities to countries with much lower labor costs, risks losing one’s technological lead and even the capability to perform the activity at all, as students retrain to enter other activities and the low-wage country acquires mastery of the value-chain tidbits one had attempted to keep for oneself.

Today the disadvantage of free trade is seen in AI; as I remarked three weeks ago, China has acquired a highly competitive position, mostly through the United States outsourcing most of its capabilities relating to this new field, which bids fair to resemble electric power in its contribution to human welfare. Now the U.S. is lumbered with a gigantic collection of regulatory detritus that leftist governments have imposed on it, which makes it very difficult for the U.S. to compete even in this new field that it invented, since it cannot build new data centers without fighting crazed NIMBYism and cannot build new power stations in less than a decade or two.

Again, we have been here before. Britain’s Locomotives on Highways Act 1865, passed in response to the noble Goldsworthy Gurney’s steam road carriages, already thirty years in the past, provided that any such device must move at no more than 4 mph, with a man with a red flag walking in front to ensure compliance. As a result, despite Britain having invented the steam engine, being the world’s leader in textile machinery through Platt Brothers, and inventing the turbine in 1884, the German Benz/Daimler invention of automobiles produced no British response. Ten long years were allowed to pass before the 1865 Act was repealed, at which point a typical witless stock market bubble ensured that innumerable British automobile companies were financed, nearly all of them scams devised by the swindler Henry John Lawson, who satiated the market’s thirst for automobile companies through his worthless promotions. Regulation likewise delayed and restricted Britain’s entry into electric power, electric lighting and telephony.

The solution to the productivity decline and to China’s competitive threat is a mass bonfire of regulations, at Federal, state and local levels – local regulations such as California’s electric vehicle mandate that regulate imports to the state are attempts to police Interstate commerce; a wise Supreme Court would declare them unconstitutional. Repealing no more than four especially foolish pieces of 19th century British legislation in the economic sphere – even without bringing back the Corn Laws — would have allowed Britain to compete effectively in electric power/light, telephony (they only got radio because Guglielmo Marconi ignored the Telegraph Act of 1868 and did a quick IPO to gain public investors and supporters) and automobiles, in all of which the country should have held a premier position. Similarly in the United States today, repealing regulations that can delay construction for a decade and multiply its cost fivefold would enable it to regain the productivity growth levels of 1987-2005 and thereby assure its citizens a permanently brighter future.

Free Trade is a demonic Pied Piper, leading to perdition. Don’t follow it!

-0-

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)