Outsourcing: Time to Talk Back to the Media...

The world is a complex and intricate place. How is anyone to understand it--even a particular piece of it, for example the United States government in Washington DC and its economic policies? It is a big problem, for the standard sources that I was taught (perhaps wrongly) as a child to rely on--the Washington Post, the New York Times, Walter Cronkhite on the evening news--are breaking down.

So it is time to build new institutions. And one way is to take advantage of the fact that those of us whom Jay Rosen calls The People Formerly Known as the Audience are no longer on the receiving end of a media system that runs one way only. We can talk back--fight ignorance with information, fight truthiness with truth, fight media narratives with the real story.

For example...

Back in early February of 2004, then U.S. Council of Economic Advisers chair N. Gregory Mankiw spent some time trying to explain the issues around "outsourcing" to America's elite Washington political news reporters. Greg Mankiw's standard paragraph about outsourcing is very much like mine--like that of any neoclassical and neoliberal economists--and goes something like this:

As with any change in technology that increases the volume of international trade in goods and services, the "outsourcing" of service-sector jobs creates winners and losers--but almost surely more and bigger winners than losers. Big winners are workers in poor countries who get better jobs working for firms that can now export services to rich core countries like the United States. The major losers are those who previously held the now-outsourced service-sector jobs in the United States, who must now find new and different jobs and almost surely find that their skills are worth less. But even in the United States the losses to the losers are outweighed by gains to winners: American workers who find their skills in industries in higher demand as foreigners spend their increased dollar earnings, American consumers who see the prices of what they buy fall, and American shareholders and managers who see the profits of their companies increase. We should worry about the distributional consequences of "outsourcing" and how policies can cushion and offset them. But we should never overlook that--as is almost surely the case with expanded trade--"outsourcing" increases the total size of the economic pie.

Greg Mankiw failed.

On February 10, 2004, he woke up to an unpleasant news story in the Washington Post:

Bush Report Offers Positive Outlook on Jobs: February 10: Wading into an election-year debate, President Bush's top economist yesterday said the outsourcing of U.S. service jobs to workers overseas is good for the nation's economy.... Mankiw's comments come as the president struggles to shore up support in manufacturing states that have lost millions of jobs and Democratic rivals make economic nationalism a centerpiece of their attacks on the administration....

Mankiw's conclusions may prove discordant during an election year, when many workers remain concerned about their prospects...

It happened again on February 11:

Bush, Adviser Assailed for Stance on 'Offshoring' Jobs: Democrats from Capitol Hill to the presidential campaign trail lit into President Bush's chief economist yesterday for his laudatory statements on the movement of U.S. jobs abroad.... Rep. Donald Manzullo (R-Ill.) called for the resignation of N. Gregory Mankiw.... "I know the president cannot believe what this man has said," Manzullo said. "He ought to walk away, and return to his ivy- covered office at Harvard"...

February 12:

Hastert Rebukes Bush Adviser: House Speaker J. Dennis Hastert... rebuked the chairman of President Bush's Council of Economic Advisers.... The speaker's statement, headlined "Hastert Disagrees With President's Economic Advisor On Outsourcing."... "I understand that Mr. Mankiw is a brilliant economic theorist, but his theory fails a basic test of real economics," Hastert said.... A chorus of Democrats preceded Hastert in condemning Mankiw's argument.... The controversy is embarrassing for Bush...

And February 13:

Bush Parts Ways With Aide on Job Losses: President Bush... distanced himself from his chief economist, who this week spoke approvingly of jobs moving overseas. The president... did not mention the aide by name but expressed his concern about the expatriation of jobs.... Several economists, including some Democrats, have defended Mankiw, a Harvard economist, for speaking the economic truth. But his remarks have become a political liability for the president...

Now the Washington Post's news reporters here--Jonathan Weisman, Mike Allen, and Dana Milbank--know, on some level, that they are being unfair to Mankiw. They don't say that what he said was inaccurate, or short-sighted, or analytically unsound. The descriptive terms they use are things like "discordant," "embarrassing," "political liability" that hint that they know that they are giving Mankiw a raw deal, and that flag that fact for careful reasons. But can you find anything of the standard neoclassical-neoliberal analysis of outsourcing in their stories? I can't.

Greg Mankiw thought a bunch of reporters were coming to talk to him about the state of the economy and the analysis made by the Council of Economic Advisers in its 2004 Economic Report of the President.

WRONG!

The last thing the Washington Post's reporters wanted to do was to convey a thumbnail summary of Mankiw's analysis of outsourcing. That's simply not the business they saw themselves as being in. To get even a hint of what the issues are, you have to abandon the news pages of the Washington Post for Bob Davis in the news pages of the Financial Times or the Wall Street Journal:

WSJ.com - Some Democratic Economists Echo Mankiw on Outsourcing: [A]mong Democratic economists... Mr. Mankiw's remarks were mainstream. "Basically I agree with Greg's thrust," said Janet Yellen, who was President Clinton's chief economist. "In the long run, outsourcing is another form of trade that benefits the U.S. economy by giving us cheaper ways to do things." But Ms. Yellen added that many moderately paid U.S. workers are suffering because of outsourcing.... Said Laura Tyson... another of Mr. Clinton's former chief economists: "The traditional economic response does sound hard-hearted and can be criticized for not taking nearly as seriously the dislocation as one should."... "On efficiency grounds, he [Mr. Mankiw] is right," said former Clinton Labor Secretary Robert Reich, meaning that the economy becomes more efficient when costs are reduced through trade. But Mr. Reich... said the administration hadn't made "a serious attempt to deal with the profound structural problems of an economy in transition."... "Linking outsourcing to aggregate employment decline is a bit of demagoguery that will bite him in the b--- next February if [Kerry] becomes president," Mr. DeLong said.

The problem is not that the Washington Post hires people who are unintelligent or lazy while the Wall Street Journal hires whip-smart workaholics. The problem is that conveying accurate information about the economy is high up on almost all the *Journal's* news reporters' and way down on almost all the Post reporters' list of priorities.

Making a splash--yes. Saying "Greg Mankiw says that increased outsourcing is like expanded trade: there are winners and losers but more winners" tells the truth but doesn't make a splash. Saying "Greg Mankiw says that outsourcing U.S. jobs to workers overseas is good for the nation's economy" is not truth but truthiness, but it does make a splash. Saying who is one-up politically inside-the-beltway today--yes. Pleasing your editors so they'll give your stories better placement--yes. Pleasing your sources--like Denny Hastert--so they'll keep talking to you first--yes. Informing the public about the functioning of the economy and about the dilemmas of economic policy--what's that?

Now there was a little bit of information inside the pages of the Washington Post that week. Steve Pearlstein devoted a couple of columns to arguing that outsourcing was bad for America after all. The editorial board defended Mankiw. But neither offered Greg the 2000 or so words in the high news hole he would have needed to get his points across with the same impact as the stories calling his analysis... not wrong but "discordant" or "embarrassing".

On the micro level, it is clear what should be done. If you want to understand Washington DC, the American government, and American economic policy, then: trust the news pages of the Wall Street Journal, trust the Financial Times, trust the political and lobbying coverage of the National Journal. Trust Bloomberg and Knight-Ridder to try as best they can to get the story straight under immense time pressure. Trust nothing else until it is verified. Use yesterday's *Post* for fishwrap. Use today's *Post* to line the kitchen floor while you continue to housetrain the new puppy.

On the macro level, it is less clear what can be done. It should be easy. After all, nobody goes into journalism (or few go into journalism) to mislead the public. But it turns out to be very hard. Government is how we, collectively, decide on and choose agents to carry out our common and joint priorities. The right model to cover government is that of how you would report to your siblings on the agent who rents out your mother's condo in Palm Beach. Government is vastly inferior to Hollywood as a venue for glitterati gossip--yet much political news coverage makes the coverage of Brad Angelina's new rugrat look profoundly serious. Government is, after all, vastly inferior to the world series as a sporting spectacle--yet much political news coverage is more "inside baseball" than the most inside of inside baseball itself.

Comments

[jerry]

Where are the elder stateman of journalism on this? I am shocked at the lack of complaint from the j-school deans.

[mere mortal]

The elder statesmen are dead. This trend has been in effect long enough that even the "dean" of Washington journalism is in thrall.

There is simply no mechanism any longer whereby an accurate journalist can gain fame over a sensational one.

News is part of the entertainment industry, so you will have to go elsewhere for facts.

[NVM]

In some sense the readership, on aggregate, has become too smart for the NYTs & WaPos of the world.

[liberal]

"We should worry about the distributional consequences of 'outsourcing' and how policies can cushion and offset them. But we should never overlook that--as is almost surely the case with expanded trade--'outsourcing' increases the total size of the economic pie."

Funny how for most economists the focus is always on the (claimed) increase in the size of the economic pie, while distributional consequences are always lip service.

[Arun Khanna]

Raise seed capital for an economic think tank that reflects Berekeley at D.C.

[huh?]

I don't see what the big deal is. As the President's chief economic advisor, Mankiw's role is inherently political. Any statement he makes, at any time, to any audience, is a political statement. Mankiw knows it. The WaPo writers know it. Readers know it.

Don't bother me with straight facts. Tell me a story so I get a sense of what's going on.

[Blar]

That's disgusting, Brad. Why would you wrap your fish today in something that you used to housetrain your puppy yesterday?

[Jay Rosen]

Thanks for the link and mention, Brad. But of course I am Jay Rosen, of NYU. Jeffrey Rosen is from the New Republic.

[Jon Fernquest]

Sounds like the Washington Post functions more as a political solidarity building , cheer leading, recirculate info , look - at - yourself in the mirror sort of media not the inject new information into the blogosphere sort of media.

There are enough good blogs by Indian PhD students on outsourcing that could replace print media on the subject one day...if they persist:

Globalization of Services (U of Mich)
http://www.wdi.umich.edu/Blog/

or
Business Process Outsourcing (Univ Texas Austin)
http://bponews.blogspot.com/

Idea: Every specialist, especially PhDs, should work as journalist - public intellectual - conduit - dissemination point for specialist knowledge to the public in addition to the comprehensive exam - orals - dissertation that's usually required.

[Barry]

Liberal, I'd go even further. Brad, the statement by Mr. Mankiw: "We should worry about the distributional consequences of "outsourcing" and how policies can cushion and offset them." is a flat-out lie. If he was to gaffe (using the Kinsley definition), he'd have said: "the distributional consequence of outsourcing are sweeeeeet. The bottom half of the labor force gets screwed, blued and tattooed. Meanwhile, we in the the upper half get cheap labor. Then we cut taxes on the rich, and stick the rest of the country with the bill. With the DLC sell-outs and the Religious Right supporting us in our lies, it's not like we have to worry about the workers actually voting against us.".

[me]

All recent studies are showing that the IT sector has not gained back the jobs lost. Furthermre, all the jobs promised by Catherine Mann due to cheap IT were never created.

When IBM fires 14,000 US workers adn hires 14,000 Indians, explain again winners and losers.

You people always talk the "theoritical" winners but I am here to tell you, those of us "losers" as you put it, have not gained back anything. You keep selling the same old bill of goods but never deliver.

[wetzel]

A fundamental problem I have with the standard neo-liberal economic line is that whenever the worker gets screwed, the goodness of the policy is defended with utilitarian ideas of justice, but when it comes down to addressing the responsibilities of owners, the best form of justice are purely libertarian.

Can't make an omelet without breaking some eggs. Hey! That's my omelet!

[y]

It's not just Mankiw. Whenever I see economists talk about how the gains to the winners are more than enough to compensate the losers, I immediately discount everything they're saying, because I know they will never do anything to actually compensate the losers. Why are you so worried about journalism, Brad, when economics has enough problems of its own?

[bailey]

"The major losers are those who previously held the now-outsourced service-sector jobs in the United States, who must now find new and different jobs and almost surely find that their skills are worth less."
Without Global rules, i.e. intellectual property rights, this "blame-the-messenger-for opting-for-sound-bites argument seems very much to be one more wonderful example of our tenured & subsidized Economics community sell-out to politicians. Where's the counter-balancing study proclaiming the societal cost of the redistribution of wealth and the power-grab of mega-corporation?
Outsourcing was an ill-conceived & poorly executed "idea" who's true accomplishment has been to forever change our national fabric. Shrill? You bet! I'm fed up with short-term political arguments being cloaked as sound Economic thinking.

[save the rustbelt]

This is not all that new.

Some years ago I almost threw a textbook into my tv screen when some slick reporter said something like.....

"Congress approved the new tax bill, which includes depreciation, a tax loophole."

The NYT and Wapo are just catching up with the electronic media.

[Doctor Jay]

wetzel, that's just how I feel. I feel that we should tie some issues together. For example, free trade should be accompanied by getting rid, or cutting back the capital gains tax. After all, that money isn't necessarily growing the economy and creating jobs here at home, is it?

I feel that outsourcing implies universal health care. If we want our workers to take on more risks, to change jobs more often, we need to provide them with more of a safety net as well.

Even a worker making 30,000 a year will benefit from cheaper stuff, but stuff isn't the issue any more. It's security. It's having a meaningful job to do, and a meaningful place in society. That's much harder...

[Slocum]

"All recent studies are showing that the IT sector has not gained back the jobs lost. "

But, of course, the rise in outsourcing coincided with both the bursting of the dot-com bubble and the end of the Y2K demand spike, so attributing all losses in IT to outsourcing is very dubious.

More than that, as a software developer with 20 years of experience, I can say that Indian engineers have every right to compete for software development jobs, and if they can do a particular kind of development work more cost effectively, they should and ultimately will get the business -- whether that is working for U.S. multinationals who 'outsource' or for home-grown Indian companies who gradually overtake U.S. competitors that refuse to use foreign labor.

Keep in mind, too, that the U.S. has been selling its IT products and services to the world for decades (Microsoft, Intel, Apple, Google, Oracle, Symantec) -- why should Indians accept this one-sided situation indefinitely? Why should they not expect to be producers and exporters as well as consumers and importers?

Lastly, the 'lump of work' fallacy is a fallacy when applied to IT specifically just as much as when applied to the economy as a whole.

[liberal]

Slocum wrote, "More than that, as a software developer with 20 years of experience, I can say that Indian engineers have every right to compete for software development jobs, and if they can do a particular kind of development work more cost effectively, they should and ultimately will get the business..."

Except they're competing based on currency exchange values, not PPP values, which means the competition isn't at all fair from US workers' point of view.

[liberal]

save_the_rustbelt wrote, "Some years ago I almost threw a textbook into my tv screen when some slick reporter said something like.....'Congress approved the new tax bill, which includes depreciation, a tax loophole.' "

It sure as hell is a loophole when it comes to depreciating real estate.

[save the rustbelt]

"...It sure as hell is a loophole when it comes to depreciating real estate...."

Liberal:

When I teach taxation I define a loophole as:

"Something that benefits my neighbor but not me."

[liberal]

rusty,

Huh?

Are you being facetious? (Sarcasm detector weak this morning; not enough caffeine.)

How does all the ridiculous depreciation of real estate assets benefit everyone, given that ownership of real estate assets (residential and commercial) is hardly uniform?

[me]

Slocum,

If you can't see anything wrong with IBM firing and replacing US workers, for no reason other than labor arbitrage, you are clueless. Did those US workers just wake up one day and forget how to do their jobs?

If you think Indians have any advantage other than cost, please enlighten us. Steve Jobs just pulled out of India. Gee, he says, its not cheap. So, doesn't he need all those brilliant Indian workers? Is Apple going to fail without India?

Look, if Dell sets up a factory in India to sell to Indians, I have no problem with that. When IBM sets up shop in India and ONLY sells back to the US, I have a problem with that.

I have a real problem when US jobs are lost because other nations don't have pensions or have to pay healthcare. Thanks to thinking like your we are in a race to the bootm and unfortunately we are getting ready to land with a huge thud.

[bob]

We should worry about the distributional consequences of "outsourcing" and how policies can cushion and offset them.

Yeah, would it not be nice if we did something about distributional consequences? But we don't, never did, never will. The reporters aren't idiots: they caught what was important - pro-outsourcing stance - and skipped nice-sounding crap.

[Esq.]

It occurs to me that the real question is whether econometric studies back up the neoclassical model. If the real world measurements don't match theory, the Post interpretation would not be mere truthiness.

In particular, if you exit the two state model into the real world, does India spend enough of its increased income here to balance the books, or does India give the benefit to a third country by spending the increased income elsewhere.

Or, what about this hypothetical? India replaces the US workers in a US export market, that only provides minimal cost savings to US consumers. Our workers are losers in this scenario, and there is no corresponding aggregate benefit to the US.

Nor is it too hard to believe that the aggregate benefit does not outweigh individual costs, especially in goods with a small market.

You would probably disagree, but barring exceptional circumstances such as preventing communist takeovers, any benefit to the Indians is basically irrelevant to US policy.

Evidence. Is there any?. What do the econometric studies say?

[save the rustbelt]

"...How does all the ridiculous depreciation of real estate assets benefit everyone, given that ownership of real estate assets (residential and commercial) is hardly uniform?..."

I did not say I endorsed the Internal Revenue Code, and specificially did not endorse the various depreciation schemes.

I did make light of the loophole debate, which tends to depend on one's perspective.

Obviously the depreciation of business real estate does not benefit everyone, as everyone does not have a business.

Depreciation is a component of "matching," a key accounting concept. I won't try to defend what Congress has done to it.

[save the rustbelt]

On slightly related news, workers are bailing from GM and Delphi so fast it looks like the airborne.

Some have full retirement (for a while) but most will be headed back to the job market - to do what?

It just gets worse.

[david]

Did I really just read a post that argues that neoclassical/neoliberal economics can't get a fair hearing in the mainstream media? Weird stuff, very weird. I guess I just haven't paid enough attention to all those critiques of equilibrium theory informing newspaper editorials on trade.

[LibertyGuard]

me: "I have a real problem when US jobs are lost because other nations don't have pensions or have to pay healthcare. "

I think its more than that -
Take a look at the resources consumed by a typical American - transportation, housing, plastics, paper packaging (the school gift-wrap sales cos. annoy me no end), vacations, even education - dripping with excess! Once I remember someone saying that she sent her penpal or relative in Eastern Europe a picture of her single family home, and they asked how many families lived there - 10 or 20?
The typical Indian, even middle class Indian lives in a 2 bedroom flat, 1 bath(if in the city), or simple 2-3 room bangalow, (if in the country), where bedrooms are routinely shared 3-4 to a room.

The same applies to the chinese - they live, commute, vacation in modest ways.

To tell buyers that they must pay the gussed up, trussed up American worker his inflated wage because he has a god-given right to his hummer and his mcmansion, and his zero-deductible, no-risk, no-fault, highest premium health, property, flood, casualty, life insurances of all kinds (which after a point are all products of the fertile imagination of Aetna and Cigna executives), when the skinny Indian or chinese worker stands there telling you they will work for a tenth of the US wages, and learn to live within their means, nay thrive with it, is not rational!

Americans need to learn to downsize a little, just as the rest of the 3rd world needs to polish their health and immunization programs. But don;t blame the lack of health care payments on the scrappy 3rd world worker - they're taking the little they have and runnning with it on a very uneven playing field, not whining to dad and mom.

[Christopher ball]

What? _TWP_ screws Mankiw (in the finance section, not the front page) but the FT does not with this page 8 lead:
"The White House's senior economic advisers delivered an upbeat message on the US economy yesterday, predicting robust job growth and denying that the outsourcing of work abroad was a serious problem."

The WP goes on to say: "Mankiw's defense of the "offshoring" of jobs has been seconded by other economists and business leaders. A recent study by the management consulting firm McKinsey & Co. also concluded that business investment in service sector jobs abroad will ultimately help the U.S. economy. But Mankiw's conclusions may prove discordant during an election year, when many workers remain concerned about their prospects. "

The WSJ gave this lead: "In an optimistic forecast, the White House expects the U.S. economy to create 2.6 million jobs this year. That would erase the entire loss of jobs since President Bush took office."

I think you have it in for the WP no matter what they write.

[Slocum]

"If you think Indians have any advantage other than cost, please enlighten us."

Why do they need any other advantage? I've been in the industry long enough to remember times when there were huge premiums paid for particular skills. When, for example, Windows programmers were almost impossible to find. Over time, the supply of people with particular skills increased and the relevant wages declined. This is just another version of the same process.

"Steve Jobs just pulled out of India. Gee, he says, its not cheap."

If it's not cheap, then what are you worried about?

"So, doesn't he need all those brilliant Indian workers? Is Apple going to fail without India?"

IIRC, Apple gave up on Indian phone support -- not a surprising decision given their premium brand positioning.

"Look, if Dell sets up a factory in India to sell to Indians, I have no problem with that. When IBM sets up shop in India and ONLY sells back to the US, I have a problem with that."

But IBM doesn't do that -- IBM produces and sells its products services worldwide.

"I have a real problem when US jobs are lost because other nations don't have pensions or have to pay healthcare. Thanks to thinking like your we are in a race to the bootm and unfortunately we are getting ready to land with a huge thud."

Ah, the 'race to the bottom' meme that won't die. Funny though, people have been predicting a 'race to the bottom' for at least 20 years and it fails to materialize. Depending on how you calculate income and inflation, you might be able to make the case that median real American wages have stagnated, but you certainly can't make the case that they've been 'crashing with a thud'.

But even if the richest people in the world (and the history of the world) are only holding their own while hundreds of millions of people in India and China are lifted out of poverty, surely that is a result that should be too distressing to 'progressives', should it?

[bakho]

Basically the corporate press avoids the topic of income redistribution as applied to the US, unless it is used in attack mode against Democrats. Income redistribution is pinko, if not outright commie and certainly something that no red white and blue conservative administration would ever undertake even if it is American workers who lost their jobs to no fault of their own. Bush Administration would enact steel tariffs before they engaged in dodgy income redistribution or worker retraining schemes to help displaced steel workers.

"We should worry about the distributional consequences of "outsourcing" and how policies can cushion and offset them." Indeed we should. But hell will freeze over before this administration does anything about it.

Unfortunately for Dr Mankiw, he worked for an administration that had zero interest in anything to do with redistribution or applying correctives to help the losers in the US to economic dislocation. "There are gains all around from outsourcing but we need to take care of the economic dislocation." is translated by Bush policy as "There are gains all around from outsourcing. The economically dislocated is a private matter. They should deal with it and quit asking for a handout."

So how is any statement from a Bush Economist about the need to help the economically dislocated interpreted? If it is not a forceful attack on the current administration policy, is it any more than a weak apology, an insincere gesture or a "too bad sucker" taunt?

The unwillingness of Republicans to address the issue of econoimc dislocation has created a huge backlash against NAFTA and other free trade agreements. Worse, they prefer to taunt the losers. It is not unreasonable for people to be against free trade if their economic self-interest is not protected.

[typo]

"and that flag that fact for careful reasons. "

Brad--I'm betting you meant to write:

"and that flag that fact for careful readers. "

It's the sort of sound-alike typo I make all the thyme.

[Ken Houghton]

Once again, DeLong attempts to carry Mankiw's water long after the former kicked a hole in the bottom of the pail. It should but embarass both that they tumbled down.

As others have noted, when the head of the CEA says "We should be happy for outsourcing; ultimately, there will be some gains" and doesn't suggest at all how to ameliorate the losses, the WP reported his statement accurately: outsource now with some paying a price ("almost surely find that their skills are worth less"), compensation will come much later, maybe (when "foreigners spend their increased dollar earnings" or "the prices of what they buy fall," which is a disincentive to saving at a time when Brad DeLong wants to tax companies to increase savings [http://delong.typepad.com/sdj/2006/06/the_tree_of_tax.html]).

Oh, wait, I see. "American shareholders and managers who see the profits of their companies increase." You mean the managers who aren't downsized in the outsourcing, and the shareholders who pay MUCH less than half of the taxes those outsourced workers paid.

And since this latter--the only group to receive gains in the short term, without cost to them--is the WSJ audience, the journal praises Mankiw. D'oh!

So in DeLongville, policies that increase income disparity, decrease tax revenues while increasing the burden on the commonweal (those downsized need to be retrained, end up on a social welfare program, or both), and place the risk on those least able to manage it are good policies, because of vague comments about things about which we "should"--but specifically do NOT--worry.

The problem DeLong has is that the WP accurately presented what Mankiw said--and specifically did not say--while the WSJ cheerled the sunny portion.

[Blissex]

«Saying "Greg Mankiw says that increased outsourcing is like expanded trade: there are winners and losers but more winners" tells the truth but doesn't make a splash.»

Well, to me rather than the the truth this sounds like yet another half truth (at best).

It omits to report that Mankiw says that the major winners are abroad and the major losers are in the USA, which is perhaps very relevant to readers of USA newspapers.

Now if Mankiw himself summarizes his position as:

«But we should never overlook that --as is almost surely the case with expanded trade-- "outsourcing" increases the total size of the economic pie.»
«But even in the United States the losses to the losers are outweighed by gains to winners:»

How can then these comments be unfair paraphrases:

«the outsourcing of U.S. service jobs to workers overseas is good for the nation's economy».
«his chief economist, who this week spoke approvingly of jobs moving overseas»

«Saying "Greg Mankiw says that outsourcing U.S. jobs to workers overseas is good for the nation's economy" is not truth but truthiness,»

That saying to me seems accurate and true, not truthy, because he does explicitly state that the nation's economy comes out ahead even if most losers are in the USA:

«The major losers are those who previously held the now-outsourced service-sector jobs in the United States [ ... ] But even in the United States the losses to the losers are outweighed by gains to winners.»

Clearer than this!

Perhaps while thumbnailing correctly Mankiw's position, the fault of those journalists is to have failed to point out that Mankiw' arguments are cleverly worded to omit some relevant details...

While he has stated that

* offshoring increases «the total size of the economic pie»;
* «Big winners are workers in poor countries»
* «The major losers are [ ... ] in the United States»;
* «Even in the USA the losses to the losers are outweighed by gains to winners»;

he has been careful to avoid saying that:

* ''most of the winners or the winnings are in the USA'';
* ''most of the winnings in the USA are widely spread'';
* ''most of the losers are not in the USA'';
* ''the major losers are not just those USA workers whose job is offshored, but all workers whose wages stagnate because of the increased competition for jobs''.

What I see in this discussion is a great deal of dissembling and prevarication on two fronts:

* Economists hopefully do believe that more trade means greater welfare across the world, that most winnings and winners are in the countries where offshoring goes, that most losers are in the western countries, and that most of the winnings in the western countries go to a small minority of well off people, even if the gains to this small minority may well be larger than the losses of the much more numerous losers.

* The republicans and democrats are now posturing to the effect that offshoring of jobs is a bad thing, purely for PR, even if Mankiw and others say correctly that it does benefit the USA economy, overall, as part of a favourable tradeoff.

That offshoring good USA jobs (and the knock-on effects on those jobs that are not offshored) may actually return a net benefit to the USA (even if the benefits are concentrated among the wealthy) and mostly other countries may well be both true and not truthy.

Too bad for truth...

[Barkley Rosser]

On the one hand, the quality of economics and business reporting in WaPo is likely to decline in the near future rather than improve. There has just been a major buyout for early retirement of 70 staffers at WaPo, with an exceptionally high concentration of these folks being in the business and finance section. So, the older and wiser ones are going out the door, while I would not hold my breath on the quality of the new arrivals, although one can always hope, I suppose.

OTOH, it is also a fact noted above by several that somehow in the US we never do get around to compensating the losers of freer trade or outsourcing. It is not impossible to do. Other countries do it. So, holding Mankiw's (and Brad's) feet to the fire over not insisting more vigorously on such assistance to the victims is something worthy to do, even if WaPo did a lousy job of it.

[camille roy]

Some economists are dipping their toes into the reality pool wrt the downside of globalization. What will it take for the cheerleaders to follow their lead?

Here's the cri de coeur from Stephen Roach at Morgan Stanley on globalization and comparative advantage.

Money quote: it’s pretty clear a theory [comparative advantage] is in trouble when it fails the simplest of reality tests.

"...the “win-win” theories of globalization are in real trouble. The basic conclusion of Ricardian comparative advantage that all economists are taught to worship from birth holds that trade liberalization not only brings poor workers from the developing world into the global economic equation (win #1), but workers in the developed world then benefit by buying low-cost, high-quality goods from the developing world (win #2). The theory breaks down because of a new disruptive technology -- in this case, the Internet -- that dramatically accelerates both the speed and scope of worker displacement in the developed world. It used to be that such workers would eventually -- with considerable dislocational distress, to be sure -- seek and secure refuge in the non-tradable segment of their economies. The shocker is that the sense of security in services has effectively broken down. In recent years, IT-enabled connectivity has quickly migrated up the knowledge worker occupational hierarchy in once-nontradable services, denying displaced workers in the developed world the comfort (i.e., sustainable labor income generation) of enjoying the benefits of the second win of globalization.

I recently participated in a seminar on “Global Competition and Comparative Advantage” sponsored by the Woodrow Wilson International Center for Scholars in Washington, DC (see their website, www.WilsonCenter.org, for a detailed summary of this 13 June 2006 conference). I had the honor of sharing the podium with two of the giants of modern trade theory -- Paul Samuelson of MIT, who basically developed the modern-day version of the theory of comparative advantage, and William Baumol of NYU and Princeton, who led the way in exploring the ramifications of nontradable services. Both of these gentlemen cautioned strongly against dismissing the plight of today’s generation of trade-displaced workers in the developed world. Samuelson stressed that in an earlier era of globalization, from 1880 to 1914, a comparable burst of innovation -- in this case, the advent of the factory assembly line -- lowered the standard of living for many workers in the US. “I am not here to be an optimist or a pessimist,” Samuelson stated matter-of-factly, “but a realist.” He concluded that it’s pretty clear a theory is in trouble when it fails the simplest of reality tests. “Displaced workers who have lost their jobs forever -- be they blue or white-collar -- draw no consolation from the theoretical conjecture of the win-win trap of the globalization advocates.”

With one of the theoretical pillars of modern economics unable to explain the way the new world is working, the economics profession has not been very helpful in suggesting a way out."

from http://tinyurl.com/jurv6

[Michael Cain]

"We should worry about the distributional consequences of 'outsourcing' and how policies can cushion and offset them."

I will believe that someone who says this has thought seriously about the consequences and the policies when they explain how they will address the problems of a 50-year-old with a mortgage payment and a kid in college who needs to go back to school for two years.

[Blissex]

«But even if the richest people in the world (and the history of the world) are only holding their own while hundreds of millions of people in India and China are lifted out of poverty, surely that is a result that should be too distressing to 'progressives', should it?»

Sure, and this is the ''moral argument'' for offshoring -- the winners are the many and poor abroad, or the few and wealthy onshore, and the losers are not losing that much: after all working for Wal*Mart for $15,000 a year is a lot better than recycling tins and bottles out of garbage dumps in Chennai, even if not as good as earning $40,000 in a union job in an onshore electronics factory.

Indeed even turning one USA job earning $40,000 into two, one offshore earning $10,000 and one onshore earning $15,000, hugely benefits offshore workers, and however painful it is not the end of the world for the onshore worker.

But the big difficulty is that in a capitalist economy people are perfectly entitled to maximize their own gains, indeed the whole ''invisible hand'' argument says that they should.

And having your wages stagnate (never mind your exchanging your $40,000 union job with a $15,000 Wal*Mart one) even if your productivity increases for many years is not something that any capitalist minded person should take happily, even if this goes to the benefit of a lot of desperate foreigners.

In a capitalist economy being callous about other people's poverty is perfectly legitimate, as is believing that having a $40,000 union job is better than losing it to a foreigner doing it for $10,000 and you getting a $15,000 Wal*Mart one instead.

But I believe that American workers are not all ''me first'' people and many (unlike their bosses) would rather grudgingly accept that doing a less well might be tolerable for a while if the desperately needy in other countries benefited most, also because eventually the rising prosperity of other countries would reflect on the USA too.

But what has happened is that the top 1% of earners in the USA have at the same time increased their share of income from 8% to 16%, grasping whatever they could as hard as they could, profiting hugely from offshoring and immigration, and capturing, thanks to increased labour competitions, virtually all of the benefits of increased productivity by USA workers, and a large fraction of those of offshoring and immigration.

Also, businesses (with the significant exception of Wal*Mart) have been rather slow to pass on to their customers the cheaper prices they get from China and India and the savings made from hiring immigrants, which have mostly gone to the bottom line.

The bottom 30% of american earners, who get about 8% of the pie, may understandably feel that their stagnating wages are benefiting only in some part the desperately poor in China and India, but mostly the wealthy in the USA, and that does not make the ''moral argument'' look that awesome.

Has the productivity of the top 1% of earners grown twice as fast as everybody else's in the past 10-15 years to ''justify'' that doubling in their share of GDP?

Anyhow, that extra 8% of GDP they have captured could have doubled the average earnings of the bottom 30% of USA workers, even leaving offshoring as it is.

Or, if that 8% of USA's GDP that has gone to the top 1% had been offshored too, instead of just the jobs and salaries of the wage earners, it could have lifted out of poverty entire continents, such is its immensity.

[Scott Martens]

Well, I hate to be the one to say this, really I do. But it seems salient to me.

Brad, why should I read your defense of Mankiw any differently than you read Chomsky?

When Mankiw says:

We should worry about the distributional consequences of "outsourcing" and how policies can cushion and offset them. But we should never overlook that--as is almost surely the case with expanded trade--"outsourcing" increases the total size of the economic pie.

...he knows that that means promoting freer trade and creating more losers in manufacturing while putting off indefinitely the "cushioning and offsetting." To think otherwise in the current political climate is foolish. To think Mankiw doesn't understand that is like taking Milosevic literally when he talked about how Serbs in Kosovo ought to be able live in security.

You ask us to read Chomsky without his hedges and without any charity of interpretation. Yet you complain when others read Mankiw the same way.

[Mr. Outsourced]

Many US workers are afraid of free trade with Mexico, China and India. Most are not afraid of free trade with Canada, UK, Germany, Japan, and many others. When you look at that and think about why that is, you can more clearly see where some things are unfair. Some of the differences are the labor standards, environmental standards, and currency valuations. If those innequalities are fixed or offset, then we wouldn't fear free trade with those countries. The US cannot do it alone. We need to band together with other high-standard countries to prevent bad goverments from dragging all of us down - possibly including their own citizens.

[Blissex]

«OTOH, it is also a fact noted above by several that somehow in the US we never do get around to compensating the losers of freer trade or outsourcing. It is not impossible to do.»

Sure it is possible, but the mailbags of congresspeople are not full of letters saying ''let's protect the losers''.

That's perhaps because the losers are a minority, and the majority, especially the 70% of families who have a house, or the plurality who have a secure job, are just doing fine, and could not stomach wasting some of their secure capital gains or protected salaries on a bunch of losers.

Also, only 50% of citizens vote, and only 5% of citizen contribute to campaigns, and congress people know that most of those are more like to own property and have a safe job than those who don't vote.

Once upon a time it was unions who aggregated the political influence of the less well off and gave all-important campaign contributions, but various laws have been passed to make that difficult...

[Blissex]

«address the problems of a 50-year-old with a mortgage payment and a kid in college who needs to go back to school for two years.»

Going back to school for two years is not going to help much, odds are that guy is f*cked.

As to his problem, it is his problem, because:

* The conservative or libertarian positions is that if that 50 year old had been concerned about the possibility of losing his job and career, he should have saved a lot (like 50% of his income probably) to protects himself against the risk of losing job and career. He freely chose not to do so, betting he would not be fired, and just as he reaped the benefits when the bet looked like winning, now that he has lost the bet, he should suffer the consequences of his mistake.

* Practically speaking, in whose interest is it to help him out? Other workers? But most of them are doing fine. Employers? Why help someone who overcharged them for his labour for decades, now that they have found two whole subcontinents full of people who are happy to charge a less exploitative price for their work?

I am only half-joking here...

[Neil']

But Brad, aren't those who talk of greater "efficiency" missing the point? In the case of using less natural resources, there is a true efficiency gain. But cheaper labor does not increase "efficiency", it simply means that more of the money involved goes to one group (owners/investors/other workers) than another group. How can redistributing income be inherently more "efficient"? I agree that there is such a case - increasing equality makes everyone more fit and able to work (more can acquire minimal healthcare, etc.), but that goes in the opposite direction to this other sort of fraudulent "efficiency."

[zenster666]

My beef with the last round of outsourcing is that it pays no deference to the US workers. All I wanted to help ameliorate the damage (loss of job in an evaporating market) was a tax break. They give them to the rich so why not to people whose careers have been sacrificed for the "new world order?" I have found new employment, but like everyone else I know it is at 60% previous pay with almost no benefits. Talk about social engineering...

[liberal]

Slocum wrote, "Over time, the supply of people with particular skills increased and the relevant wages declined. This is just another version of the same process."

No, it's not, because of disparities in PPP.

[Ian Maitland]

Go Brad! Damn the slings and arrows!

[Cranky Observer]

> Other workers? But most of them are
> doing fine.

Well, fewer and fewer of them are "doing fine" every year. Eventually we start talking about other words, like "Depression", "social instability", "revolution".

But again this goes back to the back question that neither Brad nor any economic commentator will answer at their peril: what are we going to DO in 2020? We can't just sell one another McMansions; that game is just about at an end. No factory jobs; oil wealth concentrated elsewhere; financial services becoming commoditized and spread around; no one comes here for school due to immigration restrictions post-9/11. So what do we DO that others can't?

Cranky

[bob mcmanus]

"So what do we DO that others can't?"

Software and entertainment, but we are losing that advantage fast.

The obvious answer is war.

[Tom Marney]

One question:

If the postulated redistribution of gains actually took place, how much better off would the US and/or US workers actually be in the long term or even the medium term? Really, the US is running huge and intractable trade and budget deficits, mostly due to the largesse of foreign lenders, and much of which is going toward sustaining unsustainable levels of consumer spending. Surely Americans newly flush from the redistibution of the gains from outsourcing would spend even more than they already do, making some of our worst problems even worse.

I'm a critic of the way wealth is currently distributed in the US and I've got some ideas about how things ought to be, but I'm not very satisfied with them. How about you?

[BillCross]

Also, on Blissex' argument the bottom 80% of workers have had their wages stagnate over the last 5 years, so it is hardly 50 or 70% of the workforce doing well it's like 10 or 20%.

Also, most of the benefits in the countries getting jobs aren't going to the workers there either. The benefits primarily go to the plutocrats and government sanctioned bully boys that runn the operations. Of course since capital can move more or less at will and people can't should we be surprised.

[Firebug]

I agree with most of the other commenters. This is one of the stupidest things Brad DeLong has said in quite some time. How many times does the same bait-and-switch have to be pulled before economists finally understand it - or before the rest of us start to understand that they were in on the scam from the beginning? It's not enough to talk about how, theoretically, we could redistribute wealth to make everyone better off as a result of offshoring. You actually have to DO it. And that hasn't been done, and never will be, and workers know it and have about come to the end of their patience with ivory-tower idiots.

Offshorer talk with forked tongue.

[marky]

Nothing like seeing Ken Lay types reap the benefits of globalization while the bottom 90% get screwed to reaffirm your faith in neo-liberal economics.
Three cheers for the dismal science, which leads 99% of us into misery, while the other 1%, along with a few assorted economists, reap the benefits.

[Blissex]

«Slocum wrote, "Over time, the supply of people with particular skills increased and the relevant wages declined. This is just another version of the same process."
No, it's not, because of disparities in PPP.»

I have read the understand your point about the arbitrage between exchange rate and PPP, but that is a perfectly valid and fair source of advantage, at least as to international trade.

[camille roy]

"I have read the understand your point about the arbitrage between exchange rate and PPP, but that is a perfectly valid and fair source of advantage, at least as to international trade."

I think the definition of these terms 'valid' and 'fair' becomes contentious in a period of the shrinkage of income and opportunity for the bottom 80%. What is valid and fair about a declining standard of living for the mass of Americans and an exploding share of the wealth for the top 1 per cent?

What is compelling about a free trade philosophy when it pushes most Americans in the direction of risk, insecurity, educational impoverishment, loss of pension and health insurance, etc?

The problem economists face is that the world is more political than economic. The words 'valid' and 'fair' need to be defined in the context, not of trade, but of politics.

[Blissex]

«Also, on Blissex' argument the bottom 80% of workers have had their wages stagnate over the last 5 years, so it is hardly 50 or 70% of the workforce doing well it's like 10 or 20%.»

Ah but this is entirely incorrect, as I cannot tire to repeat, 70% of american families own real estate, and this means that they are doing very fine (or so they think, at least) overall even if their salaries are not doing that well.

The capital gains they have got probably overwhelm any extra income they could have realistically obtained, because the increase in their asset values has been much bigger than 2-8% of GDP a year.

Also note that a significant plurality of workers own some stocks too, and that has helped too.

The people who are really f*cked are non home owners, if they are low wage earners or middle class people who have become low wage earners.

They have been bit by a triple whammy:

* stagnating or decreasing compensation;

* increasing rents;

* competition for low wage jobs from people who own a house and don't have to pay rent.

As to the latter, the wages at McDonalds and Wal*Mart are driven by teenagers and married women/me whose fathers or spouses don't charge them rent.

For these people McDonalds and Wal*Mart are essentially source of pocket money (which may be desperately needed, but it is still pocket money), as testified by the temporary nature of most employment there, and it is very hard for someone who has to pay rent to live on the wage a homeowners is willing to accept.

Look for example at this article on poverty in California, which rather worsened by rents:

http://www.economist.com/displayStory.cfm?Story_ID=6981198

«the federal definition of poverty dates from the 1960s and ignores house prices. Instead, the federal definition simply multiplies the cost of food by three on the assumption that families spend a third of their budget on food. For a family of four that meant income in 2004 of $19,157, appreciably lower than the 12-month rent for a modest two-bedroom apartment in San Francisco of $21,300.».

«So do the rich get richer and the poor get poorer? With unskilled immigrants pouring in from Latin America (28% of Californians in 2004 were immigrants, compared with 10% in 1969), the gap between rich and poor is growing faster in California than anywhere else in America. A family at the 10th percentile of income in 2004 had an income of $15,600, a fall in real terms of 12% since 1969. At the same time the percentage of poor families with a member working full-time has actually risen, from only 12% in 1969 to over 30% in 2004.»

I remember reading that rent per sq ft in LA's poor areas is higher than in Beverly Hills, but of course on something like $5-10/h you got to minimize your total cost, even if it means 2-4 people per room.

Hey, in the comments to another blog there was this ''hard working professional'' who complained that the cost of living in California was so high on $60-80k a year that such a ''high salary'' (in the top 20% of income) did not allow a middle class lifestyle... Try to imagine how low wage earners are doing, it just read it in Ehrenreich's "Nickel and dimed", who also argues that the big problem is rent.

But it is also the big advantage of those 70% of homeowners.

And the other things that I tirelessly and boring repeat is that of the 50% of citizens that vote probably the percentage of homeowners is much higher than 70%, and of the 5% who give campaign contributions probably close to 100% are homeowners.

[piotr]

Outsourcing in manufacturing lead to a huge substitution of investments in USA by investments abroad, and resulted in rather astronomical deficit in manufactured goods.

Oursourcing in IT industry leads to a big decrease in the investments in human capital: the number of students choosing computer science dropped at least twice from its peak. At the moment the absolute numbers of the jobs moved overseas is not that large, but as the number of new talent drops drastically, the effects will accumulate.

Things would be worse if the market was not distorted by huge military orders.

slocum: median real American wages have stagnated, but you certainly can't make the case that they've been 'crashing with a thud'.

Credit based individual consumption and government spending allow to maintain high increases in the total demand so that even with huge trade deficit we have reasonable increases in demands for domestically produced goods, software etc. Hence stagnation rather than thud.

But according to Brad, we have "25% chance" for a thud. I would guess that we have 100% chance that the former chance will increase.

[Blissex]

«but that is a perfectly valid and fair source of advantage, at least as to international trade."
«I think the definition of these terms 'valid' and 'fair' becomes contentious in a period of the shrinkage of income and opportunity for the bottom 80%.»

But note my qualification «as to international trade».

Exchange rate/PPP arbitrage is indeed not fair in terms of distributional impact in both countries affected.

The reason is that in India, where PPP is much better than exchange rate, it is the non-tradable sector (the one that defines PPP) that gets the bad effects, while in the USA, where exchange rate and PPP are more aligned, it is the tradable sector that gets the bad effects.

Why? Because those Bangalore software engineers get paid in dollars but buy at PPP prices, driving up the cost of living a lot for those unfortunates (the vast majority) who are paid in rupees. Viceversa of course in the USA, where software engineers are in effect are competing with people who cost of living is in rupees while their cost of living is in dollars, and at the same time those americans whose compensation is not affected by international competition see their earnings go up and drive up prices.

For example, if you have a secure job in the government, or you are a lawyer at a good firm, or you are a doctor at a prestigious hospital, or a Yale graduate with a vice presidency, your salaries are going up, and you can afford to drive up the prices of houses for everybody.

Same if you are a programmer or a team leader or a account manager in Bangalore, with 20% annual wage rises and absolute job security as there is 30% turnover.

Again, if you are a street seller in Bangalore and you own an however dilapidated and miserable hut you are doing a lot better than if you don't and you have to rent. Similar in San Francisco if you are a middle aged sw engineer who has been fired and is working at 7-11: owning a flat makes all the difference.

PPP/foreign exchange differences arise because of a relative scarcity of liquidity and capital; as USA companies pour ever more money as investment into and purchases from indian and chinese companies, that wall of money eventually diffuses and brings prices in terms of money to an international level.

The path to that is quite painful though because of the distributional aspects in both countries.

But, as far as international trade goes, PPP/exchange rate arbitrary is fair and valid, because having a good PPP compared to exchange rate is definitely a competitive, never mind comparative, advantage.

[Blissex]

«Three cheers for the dismal science, which leads 99% of us into misery, while the other 1%, along with a few assorted economists, reap the benefits.»

This exaggeration is really not helpful; even those that have been screwed out of the fruits of their productivity gains and of their share of increasing prosperity are not doing that badly.

They have just got a bad deal in an era in which prices of important domestic ''essentials'' (e.g. accomodation, health care, tuition) are rising fast.

A significant minority have been more thoroughly damaged, those who have lost their career and have sunk from working class purgatory or middle class heaven into casual labour hell. But while these people are somewhat numerous, they don't number enough to be politically significant.

[Blissex]

«But cheaper labor does not increase "efficiency", it simply means that more of the money involved goes to one group (owners/investors/other workers) than another group.»

But if the cheaper labor is in India, then there is an efficiency gain: underused resources get into play.

And India is more efficient, because of the lower ''PPP'' (that means ''local prices'').

Using scarce land in Santa Clara to house cubicle farms and scarce houses for scores of their employees is a lot less efficient than using much cheaper land in Pune and much cheaper housing.

A programmer in Pune does the same work as a programmer in San Jose, and presumably with much the same productivity and quality, so he should command the same price, but he can ''afford'' to charge a lot less because his entire price background is much lower because of underused resources in his area.

Dishonest neoclassical economists claim (after positing axioms of the ''lets assume all odd numbers are prime'' sort) that compensation is «determined» by productivity: but instead it is bounded by it (in the sense that no employer can sustainably afford to pay all employees more than the value they add), and settles at whatever lower value determined by the relative bargaining powers of employee and employer, which depend also on the cost of living where the employees lives.

[Blissex]

«those Bangalore software engineers get paid in dollars but buy at PPP prices»

Ooops, I have used «at PPP prices» in that comment in a stupid or meaningless or wrong way, but I hope you get what I mean: ''at local prices that expressed in foreign currency are much lower than for equivalent goods or services in the other country''.

[camille roy]

«Also, on Blissex' argument the bottom 80% of workers have had their wages stagnate over the last 5 years, so it is hardly 50 or 70% of the workforce doing well it's like 10 or 20%.»

Ah but this is entirely incorrect, as I cannot tire to repeat, 70% of american families own real estate, and this means that they are doing very fine (or so they think, at least) overall even if their salaries are not doing that well.

Ah yes, the eternal real estate bubble which rises and rises, bringing the lucky homeowner closer to heaven, closer, omygod even closer, almost ther... Oops!

How could a tiny pin do so much damage?

Seriously, I think everything Bush in the political arena fundamentally rests on rising home prices. That is the bliss which comes from having f**k buddy Greenspan at the Fed.

Are you asserting, Blissex, that in your opinion the currenly level of home values is robust, and not subject to a severe decline? Why?

I find the arguement that, in the most bubbley markets, prices may well fall 40% to regain their historic ration relative to rents to be persuasive.

[Blissex]

«Seriously, I think everything Bush in the political arena fundamentally rests on rising home prices.»

I reckon that is a big deal too, but «everything» is a bit strong.

A good Financial Times columnist argued is was clever manipulation of the ''war on terror'' and security, and other people think that it was suckering in ''values'' voters.

But there are many voters too that do support the GOP and Bush sincerely, and for respectable reasons. But anyhow, I think the edge was gained in a somewhat slimy way, and Rove is good at it.

«That is the bliss which comes from having f**k buddy Greenspan at the Fed.»

Easy Al! He is a good buddy and Ayn Rand person, but at least he has in part a ''patriotic'' justification: no matter the merits of the war in Iraq (the merit of the war in Afghanistan is clear), once the President and Congress agree it should be done, and paid entirely with debt, his duty is to supply the liquidity to do so, and to ensure that (most of) the home front is happy, exactly as during the Vietnam ''butter-and-guns'' years. Down the line there might be hell to pay for that, but keeping the war going by funding both the guns and the butter is his constitutional duty.

«Are you asserting, Blissex, that in your opinion the currenly level of home values is robust, and not subject to a severe decline?»

Not at all, I am just asserting that first a stock bubble, and then a housing bubble, have kept most asset owners quite happy regardless of other little details, so far, and that has been enough for Bush, a lot of K Street lobbysts, a number of CEOs and financial people, and Republican representatives.

In politics and economics «robust» may not mean much: a run of a few good years can do wonders for those who know the opportunity is there. Doing this and that to gain the upper hand for even just 10 years or so can be well worth it.

«prices may well fall 40% to regain their historic ration relative to rents to be persuasive.»

Most likely, but the keyword is «relative». Rents, and the general level of prices, might go up instead to restore that ratio.

In the UK in the 1980s there was a terrible time in which nominal house prices shrank, with a lot of home owners finding themselves with a negative net worth, and much pain and upset. Hey in the UK mere petrol price raises recently caused widespread quasi-rioting.

I don't think that any modern government would want negative net worth to happen to any significant fraction of that 70% of families who own a house; my impression is that governments reckon that a good dose of sustained inflation could do away with the problem with that ratio, and at the same time vastly reduce the value of government debt in the form of t-bills to foreigners and pension obligations. The ''no inflation'' Candides probably are just hoping to distract enough people for long enough that inflation catchup is delayed for as long as possible.

BTW, in theory welfare is indexed, but the index is the CPI, get it? :-)

[liberal]

Blissex wrote, "I have read the understand your point about the arbitrage between exchange rate and PPP, but that is a perfectly valid and fair source of advantage, at least as to international trade."

Huh? The question isn't whether it's fair in terms of international trade. (I don't even understand what "fair" would mean in this context.) Rather, the question is whether Indian workers are really outcompeting American workers.

[liberal]

Blissex wrote, "Ah but this is entirely incorrect, as I cannot tire to repeat, 70% of american families own real estate, and this means that they are doing very fine (or so they think, at least) overall even if their salaries are not doing that well."

70%? What fraction of that 70% have (a) a house that hasn't appreciated much because they're not in a bubble market?

What's going to happen when interest rates go back up and housing values go back down, as they will?

Furthermore, note that _their children_ don't own homes. And if you add up over all society, appreciation of land values---for that is what appreciation of real estate _is_ (improvements don't appreciate)---cannot add to the countries wealth, because land is not real wealth (viz, land is not capital).

"The capital gains they have got probably overwhelm any extra income they could have realistically obtained, because the increase in their asset values has been much bigger than 2-8% of GDP a year."

Again, those gains are going bye-bye as soon as interest rates increase, which they must, eventually.

"Also note that a significant plurality of workers own some stocks too, and that has helped too."

What does it mean, a "plurality" of workers own stock? Either a worker owns stock or he doesn't; it's either a majority or minority.

Futhermore, in terms of _numbers_ of workers, many own a pretty small chunk of change as far as stocks go, and it's largely in retirement accounts.

Finally, the market might be doing well these days, but the average since the dot com peak isn't so fantastic.

"The people who are really f*cked are non home owners, if they are low wage earners or middle class people who have become low wage earners."

That's true.

[liberal]

"...as USA companies pour ever more money as investment into and purchases from indian and chinese companies, that wall of money eventually diffuses and brings prices in terms of money to an international level."

"Eventually" is about it. AFAICT from reading around, this adjustment process can take _decades_.

[liberal]

I wrote, "Rather, the question is whether Indian workers are really outcompeting American workers."

Of course, I meant in the sense of "are they really working for less, in terms of the compensation as seen by the workers."

[Blissex]

«Rather, the question is whether Indian workers are really outcompeting American workers.»

Sure they do, they have a much lower cost base (''PPP'' not caught up with them yet), which is a sound (fair, valid) competitive advantage.

In the same way that aluminium plants get built in countries where electricity is cheap or the Ruhr got steel factories because of nearby coal.

More on this in an earlier comment you may have missed amongst all my verbiage.

However let me add one further point now that I think of it: that the intrinsic, valuable competitive advantage of living in a low cost country is a bit unfairly boosted by an enormous supply of essentially free American capital (in the Indian case mostly perhaps as working capital, in the Chinese mostly perhaps as equity capital).

If the Indians had to raise and pay for their own capital to create Bangalore or Pune the lower cost base advantage would have been a lot less valuable. Same for China and American or Japanese free money.

Japan, Korea and Taiwan mostly raised their own capital (fantastic savings rates), and they grew more slowly for that, but they now own their own their own means of production.

The big difference in this round of offshoring is that USA funds are being allowed to throw a wall of money at China and India, and they seem to be doing so not just because it was free money, but also because they hope to get significant stakes of the equity in those economies, a bit like the English did in the USA or Argentina.

My impression is that most people except Clissold and Landes and their ilk are underestimating the Indians and the Chinese (China now also has incredible savings rates, even higher than the tigers had).

[Blissex]

«70%? What fraction of that 70% have (a) a house that hasn't appreciated much because they're not in a bubble market?»

Well, probably some, but then virtually all areas have seen some improvement and all homeowners have benefited from exceptionally low mortgage rates. If you want to scare yourself have a look at the charts in these two posts in another great blog:

http://bigpicture.typepad.com/comments/2006/06/housing_leads_t.html
http://bigpicture.typepad.com/comments/2006/06/why_the_real_es.html
http://bigpicture.typepad.com/comments/2006/06/new_real_money_.html

«What's going to happen when interest rates go back up and housing values go back down, as they will?»

Predicting the future? Well, first it does not matter, because the ''happy times'' of the past several years have been enough to get quite a few things sorted out...

Secondly, it can well happen that any future housing crash gets sorted out by sustained inflation if the pain becomes too much.

«Furthermore, note that _their children_ don't own homes.»

And the point is? First of all those children are then part of the 30% that don't matter, and anyhow they have the certainty that because of the baby bust following the baby boom, many of them will not just inherit, but inherit 2-3 properties.

Then there are 3 generations involved: boomers, their children and their parents. The parents of the boomers often own a home with clean 100% equity. Most of the boomers own a home, even if usually with rather less than 100% equity as either the original mortgage is still running or they have refinanced to splurge' most know they inherit their parent's homes soon. Then there are the boomer children who stand to inherit from both generations, eventually.

Even worse, until they get their rightful due, them and their parents and grandparents will vote for whatever subsidy is needed to ensure that those heirlooms do not have to be sold before time to pay for the retirement of the boomers (the boomer parents tend to have good pensions, who knows if they will last).

«And if you add up over all society, appreciation of land values [ ... ] cannot add to the countries wealth,»

And how does this matter to the political consequences of house owners having been winners? Not...

As the Economist said, while house price rises do not add a bit to national wealth, they redistribute it from non-owners to owners. The owners do get richer, even if the net gain for the nation is zero, because the non-owners get poorer.

But my argument is precisely that since owners are the majority, that the minority get f*cked is politically irrelevant, because the majority votes with their wallets, and whether temporarily or not, and whether because overall welfare grew or rather was redistributed, those wallets have gotten fatter so far.

That minority is made up largely of people who (suicidally) do not participate in the political process, or being immigrants cannot, and even if they all did, that probably would not matter much (fast handwaving here) in most seats.

If house prices collapse and that 70% get trapped in negative net worth things will be different, but that 70% will vote for whatever makes sure that does not happen or last...

[A. Zarkov]

Mankiw is giving us econo-speak for the “trading up” theory that promises new management jobs to replace the worker jobs lost to outsourcing. But how can you manage something that you have no experience in? The new management jobs are going to get created in India, not the US, if that’s where the work is going.

There are also national security implications to out sourcing. The free trade model assumes products and skilled services are always going to be available to the US. But what if we are at war? What happens if you go to war with the country that makes key parts of your military technology? You can’t assume we won’t ever be at war with a country like China or even-- some day-- Mexico. Unfortunately war is a permanent part of the human condition. Listen to what the current Mexican politicians are saying as they campaign: “Mexico first, foreigners second.” Funny few American politicians have the courage to put American first.

[liberal]

"As the Economist said, while house price rises do not add a bit to national wealth, they redistribute it from non-owners to owners. The owners do get richer, even if the net gain for the nation is zero, because the non-owners get poorer."

I don't disagree with much of that. But I think the picture is more complicated because of the role of the discount rate in setting prices. That is, land ownership is "zero sum" insofar as for every collector of land rents, there's a payor. But much (most, AFAICT) of the recent run-up in housing prices in the past few years has been due to declines in interest rates, not so much increases in (annual) land rent.

And it's not clear to me why a gain due to a decrease in interest rates comes out of the hides of non-owners. Clearly gains due to increases in land rents must---there's only so much national income, and every dollar going to land is a dollar not going to labor (or capital, but here we're referring to the working poor versus homeowners).

But, again, gains due to declining interest rates are not flows from increasing income from land rents.

Of course, I completely agree that increases in housing values can't be merely brushed off as purely paper gains (ignoring my claim that interest rates must increase in the future), because you "get" $$ out of refinancing. It's just not clear to me that it's coming from nonowners. (Rather, might have something to do with international capital and liquidity flows, but I haven't thought enough about that.)

Interesting pages on Linux you got there, BTW.

[Blissex]

«Of course, I meant in the sense of "are they really working for less, in terms of the compensation as seen by the workers."»

Interesting question (I choose to interpret «compensation as seen by the worker» as referring to the lifestyle), but sort of mostly irrelevant to a discussion about offshoring: their lower cost base advantage is what matters.

However, I try to follow the Indian situation, and my impression is that, very broadly speaking, Indian call centre operators and programmers enjoy a lifestyle somewhat lower than that of an equivalent USA worker, a bit like Indians on H1B, or most legal immigrants, earn less in the USA than established ''equivalent'' USA citizens (in much the same way as being taller often means better pay).

For example my impression is that the lifestyle of an Indian programmer is roughly equivalent to that of a programmer in the USA midwest, but not that of a California or Beltway one.

Being a programmer in India now is definitely aspirational middle class; it used to be that middle class was to work for the government, but offshore companies have the same prestige and pay a lot better.

This article is 2 years old already:

https://www.iniitian.com/ess/press/impstories/McProgrammers.pdf

but it is very very clear that the young indians depicted doing vocational programming training are middle class (aspirational: their parents tend to be lower middle class or even working class).

Being in a call centre? Well the impression I get it is still regarded as a desirable graduate career, lower middle class, a bit like being a librarian or a bookkeeper in the USA.

Anyhow it is really hard to compare, because of enormous differences of detail: for example house staff is relatively much much cheaper in India, and housing relatively much cheaper in the midwest. So the Indian programmer's family may have 2-3 house servants, but a much smaller home and backyard.

Anyhow, at least for programmers, there are huge differences in India between the salaries of experienced ones and beginners (experienced programmers and especially team leaders are far harder to find), and overall Indian salaries may be growing by 10-20% a year (but prices of stuff in places like Bangalore also grows fast).

BTW, in particular BusinessWeek, which is pretty keen on the tech industry, publishes pretty often articles on how Indian (and Chinese) offshoring is doing, and how the indians and chinese are doing as offshore workers.

But then Indian companies are starting to and to offshore the lower added value parts of their business back to the cheaper areas of the USA, a bit like Japanese car factories have offshored back some of their production.

Indian companies are starting to sponsor american or european immigrants to India; I have read that if you can adapt to the different culture the lifestyle is not bad, surely beats working for Wal*Mart, at least for programmers, and Indian companies have been sponsoring for their equivalent H1B visas multilingual staff for call centers, and these are young european graduates as both a career boost and an adventure:

http://WWW.Gulf-Times.com/site/topics/article.asp?cu_no=2&item_no=60498&version=1&template_id=38&parent_id=20

The ironies of history may abound: during the 1980s I read than in Sydney young unemployed australians would run rickshaws around town, often carrying Japanese tourists...

[Blissex]

«This is one of the stupidest things Brad DeLong has said in quite some time.»

Well, this is a bit too harsh...

Even if I have formed the impression that when it comes to offshoring or immigration people people like deLong or Thoma (never mind ''Candide'' Mankiw) are ''deliberately obtuse'', in glossing over some inconvenient aspects of the offshoring and immigration issue.

My own fantasy interpretation is that:

* These guys know full well that for the victims of offshoring or immigration it is going to be grim.

* They probably reckon that the overall advantages in the long term are worth all the costs, even accounting for the distributional impact and the grimness for a minority.

* If the costs were too openly discussed the march of progress might be halted for narrow selfish reasons, so dissembling is in order to avoid the pitchforks...

Now this is my imagination talking (but 'camille_roy' has mentioned in another blog site a paper by Stephen Roach at Morgan Stanley who seems to say the same as my first two points above), and I have no idea what these guys really think, I just delude myself that these are the premises that transpire from their arguments.

But if their reasoning is like that I can understand and even partially justify it, because there is a good precedent: the relatively small blue collar massacre in the previous wave of ''dislocation'':

* Several industries, like electronics, steel, shipbuilding moved mostly offshore to Japan, Korea, Taiwan, Singapore (all nice anti-communist places, coincidentally), even if more slowly than what's happening now.

* A lot of people in Japan, Korea, Taiwan and Singapore got out of dire poverty, and entire countries joined the developed world (Japan of course was already developed, even if poor, but the others were desperate backwaters; read Myrdal's phenomenal books to see how bad it was).

* A significant but much smaller number of Americans and Europeans lost for good their union blue collar careers and jobs and the American Midwest or the British North were gutted and have not recovered, and the Rustbelt is largely still the Rustbelt.

* Most of the rest of the USA and Britain did pretty well anyhow, and the losers got forgotten.

Overall, a big win for all countries involved, and a big geopolitical win too.

The USA (and Europe) lifted out of poverty several key countries who have been steadfast allies for decades. The argument could be that the Midwest was sacrificed not just because it did not matter that much, but also in the final push of the Cold War: if the Asian tigers had not done as well as they did, market based economics would not have smelt as good and attractive to the now ex-communist countries; and more Vietnam wars might have happened.

Now, well now it is the time to engage and reel in India and China (and the ex-Iron Curtain countries), that are far more important (even if I think that Bush miscalculated in promising the Indians to help them with proliferation as part of that strategy), and even if the Cold War is won and gone, that is still a good goal. And even better if the USA elites do well out it. :-)

After all many and probably most of the losers of the 1980s got to suck it up/lump it, despite strikes and the like, and life went on, and pretty well for most (other) people.

From an economist's point of view just the (probably colossal) global economic benefit is worth a small (say the impoverishment of 10% of the population) and temporary (say 2-3 generations) sacrifice.

Anyhow the biggest troubles happen in the developing countries, as many more people there are losers from development, at least in the short term (the old, uneducated, peasants, sick, minority get brutally sidelined as the the cost of living goes up).

«How many times does the same bait-and-switch have to be pulled before economists finally understand it - or before the rest of us start to understand that they were in on the scam from the beginning?»

Problem is, the small and temporary sacrifice described above is pretty huge and not so temporary for the small minority being sacrificed, and while they are too few to do much about it, they are enough to potentially cause some futile trouble.

So some people may think it better to becalm the waters and put on the smiling face and mention the possibility of ''help with the pain of dislocation'' as if it were forthcoming; as if most voters, who so far have done OK overall, just like most did OK in the 1980s, don't much care; as if the mailbags of congressmen were full of letters asking for better unemployment or retraining support for a minority of losers (they are full of demands to reword the AUMF to prevent civil rights abuses instead :->).

To put it another way, one might think of those losers as being like the indian tribes heading for their reservations, and that «We should worry about the distributional consequences of "outsourcing" and how policies can cushion and offset them» are words as eternal as the promises in the indian treaties...

(and I hope it is understood that this is an exaggeration for effect, I do not want to belittle the far more atrocious things done over the centuries to the original nations)

[Blissex]

«But how can you manage something that you have no experience in?»

Easy enough if they have a Yale degree... :-)

«The new management jobs are going to get created in India, not the US, if that’s where the work is going.»

That's also one of my favourite observations: that as shipbuilding moved to Japan and then Korea, it was note the docks that moved there while management staid in the USA, the whole industry moved.

Of course many hope it won't be like shipbuilding: the model should be Nike, where the very well paid design and management are in the USA, and the factories across the world.

But I wonder how generally applicable this Nike model is: Nike has managed to stay on top of its suppliers probably because it sources from countries that are not just poor, but backward, and who just can't do design and marketing. But India and China aren't like that, they are more like Japan and Korea.

«There are also national security implications to out sourcing. The free trade model assumes products and skilled services are always going to be available to the US. But what if we are at war? What happens if you go to war with the country that makes key parts of your military technology?»

That's not a good card to play. In part because the USA military are keenly aware of this and they have built huge stockpiles of foreign (and nationally sourced) components for decades. And the world of military contracts is pretty closed; someone said that a current TS/SBI clearance is the USA programmer's meal ticket for life.

But in part because the strategic thinkers both in the military and at State are not stupid, and they can make a better geopolitical argument: that «the country that makes key parts of your military technology» is much less likely to go to war with its best customer.

The USA strategy (not the USA corporate strategy, which is driven almost purely by bonuses) is to give India and China every reason not to go to war with the USA.

Both because they may become rich, complacent countries looking for a good life, not glory, and because they may end up too enmeshed with the USA economy to become enemies of USA interests.

This has gone to dangerous lengths: for example recently Bush has decided that if an important country like India is engaged in a nuclear arms boom, it is in the best interests of the USA to help them rather than to shun them. It has been USA policy for decades to fight proliferation, now largely because of India it has become one of leading proliferation. If you can't stop them, lead them.

Anyhow, look at the alternative: India and China stay poor, shunned by the USA, and with no stake in it. Very dangerous idea. Another 45 years of Cold War? Crazy risk. It is much less risky to give them a taste for dollars.

To put it another way, the USA are planning to turn India and China into another Brazil or Turkey, or perhaps into another UK or France.

Of course the Chinese and Indians have exactly the same strategy in reverse, because they are much more afraid (and quite justifiably) of USA aggression than the USA has reason to be afraid of them. And they think that they can best the USA at its own games, making the USA dependent on them, more than viceversa. But even so, the USA is safer.

Anyhow all these games, which are discussed quite openly, are an improvement on the Kissingerian ones, even if (arguably) it was him after all who started the ''engage with China'' policy.

Simple Idea: Displaced workers in the outsourced US IT industries become entrepreneurs and intermediaries working with the Indian IT workers who their jobs went to, i.e. cut out the middlemen.

I know this sounds rather pie in the sky, but an enterprising but displaced IT consultant in the US should be able to find some way to leverage his expertise and reduce labor cost by employing overseas staff in his consulting.

[I'm proposing this as a former IT consultant who worked across the US at many clients, who for the last ten years has worked in Asian universities, and has done a lot of collaborative intellectual work (translation).]

The biggest problem is finding partners for joint ventures. There is already a developing elancing industry that could enhanced with upfront imtermediaries in the US doing the sales and project management.

In short, market adjustments could solve the solve the outsourcing problem. Government intervention restricting outsourcing is not necessary and Mankiw is right.

To be sure, US labor laws and markets leave workers a lot more exposed than counterparts in Europe, and this has always meant more of the burden of adjustment and retraining is placed on the worker in the US, particulary in IT. That the US can adapt rapidly like this has always given it a competitive adva