The ‘Lump of Labor’ Fallacy

Last night, the president embraced a strong skepticism of trade -- to the country's detriment.

Win McNamee/Getty Images
Win McNamee/Getty Images

In his 2012 State of the Union address, President Obama jumped from issue to issue. At times, in all this leaping, he found himself on the opposite side of a stance he had taken minutes before.

Early on, he claimed success on his bailout of the auto industry (continuing a policy launched by Pres. Bush) and claimed it was a model that could be replicated:

"On the day I took office, our auto industry was on the verge of collapse. Some even said we should let it die. With a million jobs at stake, I refused to let that happen…We bet on American workers. We bet on American ingenuity. And tonight, the American auto industry is back. What’s happening in Detroit can happen in other industries. It can happen in Cleveland and Pittsburgh and Raleigh."

Then, minutes later:

"It’s time to apply the same rules from top to bottom: No bailouts, no handouts, and no copouts. An America built to last insists on responsibility from everybody."

One of the most striking themes of a generally hodgepodge speech was strong skepticism about trade. The president fully embraced the "lump of labor" fallacy, in which one imagines a fixed number of jobs in the world that are simply slung back and forth across oceans.

"Let’s remember how we got here. Long before the recession, jobs and manufacturing began leaving our shores…we have a huge opportunity, at this moment, to bring manufacturing back. But we have to seize it. Tonight, my message to business leaders is simple: Ask yourselves what you can do to bring jobs back to your country, and your country will do everything we can to help you succeed."

The strong implication is that the rest of the world has been booming, enjoying all those factory jobs they swiped from us. It’s difficult to find that in the data. But the president promised to chase down foreign wrongdoers with a new Trade Enforcement Unit.

He claimed previous efforts at trade enforcement, such as his tariffs on Chinese tire imports, had saved American jobs (1,000, in that case). This is interesting on several counts. First, he made the claim in the context of saying that "I will not stand by when our competitors don’t play by the rules." Yet the Chinese tire tariffs case never even alleged wrongdoing on the part of the Chinese. They were just selling at low prices.

Second, other observers have generally found no evidence those tariffs did anything to help American workers. The U.S. China Business Council, in a study, concluded:

"U.S. imports of the low-end tires involved in the case have actually increased substantially since the tariffs were imposed — but have shifted from China to other countries. And, there is no objective evidence that the tariff boosted U.S. tire manufacturing jobs."

A Wall Street Journal report last week reached a similar conclusion. In order to be fair, the Journal offered the administration the chance to rebut, but reported: "Spokespeople at the ITC, the Commerce Department, and the Office of the U.S. Trade Representative say they have no comprehensive analysis yet of the broad effect that the tariff has had." That was last week. So how did the President determine that 1,000 jobs were saved?

The third point on this illuminating case is that — even if his numbers were right — the president thinks it would be a successful policy to charge tens of millions of Americans more for their tires if it protected 1,000 jobs. That’s a fairly stark statement in favor of protectionism.

So much for what the president did say. What about the things he did not say? He made no mention of his vaunted Trans-Pacific Partnership. Recall that two months ago, in Hawaii, this was a pillar of his administration’s turn back to Asia. It is a highly ambitious undertaking and would require a huge administration effort, in close collaboration with Congress, if it were to conclude this year. The State of the Union is traditionally where an administration sets out its priorities for the year ahead. Yet not a mention.

Nor did the president say anything about the economic crisis in Europe. One hears that the White House considers it the biggest threat looming over a nascent U.S. recovery. If the president were truly trying to describe the State of the Union, Europe’s predicament would seem to deserve some serious mention.

But it would fit awkwardly in a campaign speech and was thus, presumably, omitted. The topic, after all, seems to highlight the potential dangers of excessive borrowing, as Indiana Gov. Mitch Daniels demonstrated in his response:

"In our economic stagnation and indebtedness, we are only a short distance behind Greece, Spain, and other European countries now facing economic catastrophe. But ours is a fortunate land. Because the world uses our dollar for trade, we have a short grace period to deal with our dangers. But time is running out, if we are to avoid the fate of Europe, and those once-great nations of history that fell from the position of world leadership."

That’s certainly not an image the president wanted to invoke, as he moved on to a grab bag of new spending proposals and as his administration delays the release of his budget.

Thus, the state of our union: we’re in campaign mode.

Phil Levy is the chief economist at Flexport and a former senior economist for trade on the Council of Economic Advisers in the George W. Bush administration. Twitter: @philipilevy