Alan Blinder: Free Trade's Great, but Offshoring Rattles Me

Alan Blinder writes:

Free Trade's Great, but Offshoring Rattles Me - washingtonpost.com: I'm a free trader down to my toes. Always have been. Yet lately, I'm being treated as a heretic by many of my fellow economists. Why? Because I have stuck my neck out and predicted that the offshoring of service jobs from rich countries such as the United States to poor countries such as India may pose major problems for tens of millions of American workers over the coming decades. In fact, I think offshoring may be the biggest political issue in economics for a generation.

When I say this, many of my fellow free-traders react with a mixture of disbelief, pity and hostility. Blinder, have you lost your mind? (Answer: I think not.) Have you forgotten about the basic economic gains from international trade? (Answer: No.) Are you advocating some form of protectionism? (Answer: No !) Aren't you giving aid and comfort to the enemies of free trade? (Answer: No, I'm trying to save free trade from itself.)

The reason for my alleged apostasy is that the nature of international trade is changing before our eyes. We used to think, roughly, that an item was tradable only if it could be put in a box and shipped. That's no longer true. Nowadays, a growing list of services can be zapped across international borders electronically. It's electrons that move, not boxes. We're all familiar with call centers, but electronic service delivery has already extended to computer programming, a variety of engineering services, accounting, security analysis and a lot else. And much more is on the way.

Why do I say much more? Because two powerful, historical forces are driving these changes, and both are virtually certain to grow stronger over time.

The first is technology, especially information and communications technology, which has been improving at an astonishing pace in recent decades. As the technology advances, the quality of now-familiar modes of communication (such as telephones, videoconferencing and the Internet) will improve, and entirely new forms of communication may be invented. One clear implication of the upward march of technology is that a widening array of services will become deliverable electronically from afar. And it's not just low-skill services such as key punching, transcription and telemarketing. It's also high-skill services such as radiology, architecture and engineering -- maybe even college teaching.

The second driver is the entry of about 1.5 billion "new" workers into the world economy. These folks aren't new to the world, of course. But they live in places such as China, India and the former Soviet bloc -- countries that used to stand outside the world economy. For those who say, "Sure, but most of them are low-skilled workers," I have two answers. First, even a small percentage of 1.5 billion people is a lot of folks. And second, India and China will certainly educate hundreds of millions more in the coming decades. So there will be a lot of willing and able people available to do the jobs that technology will move offshore.

Looking at these two historic forces from the perspective of the world as a whole, one can only get a warm feeling. Improvements in technology will raise living standards, just as they have since the dawn of the Industrial Revolution. And the availability of millions of new electronically deliverable service jobs in, say, India and China will help alleviate poverty on a mass scale. Offshoring will also reduce costs and boost productivity in the United States. So repeat after me: Globalization is good for the world. Which is where economists usually stop.

And where my alleged apostasy starts.

For these same forces don't look so benign from the viewpoint of an American computer programmer or accountant. They've done what they were told to do: They went to college and prepared for well-paid careers with bountiful employment opportunities. But now their bosses are eyeing legions of well-qualified, English-speaking programmers and accountants in India, for example, who will happily work for a fraction of what Americans earn. Such prospective competition puts a damper on wage increases. And if the jobs do move offshore, displaced American workers may lose not only their jobs but also their pensions and health insurance. These people can be forgiven if they have doubts about the virtues of globalization.

We economists assure folks that things will be all right in the end. Both Americans and Indians will be better off. I think that's right. The basic principles of free trade that Adam Smith and David Ricardo taught us two centuries ago remain valid today: Just like people, nations benefit by specializing in the tasks they do best and trading with other nations for the rest. There's nothing new here theoretically.

But I would argue that there's something new about the coming transition to service offshoring. Those two powerful forces mentioned earlier -- technological advancement and the rise of China and India -- suggest that this particular transition will be large, lengthy and painful.

It's going to be lengthy because the technology for moving information across the world will continue to improve for decades, if not forever. So, for those who earn their living performing tasks that are (or will become) deliverable electronically, this is no fleeting problem.

It's also going to be large. How large? In some recent research, I estimated that 30 million to 40 million U.S. jobs are potentially offshorable. These include scientists, mathematicians and editors on the high end and telephone operators, clerks and typists on the low end. Obviously, not all of these jobs are going to India, China or elsewhere. But many will.

It's going to be painful because our country offers such a poor social safety net to cushion the blow for displaced workers. Our unemployment insurance program is stingy by first-world standards. American workers who lose their jobs often lose their health insurance and pension rights as well. And even though many displaced workers will have to change occupations -- a difficult task for anyone -- only a fortunate few will be offered opportunities for retraining. All this needs to change.

What else is to be done? Trade protection won't work. You can't block electrons from crossing national borders. Because U.S. labor cannot compete on price, we must reemphasize the things that have kept us on top of the economic food chain for so long: technology, innovation, entrepreneurship, adaptability and the like. That means more science and engineering, more spending on R&D, keeping our capital markets big and vibrant, and not letting ourselves get locked into "sunset" industries.

In addition, we need to rethink our education system so that it turns out more people who are trained for the jobs that will remain in the United States and fewer for the jobs that will migrate overseas. We cannot, of course, foresee exactly which jobs will go and which will stay. But one good bet is that many electronic service jobs will move offshore, whereas personal service jobs will not. Here are a few examples. Tax accounting is easily offshorable; onsite auditing is not. Computer programming is offshorable; computer repair is not. Architects could be endangered, but builders aren't. Were it not for stiff regulations, radiology would be offshorable; but pediatrics and geriatrics aren't. Lawyers who write contracts can do so at a distance and deliver them electronically; litigators who argue cases in court cannot.But even if we do everything I've suggested -- which we won't -- American workers will still face a troublesome transition as tens of millions of old jobs are replaced by new ones. There will also be great political strains on the open trading system as millions of white-collar workers who thought their jobs were immune to foreign competition suddenly find that the game has changed -- and not to their liking.

That is why I am going public with my concerns now. If we economists stubbornly insist on chanting "Free trade is good for you" to people who know that it is not, we will quickly become irrelevant to the public debate. Compared with that, a little apostasy should be welcome.

Comments

[anonymous]

Ah, the same people who never worried while huge swaths of the American interior were transformed into "the rust belt," leading to massive union loss and contributing significantly to the current hoovering of all revenues of productivity growth by the top 1%, are beginning to notice problems now that they affect people economists actually know.

The crystal meth epidemic was your first big clue, but I suppose you can be forgiven for ignoring it since, of course, it didn't affect anyone YOU knew.

I suppose better late than never. It's time to start advocating now to decouple health insurance & pensions from jobs. It's time now to repeal so-called "right to work" laws and other unionbusting measures that have weakened employees' ability to organize in response to these challenges. It's time now to create the kind of soft landings that will prevent further massive economic dislocation and the social violence that so often follows it.

[save_the_rustbelt]

Working double time

Tough times mean multiple jobs, taxed lives for 250,000 in state

Jennifer Youssef / The Detroit News

Margaret Henwood used to have a busy social life, going out with friends, playing softball on Sundays and visiting her nieces and nephews in Seattle, Port Huron and New Jersey.

Those days are only a happy memory now that she's taken on three jobs just to pay the bills. When she actually does have time to do anything but work, Henwood, who is in her 40s, said she's too tired to leave her house or talk to her friends.

"Well, you have no life and that's the hardest part," said Henwood of Royal Oak.

Henwood's complaint is a familiar one among the more than 250,000 Michigan residents who are working two or more jobs. With decent-paying full-time jobs getting harder to find, more workers are holding down several to keep their homes and put food on the table.

[FredW]

"Just like people, nations benefit by specializing in the tasks they do best and trading with other nations for the rest."

I was trying to think of what we do best - make war, consume, and print money to be used by foreigners as reserves. This actually has worked surprisingly well but probably can't last forever.

Can anything prevent prices and wages essentially everywhere from seeking some low world-wide norm? Unions, minimum wage laws, etc. in the US and other advanced countries alone won’t help. What’s particularly scary is seeing regions of China competing with each other as they race for the bottom in terms of environmental controls. It seems like the first world will be forced back to some pre-regulatory state like in the laissez-faire industrialization period..

My guess is we’ll go with trade restrictions … because no one has come up with a better idea. Maybe we should put some foreign economists onto this project because like Blinder writes, US economists will continue to beat the drums of free trade even as we lead them to the guillotines.

[akp]

So the jobs that Americans should train for are the ones that can't be outsourced because they provide services that can't be imported? But if they can't be imported into America, then they also can't be exported anywhere else, right? So the suggestion is that we make an economy that imports all goods and services that can be imported/exported (because we can't compete on price for any of those), and doesn't produce any goods/services that can be exported?

Doesn't that seem like a bad idea?

[Idaho_Spud]

I modestly propose that pro free-traders be the first of the 30-40 million jobs outsourced.

I am fascinated by the worldview that extends "promote the general welfare" to the entire world, mostly at the expense of America's middle class.

Who benefits from this tremendous sacrifice of income, security? Peasants in India, China, Eastern Europe, surely. Certainly a few crony-packed boardrooms.

I fail to see the economic magnificence we achieve by cramming down all this suffering. Prices at Wal-Mart a few pennies lower?

[Neo-Malthusian]

"Because U.S. labor cannot compete on price, we must reemphasize the things that have kept us on top of the economic food chain for so long: technology, innovation, entrepreneurship, adaptability and the like. "

I personally (that is, I am radically inexpert and my right to an opinion is dubious) think that what kept us on top of the food chain historically has had as much to do with capital immobility, network externalities, and infrastructure (including social infrastructure such as transparent accounting and honest courts) as with the factors above. Moreover, I fail to see why any of "technology, innovation, ..." won't move or be replicated abroad.
For instance, last I looked American companies were busy opening research facilities in China.

Professor DeLong has mentioned in the past jobs "up the food chain" or "in more productive industries." There certainly are areas where those advantages still exist, like movies, finance, and Silicon Valley. I'd expect that to dissipate over time, but even if it doesn't those are hardly areas that will employ masses of Americans. I direly suspect that for most these jobs up the food chain do not exist.

Moreover, I would expect that over time even non-contestable jobs will pay less. That is because service people only make money if they serve customers who have money.

The only things that seem really secure are the upper executive echelons and the ownership of capital.

In other words, the equilibrium wage level of workers performing the same jobs, in the absence of systematic blocking factors, is identity.

This thread is being dominated at the moment by the pessimists. Any optimists around to tell us why we're wrong? It would certainly improve my disposition.

Akp: good point.

[John Emerson]

I've described this as a global race of wages to the bottom which will continue until global full employment is reached. Jobs have already left Mexico for poorer countries. (In per capita income, Mexico is average in global terms, not poor).

Economically it may be a good thing in terms of averaging over the whole global population. The US labor force will take a terrible bite, though. I find it hard to imagine that American democracy will survive.

The same forces impacting wages will impact tax revenues, so the safety net won't be improved.

There was a little piece her recently about the Turks and Caicos. The globalization winners can offshore their holdings to nice little boutique countries like that and live in unimaginable luxury while the no-longer-necessary US decays.

[Ponzi Q. Globalization]

Dr. Blinder, you've completed the first step: admitting to yourself and others that there is a problem. Eleven more steps to go.

It'll be tough, Alan, but you can beat it. I'm rooting for you. We're rooting for you.

[Nat]

Tonight the news had a story about the dire situation in the Hamptons (!) because the Feds are slow and/or disallowing their 5000 H2B worker requests for low end jobs like gardeners and maids at hotels. Businesses might be going bankrupt! Or they might have to resort to undocumenteds! Wealthy folk like their labor cheap.

They did not mention either the rates of pay or any attempts to attract US citizens.

Dean Baker has sort of a perverse thing going on about higher end jobs finally being outsourced: engineers, software, physicians... The thought being the advantages of this high cost labor being undercut to the benefit of those lower on the economic ladder. I guess now our software will be cheaper along with our Walmart DVD players.

Much as I admire Dean this is crazy on several levels. First, some professions are protected, such as physicians. Monkeys will fly out of our collective butts when they are truly at risk. Second, the benefits of outsourcing do not necessarily have to pass to the consumer. It can be waylaid by profits*. Lastly, this process is knocking out the middle to upper middle rungs of the economic ladder instead of the lower middle to middle rungs.

Somehow an economy with legions of very low tier service workers with a huge void between them and elite workers and inherited wealth seems dangerous. Brad likes to say the world benefits from a prosperous and therebye stable China. But will that occur at a cost to our political stability? A very heavily armed, politically unstable US does not bode well for anyone either.

*Speaking of profits: the state of Texas Human Services Commission has spent 450+ billion on a new software system with a large foreign contingent of technical staff. The project is currenly on hold. Outsourcing does not necessarily mean inexpensive.

[Nat]

Oops: 450+ MILLION. My bad.

[ArC]

'Moreover, I fail to see why any of "technology, innovation, ..." won't move or be replicated abroad.'

I agree. After all, technology and innovation was replicated abroad in automobiles and consumer electronics and appliances already; I don't think they're going to be the silver bullets for America.

[Fred]

Radiology is already being outsourced to American-trained radiologists living abroad. They are employed by medical clinics and hospitals in the US.

And a little googling found this website for outsourcing radiologists: http://www.outsource2india.com/services/radiology.asp

And what sort of retraining program is appropriate for unemployed engineers and programmers? Massage therapist?

[Ponzi Q. Globalization]

"The basic principles of free trade that Adam Smith and David Ricardo taught us two centuries ago remain valid today: Just like people, nations benefit by specializing in the tasks they do best and trading with other nations for the rest."

Nations do not benefit from performing certain tasks they do best. Some people in the nations do. And others do not. In fact, the policies that Blinder preaches make it so that many people in this nation lose by doing what they do best.

The 'nation' shorthand is misleading in this context. Its use should be discouraged.

[Paul]

As an American who works in software development, one of the careers hardest hit by the outsourcing hurricane, I think the eye of it has already passed and the worst is over.

There are no more unemployed qualified Indian workers. The rate of job creation in India due to offshoring is faster than the rate India now generates new workers for those jobs. This is leading to double digit salary increases for Indian developers and making offshoring to India less attractive.

Further, the US is running a trade deficit of around over 700 billion dollars or so a year. Eventually that will probably crash the dollar and make the Indians and Chinese much more expensive.

If all the jobs that could be outsourced to India and China were to be outsource, the trade deficit would be massively worse. That would also increase the rate and extent to which the dollar crashes.

My sense is that over the next few years a combination of rapidly rising wages in low wage companies and a crashing dollar will make the next five years of outsourcing much, much less painful than the previous five years of outsourcing.

[Ponzi Q. Globalization]

"Indian companies have set up centers in other low-cost countries like Vietnam and Romania so to stay competitive despite rising salaries at home. As a result, they are hiring more people in these countries. Nearly 10 percent of Tata Consultancy's employees are now foreign nationals. For Infosys, the number is close to 3 percent."

http://www.toptechnews.com/story.xhtml?story_id=51802

America makes up 5% of the world in population and has a much higher percentage of the world'd wealth. This wealth is spread widely enough today to give many Americans a relatively high standard of living. Wages are the primary mechanism that spreads this wealth.

A single global labor pool in all fields where location doesn't matter will eventually lower the living standards of the majority of Americans.

Blinder knows this and yet, not wanting to sin too much, he spews out the same old tired bromides about retraining, refocusing, and education.

[bernard Yomtov]

Blinder's general idea is OK, but his examples are silly. Turn tax accountants into auditors? Where will the demand for lots of new auditors come from? Turn programmers into computer repairmen? How much do you spend on software per year? How much on computer repair? And so on with his examples. More litigators means more lawsuits. That'll be good for the economy.

So while I agree that we need to understand the human consequences of free trade, I don't think Blinder's ideas about professions are particularly thoughtful.

[Steve]

Let us summarize Mr Binder's thesis:

Everything that can be offshored will be offshored resulting in massive white collar un- or under-employment in the US.

Now let us consider the US labor market and see if we see any indication that this disaster is indeed in the making:

If employers anticipate shipping everything that isn't nailed down overseas then we would presumably see increasing unemployment as surplus US workers are laid off......

- US unemployment is at very low levels and falling. News of skills shortages is common.

At the very least we would see a reduction in the import of skilled labor........

- The annual quota of H-1B visas (employer sponsored visas for skilled workers) was exhausted in record time this year, beating last year's record performance by several months.

Well maybe this is just a short term spike in demand before the economy hits the skids...

-Tech employers (Microsoft in particular) have been loudly calling for both urgent increases in math and science education in the US, and increased immigration of high skill workers. These are hardly the actions of people who anticipate a skilled labor surplus in US.

So my question for Mr Binder is, "Where's the beef?"

Paul has already pointed out that the worst is over in terms of outsourcing to India. I would go further and suggest that India is unique. Fifty years of very dubious economic policy left India with a large, highly educated, English speaking elite that had few economic opportunities.

There aren't any more such countries waiting to be discovered by the global economy. It is true that there are still millions upon millions of poor people in the world desperate for education and opportunity. But there aren't any large groups left that can be as easily substituted for skilled American workers.

Even if there were, it wouldn't be cause for panic. The world economy hoovered up millions of skilled Indian workers with (headlines aside) few negative effects on the US labor market. In the period since India began opening up its economy the US has experienced two sustained economic expansions, one shallow recession and consistently low unemployment.

Panic merchants consistently underestimate (or perhaps forget entirely) Say's Law. Supply creates Demand. Increase the supply of skilled labor and our increasingly dynamic global economy will very quickly find new ways to put that labor to use. The phrase "skilled labor surplus" is practically an oxymoron.

Mr Binder's concern about offshoring is sadly misplaced. When it comes to the global economy all we have to fear, as the saying goes, is fear itself.

[Dean Baker]

I give Blinder credit for honesty and being willing to step away from the "free trade" church, however timidly, but I'm still at a loss to understand his position.

It seems to be that free trade really was great as long it was just those dumb people without college and advanced degrees who got their wages depressed by being subjected to international competition. Now, it turns out that some smart people with college and advanced degrees may also have to face competition from comparably skilled workers in China, India, Russia and elsewhere. So, free trade really does cause problems. (If I misinterpreted Blinder, maybe someone can help me.)

Some of us who thought the upward redistribution of the last quarter century was not a good thing, are not especially bothered to see that high end workers might get to face the same sort of competition as their less-educated counterparts. In other words, what Blinder sees as a problem looks to me like a win-win, greater efficiency and greater equality, and it benefits the developing world.

Finally, Blinder's solution is to train people for jobs that require face to face contact. Haven't the economists at Princeton heard about immigration? That is how we subject our custodians, construction workers, and nannies to international competition. We can do the same with our doctors, lawyers, and economists. His models will show that increased immigration in these occupations will lead to enormous economic gains for the United States, increased equality, and can even provide large benefits for the developing world with the right policies.

Again, I'm glad to see Blinder step away from the church, but what he seems to describe as a problem looks like a great gain. What's wrong with greater efficiency and greater equality?

[Ponzi Q. Globalization]

Dean and Steve forget or ignore that weakening a person's bargaining position tends to decrease their pay. Does the offshoring option increase or decrease the bargaining position of American workers? Does importing labor increase or decrease the bargaining position? Does the offshoring option and labor importing increase or decrease the bargaining position of American executives, rentiers, and financiers? The answers seem pretty clear to me.

Remember the jobs we're discussing are not restricted to a few types in a few industries anymore. Like Blinder says, it's every job that is not dependent on location.

I suppose Steve believes (he cites Say) that this weakening will grow the global economy so much that demand will rise and their bargaining positions will be greater in the long run. Or maybe he thinks there will be so much wealth that it won't matter. This shows a nice optimistic faith in the orthodoxy. But that's all it is.

Steve also states that foreigners are incapable of doing the skilled work that Americans can do. This is not true. Or at least it won't take too long for this not to be true. Are non-Americans really that much dumber?

And what about the unskilled Americans anyway? Are they to be written off? I suppose it would be nice for the aristocrats to have their serfs back but I personally find this type of system to be ugly.

Dean is being too American-centric (in a much different way than I am). He thinks that equalizing labor costs within the United States is a good thing. Case closed. He forgets that his strategy will also equalize labor costs between America and the rest of the world. Is this what Dean desires?

You don't create an America with wide spread prosperity by pulling the rug out from under the majority of Americans who are workers. You don't make American workers stronger by putting them into competition for American capital with much poorer workers from around the world who labor under less pleasant (and thus cheaper) conditions or by making American workers rely on the kindness of strangers (even if noble people are the strangers). Today, the way you create a more widely prosperous America is to increase the power of workers and lessen the power of executives, rentiers, and financiers.

[David Lloyd-Jones]

The rest of the world, or at least Asia, is going to catch up with the US and Europe over the next fifty years?

What's the problem?

[Ponzi Q. Globalization]

"The rest of the world, or at least Asia, is going to catch up with the US and Europe over the next fifty years?

What's the problem?"

The problem is that you're assuming the majority of people in the US and Europe will at least stay where they are while the rest of the world or at least Asia 'catches up'. This is not a sure thing.

[sleepdeprived]

Every time I hear someone wax about the glories of off-shoring everything but upper middle managers and their hedge fund brokers, I now think of the pet food scandal were 4000 cats and dogs died (maybe as many as 17000 - there is no central reporting).

http://en.wikipedia.org/wiki/2007_pet_food_crisis

At least a crises arising from lax/non-existent inspections in China and an intentional program by Chinese pet food ingredient suppliers to taint their product so it falsely appears to be better (more protein) than it actually is, would never happen in outsourced white collar fields. Even the pet food only effected a few thousand pets and not millions of human consumers, right?

" Feds: Millions have eaten chickens fed tainted pet food" -- http://www.cnn.com/2007/HEALTH/05/02/pet.food.poultry/index.html

Oops! Well at least we can trust the upper and middle managers of US corporations to put quality and safety above making a buck, am I right people?

"Last week, FDA officials said 6,000 hogs that may have ingested tainted pet food entered the human food supply. Pork producers in seven states -- California, Kansas, North Carolina, New York, South Carolina and Utah -- are being investigated for buying adulterated feed." -- (CNN, same article)

To be fair to the Chinese regulators, this is the same FDA which found if they don't look for "mad cow" / BSE tainted food, the will find no tainted food problems.

"Possibly due to pressure from large agribusiness, the United States has drastically cut back on the number of cows inspected for BSE (USA Today, August 4, 2006, archived at [http://www.commondreams.org/views06/0804-24.htm]). Also, the U.S. is prohibiting the sale of test kits that detect BSE." -- (Bovine spongiform encephalopathy at wikipedia, http://en.wikipedia.org/wiki/Bovine_spongiform_encephalopathy)

Thankfully this can never happen in white collar fields, like software development, medical diagnoses, or accounting. The companies in the US doing the offshoring would never allow it, because it wouldn't be in their financial interest.

"In a "horrible coincidence," Menu Foods Chief Financial Officer sells roughly half his shares of company stock [5 days after the company was notified of a confirmed pet death from their product]." -- (wikipedia timeline on the tainted pet food)

[wkwillis]

Well, eventually the foreigners will tire of providing us with free TV sets and employment will go up again.
But my God is it taking a long time.

Do they actually think the Republicans are going to pay them back? The Democrats would love to pay them back, good jobs at good wages and all that, but is it going to happen? How are the Democrats going to get elected if they try to get the 20% of voters in primary(ore), secondary(steel), or tertiary(shipyards) production better pay at the expense of the 80% of voters who are in service industries of various types?

[David Lloyd-Jones]

PonziQ,

Nobody is claiming that total US production is going down.

If total US production goes up, and if "total US" is in any sense a relevant unit for anything, then the question is only how it gets divided among USA-ians.

Fred,

If American computer programmers were all retrained as massage therapists, and the ones who could compete as programmers then continued programming, the net gain to world and US welfare would be astronomical.

Uh, this may actually have something to do with David Ricardo...

[Bill]

Can anyone explain to me how it is that the US will import everything (leaving no work for Americans), yet simultaneously suffer some big implosion soon because the foreign banks are supposed to wake up and stop buying all these dollar reserves? I guess if you go around predicting two totally contradictory disasters long enough, one of them will eventually happen. While we're waiting, I'd suggest reading Paul Krugman's "Pop Internationalism". Or maybe just some Econ 101 textbook.

[DILBERT DOGBERT]

DLJ, Your comment sprung loose a memory. A friend of mine, ex air force officer and nuclear power engineer is now a massage therapist. He beat the crowd thru the gate.

[Kyle Hummel]

I have also often thought that outsourcing of jobs will eventually hurt our economy in America. I have friends who have lost jobs due to outsourcing and many of them had trouble finding new jobs. I would say that many couldn't find a job for at least 6 months and some never did. Luckily, some were nearing retirement and that enabled them to use that option and still survive in our society. Jobs are often scarce in many locales and anything that helps scarcity of jobs should have its effects studied carefully before action is initiated.

[FredW]

I see the off-shoring and H-1B visa program as essentially the same - US wages lowered by competition with equally skilled (or perhaps even better skilled) foreigners. H1B is used by US businesses to keep salaries low (based on personal experience). Cooking up the required justification is trivial.

From a Ricardian perspective it’s all good. The downside is that the pain will be felt by the relatively high-paid US/European workers as the world playing field levels out. Lose-win with the US on the short side. The additional downside is that the lack of worker and environmental safeguards in most of the world will mean that the playing field sinks to some abysmal world norm.

Can it be avoided? Americans are probably not smarter but they do have some major strengths as have been pointed out above: economic infrastructure, not too burdensome regulatory environment, low taxes, enough honesty to facilitate basic business transactions (try running a business where many have to be bribed – just figuring out how much to offer each is a major effort). I also think the US Constitution has been a special blessing. On the downside, the US seems to have a propensity for wars and now for debt.

It is fascinating that economists, excepting a few howlers on the left, don’t see any problem with globalization. Maybe it has to be – but it won’t be easy.

[Slocum]

"As an American who works in software development, one of the careers hardest hit by the outsourcing hurricane, I think the eye of it has already passed and the worst is over."

And as another one (and strong advocate of free-trade), I agree. Outsourcing software development to India has turned out not to be a piece of cake. Despite the Internet, there are still time-zone barriers and cultural barriers. Indian software developers are often not very experienced (how could they be?), and the rapid growth of the industry there results in lots of job-hopping.

Does the rise of the Indian software industry put some downward pressure on my wages? Oh, probably, to some extent. But if you knew what my wages are (and have been for the last two decades), I really don't think you'd be all that sympathetic.

And finally, it's a fallacy that there is a fixed lump of software development work to be done in the world.

[wood turtle]

As others have stated, it is a bit unfair for the author to say, that now that his job is in the outsourcing food chain, that we should reconsider. If you are skilled labor you are in a "sunset industry" which I think is grossly unfair. Our labor is as productive as any in the world and yet they have to compete against countries with low wages and little regulation.

If things go the way they have been, then outsourcing is inevitable. But they will really have a tougher sell when you tell people with expensive college educations that they have to retrain. Then the government that allows this should offer them their college tuition back so they can retrain.

But I have another solution. Let the government smash everything to hell and then we can start over with our wages comparable to what China and India get. About early 1960's wages should do it. Sure asset prices would go in the toilet but what exactly is holding them up anyway but our inflated economy as compared with the rest of the undeveloped world?

That way everybody has to pay the price and we don't have a few people at the top with good jobs and/or investments and the rest trying to compete against them.

[ferd]

This isn't comparative advantage, it's arbitrage, isn't it? Indians aren't better engineers, just cheaper. Once wages equal out won't it be just as cheap to hire engineers back here at home? Then what? "Ok, we get to be engineers again and not just masseuses and builders?" Seems as if we'll have gone through a hugely painful, family and community-destroying round-trip outsourcing era, for what? Money? Are we trying hard to put a dollar figure on ALL the horrible costs of this seemingly bizarre exercise?

There's gotta be a less costly, more humane way to bring the Third World into prosperity. I mean, we're in business to produce people and families, not mere things.

[Dirk]

I think a lot of people miss the monetary side of this (This would include you, Brad.). If the US continues with outsourcing, it demands foreign currency. The price of the dollar will then decline vis-a-vis that currency. The dollar will fall until the point is reached when the US cannot pay the high Indian wages in IT and has to produce these services within her borders. The depreciation of the dollar can be stopped, though, if India imports from the US (remember, US goods are cheaper now because of the depreciation of the dollar). This must create jobs in the US. Hence Offshoring works just as trade in goods.

Anyone remembers the NAFTA and Mexico? Giant sucking sound? It never materialized, probably because the peso became to expensive. Exchange rates are very important in determining trade, and this seems to have been forgotten.

And by the way: distance still matters: the world is not flat. If it were, how come agglomerations are still that important? Think of NY city or Silicon Valley. There's more to say, but I have to get back to work.

[Ponzi Q. Globalization]

"There's gotta be a less costly, more humane way to bring the Third World into prosperity."

The raising up of the Third World is not a reason that this system has been formed. The main reasons are increased access to cheap labor and control of (other) foreign resources. The fact that American workers will lose is actually a good thing for the important people. Greater loss for workers = more profits for multinationals.

Anyone improving their lot is a good thing all else being equal. However, in the context of neoliberal globalization, as far as the West is concerned, bringing up the Third World is simply a marketing tactic. Caring and affluent Americans who currently benefit can still get all dewy eyed as their compatriots sink into penury.

[Slocum]

"There's gotta be a less costly, more humane way to bring the Third World into prosperity."

Meaning what? They should only buy our software, and pharmaceuticals, and other technologies but never produce them themselves and sell them to us? Third world countries should sell us what, just oil and coffee beans and sneakers?

Do you think global software companies like Microsoft, IBM, and Google, *shouldn't* open R&D centers in India and China to take advantage of (and develop) the talent in those places?

[Modest Anonymouse]

Binder may not be as far ahead of the curve as he believes. Exhibit One comes from tech columnist Robert Cringely, who wrote on Friday about what he believes is IBM's plan to replace 100,000 U.S. workers with offshore labor.

http://www.pbs.org/cringely/pulpit/2007/pulpit_20070504_002027.html

As far as the rest of the debate -- Baker's logic is unimpeachable. It's also depressing as hell. And if I were laying bets, I wouldn't put money against the greater political power of the higher classes.

[Slocum]

"Binder may not be as far ahead of the curve as he believes. Exhibit One comes from tech columnist Robert Cringely, who wrote on Friday about what he believes is IBM's plan to replace 100,000 U.S. workers with offshore labor."

This is from the Cringely article:

"Remove at least 100,000 heads, eliminate the long-term drag of a defined-benefit pension plan, and the price of IBM shares will soar. This is exactly the kind of story Wall Street loves to hear. Palmisano and his lieutenants will retire rich."

"I am told there is a broad expectation at all levels of IBM familiar with the LEAN plan that it will cause huge problems for the company. Even the executives who support this campaign most strongly expect it to go down poorly with employees and customers, alike. But in the end they don't care, which shows that only the reaction of Wall Street matters anymore."

But if IBM does do this and the move goes down badly with customers for the reasons that Cringley suggests (and I think there's a good chance that he's right), then IBM will lose business to other firms whose service does not suck because of a massive off-shoring effort. These companies will pick up some of IBM's business and some of IBM's ex-employees in the U.S.

And the next time a company thinks they're going to enhance their stock price by promising huge savings from offshoring, Wall Street will respond with skepticism. In fact, my sense is that has already happened (industry watchers have seen enough offshoring efforts go bad that they no longer believe it's obviously the right call).

Also from Cringley:

"Global Services IS overweight and inefficient. Something has to be done and the company has already considered (and apparently rejected) a range of options, right up to putting Global Services on the auction block."

And:

"The worst part of all is that nobody at IBM I have talked to thinks this can or will help the business. It will probably just speed up the death spiral."

In other words, Cringley's story is that this a desparate action by an organization having serious problems where business-as-usual is really not an option.

[Blog Reader]

Dirk:

This:
"I think a lot of people miss the monetary side of this (This would include you, Brad.)."

is silly. The reasoning you give is elementary economics, and Dr. DeLong has used it here more than once.

[anon]

What we're seeing with outsourcing is not trade but rather arbitrage in currency and wage prices. As such, monetary policy really are the key to maintaining an acceptable standard of living without exporting every job that isn't nailed down.

The status of the US dollar as the world's reserve currency means the US is strongly insulated from orthodox currency market constraints. The demand for dollars is set not by the US balance of trade but rather by global market dynamics. Everyone needs dollars to buy goods--especially oil--on the international market. The asymmetric relationship of the US dollar to the the rest of the global economy means that the US trade deficit is almost (but not entirely) irrelevant because the US buys goods in its own currency using value created by its internal market. As long as this demand continues to exist, the US can run nearly a unlimited trade deficit without much risk of currency devaluation.

Don't expect a reduction in the value of the dollar to save us from outsourcing as the dollar isn't going all that far down as long as the dollar remains the global reserve currency. In contrast, if the US dollar was merely one among many trade currencies, then orthodox economics would apply and arrest outsourcing (along with the general trade deficit) by virtue of falling dollar value.

An easy defense for the United States *only* against quality of life erosion through outsourcing and trade is to stop importing goods denominated in its own currency. This will crash the dollar in the short term but the medium term result will be the emergence of a sound domestic economic foundation not especially vulnerable to outsourcing.

More broadly, the world desperately needs to shift to a global currency regime resistant to arbitrage and speculation.

The solution to destruction of the western standard of living by unrestrained trade and outsourcing is not protectionism but rather monetary systems reforms that make slash-and-burn transnational business models profitable in the first place.

[zinc]

Blinder's acknowledgement that something is wrong in economicsville is a hopeful sign.

As we busily calibrate our thermoeconomitors on the past six years of debt funded, budget busting, anti-free trade FX machinations, the tenure protected intelligencia can continue to scold from the ivory tower. Meanwhile the corporations and the pre-fascist government rush production to the third world in a breathtaking harvesting of American middle class wealth. Never would have been possible without the Federal Reservea' destruction of the incentive to save and destruction of the dollar.

We will have to wait until the American consumer runs out of spendable wealth to see the true beast for what it is.

What troubles me about the songs Dr. De Long, Dr. Blinder, and the whole "free trade" crowd are singing is their absolute refusal to admit that the current free trade system is dependent on gross manipulation and dis-equilibrium in the financial markets and by governments across the globe.

Level playing field my arse.

[Oskar Shapley]

Blinder's article is important, but I'd rather hear Delong's opinion/counteropinion.

[Dirk]

@Blog Reader

It is not silly to explain the monetary side once more if Brad doesn't use it here in this context. I know he knows the monetary side, but then he makes no use of it. I guess he has a reason. It is pretty strange to have these huge dollar reserves held by Asian central banks (CH,JP+Saudis), that's new. Will it stay like this? Hard to say what happens to the dollar next.

I still think it would help people to understand offshoring better if someone says: according to conventional economic theory there's a limit to this, we can't offshore everything (or if we did, we'll get some new jobs in other sectors). And this claim is based on the monetary side.

btw: Brad's "AFTA thoughts on NAFTA" article is quite interesting. Brad predicted - like many others and I wouldn't blame him for that - that a lot of jobs would move South of the border to Mexico as a result of NAFTA. The great sucking sound, remember? But things went differently. It's in the article.

[Dirk]

@Blogreader

I mistakenly put in "Brad" instead of "Alan" in the first sentence. My critique is directed at Alan Blinder's article, but somehow I did not express that clearly. Sorry for that.

[Christine]

"I give Blinder credit for honesty and being willing to step away from the "free trade" church, however timidly, but I'm still at a loss to understand his position"

His position is as follows:

Globalization is both highly positive and inevitable, but in the short term will hurt politically well linked members of the rust belt. If these rust belt voters aren't protected with a social safety net that includes rest-of-western-world level unemployment benefits and a tertiary/trade retraining program they will vote for protectionism with disastrous consequences.