The Final Solution
May 21st, 2004, 10:57 AM
May 17, 2004
Paul Craig Roberts debates Jagdish Bhagwati in the Wall Street Journal
But is it bad for the U.S. economy?
Two economists debate the issue
DOES OFFSHORE outsourcing hurt the U.S. economy by draining away jobs and investment, or does it ultimately make the U.S. stronger? Is it a cost-cutting tactic that should be encouraged, or should it be punished in some way? The issue has become a hot button this election year.
Framing the debate in economic terms can be tricky, because while economic theory offers tidy equations that lead to win-win situations, there are losers in the real world. Workers who see their jobs shipped overseas are hurt, even while companies and the economy as a whole may see benefits, such as lower prices for consumers.
It's also problematic that the pain is felt quickly and prominently, while benefits are spread out over time and hard to quantify, says Haseeb Ahmed, an economist at Economy.com, an economic-research company in West Chester, Pa. Still, many economists say offshore outsourcing is good for the U.S. for the same reasons that free trade is beneficial for a vibrant economy. "Arguing that outsourcing hurts is arguing that free trade hurts," says Mr. Ahmed.
There are many people saying precisely that these days, as reflected in a protectionist wave in Congress and in conversations on the streets of battered mill towns in North Carolina and among unemployed computer programmers in Boston. So we asked two economists, known for their positions on opposite sides of this debate, to conduct an e-mail conversation on the subject.
Jagdish N. Bhagwati is a university professor at Columbia University in New York and a leading expert on trade who has emerged as a defender of offshore outsourcing. He was born in India and was educated there as well as in England and the U.S. He earned his Ph.D. from the Massachusetts Institute of Technology and is currently the Andre Meyer Senior Fellow in International Economics at the Council on Foreign Relations in New York.
Prof. Bhagwati says the offshore-outsourcing controversy has arisen over the growing ability to import services from other countries through advanced computer technology, like having radiologists in Bangalore read X-rays taken in Boston. It's a form of trade, he says, and, as such, is a positive force.
Paul Craig Roberts is a former assistant Treasury secretary for economic policy in the Reagan administration and was once an avid free-trader. He's one of a small but growing group of economists raising warning flags about the impact of offshore outsourcing.
Mr. Roberts, who studied in the U.S. and England and has a Ph.D. in economics from the University of Virginia, argues that the world may have fundamentally changed and that economic thinking simply hasn't kept up. He says companies are now freer to move capital and technology around the globe in search of cheaper labor. And as countries like China and India have emerged, with their vast pools of skilled and well-educated workers, it becomes harder for any industry to justify investing in or employing people in the U.S. and other high-wage countries.
Mr. Roberts is currently chairman of the Institute for Political Economy, a think tank in Washington.
Here are excerpts from their discussion.
MR. ROBERTS: From the perspective of trade theory and economic- development theory, it is hard to see the benefit to the country whose firms outsource. With domestic capital and technology reallocated to the employment of foreign labor, there is less to employ domestic labor. Either unemployment results or the remaining capital is spread more thinly with a decline in labor productivity and real incomes. As industries move offshore, suppliers are forced to follow. The domestic economy becomes a less-efficient place to produce as concentrations of skills are diluted by movement offshore.
If outsourcing were a limited phenomenon driven, for example, by domestic scarcity of a few specific skills, it is possible to imagine scenarios under which a country gains from outsourcing. But even here caution is appropriate. For example, if technology jobs are outsourced because of domestic supply constraints, the mechanism for expanding domestic supply is short-circuited. If a shortage of nurses is met by importing foreign nurses under a visa work program, domestic nursing schools are unlikely to increase their enrollments.
Outsourcing is a problem for the U.S. and First World in general, because all tradable goods production and service jobs can be outsourced. The higher the value added, the greater the incentive to outsource the work to India or China where enormous excess supplies of labor guarantee relatively low wages for years to come. Faith that new industries and occupations will rise to replace lost ones is problematical, because the same incentive will encourage replacement industries to be outsourced as well.
With excess supply overhanging Indian and Chinese labor markets, First World wages and salaries can fall swiftly and sharply long before Asian wages rise. The resulting declines in employment and/or real wages can bring political instability to First World countries.
MR. BHAGWATI: [ed: dot comments deleted due to incomprehensible accent: think Math TA with tenure].
THE WALL STREET JOURNAL: Mr. Roberts, what should the U.S. do about all this? Do you favor some sort of protectionist response?
MR. ROBERTS: To get to the "solution" stage, we have to pass through the "identification of the problem" stage. Jagdish says that there is no problem, but I am concerned that comparative advantage [theory] might be broken. [The theory says countries should specialize in goods they're better at producing than other countries and then trade for things in which they don't have the edge.] One virtue of comparative advantage is that a country doesn't need a trade strategy, because comparative advantage causes all free-trade outcomes to be beneficial. But if comparative advantage is broken and cannot be fixed by restoring its premises, the U.S. needs to develop a trade strategy.
A successful trade strategy would require careful thought from many, and require economists first to get their minds around the problem. Perhaps this exchange will lead in that direction.
I am calling for a policy of thought to examine whether real-world conditions still support the case for free trade. If real-world conditions differ from the premises of the free-trade case, we must learn to think differently and to develop a strategy based on recognition of synergies between industries and occupations and geared toward retaining high-productivity industries.
MR. ROBERTS: I agree that government policy is capable of worsening any situation. At the same time, I am aware that economists, long accustomed to shouting down "protectionist impulses," can fail to carefully examine whether changed real-world conditions or new developments in theory undermine the assumption that every act of free trade is beneficial. All I am asking is that economists seriously re- examine the case for free trade and verify that the conditions necessary for the case still hold.
In my opinion the issue will be settled by developments in the U.S. labor market and not by economic debate. If there is a recovery in high-productivity, high-value-added jobs in the U.S., the issue will dissipate. However, if U.S. labor continues to be reallocated toward lower-pay, nontradable, domestic services, the issue will come to a head, especially as wages in domestic nontradable services would experience downward pressure both from entry from displaced manufacturing and knowledge workers and from high rates of legal and illegal immigration.
WSJ: So what about the jobs, Prof. Bhagwati? Where are the good- paying ones going to come from in the future?
MR. ROBERTS: Jagdish, retraining programs are a misplaced hope. As all tradable goods and services production can be outsourced today, retraining is limited to domestic services, an increasingly crowded field, and even here foreign labor is brought in under various work- visa programs.
I appreciate your optimism, but it needs to be tempered with realism. According to economist Charles McMillion's report in the April 2 Manufacturing & Technology News, the U.S. has lost its lead in advanced-technology products and now runs a deficit in advanced technology with China (supposedly a low-tech producer of clothes and shoes) that is almost five times larger than the U.S. technology deficit with Japan. It is not clear how a country benefits from losing its superiority in advanced-technology products.
Neither is it clear how a country benefits from declining incomes. Occupations where jobs are growing pay considerably less than occupations that are contracting. Americans are heavily in debt, and their debts are not indexed to their incomes. With any luck, perhaps our discussion will prevent economists and policy makers from being caught off guard in the event there is a deterioration in U.S. economic welfare. (Cont'd)
http://www.vdare.com/roberts/jagdish_bhagwati.htm
Paul Craig Roberts debates Jagdish Bhagwati in the Wall Street Journal
But is it bad for the U.S. economy?
Two economists debate the issue
DOES OFFSHORE outsourcing hurt the U.S. economy by draining away jobs and investment, or does it ultimately make the U.S. stronger? Is it a cost-cutting tactic that should be encouraged, or should it be punished in some way? The issue has become a hot button this election year.
Framing the debate in economic terms can be tricky, because while economic theory offers tidy equations that lead to win-win situations, there are losers in the real world. Workers who see their jobs shipped overseas are hurt, even while companies and the economy as a whole may see benefits, such as lower prices for consumers.
It's also problematic that the pain is felt quickly and prominently, while benefits are spread out over time and hard to quantify, says Haseeb Ahmed, an economist at Economy.com, an economic-research company in West Chester, Pa. Still, many economists say offshore outsourcing is good for the U.S. for the same reasons that free trade is beneficial for a vibrant economy. "Arguing that outsourcing hurts is arguing that free trade hurts," says Mr. Ahmed.
There are many people saying precisely that these days, as reflected in a protectionist wave in Congress and in conversations on the streets of battered mill towns in North Carolina and among unemployed computer programmers in Boston. So we asked two economists, known for their positions on opposite sides of this debate, to conduct an e-mail conversation on the subject.
Jagdish N. Bhagwati is a university professor at Columbia University in New York and a leading expert on trade who has emerged as a defender of offshore outsourcing. He was born in India and was educated there as well as in England and the U.S. He earned his Ph.D. from the Massachusetts Institute of Technology and is currently the Andre Meyer Senior Fellow in International Economics at the Council on Foreign Relations in New York.
Prof. Bhagwati says the offshore-outsourcing controversy has arisen over the growing ability to import services from other countries through advanced computer technology, like having radiologists in Bangalore read X-rays taken in Boston. It's a form of trade, he says, and, as such, is a positive force.
Paul Craig Roberts is a former assistant Treasury secretary for economic policy in the Reagan administration and was once an avid free-trader. He's one of a small but growing group of economists raising warning flags about the impact of offshore outsourcing.
Mr. Roberts, who studied in the U.S. and England and has a Ph.D. in economics from the University of Virginia, argues that the world may have fundamentally changed and that economic thinking simply hasn't kept up. He says companies are now freer to move capital and technology around the globe in search of cheaper labor. And as countries like China and India have emerged, with their vast pools of skilled and well-educated workers, it becomes harder for any industry to justify investing in or employing people in the U.S. and other high-wage countries.
Mr. Roberts is currently chairman of the Institute for Political Economy, a think tank in Washington.
Here are excerpts from their discussion.
MR. ROBERTS: From the perspective of trade theory and economic- development theory, it is hard to see the benefit to the country whose firms outsource. With domestic capital and technology reallocated to the employment of foreign labor, there is less to employ domestic labor. Either unemployment results or the remaining capital is spread more thinly with a decline in labor productivity and real incomes. As industries move offshore, suppliers are forced to follow. The domestic economy becomes a less-efficient place to produce as concentrations of skills are diluted by movement offshore.
If outsourcing were a limited phenomenon driven, for example, by domestic scarcity of a few specific skills, it is possible to imagine scenarios under which a country gains from outsourcing. But even here caution is appropriate. For example, if technology jobs are outsourced because of domestic supply constraints, the mechanism for expanding domestic supply is short-circuited. If a shortage of nurses is met by importing foreign nurses under a visa work program, domestic nursing schools are unlikely to increase their enrollments.
Outsourcing is a problem for the U.S. and First World in general, because all tradable goods production and service jobs can be outsourced. The higher the value added, the greater the incentive to outsource the work to India or China where enormous excess supplies of labor guarantee relatively low wages for years to come. Faith that new industries and occupations will rise to replace lost ones is problematical, because the same incentive will encourage replacement industries to be outsourced as well.
With excess supply overhanging Indian and Chinese labor markets, First World wages and salaries can fall swiftly and sharply long before Asian wages rise. The resulting declines in employment and/or real wages can bring political instability to First World countries.
MR. BHAGWATI: [ed: dot comments deleted due to incomprehensible accent: think Math TA with tenure].
THE WALL STREET JOURNAL: Mr. Roberts, what should the U.S. do about all this? Do you favor some sort of protectionist response?
MR. ROBERTS: To get to the "solution" stage, we have to pass through the "identification of the problem" stage. Jagdish says that there is no problem, but I am concerned that comparative advantage [theory] might be broken. [The theory says countries should specialize in goods they're better at producing than other countries and then trade for things in which they don't have the edge.] One virtue of comparative advantage is that a country doesn't need a trade strategy, because comparative advantage causes all free-trade outcomes to be beneficial. But if comparative advantage is broken and cannot be fixed by restoring its premises, the U.S. needs to develop a trade strategy.
A successful trade strategy would require careful thought from many, and require economists first to get their minds around the problem. Perhaps this exchange will lead in that direction.
I am calling for a policy of thought to examine whether real-world conditions still support the case for free trade. If real-world conditions differ from the premises of the free-trade case, we must learn to think differently and to develop a strategy based on recognition of synergies between industries and occupations and geared toward retaining high-productivity industries.
MR. ROBERTS: I agree that government policy is capable of worsening any situation. At the same time, I am aware that economists, long accustomed to shouting down "protectionist impulses," can fail to carefully examine whether changed real-world conditions or new developments in theory undermine the assumption that every act of free trade is beneficial. All I am asking is that economists seriously re- examine the case for free trade and verify that the conditions necessary for the case still hold.
In my opinion the issue will be settled by developments in the U.S. labor market and not by economic debate. If there is a recovery in high-productivity, high-value-added jobs in the U.S., the issue will dissipate. However, if U.S. labor continues to be reallocated toward lower-pay, nontradable, domestic services, the issue will come to a head, especially as wages in domestic nontradable services would experience downward pressure both from entry from displaced manufacturing and knowledge workers and from high rates of legal and illegal immigration.
WSJ: So what about the jobs, Prof. Bhagwati? Where are the good- paying ones going to come from in the future?
MR. ROBERTS: Jagdish, retraining programs are a misplaced hope. As all tradable goods and services production can be outsourced today, retraining is limited to domestic services, an increasingly crowded field, and even here foreign labor is brought in under various work- visa programs.
I appreciate your optimism, but it needs to be tempered with realism. According to economist Charles McMillion's report in the April 2 Manufacturing & Technology News, the U.S. has lost its lead in advanced-technology products and now runs a deficit in advanced technology with China (supposedly a low-tech producer of clothes and shoes) that is almost five times larger than the U.S. technology deficit with Japan. It is not clear how a country benefits from losing its superiority in advanced-technology products.
Neither is it clear how a country benefits from declining incomes. Occupations where jobs are growing pay considerably less than occupations that are contracting. Americans are heavily in debt, and their debts are not indexed to their incomes. With any luck, perhaps our discussion will prevent economists and policy makers from being caught off guard in the event there is a deterioration in U.S. economic welfare. (Cont'd)
http://www.vdare.com/roberts/jagdish_bhagwati.htm