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Mankiw and Swagel Reflect on the Politics and Economics of Offshore Outsourcing

Well worth reading. Greg Mankiw and Phil Swagel reflect on their unfair trashing by the Washington media machine in February 2004:

The Politics and Economics of Offshore Outsourcing. N. Gregory Mankiw, Phillip Swagel. NBER Working Paper No. 12398. Issued in July 2006. NBER Program(s): EFG ITI POL

Abstract: This paper reviews the political uproar over offshore outsourcing connected with the release of the Economic Report of the President (ERP) in February 2004, examines the differing ways in which economists and non-economists talk about offshore outsourcing, and assesses the empirical evidence on the importance of offshore outsourcing in accounting for the weak labor market from 2001 to 2004. Even with important gaps in the data, the empirical literature is able to conclude that offshore outsourcing is unlikely to have accounted for a meaningful part of the job losses in the recent downturn or contributed much to the slow labor market rebound. The empirical evidence to date, while still tentative, actually suggests that increased employment in the overseas affiliates of U.S. multinationals is associated with more employment in the U.S. parent rather than less.

Mankiw and Swagel write:

Outsourcing was the topic of two questions at the press conference. It is useful to reproduce the complete answers to these questions to illustrate just how far out of context the subsequent public discussion was to take the comments made at the press conference. The response to the first question on outsourcing was:

I think outsourcing is a growing phenomenon, but it's something that we should realize is probably a plus for the economy in the long run. Economists have talked for years about trade, free international trade, being a positive for economies around the world, both at home and abroad. This is something that is universally believed by economists. The President believes this. He talks about opening up markets abroad for American products being one of his most important economic priorities. And we saw discussions this weekend of the Australia agreement. So it's a very important priority.

When we talk about outsourcing, outsourcing is just a new way of doing international trade. We're very used to goods being produced abroad and being shipped here on ships or planes. What we're not used to is services being produced abroad and being sent here over the Internet or telephone wires.

But does it matter from an economic standpoint whether values of items produced abroad come on planes and ships or over fiber optic cables? Well, no, the economics is basically the same. More things are tradable than were tradable in the past, and that's a good thing. That doesn't mean there's not dislocations; trade always means there's dislocations. And we need to help workers find jobs and make sure to create jobs here. But we shouldn't retreat from the basic principles of free trade. Outsourcing is the latest manifestation of the gains from trade that economists have talked about at least since Adam Smith.

Notice that the order of response was to first note the gains from trade, and only second to refer to the dislocation to affected workers; later we will discuss how, from a communications standpoint, this was a tactical error....

It was not at all clear following the press conference that a political firestorm was in the making. Indeed, reporters from the Financial Times, USA Today, and the Wall Street Journal complained at the end of the press conference that there had not been any news. A reporter from the Washington Post suggested after the event that the answer on outsourcing might be controversial, but more because of the inherently contentious nature of the topic.... [T]he reporters who missed the story at first were among the best in the Washington press corps in terms of their economic knowledge. The FT and Wall Street Journal reporters had the backgrounds one would expect of economics writers for those publications, while the reporter for USA Today was a 1995 graduate of Harvard who had majored in economics and written on the subject for the FT before moving to the mass-circulation USA Today. For these reporters (as for ourselves), a focus on the economic substance meant overlooking the newsworthy point that a White House adviser was talking straightforwardly about the subject of outsourcing in the first place during an election year....

The controversy arose instead from coverage of the press conference in the Los Angeles Times. Above a nuanced discussion of the costs and benefits of outsourcing, the LA Times ran the incendiary (and inaccurate) headline “Bush Supports Shift of Jobs Overseas.” In contrast, the Post headline above a similar story was “Bush Report Offers Positive Outlook on Jobs.”

It took less than a day for the words “Bush Supports Shift of Jobs Overseas” to be picked up by opponents of the President. However, it took more than half a day for this to happen, so that the issue of outsourcing figured little at the Congressional hearing on the ERP on February 10—-the day of the inflammatory LA Times headline.... This changed within the same day’s news cycle.... The next day, February 11, a story on the ERP in the Washington Post was headlined “Bush, Adviser Assailed for Stance on 'Offshoring' Jobs”... and quoted Senator Kerry decrying the White House desire to “export more of our jobs overseas,” as well as Republican Congressman Donald Manzullo from Illinois calling for the resignation of the CEA chairman. White House aides responsible for Congressional liaison warned of fury on the part of Republican members of Congress from Pennsylvania, Ohio, Michigan, and other industrial states....

An interesting note is that after the first day’s stories on the ERP and the press conference, subsequent press coverage focused largely on the political response rather than the substance of what was actually written and said. Indeed, reporters writing the stories universally acknowledged in private that the CEA Report was both correct and unremarkable on the substance. What was remarkable was the reaction, and as journalists they were obligated to cover the political reaction and fallout. The coverage reflected the unfortunate reality of the modern craft of journalism. In general, the coverage did not seem to us to reflect malice, bias, or sloppiness on the part of the journalists involved.... Matters of substance were left to editorial writers...

Well, it depends on what the meaning of "bias" and "malice" are.

Journalists may have been "obligated to cover the political reaction and fallout," but they were also obligated--an obligation they failed to perform--to inform their readers. If it was indeed the case, as Mankiw and Swagel say (and I believe them) that the "reporters writing the stories universally acknowledged in private that the CEA Report was both correct and unremarkable on the substance," then the reporters had an obligation to inform their readers of that fact--a obligation they did not meet, yet easily could have met. Had they met the obligation, they would have better informed their readers. They would also have annoyed a few members of congress by making them look ill-informed.

A reporter who successfully covered both the political reaction and the economics was the excellent Bob Davis of the Wall Street Journal, who wrote on February 12, 2004:

"Some Democratic Economists Echo Mankiw on Outsourcing," By BOB DAVIS February 12, 2004: WASHINGTON -- White House chief economist Gregory Mankiw set off a political firestorm this week when he said that outsourcing U.S. jobs helps the economy. But some prominent Democratic economists make the same argument.

At a Monday news conference, Mr. Mankiw said that sending U.S. service jobs abroad "is probably a plus for the economy in the long run." That is because foreign workers can do the jobs more cheaply, reducing costs for U.S. consumers and companies. "Outsourcing is just a new way of doing international trade," he added.

Since then, his remarks have brought sharp rebukes from lawmakers, including some Republicans. "Incredible indifference," said Democratic presidential contender Sen. John Edwards of North Carolina. "What planet do they live on?" Even Republican House Speaker Dennis Hastert of Illinois said Mr. Mankiw's "theory fails a basic test of real economics."

The White House has offered Mr. Mankiw only tepid support. Calls for his resignation were "kind of laughable," said White House spokesman Scott McClellan, because the economic team is "doing a great job."

Even among Democratic economists, though, Mr. Mankiw's remarks were mainstream. "Basically I agree with Greg's thrust," said Janet Yellen, who was President Clinton's chief economist. "In the long run, outsourcing is another form of trade that benefits the U.S. economy by giving us cheaper ways to do things."

But Ms. Yellen added that many moderately paid U.S. workers are suffering because of outsourcing, especially call-center workers whose jobs have been shipped to India and elsewhere.

The controversy surrounding Mr. Mankiw's remarks spotlights the political potency of the jobs issue this year. Since Mr. Bush has taken office, the U.S. has lost more than two million jobs -- a statistic that has become a major point of attack for Democrats who cite outsourcing as one cause. In recent months, the economy has sharply rebounded, but job growth remains weak .

Mr. Mankiw, who is chairman of the White House's council of economic advisers, may have been trying to put the outsourcing issue in perspective, and speaking more as an economist than a politician. But to some critics he sounded cavalier -- for instance, in suggesting that high-paying jobs in radiology might be better done abroad than in the U.S.

Said Laura Tyson, dean of the London Business School and another of Mr. Clinton's former chief economists: "The traditional economic response does sound hard-hearted and can be criticized for not taking nearly as seriously the dislocation as one should."

A chastened Mr. Mankiw said Wednesday, "I wish I had been more clear at the press conference; any loss of jobs is regrettable. If I suggested otherwise, I failed to communicate."

Though Mr. Mankiw also trumpeted the administration's job-retraining initiatives, the message was obscured by his outsourcing remarks.

"On efficiency grounds, he [Mr. Mankiw] is right," said former Clinton Labor Secretary Robert Reich, meaning that the economy becomes more efficient when costs are reduced through trade. But Mr. Reich, who advises Democratic presidential front-runner Sen. John Kerry, said the administration hadn't made "a serious attempt to deal with the profound structural problems of an economy in transition as it affects middle-class jobs."

Monday, Mr. Kerry joined in the Mankiw bashing, saying the administration wants "to export more of our jobs overseas." But Brad DeLong, a former Clinton treasury economist, cautioned that Mr. Kerry ought to be careful with his word because the outsourcing trend is bound to continue. "Linking outsourcing to aggregate employment decline is a bit of demagoguery that will bite him in the butt next February if he becomes president," Mr. DeLong said.