George Llewellyn Christian.

NAFTA job claims : truth in statistics? : hearing before the Committee on Governmental Affairs, United States Senate, One Hundred Third Congress, first session, November 10, 1993 online

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y\j ' S. Hrg. 103-386

NAFTA JOB CLAIMS: TRUTH IN STATISTICS?

Y 4. G 74/9; S. HRG. 103-386

HAFTA Job Clains: Truth in Statist!...

HEARING

BEFORE THE

COMMITTEE ON
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE

ONE HUNDRED THIRD CONGRESS

FIRST SESSION



NOVEMBER 10, 1993



Printed for the use of the Committee on Governmental Affairs




^\::c






U.S. GOVERNMENT PRINTING OFFICE
74-339 cc WASHINGTON : 1994

For sale by the U.S. Government Printing OtTice
Superintendent of Documents, Congressional Sales Office, Washington. DC 20402
ISBN 0-16-0A3504-8



(V

v\j ' S. Hrg. 103-386

NAFTA JOB CLAIMS: TRUTH IN STATISTICS?

Y 4, G 74/9: S, HRG. 103-386

KAFTA Job Clains: Truth in Statist!...

HEARING

BEFORE THE

COMMITTEE ON
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE

ONE HUNDRED THIRD CONGRESS

FIRST SESSION



NOVEMBER 10, 1993



Printed for the use of the Committee on Governmental Affairs







U.S. GOVERNMENT PRINTING OFFICE
74-339 cc WASHINGTON : 1994

For sale by the U.S. Government Printing Office
Superintendent of Documents. Congressional Sales Office. Washington, DC 20402
ISBN 0-16-043504-8



COMMITTEE ON GOVERNMENTAL AFFAIRS

JOHN GLENN, Ohio. Chairman

SAM NUNN, Georgia WILLIAM V. ROTH, Jr., Delaware

CARL LEVIN, Michigan TED STEVENS, Alaska

JIM SASSER, Tennessee WILLIAM S. COHEN, Maine

DAVID PRYOR, Arkansas THAD COCHRAN, Mississippi

JOSEPH I. LIEBERMAN, Connecticut JOHN McCAIN, Arizona

DANIEL K. AKAKA, Hawaii ROBERT F. BENNETT, Utah
BYRON L. DORGAN, North Dakota

Leonard Weiss, Staff Director

Sebastian O'Kelly, Staff Assistant

Franklin G. Polk, Minority Staff Director and Chief Counsel

Michal Sue Prosser, Chief Clerk

(n)



CONTENTS



Opening statements: Page

Senator Glenn 1

Senator Levin 2

Senator Dorgan 5

WITNESSES

Wednesday, November 10, 1993

Paul A. London, Acting Undersecretary of Commerce for Economic Affairs 7

(III)



NAFTA JOB CLAIMS: TRUTH IN STATISTICS?



WEDNESDAY, NOVEMBER 10, 1993

U.S. Senate,
Committee on Governmental Affairs,

Washington, DC.

The Committee met, pursuant to notice, at 2:08 p.m., in room
SD-342, Dirksen Senate Office Building, Hon. John Glenn, Chair-
man of the Committee, presiding.

Present: Senators Glenn, Levin and Dorgan.

OPENING STATEMENT OF SENATOR GLENN

Chairman Glenn. The Committee will be in order. Good after-
noon. Today, the Senate Committee on Governmental Affairs meets
to examine the assumptions, the facts, and the methodologies used
by the Clinton Administration in determining NAFTA's impact on
U.S. jobs.

The Administration has claimed that 200,000 U.S. jobs will be
created as a result of NAFTA. Studies by other groups claim that
this figure could exceed 2 million. But even those who claim all
these varying degrees of increased employment, no matter at what
level, leave when as an unanswered question; 5 years, 10 years, 20
years, or which generation is what I have been asked back home,
and we don't have a good estimate on that.

On the negative side of the ledger, several studies have esti-
mated that NAFTA will cause a loss of anywhere from 34,000 to
900,000 U.S. jobs. Most economists will tell you that the science,
or rather the art of economics is an imperfect study of an imperfect
world, and I guess I would have to agree with that.

So I believe we would be well served to view the predictions of
any of these NAFTA studies with a jaundiced eye and a grain of
salt. Unfortunately, the Administration has tossed a figurative
grain of salt over its shoulder and to the wind and has embraced
the 200,000 jobs figure as the gospel truth without taking into ac-
count a number of important factors.

First, there is no assessment as to whether the pact will cause
a shift in investment from the U.S. to Mexico and how that might
impact U.S. employment. Nor, as Senator Levin will point out, do
the Administration's projections factor in U.S. jobs that could be
displaced through increased Mexican imports.

The Joint Economic Committee recently completed a report ana-
lyzing the 16 major economic studies on NAFTA and the report
concludes that, and I quote, "The predictions of the studies are
widely contradictory and the utility of the studies in reaching pol-

(1)



icy conclusions on NAFTA is extremely limited." That is what we
want to investigate today.

Let me say that out of our own office, my Senate office, not the
Committee office, we asked the Congressional Research Service to
do a study of the major studies of NAFTA and the impact that it
might have, because at home in Ohio we had one person ^yho is
now a professor at Ohio University, and at one time was Chairman
of the International Trade Commission who predicted that in the
first 2 years of NAFTA we would probably lose up to 56,000 jobs
in Ohio.

That was not based on a solid econometric computer run or any-
thing scientific like that. It was sort of a general estimate, and so
it could be ofi" by quite a factor, as he readily acknowledges. But
we went to CRS and asked for their study of these reports and they
came back and said, well, yes, they vary quite widely, but at the
same time the one thing that all of them had ignored was factoring
in a changing investment pattern where investment would prob-
ably be shifted from investment in this country to investment in
Mexico. One other study, then, was done out at Berkeley in Califor-
nia — my understanding of it indicated that once an investment
shift was factored in, there could be as many as 500,000 jobs lost
in the first 2 years for the whole U.S.

I only go on this way to show that the figures are hteraUy all
over the lot, and are projected by people who are trying to do their
best, but when they use slightly different assumptions, that
changes the overall impact tremendously. So we really don't know
quite what to expect. We would like to be able to settle down on
some figures concerning job projections and then know what to tell
our people back home, as everybody is concerned about the effect
on their home State.

Senator Levin has spoken extensively about this on the Senate
floor and was the spark plug for today's hearing. I don't want to
unnecessarily castigate the Administration or anyone else for their
economic estimates and projections. On the other hand, some of the
figures that we have fi'om reputable studies contradict each other.
They are all over the lot, and the purpose of this afternoon's hear-
ing is to try to make some sense out of them.

Dr. Paul London, who is Acting Undersecretary and Deputy Un-
dersecretary of Commerce for Economic Affairs, and very much in-
volved in the whole NAFTA question — we will get to his testimony
shortly after Senator Levin makes his opening statement.

OPENING STATEMENT OF SENATOR LEVIN

Senator Levin. Thank you, Mr. Chairmgin, and thank you for
convening this hearing. Over and over again, we hear the Adminis-
tration tell us that NAFTA will create 200,000 new U.S. jobs by
1995. However, that figure simply is a distortion and is not credi-
ble. The equation and the numbers used by the Administration in
estimating job growth as a result of NAFTA don't add up.

In essence, NAFTA math, as I call it, uses three principles that
would make most elementary school teachers wince. First, it uses
only half the equation by only counting jobs claimed to be created
by increased exports, while ignoring the jobs displaced by increased
imports from Mexico.



Second, it confuses addition with subtraction by adding as job-
creating even those exports that are exports of parts and compo-
nents that were once assembled here in the United States. Exports
are always counted as job creators, whereas, in fact, some rep-
resent job losses.

Third, NAFTA math hangs on to a single specific job creation
number even though NAFTA proponents are inconsistent about
how that number is reached. In fact, two different proponents in
the Administration use two different sets of numbers to get to that
same conclusion.

Now, the first principle — using only half the equation — is exem-
plified by the Administration's claim that NAFTA will create
200,000 additional jobs by 1995. And this is not a minor factor in
the NAFTA debate; this is one of the central selling points to the
American people — 200,000 new jobs by 1995. We hear it over and
over and over again, and it is a gross distortion.

First, it looks at only half the story. In fact, if you use the whole
picture and look at both exports and imports, jobs which will be
lost because of the job displacement effect of increased imports
from Mexico should be deducted from any jobs claimed to be cre-
ated by increased exports. What the Administration is doing is like
looking at half of a ledger, the revenues, while ignoring the other
half of the ledger, the expenses, and then claiming great profits.

The second principle — confusing addition with subtraction — is
also part of NAFTA math. That is demonstrated in the Administra-
tion's claim that all exports are job creators when, in fact, some ac-
tually represent a loss of jobs. For example, take an assembly plant
in Michigan or Ohio or anywhere else in America employing, say,
1,000 workers that is supplied by various U.S. parts suppliers. If
that American assembly plant moves to Mexico and continues to
use the same parts and components from the United States, 1,000
assembly jobs would have been lost in the United States.

But according to the Administration, exports have just gone up
because now some parts and components are crossing the border to
Mexico to that assembly plant which just moved there from the
United States. And since exports have gone up, automatically —
that is the equation — jobs are created. The Administration wrongly
assumes jobs are created when those particular exports that I have
just described in fact reflect lost jobs. Counting those exports as
jobs is typical of NAFTA math.

By NAFTA math, if every assembly plant in America picked up
and moved to Mexico and still used some U.S. parts, the way the
Commerce Department figures things, our exports and job growth
would show a huge jump, despite a catastrophic loss of U.S. assem-
bly jobs which would have actually taken place.

The Administration demonstrates the third principle of NAFTA
math — inconsistency — when it sticks like glue to the figure of
200,000 NAFTA-created jobs by 1995. We start with President
Clinton's statement that every time we sell $1 billion of American
products and services overseas, we create about 20,000 jobs. That
is the President's statement. Every time we sell $1 billion of Amer-
ican products and services overseas, we create about 20,000 jobs.

Treasury Secretary Bentsen then arrives at the 200,000 new jobs
number based on an expected $10 billion increase in U.S. exports



to Mexico in that period. According to the Administration's math,
since each $1 billion in exports creates about 20,000 jobs, $10 bil-
lion in exports equals about 200,000 jobs.

However, although Secretary Bentsen bases his 200,000 jobs on
a claim of $10 billion in increased U.S. exports through 1995, the
Administration's Trade Representative's office, when pressed on its
methodology, says that the export rise in the same period will be
$17 billion, reaching $57 billion in 1995. Although the U.S. Trade
Representative says that exports are going to rise by $17 billion by
1995, and although Secretary Bentsen says it is only going to rise
by $10 billion through the same year, lo and behold just Uke magic
the Trade Representative says there are going to be 200,000 new
jobs created from those exports. Now, how can both of their equa-
tions add up to 200,000 if one is using a $10 billion additional ex-
port figure and the other is using a $17 billion increase in exports
during the same period of time?

By Washington standards, the difference between Secretary
Bentsen's $10 billion in increased exports and Trade Representa-
tive Mickey Kantor's $17 biUion in increased exports may be con-
sidered small. But by any other math but NAFTA math, it is a
pretty big discrepancy.

So some of the questions that I will keep on asking the Adminis-
tration are these. Why do you continually promote the 200,000 job
gain number? What is the figure for job displacement from im-
ports? Why don't you deduct jobs lost from imports from your claim
of jobs gained from exports? How can you include in exports bil-
lions of dollars in parts and components that were once assembled
here in the United States?

So, Mr. Chairman, NAFTA math doesn't add up. I am delighted
that Dr. London has come here today to try to help explain it. We
had invited the Trade Representative, Mr. Kantor, to be here and
he declined, for one reason or another. I don't know that we even
ever got a direct response from him, but in any event he has been
hard to pin down to get over here to a hearing, and that is too bad
because I think that he should have accepted the Committee's invi-
tation. But I know Dr. London and I am glad that he is here to
give us the benefit of his thinking on these questions.

The Administration has just simply got to avoid using distortions
in order to sell NAFTA. There is not going to be an agreement on
one set of numbers; that is clear. There are going to be 16 or 20
or 30 or 50 assessments from every think tank around, most of
whom have axes to grind, but the least we can expect is that the
Administration math adds up, and it hasn't.

Thank you, Mr. Chairman.

Prepared Statement of Senator Levin

Over and over and over again we hear the Administration tell us that NAFTA
will create 200,000 new U.S. jobs by 1995. However, that figure simply is a distor-
tion and isn't credible. The equation and the numbers used by the Administration
in estimating job growth as a result of NAFTA don't add up.

In essence, NAPTA MATH, as I call it, uses three pnnciples that would make
most elementary school teachers wince. First, it uses only half the equation by only
counting jobs claimed to be created by increased exports while ignoring the jobs dis-
placed by increased imports from Mexico. Second, it confuses addition with subtrac-
tion by adding as job creating even those exports that are exports of parts and com-
ponents that were once assembled here in the U.S. Exports are always counted as



job creators whereas, in fact, some represent job losses. Third, NAFTA MATH hangs
on to a single specific jobs creation number, even though NAFTA proponents are in-
consistent about how that number is reached. In fact, they use at least two different
sets of numbers to get there.

The first principle — using only half the equation — is exemplified by the Adminis-
tration's claim that NAFTA will create 200,000 additional U.S. jobs by 1995. And
this is not a minor factor in the NAFTA debate; this is one of the central selling
points to the American people. That claim is a gross distortion. First, it looks at only
half the story. In fact, if you use the whole picture and look at both exports and
imports, jobs which will be lost because of the job displacement effect of increased
imports from Mexico should be deducted from any jobs claimed to be created by in-
creased exports.

What the Administration is doing is looking at half a ledger — the revenues, which
ignores the other half — expenses, and then claiming great profits.

The second principle — confusing addition with subtraction — is demonstrated in
the Administration's claim that allexports are job creators when, in fact, some actu-
ally represent a loss of jobs.

For example, take an assembly plant in Michigan or Ohio employing 1,000 work-
ers that is supplied by various ILS. parts suppliers. If that American assembly plant
moves to Mexico and continues to use the same parts ft-om the United States, 1,000
assembly jobs have been lost in the United States. But, according to the Administra-
tion, exports have iust gone up and therefore jobs created. The Administration
wrongly assumes jobs are created when those exports reflect lost jobs. Counting
those exports as jobs is typical of NAFTA MATH.

By NAFTA MATH, if every assembly plant in America picked up and moved to
Mexico and still used some U.S. parts suppliers, the way the Commerce Department
figures things, our exports and job growth would show a huge jump despite the cata-
strophic loss of U.S. assembly jobs which would actually have resulted.

The Administration demonstrates the third principle of NAFTA MATH — inconsist-
ency — when it sticks like glue to the figure, 200,000 NAFTA created jobs by 1995.
We start with President Clinton's statement that, "every time we sell $1 billion of
American products and services overseas, we create about 20,000 jobs." Treasury
Secretary Bentsen then arrives at the 200,000 new jobs number based on an ex-
pected $10 billion increase in U.S. exports to Mexico in that period. According to
the Administration's math, or NAFTA MATH, since each $1 billion in exports cre-
ates about 20,000 jobs, $10 billion in exports equals about 200,000 jobs.

However, although Secretary Bentsen bases his 200,000 jobs claim on a $10 bil-
lion U.S. export rise through 1995, the Administration's Trade Representative's of-
fice, when pressed on its methodology, says that exports rise in the same period by
$17 billion, reaching $57 billion in 1995. Yet it also sticks to the 200,000 figure. How
can both of their equations add up to 200,000, if one is using $10 billion and the
other $17 billion for a claimed rise in exports?

By Washington standards, the difference between Secretary Bentsen's $10 billion
and U.S. Trade Representative Mickey Kantor's $17 billion may be considered
small. But by any other math but NAFTA MATH, it's a pretty big discrepancy.

So, some of the questions I keep asking the Administration are these, why do you
continually promote the 200,000 job gain number? What is the figure for job dis-
placement from imports? Why don't you deduct jobs lost fi-om imports fi^om your
claims of job gains from exports? How can you include in exports billions of dollars
in parts and components that were once assembled here in the United States?

NAFTA MATH doesn't add up.

It's time for the Administration to play it straight and stop using distortions and
NAFTA MATH to sell this agreement.

Chairman Glenn. Senator Dorgan

OPENING STATEMENT OF SENATOR DORGAN

Senator DoRGAN. Mr. Chairman, that was a presentation of al-
most breathtaking clarity and I agree wdth every single word of it.
Senator Levin has performed, I think, a remarkable service to the
Senate with his presentations on NAFTA math on the floor of the
Senate and here today.

I think, often, the answer you get depends on the question you
ask. Senator Levin is asking exactly the right questions to try to
dissect all these claims and find out what exists inside these often



hollow claims. So I thought it was a great presentation and I shall
not add to the length of the opening. I am interested in hearing the
presentation of Dr. London.

Prepared Statement of Senator Dorgan

You will be posing many questions to our witness from the Commerce Department
today concerning the economic projections for job gains attributable to the North
American Free TVade Agreement.

Many of the gleeful projections for job gains are attributed to the Commerce De-
partment, and I, too have had problems with some of these projections and the ap-
parent basis, or lack of basis, for them.

For example, the NAFTA-USA campaign papered this city with little catalogues
which contained flashy "coupons" purporting to show the benefits of NAFTA for
each state. The coupon for my state, North Dakota, advertised "7,800 jobs" in big
red letters. But I found that these numbers, which were attributed to Commerce De-
partment statistics, had nothing to do with NAFTA, and had nothing to do with po-
tential job gains. In addition, I learned the number of jobs displayed on the coupon
were extrapolated from some very questionable state-by-state export reports from
the Commerce Department. My strong impression is that we need more responsible
reporting of data in these areas by the Commerce Department.

So I am pleased to see an examination here today of the recent Commerce Depart-
ment reports relating to NAFTA, and I appreciate the excellent critical examination
that the staff of the Joint Economic Committee did recently on the framework for
the economic projections for NAFTA.

For myself, however, I don't wish to get into the details today of this or that eco-
nomic model used to make NAFTA projections. I think the problem with the econo-
mists projections on NAFTA are more basic.

Let me quote from a critique of recent major books that advance the claims of
economists on both sides of the NAFTA argument. The critique is written by Lester
Thurow, of Massachusetts Institute of Technology, who is prominent among the
American family of economists. I hate to agree with any economist but he may be
right on this score.

Mr. Thurow says: "when it comes to estimating job losses or gains, the only truth-
ful answer is that no one knows exactly how many jobs will be lost of gained. Nei-
ther of the two estimates is derived from detailed micro-economic studies of Mexican
and American industries. Both are simply extrapolations drawn from historical
analogies based on what once happened elsewhere in the world.

"Mexico is America's largest neighbor, shares thousands of miles of common bor-
der, and both the United States and Mexico live in the global economy of the 19908.
Even if detailed micro-economic studies were done it would not be possible to esti-
mate job losses or gains."

Let me take this one step further. Let's say, after hearing Mr. Thurow's views,
we were to make the giant leap of faith and say that responsible economists could,
with their best scientific tools, make a credible and reasonable projection of jobs loss
or gain resulting from a trade agreement with Mexico. If we were to do that, we
could expect, at least, that the economists making the projections would have a
good, first-hand knowledge of what is in the proposed agreement.

But, that apparently is not the case with economists projecting glorious job
growth from NAFTA. The People's Radio Network recently contacted 150 of the 300
economists who wrote to President Clinton, endorsing NAFTA. PRN asked the
economists if they had read the agreement. Nineteen claimed they had read it, and
eight did not even remember signing the petition. Not surprisingly, the headline on
the article about this survey is: 'The Best Book I Never Read."

So, of 150 economists endorsing NAFTA — asking the American people to follow
them into this major trade agreement — 19 could say they knew what was in the doc-
ument.

Mr. Chairman, I certainly support the efforts of the committee to discern what
is credible and what is fictitious among the government's economic projections on
NAFTA. I also want to challenge the community of macro-economists of this nation
to require more responsible work when their work weighs upon this nation's major
economic decisions.

Chairman Glenn. Dr. London, we look forward to your testi-
mony. Thank you.



TESTIMONY OF PAUL A. LONDON, ACTING UNDERSECRETARY
OF COMMERCE FOR ECONOMIC AFFAIRS

Mr. London. Thank you very much, Mr. Chairman and Senators.
I have a long statement which I know you have received and I
would like to have it put in the record, if I could.

Chairman GLENN. Without objection, the entire statement will be
included in the record, and deliver whatever portions you wish to.

Mr. London. Thanks very much. My name is Paul London. I am
the Acting Undersecretary of Commerce for Economic Affairs. It is
a pleasure to be here today to discuss the data and methodology
the Administration has used to project job growth from the NAFTA
and the question of investment in Mexico which Senator Glenn
asked about earlier.

Let me say at the beginning that the Administration under-
stands the Committee's concern about job numbers relating to the
NAFTA. We share your concern. We support this agreement be-
cause we believe it is good for American working people. We sup-
port it because we believe that the NAFTA will make this country
more competitive in the global economy where our greatest chal-
lenges come not from Mexico, but from mostly high-wage countries
in Asia and Europe.

The Committee's letter of October 27th raised three central is-
sues which I would like to address. Since the question of export
statistics and maquiladora-type exports has been a central one for


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Online LibraryGeorge Llewellyn ChristianNAFTA job claims : truth in statistics? : hearing before the Committee on Governmental Affairs, United States Senate, One Hundred Third Congress, first session, November 10, 1993 → online text (page 1 of 6)