.
"This approach was used by the U.S. Chamber of
Commerce to estimate approximately 700,000 jobs."
1/30/15,
"The Obama administration’s illusionary job gains from the Trans-Pacific Partnership," Washington Post, Glenn Kessler
"The Fact Checker frequently warns readers to be wary of claims by
politicians that various policy initiatives will yield tens of thousands
of jobs. Such claims are often based on studies that rely on a variety
of assumptions, any of which can be called into question. So we were
interested when we received a call from a reader who wondered how the
administration calculated that a proposed international trade agreement,
known as the Trans-Pacific Partnership, would support some 650,000
jobs.
The Obama administration is on a full-court press to complete negotiations on the trade pact,
involving 12 Pacific Rim nations, and also win from Congress the
authority for an up-or-down vote from lawmakers, which officials say is
necessary to close the deal. The TPP is one of the few areas in which
the White House can expect strong support from Republicans, though many
Democrats remain skeptical or hostile.
.
The Fact Checker of course
takes no position on whether the proposed trade deal is good or bad.
But we were curious about how this number was calculated.
The Facts
Notice that Vilsack referred to the Peterson Institute for International Economics,
which is a well-regarded centrist think tank that focuses on
international economic policy. The Peterson Institute advocates for
free-trade agreements but also for programs that aid people who may be
hurt by globalization.
.
The Peterson Institute in 2012 published a book titled “The Trans-Pacific Partnership and Asia-Pacific Integration: A Quantitative Assessment,” by Peter A. Petri,
Michael G. Plummer and Fan Zhai. The book does include an estimate
that, by 2025, the United States would experience a gain of $77.5
billion in income from TPP, as well as a $124 billion increase in
exports. (More on those numbers, which are expressed in 2007 dollars,
below.) But nowhere in the book does it says 650,000 jobs would be
created.
.
Asked about the statistic on 650,000 jobs, the White
House referred us to the Office of the U.S. Trade Representative. USTR
spokesman Matthew McAlvanah directed us to page 58
of the book. “They do not provide an estimate on jobs,” he
acknowledged. “However they do provide a methodology that one could
use.”
.
Essentially, the book suggests that an income gain of
$121,000 would be “roughly equivalent to creating an extra job.” So the
Obama administration took the figure of $77.5 billion and divided it by
$121,000, which yields 640,000. Rounded up, that becomes 650,000.
.
There’s
just one problem: This is the incorrect way to use Petri’s research,
especially when officials such as Kerry combine the jobs figure in the
same sentence as the income prediction: “The TPP could provide $77
billion a year in real income and support 650,000 new jobs in the US
alone.”
.
That’s because the calculation on jobs can only be done
if one assumes that wages have been frozen and there is no income gain.
So it’s completely misleading to suggest there would be both a gain in income and a gain in jobs.
.
Petri
said that his book did not discuss job gains because mainstream
economists do not believe that the number of jobs is significantly
affected by trade policy.
.
“The reason we don’t project employment
is that, like most trade economists, we don’t believe that trade
agreements change the labor force in the long run. The consequential
factors are demography, immigration, retirement benefits, etc.,” he
said. “Rather, trade agreements affect how people are employed, and
ideally substitute more productive jobs for less productive ones and
thus raise real incomes.”
.
The same dynamic exists with the claim
that the trade bill would increase exports by $124 billion by 2025. The
Commerce Department estimates
that about 5,500 jobs are supported by every $1 billion in exports, so
in theory that also would yield about 650,000 jobs. But that calculation
would ignore the fact that the Petri book found that imports would
increase by virtually the same amount as exports, meaning the net number
of new jobs is zero.
.
The mix of jobs would change, however.
“Employment could be negatively affected by the adjustment implications
of a trade agreement,” Petri said. “We estimate ‘job shifts’—employment
moving from one sector to another—and in difficult labor markets such
shifts can lead to transitional unemployment, retirement or wage cuts.”
But, he added, “in the case of the TPP such shifts will be small and
slow, dwarfed by routine job separations and new hires in the economy.
So adjustments and costs should be covered many times by gains. This
makes possible strong transitional assistance for workers and
communities that are adversely affected.”
.
Finally, let’s put
these numbers in context. Petri’s book says that a gain of $77.5 billion
in income amounts to just a 0.4 percent increase in the pre-trade-deal
baseline for the United States’ $20-trillion gross domestic product. You
read that right—0.4 percent.
.
Indeed, a gain of 650,000 jobs
would also be just 0.4 percent of projected employment of 168 million
people, Petri said. “The percentage change is small,” Petri
acknowledged, which he said is what one would expect from a large and
efficient economy such as the United States. (Vietnam, by contrast,
would see a gain of nearly 14 percent in income according to Petri’s
model.)
.
There is, of course, a long history of presidential
administrations touting imaginary job gains from trade deals. “I believe
that NAFTA will create 200,000 American jobs in the first two years of
its effect,” then-President Bill Clinton said in 1993,
when he signed supplemental agreements to the North American Free Trade
Agreement. “I believe that NAFTA will create a million jobs in the
first 5 years of its impact.”
.
Clinton was relying in part on
analyses generated by the Peterson Institute. Two years later, after a
financial meltdown in Mexico and collapse of the peso evaporated any job
gains from NAFTA, the economist who generated the forecasts famously
said he would stay away from job forecasting in the future.
.
In 2012, C. Fred Bergsten, the founder of the Peterson Institute, conceded
the Institute had “big internal debates” over whether to calculate job
numbers. “Congress always wants to know how many jobs they’re going to
create,” Bergsten said. “As good economists, we all take the view I
think that trade agreement does not unbalance, create, or destroy jobs,
it alters the composition of the workforce.”
.
McAlvanah provided the following response:
“The
Peterson Institute study provides a variety of different analytical
pathways to estimate the job supporting potential of TPP. Peterson
provides estimates of both the increase to U.S. income and to U.S.
exports as a result of TPP. The methodology laid out in the Peterson
study for calculating potential employment gains based on their
projected increase in income suggests a jobs number just below 650,000.
A different approach is to use the sectoral value added estimates from
the Peterson study. This approach was used by the U.S. Chamber of
Commerce to estimate approximately 700,000 jobs. Another approach is to
map the incremental increase in national economic output to a
proportional increase in employment. The Peterson study estimates an
increase of 0.4 percent of GDP attributable to TPP. Based on a 2025
working population of 168 million cited by Peterson, a 0.4 percent
increase would be approximately 672,000 jobs. It is also possible to
estimate jobs supported by new exports by multiplying estimates of jobs
per billion exports by the 124 billion dollars of increased exports
projected in the Peterson study.”
We note
his statement did not address the fact that the study itself did not
offer these calculations — or that effects of one action, such as more
exports, are canceled out by another action, such as imports.
The Pinocchio Test
Clearly,
with the Peterson Institute refusing to play the game this time and
cough up a jobs number, the administration decided to concoct its own.
But, as we have shown, one cannot at the same time claim both a gain of
$77 billion in income and a gain of 650,000 jobs; the same effects
simply cannot happen at once.
.
Moreover, these are big numbers
with virtually no context. It is pretty lame to use such huge numbers to
tout what, in the context of the U.S. economy, amounts to minuscule
changes in income —10 years from now.
Our advice remains: be wary
whenever a politician claims a policy will yield bountiful jobs. In
this case, the correct number is zero (in the long run), not 650,000,
according to the very study used to calculate this number.
Administration officials earn Four Pinocchios for their fishy math.
.
