Potential Reasons for Worrying About Outsourcing/Offshoring

Alan Blinder is very worried about outsourcing and offshoring http://delong.typepad.com/sdj/2007/03/alan_blinder_on.html. And I am not quite sure why.

You see, trade balances. What we buy equals what we sell, in value. What we buy and what we sell can be goods, services, or property, but it balances. If we have a comparative advantage in nothing--and export nothing--then we necessarily have a comparative disadvantage in nothing--and import nothing. Trade is thus an opportunity for us to move workers out of occupations where we are least and into occupations where we are most productive.

This doesn't mean we shouldn't worry about trade. But it does mean that the right reasons to worry about trade are relatively specific and relatively small in number.

I see four reasons:

• First, we can worry about trade because we can worry about what trade does to our income distribution: perhaps we would be happier with our income distribution and assess ourselves as having a higher level of social welfare if we made some of the things we import at home and didn't make some of the things we export--even though each of our imports and exports makes narrow profit-and-loss getting-and-spending sense.
• Second, we can worry about trade because we worry about what trade does to external benefits from productive activity that boost growth: perhaps we would grow faster and become richer if we made some of the things we import at home and didn't make some of the things we export--because making some things produces increased worker skills and technological knowledge through unpriced, un-accounted for channels.
• Third, we can worry about trade to the extent that it amplifies the ability of our dysfunctional government to dysfunction: the ability to borrow from abroad to cover deficits may diminish the pressure on feckless politicians and their supporters to deal responsibly with fiscal policy.
• Fourth, we can agree that increased trade is good for the nation, yet believe that government has to play an active and aggressive role in providing social insurance and a measure of compensation to those ground exceedingly fine by the mills of globalization--and outsourcing/offshoring are likely to cause bigger changes and more disruption than anything we have seen to date.

It is not clear which of these reasons is behind Alan Blinder's current worries on outsourcing and offshoring. My worries about outsourcing are mostly (4). I worry somewhat about (2). But (1) and (3) are, I think, not on the agenda. Global outsourcing seems to me at least as likely to improve as to worsen the distribution of income. And the marginal amount of governmental fecklessness produced by access to global capital markets seems to me to be small.

But I don't know what worries Alan most. I should ask him for clarification...

UPDATE: Alan writes: of course it's number 4!

Comments

[save_the_rustbelt]

1 of 7 homes in Cleveland is subject to foreclosure procedures, largely as a result of offshoring huge chunks of our light and medium manufacturing, while at the same time the domestic auto industry finishes a slow-motion suicide.

Michigan is in a worse mess than Ohio.

Shopping at Wal-mart does not make up for losing a job, health insurance, a pension and your home - except perhaps in the minds of free trade economists.

For my money, 1,2,4,then 3 - mostly #1 though.

[jerry]

On the Diane Rehm show today, he seemed to come down behind (4). He is a religious free trader, but feels people need help from the gov't to be retrained. He also comes down behind (5), the amount of offshoring might be greater than can be accommodated and can produce an enormous unplanned shock to the system.

Take (4). Please tell me the history since the WTO and NAFTA of the great amounts of money the gov't has invested in social welfare pogroms. I mean programs.

Brad, if your desired future outcome depends on something that has never happened, is not happening now, and shows no signs of it ever happening in the future, ARE YOU REALLY GRASPING REALITY WITH BOTH HANDS?

[quiddity]

BDL says: "Trade is thus an opportunity for us to move workers out of occupations where we are least and into occupations where we are most productive."

Given the wages paid overseas, we will move workers out of many, many occupations. And that is all. You see, we will not be the most productive at anything when there are millions willing to work for $25K/year at jobs that, until now, were the province of college educated U.S. residents.

I am puzzled why several economists, including Brad DeLong, are musing about theoretical trade advantages when the practical results are a radical reorganization of economic society. Until about now, even though manufacturing got hit hard in the last few decades, there was an advantage with occupations that entailed "symbolic" manipulation (computer programming, some medical analysis, legal). And so, this country could use its economic advantage with these 'higher skilled' occupations to bring in cheap manufactured jobs. But what happens when the country has no advantage? It means that for any occupation that can be done equivalently somewhere oveseas, the domestic worker is going to be paid a very low wage (or maybe not have a job at all, since there are additional costs - e.g. FICA, health coverage - not incurred oveseas).

Trade with other countries means, eventually, a merging of social and economic standards. That's something I don't want.

I would be very interested to hear a pro-trade economist tell me what the outcome would be if there were a country with slave labor producing goods and services for export. Should we trade with them? They certainly are more producive, so, in theory it would be a good thing. But wouldn't that have as a byproduct, a trending towards slave-wages in this country? If not, why not?

[Ponzi Q. Globalization]

"If we have a comparative advantage in nothing--and export nothing--then we necessarily have a comparative disadvantage in nothing--and import nothing."

You speak as if these comparative advantages are static. Isn't it possible that they can be driven in certain directions through conscious policy?

You and others here know much more economic history than I. Weren't these types of policies implemented in the United States many years ago when our policy makers wanted to increase our industrial production? What did Germany do? Japan? Did they really trade 'freely'. Did they even pay lip service to 'free' trade?

"What we buy equals what we sell, in value."

What's going on when another nation loans us money so we continue to transfer technology to them? Through the risk and the losses they may entail they are buying from us future advantage in certain areas of production. That is, we are selling some of our assets.

Is China, for example, letting the market completely dictate the types of investment and where investment goes or are planners partially directing the types of production they desire in the future?

[Ponzi Q. Globalization]

"Trade with other countries means, eventually, a merging of social and economic standards. That's something I don't want."

Why not!? It's not a zero sum game. The trade model I have in my pocket right here -- written on a barroom napkin -- says that the standards will merge at a higher level than we have anywhere today. Don't you believe my model? Ignore the mustard stain where I wanted to specify the time scales involved -- hope you don't have any kids (heh heh heh). Still no? Racist! Heretic!

"I would be very interested to hear a pro-trade economist tell me what the outcome would be if there were a country with slave labor producing goods and services for export. Should we trade with them? They certainly are more producive, so, in theory it would be a good thing. But wouldn't that have as a byproduct, a trending towards slave-wages in this country? If not, why not?"

Of course we should trade with slave nations! The fact that we are using slave labor doesn't matter because the slaves are all overseas. Thus it is not human exploitation or a criminal act but the moral and right workings of FREE TRADE (praise be thy name).

For, you see, trading with slave nations is a win-win situation. For us, cheaper goods and services. Really cheap. For them, the first neoliberal and necessary stepping stone to prosperity.

[Nikolas Nies]

www.ivehadenough.us

[PSP]

I'm curious. We know all the American economists are big supporters of free trade. Most Brit economists too.

But what do the German academics say? What are they teaching at the Ecole Polytechnique? What are the Chinese and Indian economists saying.

I ask, because I don't see the policies american economists recommend happening abroad. So are their academics being ignored, or are they teaching something different?

Unfortunately, being a typical american, I lack the language skills to investigate.

[Don Quijote]

And I am not quite sure why.

I don't know why he is worried, but I know why I am...

My damn good paying IT job could be shipped to India tomorrow morning and I would have to go find another one...

I 'll need all the luck in world to find another one since the powers that be have spent the last ten to fifteen years outsourcing all the IT that they could and importing all the cheap labor that they could (H1B).

Despite the fact that I would not have a job, I would still have a mortgage and two kids to raise and put through college.

Why should I or any other working stiff support outsourcing and globalization, the upside is cheap crap at Walmart and the downside is loss of job, benefits, housing and pension? The downside far outweighs the upside...

[Gian dei Brughi]

The policies American economists recommend don't consistently happen in America, either. I doubt many respected American economists advocate steel tariffs, or farm subsidies, at least on anything like the level we have.

[potter]

I guess Im basically a pro free trader now but I wonder whether theres anyway we could orchestrate this somewhat more slowly, to smooth outh the bumps. Does how fast you go to freedom change the benefits for freedom? Also what do we do about countries like China that have big trade barriers to our products?

[bakho]

Yes, it was #4 on Diane Rehm. I think it was Blinder (might have been Faux) that said that trade protectionism was not going to work with services delivered online.

The trade problems go hand in hand with underinvestment in infrastructure. One way to get comparative advantage is to have an infrastructure that enhances productivity. Building our infrastructure here at home would simultaneously address our unemployment/underemployment issues and improve our trade advantage by increasing productivity. Utilizing excess labor to manufacture and build alternative energy devices and infrastructure (for instance) could lower our energy costs of production. Providing city-wide broadband by eliminating the rentiers could expand internet commerce. Fully funding our urban and poor rural schools is another area of investment that would increase employment by lowering student/teacher ratios and putting labor to work on school infrastructure.

Isn't 30 years of low tax no-service enough?

[Doctor G]

Arguably, Chinese labor is slave labor. And if trends continue American labor could be as well.

And what is this retraining nonsense? Take a middle aged professional with years of education and practice, a decent salary, and financial obligations to match. Someone like Brad, or myself. Then destroy their profession with outsourcing. What good will retraining do to stave off bankrupty, when all that can buy is entry-level pay in a new occupation?

Myself, I'm working on founding a company, which is retraining of a sort. But that is a very risky endeavour, and I expect to suffer bankruptcy and foreclosure regardless. "Ground exceedingly fine" indeed.

Also, how can we engage in "free trade" with countries who purposely keep their currency undervalued? It's not that my Indian colleauges are willing to accept a lower standard of living than I am. Not at all, because their thirty-grand salary amounts to a million rupees, which afford a fine home, servants, good schools for their children, a good retirement, and more if spent inside India. How can I possibly compete?

[derrida derider]

When we get to the stage where distance matters so little that we can be taught our economics by tenured professors at the Universities of Shanghai or Delhi I wonder if tenured US professors will be quite so relaxed about offshoring ....

But I've always thought (4) makes little sense, though. It implicitly concedes the claim of the Right that a welfare state lowers human welfare, which I think is clearly untrue. And in an era of floating exchange rates there is no reason why being "competitive" matters anyway.

On which, I reckon a lot of US angst over deindustrialisation and offshoring will disappear when the dollar collapses - to be superseded, of course, by even worse angst.

[jm]

The theory of comparative advantage was developed in an era when it would have been unimaginable that any sovereign would ship 40,000 tons of gold to a foreign country in exchange for paper IOUs in order to promote exports. In that era, there could be no sustained imbalance in the market value of traded goods, because the settlement of accounts in gold ensured that all economic inputs and outputs were valued against the same monetary standard, and any large imbalance in the value of traded goods would lead to an intolerable flow of gold from the deficit nation to the surplus nation.

If the mechanisms of comparative advantage indeed lead to optimal resource allocations among a group of trading nations, then currency manipulations that cause economic inputs and outputs having identical real value to be valued differently in practice must inevitably lead to suboptimal allocations.

[dissent]

It's the height of folly to proclaim that this is the home of
Grasping Reality With Both Hands

and then write

Global outsourcing seems to me at least as likely to improve as to worsen the distribution of income.
For heaven's sake, even globalization apologists note that the huge expansion of the world labor market has put a damper on worker wages, and that effect will probably last for decades.

[Go back and read Blinder: he is not talking about semi-skilled manufacturing jobs in the second and third quintiles of the income distribution being subject to foreign competition; he is talking about service-sector jobs at all income levels being subject to foreign competition. The first has an impact on the income distribution. The second... it's not clear to me that it does.]

It's widely acknowledged that income inequality is related to globalization. Ditto rising insecurity and falling benefits.

I'm with you Prof. DeLong when you rail against the ideologues who hold onto their pet beliefs after the gruesome failure and huge death toll of Iraq.

But you need to look at your own pet beliefs. Enough evidence is in NOW for you to re-evaluate.

[Bruce Wilder]

The key undefined term in Brad's analysis is: "we".

[Michael]

Blinder tells you what he is worried about right in the article. He is worried about the shock when so many workers lose their jobs at once or a rapid pace. He predicts 30 to 40 million. The problem might be stated as the speed of the shift. Remember what Lord Keynes said to Hayek, in the end we're all dead. A lot of people might die before the new job appears.

[matt wilbert]

I am worried because our main area of competitive advantage appears to be in printing T-bills and T-bonds.

I am worried that this is probably not a durable advantage.

I am worried that in addition to the adjustment costs we have already paid, there will be further large adjustment costs if we have to find something else to sell, or if we have to stop buying foreign things.

I guess that is 5).

[Caravaggio]

As Michael says, Blinder's concerns also seem related to point 4. My concerns about free trade also lie here. I believe that if gvt policy was better geared to helping the 'losers' of globalisation in the awkward transition phase, there would be less hostility to the concept of free trade. In the UK for example, there has been a hollowing out of the UK manufacturing sector in recent decades, and many pockets of the country have stagnated as unemployment has soared. For these people, at the level of the individual and the family, it seems wholly unfair and unjust.

[trb456]

Why is it that Blinder (and others) didn't give a wit about this issue until workers closer to their own income demographic became affected? Factory workers outsourced: we are all better off on average in the end. White collar workers outsourced: may generate more risks than the system can take. Truly reprehensible thinking. Bring on the class warfare, I say.

[Doug]

Congrats Brad! You more or less agree with Don Luskin:

http://article.nationalreview.com/?q=NDY5OTM1ZThlN2NjYTUzZjVlZmVkMDU3MDZkODM0NDM=

[Ken Jarboe]

There are three statements in your beginning that I find most interesting:

1) "You see, trade balances. What we buy equals what we sell, in value. What we buy and what we sell can be goods, services, or property, but it balances.”

Yes, trade balances – and right now we are selling property to pay for goods and services. That is the age-old formula for bankruptcy (or what Buffet calls the sharecropper economy.

2) “If we have a comparative advantage in nothing--and export nothing--then we necessarily have a comparative disadvantage in nothing--and import nothing.”

Yes, when you have a comparative advantage in nothing you eventually stop importing - and we all know how pleasant an autarkic economy is

3) “Trade is thus an opportunity for us to move workers out of occupations where we are least and into occupations where we are most productive.”

How does it follow that if we have a comparative advantage in nothing, we can move workers into more productive occupations?

Theoretically, it is impossible to have a comparative advantage in nothing – because other countries will put all their resources into those areas (wine or cloth) where they have the comparative advantage, there by opening up some areas for us. Practically, however, countries follow absolute advantage – I’m better than you in both wine and cloth, so I’m going to make both and not bother with your imports.

What Blinder said yesterday was that the occupations we should be moving people into are in the non-traded sectors. Note that Alan’s work has been to show that there are fewer and fewer of this.

[save_the_rustbelt]

New projections out today on the future of Michigan, and it is pretty grim.

By the way, Donald Luskin, the "Stupidest Man Alive" [(c) Delong] is on NRO today telling all of us that free trade is great, most economists agree, and that free trade benefits EVERYONE (per Mankiw).

[DRK]

"Free trade" aka the Global War on Labor.

[Walt]

It's impossible to have a comparative advantage in nothing. You have a comparative advantage in what you do best, compared to everything else you can do, not compared to what everyone else can do. In trade theory, roughly every country does what they are best at, and exchange rates adjust so that it's still worth trading.

[josh bivens]

i'm always surprised at how unseriously economists take their own theories when it comes to trade - or, rather, how they conveniently take seriously only the ones that buttress the political case for more trade without compensation.

you have to get pretty avant-garde in your theorizing to find support for the proposition that trade is as likely to improve the distribution of income as to worsen it for the US.

on the other hand, the prediction that trade will indeed worsen inequality (and inflict absolute costs on the losers) can be found in about chapter 2 of most international texts.

inequality is up a lot in the past 30 years, trade flows are up a lot, chapter 2 of the international textbook predicts that the latter leads to the former, and, there's a huge empirical literature confirming the direction (if arguing about the magnitude) of trade's impact on inequality.

blinder ought to be worried, and, he ought have been worried a long time ago.

josh bivens

[Edward]

With the massive growth of “NEW” jobs in India to support operations back in the USA, all I can think of is…. who is going to pay for our Social Security, Medicare, Federal Tax and local income taxes?

It seem the main incentive and attraction to Outsource jobs Offshore to places like India is the combination of low salaries and the avoidance of Payroll Taxes here in the USA.

Funny, if you Outsource a job out of New York City to North Carolina, the employee in NC has to pay Federal, State, Social Security and Medicare tax……But…if the assignment is Outsourced to India to support Operations in New York City, the companies avoids all Payroll Taxes in the USA.

This practice of replacing workers in the USA with workers Offshore in order to save money by avoiding the payment of taxes in the USA is going to be an issue for the 2008 elections.

We cannot expect to Offshore as many Jobs as we can without if having a profound effect on our economy and the Middle Class. Remember folks it’s those salaries that employees earn in the USA that pump our economy.

The only fair and quick solution to help recoup the lost tax revenues is to impose a Sales Tax on any Service that is supporting Operations in the USA from an Offshore location….it’s only fair!

[JonF]

Re: 1 of 7 homes in Cleveland is subject to foreclosure procedures, largely as a result of offshoring huge chunks of our light and medium manufacturing, while at the same time the domestic auto industry finishes a slow-motion suicide.
Michigan is in a worse mess than Ohio.

I have to take issue with this. The problem is not that jobs in that region have been outsourced; the problem is that the jobs have ceased to exist anywhere- not in Cleveland, not in Mexico and not in China. The auto industry for example is not sending jobs overseas; it is shedding jobs overall due to collapsing revenues.

Re: Given the wages paid overseas, we will move workers out of many, many occupations.

Wages alone do not determine this. And if a company relies on wage differntials alone to make this decision it is in for a very nasty shock. When you move some but not all jobs across time zone, language and culture boundaries you create opportunities for operational friction, and that operational friction can be so enormous as to swamp any savings on wages and even sufficient to brings operations to a grinding halt. Now if you can move entire divisions overseas, or entire factories, and staff them with your own management, this is not a factor, but in most cases this is not doable: some of the jobs have to stay home and so you get the frictional effect I mention. You will find that many companies experimented with outsourcing, found it was more trouble than it was worth, and are no longer interested in it. The main exceptions are the truly large corporations, already international in scope, which can afford to maintain far-flung global facilities.

Re: My damn good paying IT job could be shipped to India tomorrow morning and I would have to go find another one...
I 'll need all the luck in world to find another one

Unless your skills are obsolete (e.g., COBOL on mainfarmes) or you live in a depressed region like Michigan and are unable/unwilling to relocate you will not need much luck at all. IT remains a growth field, albeit less feverishly so than it was in the late 90s. Last year the company I worked for went belly-up; I posted my resume online, my phone rang off the hook with recruiter calls for weeks, and I was back to work in three days. Then I took another job ten days later (the first job having proven utterly unstisfactory), then I moved across the state to yet another job two months later. In fact, thirteen months later I am still getting the occasional headhunter call. And by the way, I am now making 7K more than my original lost job paid.

[raboof]

I don't know what it's going to take for Brad to abandon his dogma, other than having his own job outsourced. People have been telling him the true facts of the economy for years and years now, but he goes on and on with his "free trade is always good" philosophy without even thinking to question whether his basic assumptions are true.

Kind of sad, actually.

[AndrewBW]

Even where outsourcing doesn't actively destroy existing jobs, it can still prevent the creation of new jobs. My company has in the last year begun outsourcing more and more work to India and China. While I don't personally feel threatened by this right now, it could cause problems down the road. And even if it doesn't, where we could be hiring ten new workers here, we're instead hiring zero.

[Matt]

Lotta great comments.

The problem is 3.

Take China, China has decided that we have a short term volatility that must be compensated for over the next business cycle. They intend to place their excess dollars in a combination of equity and five year debt over the next business cycle while we remove this volatility. Because they are not coupled to the volatility, the Chinese bankers have freedom to shift funds back and forth as we pay off this volatility and acheive a return comparable to the return our monopoly bank will make.

China has the mathematical tools (they read this blog). Our ability to resolve this short term volatility is very restricted. Essentially we have to recover the 2 trillion that Cheney, Halliburton and the oil companies swindled out of us. But our ability to collect this debt due over the next business cycle is limited by our voter correction cycle. Therefore we have to shift debt around to cover it, and China, using techniques outlined by my posts can mathematically shave off a percent of two over the next few years as we are forced to misallocat debt.

[DRK]

"I posted my resume online, my phone rang off the hook with recruiter calls for weeks, and I was back to work in three days. Then I took another job ten days later (the first job having proven utterly unstisfactory), then I moved across the state to yet another job two months later. In fact, thirteen months later I am still getting the occasional headhunter call. And by the way, I am now making 7K more than my original lost job paid."

Short-term contracting? Doesn't sound very stable, and 3 different jobs in less than a year will not work for a lot of people. Short-term contracting often pays a little bit more to make up for the temporary nature of the work. Offshoring won't ship all jobs overseas, but it certainly has helped to depress salaries here. That's the whole idea it seems to me.

[Matt]

Sorry, I misinterpreted number 3.

Brad missed one argument, the ability of foreign banks to manipulate out fickleness and inertia to gain appreciably from hedging. That is the worry I have.

Just to repeat. Smart foreign banks know what we have to do to cover governmnet induced volatility, and they know we have limited debt mobility. They can counter invest and always stay a point or two ahead.

Hedging is rather simpler. Take total debt, distribute it across the yield curve (getting a spectrum of true volatility). Then counter invest as the American government fails to do the same calculation because of voter delay.

[kumbaya]

Brad: If we have a comparative advantage in nothing--and export nothing--then we necessarily have a comparative disadvantage in nothing--and import nothing.

Lol, no, it means we'd have disadvantage in everything. And this is not a serious example. Better example, Soviet Union exported to Finland dill pickles in wooden barrles. Pickles were inedible and would be thrown away right away. Wood in barrels on the other hand was ok and used for hardwood floors - both domestically and sold back to the Soviet Union whenever oil prices would allow its elites some modest luxuries. So did Soviet Union had comparative advantage in pickles ? barrels ? wood ? Did Finalnd have comparative advantage in hardwood floorings ? See, the only way to treat the words comparative advantage serious is to make them tautology - whatever sells must be somehow advantageous to someone. But than the statements about it have no meaning.

[bakho]

During the last recession, instead of bailing out the states and putting money into infrastructure, we had a round of tax cuts for the wealthy investor class. The tax cuts did not have a great stimulatory effect because they were backloaded, the money was dumped on the investor class that had excess captial sitting on the sidelines and an inventory glut. Many of the best investment opportunities were overseas, not domestic.

It is widely recognized that the greater stimulation was the temporary low interest rates that led to a housing boom. The housing boom can be described as an investment in our domestic (housing) infrastructure which meant that it created a lot of domestic jobs during the construction phase. A problem is a jobs bubble during the construction phase followed by a job bust.

Here in the Midwest there are new jobs building ethanol plants and new jobs as plant operators. Admittedly, we need a better feedstock than corn but these are domestic jobs unlikely to be exported. Lugar is proposing an ethanol pipeline which would be more jobs that are not exported. Closed carbon cycle energy production is one example of a new technology that lacks adequate research, training and infrastructure. Do these types of projects make more sense than sending our army to Iraq in order to liberate their oil?

[c.l. ball]

I dearly do hope kumbaya is joking.

[Gerard MacDonell]

Dr. Delong: I'll bet you really enjoy having peope with no clue about comparative advantage imply that you don't either.

I find there are two areas where knowledge is definitely not a precondition for a strong opinion. The first, easily, is the Fed. But the second is trade. Nobody ever rolls their eyes when economists pronounce on industrial organization, pure finance or econometrics. But when it comes to trade, everybody is a genius, realizing -- as you couldn't possibly -- that trade is really a contest.

Anyhow, my guess is that Blinder worries mostly about income distribution. The WSJ article implied otherwise, suggesting that efficiency issues are different when services are involved or once a certain scale has been achieved.

But I doubt that is what Blinder meant. I would bet that Blinder views protection as second-best (re-)distribution policy. If the bad guys insist on flattening the tax curve and destroying the social safety net, then we aren't going to place nice on trade. The rich/powerful were too greedy and repeatedly refused to take yes for an answer, so screw em on trade.

Related, we can't convince poor people to vote their own economic interest by supporting a steeper tax curve to fund the social safety net. After all, they are too easily distracted by gay marriage, stem cells and such.

But we probably can rile them up to hate foreigners, shut down trade and thereby screw the rich. I think Blinder also believes that the distributional effects of REDUCED trade might cut in his direction. But I have no idea if he is right or why he thinks that.

[save_the_rustbelt]

"...I have to take issue with this...."

Ohio Art
American Standard
Phillips Sylvania
Ticonderoga (crayons)
Huffy
Electrolux
Intersil-Harris
Delphi
Dana
Timken
etc.
etc.

It is the offshoring in Ohio and Michigan.

[MQ]

"And the marginal amount of governmental fecklessness produced by access to global capital markets seems to me to be small."

I find this an astounding statement for an American to make...the Iraq war would probably not have occurred without the unlimited borrowing ability created by privileged U.S. access to global capital.

[Jon Fernquest]

"...trade is really a contest."

That's why the government should be doing more to create world class athletes....

....not just with book knowledge, but knowledge of how to sell their knowledge, i.e. how to be successful small business entreprenuers that can exploit the oppportunities interfacing with the rest of the world's offshore outsourcing possibilities....

[Ponzi Q. Globalization]

"....not just with book knowledge, but knowledge of how to sell their knowledge, i.e. how to be successful small business entreprenuers that can exploit the oppportunities interfacing with the rest of the world's offshore outsourcing possibilities.... "

It would be nice if this type of work would give good income to most Americans (>300,000,000 and rising). But I fear this will never be the case.

So the question remains. In a globalizationized world, which is converging to a single global labor pool in so many areas and one that has vast disparities of wealth and regulation, what do the majority of Americans really do to not see their standard of living go into the crapper?

[Dean Baker]

It seems that some notion of "free trade" (it doesn't apply to patents and copyrights) has taken on religious significance among the mainstream in the economics profession.

Alan Blinder notes that large numbers of high-skilled jobs will be subject to international competition, so his answer is to train people for the jobs that will not be subject to competition. Of course, we can make any job we want subject to international competition, including brain surgeons and divorce lawyers, the heros of Blinders future, we just allow immigration. This is how we have international competition today for dishwashers, custodians, and lettuce pickers.

If Blinder were a consistant free trader he would support open immigration in the highest paid professions. This would allow for large economic gains and promote equality. However, he seems to be a determined supporter of a form of selective protectionism which he somehow imagines is free trade. The rest of the country can be excused for not taking this sort of economics seriously.

[JonF]

Re: Short-term contracting?

No, you did not read what I wrote. Let me expand on it. After losing my former job in Feb 0f 2006I was hired for a new position three days later. Itwas however a mile from home and, as I speedily foudn out, the office environment was chaotic and angry. Not some place I wanted to work. Another job I had interviewed for became a solid offer ten days later, and I jumped at it (it was much closer to home). This was a contract job, temp to perm, and I was offered a permanent position two months into it, but by then my partner and I had already decided to relocate from Tampa to Lauderdale; in fact he had already moved and we had rented a house and I was actively interviewing. I found a position (again temp to perm), completed the move, and was finally made a permanent employee of a major financial firm in October-- with a higher salary and better benefist than I have ever had before. It on the basis of what I found, by personal experience, to be a very feverish job market that I discount all the doom-mongering about outsourcing. To be sure, there are people whose skills are outmoded and people stuck in the economic collapse of the Great Lakes region (where I grew up). I understand these people are in bad shape. But even they should look at the real causes of the problems not scapegoat foreigners. Most jobs that are lost are lost-- not moved elsewhere, but simply lost.

[Doctor G]

Jon -- All I can say is that Florida is not the same as everywhere, and the financial industry is not the same as every industry. The official IEEE position is:

"The offshoring of high wage jobs from the United States to lower cost overseas locations is currently contributing to unprecedented levels of unemployment among American electrical, electronics and computer engineers. Offshoring also poses a very serious, long term challenge to the nation's leadership in technology and innovation, its economic prosperity, and its military and homeland security."

[Doctor G]

Dean - I think I may be starting to get your point. It's not that you think we should all be exposed to maximum competion from immigrants and offshore workers, just that a person who advocates unlimited "free trade" should also advocate unlimited immigration.

I'd actually be fine with free trade and open borders if there was reciprocation and a common currency with all the other countries. But I don't see that happening.

[craig tindale]

Globilisation threatens the economic viability of the "nation states" reason for existence. Previously a nation states competitve advantage was linked to the economic productivity and production of that state, nation states are now like corporations in that they must economically justify themselves, technology has created the means for capital to disconnect from a nation, the tired old theory that jobs lost are infinitely replacable by new jobs as the disp-laced workers headed up the value chain just doesnt hold water, the service jobs that replaced the manufacting jobs are based on debt and consumption, in any case as in (4) they may well be replaced as well.

Schumpeter said that change came in clusters after period of relative stability, innovation caused "creative destruction" the problem we have is that this creative destruction now has the potential to destroy the basis of nationhood, the new context is not obsolete firms but obsolete nations.

Centrally managed production is the opposite side of the coin as centrally managed consumption, both cause inbalances that beocme increasingly complex to manage. Raining money on the consumer via the real estate channel to avoid deflation is having its day of reckoning.

The large corporations are moving everything including R&D to lower cost countries, genetically based American exceptionalism is a myth , US labor is in competition with the rest fo the world and US capital will abandon the US worker.

[Jon Fernquest]

"...we can make any job we want subject to international competition, including brain surgeons and divorce lawyers, the heros of Blinders future, we just allow immigration. This is how we have international competition today for dishwashers, custodians, and lettuce pickers."

Yes, yes, yes, but opening up insurance or Medicare supported offshoring of medical services would put a little competitive pressure on the monopoly of the AMA, for instance. Which jobs get protected certainly seems to be occupational/class based.

Furthermore, opening up foreign labor markets, i.e. migration of westerners to Asia, where skilled professionals can engage in technological transfer, is only logically consistent with embracing offshoring.

"The official IEEE position is:...Offshoring also poses a very serious, long term challenge to the nation's leadership in technology and innovation, its economic prosperity, and its military and homeland security."

Offshoring is inevitable. How are you going to make laws against it?

If engineering was a little bit more on a contract basis, instead of cradle to grave, engineers would develop a presence outside of the large corporations they work for, like software people with their open source.

Example: It certainly wasn't to engineers' benefit to spend the whole cold war programming in ADA for Martin-Marietta, lets say, or some other big defence contractor, only to be thrown back in the sea and be a fish that can't swim at the end of the cold war.

[Jon Fernquest]

"...opening up foreign labor markets, i.e. migration of westerners to Asia, where skilled professionals can engage in technological transfer, is only logically consistent with embracing offshoring."

Just to cite a case where this is being considered as an viable option to jumpstart a rather moribund software industry:

http://www.readbangkokpost.com/business/foreign_direct_investment/incentives_to_build_the_thai_s.php

Obviously, the impact of offshoring needs to be mitigated, but IMHO people have to be creative about it, and not treat it like a zero-sum game.

[Jon Fernquest]

That link didn't show up correctly:

http://www.readbangkokpost.com/business/
foreign_direct_investment/
incentives_to_build_the_thai_s.php

[Sunlight]

Brad, the free trade world you idealize existed in Ricardo's textbook but died long ago. I think it is important to remember what Ricardo's outlook is based on before we can assume that free trade makes both partners better off.
1. In Ricardo's world there was a gold standard. Trade imbalances were not tolerated. The current system of a reserve currency, where the US can pay off debts with its own paper, was something he did not contemplate.
2. Transportation costs were very high in Ricardo's day. He could not have contemplated a world where autos cross the Pacific in containerships and chips by 747 jet. Thus imports were almost always subject to a large additional cost that no longer obtains.
3. Ricardo assumed that countries had natural comparitive advantages. In fact no country now has a comparitive advantage in much of anything outside the ancient sectors of agriculture and mining. Now the only advantage is a low wage cost, and an MNC sets up a modern plant in the lowest cost country, instantly creating an efficient competitor.
4. Which leads us to Ricardo's Iron Law of Wages, a priniciple that is reasserting itself under current rules. As you know, that Law said that, wages will tend be set at the subsistence level for everyone else around the world. (Back then, only a few wealthy landowners, merchants, and industrialists were exempt from this Law; Ricardo did not foresee a large wage earning middle class.) Those who toiled in the Portuguese vineyards and the British sheep pastures earned approximately the same subsistence wage; the only differences in comptetitive wherewithal came down to soil types and climates. These were the differences that made England a low cost wool producer, Portugal a low cost wine producer, and for trade to make both partners better off.

I have two more points to make. Although the international accounts balance as an accounting identity, I think that your statement about balance is misleading. We "balance" our accounts by exporting paper, ie.,taking on debt. I don't believe we can run an economy, long term, where we buy things from others and don't sell them in return. In my opinion the price performance of gold over the last several years is saying something in that regard.

Secondly, if Chinese manufacturing workers make $5-10 per day and US manufacturing workers try to compete with them when they make $10-20 per HOUR, US workers had better be far more productive to have half a chance to stay employed. You are not going to plug that gap with social insurance no matter how hard you try. The system is imbalanced and unsustainable.

Finally I would also like to know if there is at least ONE decent, comprehensive economietric study setting forth solid evidence to persuade a reader that the current free trade regime benefits the United States. I asked Brad Setser this and he could not come up with a cite, can you?

[Ponzi Q. Globalization]

"Finally I would also like to know if there is at least ONE decent, comprehensive economietric study setting forth solid evidence to persuade a reader that the current free trade regime benefits the United States."

Why bother with facts when the models and theories based on the models are so beautiful? In this area, the real world is not easy to mathematically analyze and so it must be largely ignored.

Sunlight, you gotta have FAITH!

[jerry]

"software people with their open source"

Most successful and large open source projects are funded and staffed by large corporations.

I doubt if we'll get the next generation aircraft, a safer nuclear power plant, a new rocket to the moon and mars with a globally distributed, loosely managed, team of contract engineers. These are the sorts of large scale, heavily managed, heavily engineered projects that teams of independent consultants cannot do on their own.

(And I have developed both open source projects as well as closed source aircraft.)

[Slocum]

"Michigan is in a worse mess than Ohio."

"I have to take issue with this. The problem is not that jobs in that region have been outsourced; the problem is that the jobs have ceased to exist anywhere- not in Cleveland, not in Mexico and not in China."

I live in Michigan and this is nonsense. Auto manufacturing in the U.S. is doing fine overall, but the Big 3 (and their suppliers) have been and are continuing to hemorrhage market share. That market share is being taken by the foreign transplants who also build cars and trucks (and new factories) in the U.S. The idea that off-shoring is what has hurt Ford, GM, and Chrysler is just wrong.

I do wonder, though, why DeLong worries most about #4 with respect to foreign competition when that is hardly the only or the most important source of 'creative destruction'. It has been domestic competition (in the form of new plants in UAW-unfriendly southern states) that has hurt Detroit the most. But completely apart from that, increasing automation has had a more powerful impact on auto-industry employment than anything else.

But that's OK -- 100 years ago a large fraction of people worked on farms, and now only a very small fraction do. But it was a good thing to get all those people out of dirty, dangerous farm work, just as it has been a good thing that so many fewer man-hours are needed to build cars now than 40 years ago.

We don't need a safety net especially because of foreign competition, we need one because the U.S. is (and should remain) a dynamic economy, and it is likely that people will need to retrain and change occupations over the course of a working lifetime.

[reason]

The problem is that the US imports almost twice as much as it exports. And the international financial system is feeding this debt habit. And it is the debt explosion that is driving inequality. The comparitive advantage model only works if price signals are correctly aligned. We need to work out why the international financial system is disfunctional and fix it.

[JonF]

Re: The offshoring of high wage jobs from the United States to lower cost overseas locations is currently contributing to unprecedented levels of unemployment among American electrical, electronics and computer engineers.

Odd, because I keep seeing articles saying that IT (for those with the right skills) is a growth field. As for EE, there's a fair amount of that work that has to be done locally: you can't very well work on stationary infrastructure from the other side of the planet, or even from a few miles away! Again, I am well aware that there is a large swath of the country (pretty much everything from Syracuse NY to Milwaukee WI, partially excepting Chicago only) where the economy is in horrible shape-- I am native to Michigan and keep in touch with the home folks. And for skilled professionals in that region who are unable or unwilling to relocate, prospects may indeed bleak (been there, done that, except I was able to move when push came to shove in 2002). I am not trying to play Polyanna. However I would suggest, again, that the problem these people have is not outsourcing, but rather the wholesale collapse of the Great Lakes economy, and this Zone of Ruin festering on our northern shore is something that urgently needs to be addressed. Also, if you knew my full work history since my college graduation in 1992, something that would stand out would be its sheer volatility (of which last year was an extreme example.) While I have always been able to find another (often better paying) job, no position I have held has lasted more than four years. None have been outsourced: they have simply gone away when the bean-counters decided to cut the workforce in response to falling stock prices or whatever. This lack of job security (even if the end result of each and every layoff everwyhere was positive-- a better job at higher wages) is a problem, especially, I would imagine, for people trying to raise families. I am a bit tired of it too, and would to settle and start saving for the future, maybe even buy a house if S Florida real estate prices ever return from their space flight to Mars. So yes, I am open to hearing about the problems the skilled workforce now faces, and to exploring for solutions. I just don't think it's beneficial to scapegoat foreigners, or offer one-size-fits all diagnoses and cures.

Re: I live in Michigan and this is nonsense. Auto manufacturing in the U.S. is doing fine overall, but the Big 3 (and their suppliers) have been and are continuing to hemorrhage market share. That market share is being taken by the foreign transplants who also build cars and trucks (and new factories) in the U.S. The idea that off-shoring is what has hurt Ford, GM, and Chrysler is just wrong.

Though you are replying to my post, and apparently objecting, you are actually making my point-- that outsourcing is not what is hurting the economy of MI et al. If I were to expand on my own words a bit, let me say that GM, Ford and Chrysler are being hurt in large part because of their own boneheaded decisions, and their failure to anticipate the rise in energy prices. And in part as well by America's looney-tunes healthcare non-system.

[Currency Online Trading]

As the global economy continues to express the capitalistic nature of humanity, our government needs to stop acting like they have no role in protecting our interests. It isn't a completely open world market as it is within each country. Some measures of protectionism need to be in place to insure the integrity of the home companies.