December 11, 2003

The Economist on Service-Sector Offshoring

The Economist writes about service-sector offshoring:

Economist.com | Offshoring: ...Although there have been no federal legislative proposals in America against offshoring per se, there has been a tightening up on the granting of visas that allow foreign workers to enter America for training and temporary employment. The annual quota for so-called H-1B visas used by itinerant Indian software programmers fell in October to 65,000 from 195,000 a year ago. The idea is to prevent foreigners from taking Americans' jobs. In fact, the effect may be the reverse. Craig Barrett, the chief executive of Intel, a chipmaker and a big employer of Indian engineers, says that America's main problem is a lack of suitably educated engineering graduates. The impact of fewer visas may thus be to encourage American firms to shift more work to India, where well-qualified computer engineers are plentiful.

But the vast majority of the service jobs that are now going offshore do not require highly qualified engineers. Multinationals may in future do original R&D in low-cost places, but for the moment most of the jobs on the move are the paper-based back-office ones that can be digitalised and telecommunicated anywhere around the world, plus more routine telephone inquiries that are increasingly being bundled together into call centres.

Several American states have moved faster than the federal authorities in trying to halt this "labour arbitrage". Lawmakers in New Jersey have proposed a bill to stop firms using foreign workers to fulfil state contracts. Public pressure forced the state to bring back a helpline for welfare recipients that had been outsourced to India. For similar reasons, in late November Indiana withdrew from a $15m contract with the American subsidiary of a leading Indian IT outsourcing firm. Governor Joe Kernan said that the contract did not fit with Indiana's "vision" of providing better opportunities to local companies and workers.

On one estimate, America accounts for over 70% of all offshoring business. The second biggest market is in Britain. Big companies there regularly announce that they are moving service jobs abroad, many of them involving the wholesale transfer of call centres. In late October, the HSBC banking group announced that it is taking 4,000 jobs from Britain to India, and earlier this month Aviva (the Norwich Union insurance group) said it is transferring 2,350 jobs, also to India.

As yet, such moves have been less politically contentious than in America. Patricia Hewitt, Britain's minister of trade and industry, responded to those concerned about the job losses by saying it was a"myth" that offshoring would create widespread unemployment. Nevertheless, her department has commissioned an independent study into the competitiveness of Britain's call centres. Representatives of Amicus, a big British finance-sector union, were this week seeking to persuade the European Parliament to set up a more general inquiry into the likely impact of offshoring on Europe's economy.

The offshoring business remains predominantly English-speaking. It is dominated by American and British companies outsourcing their internal operations to third parties in places such as Ireland, Canada and South Africa, but most of all in India. The fact that America and Britain have relatively liberal employment laws has also been influential in the shift of business overseas...

The fact that trade balances--that dollars paid to Indian call-center workers show up as demand for American exports or as funding for investments in America*--means that the Economist is doing a bad thing when it talks about "job loss" rather than "job shift." Bad Economist! Go lie down now!! No biscuit for you!!!

The question these state governors should be asking themselves is, "Are these call-center jobs really the ones we want to keep?"


*As long, that is, as the Federal Reserve does a reasonably good job of turning Say's Law from an ideology-soaked theory into a practical rule of thumb.

Posted by DeLong at December 11, 2003 03:38 PM | TrackBack

Comments

Maybe not the best accounting but at least this article has us discussing an important issue. Did you see the Wall Street Journal article this week noting how the U.S. restrictions and basic go it alone attitude is retarding the ability or willingness for Chinese business people to enlist products from U.S. exporters? Let's just say I'm not articulating this as well as the WSJ did. But then the article definitely belongs in the file noting China Bashing is bad economic policy.

Posted by: Harold McClure on December 11, 2003 04:00 PM

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Sorry, Dr. de Long. I cannot see ANY circumstances under which exporting jobs is a good thing. Not while there are unemployed here.

Posted by: Chuck Nolan on December 11, 2003 04:38 PM

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One would imagine there would be an economic equivalency between low-cost offshoring and productivity improvement thru technology. In other words, if technology improved such that one could produce 5x functionality for the same IT budget, isn't it economically equivalent to offshoring to get a 5x cost benefit?

And yet, if asked "imagine that new technology allows IT projects to become 5x cheaper; predict what will happen?" we think that more projects and more sophisticated projects will be undertaken for the same IT budget. But we react differently ("we'll lose our jobs") when contemplating the off-shoring trend.

Is this a mental framing illusion or am I missing something obvious?

AG

Posted by: AG on December 11, 2003 04:38 PM

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Professor Matloff, of UC Davis, has been maintaining a site claimging that the software labor shortage is a myth (http://heather.cs.ucdavis.edu/itaa.others.html). He's been doing this for a couple of years. I couldn't find the location in his materials, but he mentioned Intel as being unwilling to hire UC Davis Ph.D.'s. Back during the Boom, when any computer related people were allegedly in very short supply.


Posted by: Barry on December 11, 2003 04:46 PM

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It's SO tiresome when professional economists don't give a hoot about American workers.

The notion that technology companies are outsourcing jobs that are so low-level we don't need them is FAITH-BASED. The idea that we are going to replace these jobs with more advanced technology management jobs is FAITH-BASED.

This article has a table of announced job cuts at American high tech companies, and for those same companies, estimates of high tech hiring in India.
http://www.morganstanley.com/GEFdata/digests/20031006-mon.html#anchor0

There was an article on a UCLA study of the Bay Area economy today (12/11) in www.sfgate.com that really nailed the effect of outsourcing as the most important contributor to the jobloss recovery locally.

I think the projections in this study understate the drag on the job market from outsourcing over time because they do not take into account how outsourcing will continue to accelerate.

>>>>But the most important explanation for slow job growth involves changing patterns of corporate hiring, especially in technology, the sector that dominates the Bay Area economy.

Technology hardware and software companies are already experiencing a rebound in demand for their products. But when companies add to their workforces to meet rising demand, they often hire in India or China rather than California.

In Silicon Valley, "hiring is going to be selective, it's going to be limited and we are going to continue to see layoffs," Los Gatos career counselor Patti Wilson said. <<<<

Posted by: camille roy on December 11, 2003 04:55 PM

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Inflammatory post follows, please explain...
I am confused. For simplicity, say we have 9 economically tiny countries and 1 800-lb economic gorilla. The gorilla starts outsourcing to the other countries. Your argument is that this doesn't hurt the Gorilla People because the Tiny Country People will be spending their new 10k/yr salaries to buy Gorilla Company products. But isn't it the case that as long as G.People are higher-paid than correspondingly skilled T.C.People, the G.-produced products will have less demand than the T.C. products? (what will keeps them from starting their own companies? nothing.) And that over time, the pay imbalance will shrink until the average G.person and T.C.person make the same 15k/yr salary? not that this is a bad thing - from The Flight to India at http://www.zmag.org/sustainers/content/2003-10/26monbiot.cfm , "All those concerned about economic justice and the distribution of wealth at home should despair. All those concerned about global justice and the distribution of wealth around the world should rejoice. As we are, by and large, the same people, we have a problem." (via bonoboathome.blogspot.com)

Posted by: Anna on December 11, 2003 05:28 PM

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The idea that it's mainly low-level jobs that have been outsourced so far is not faith-based. In fact, it's not even an idea -- it's reality. Look at the jobs that have been shipped to India and the vast majority of them are exactly what The Economist says they are, back-office and call-center jobs.

More to the point, the number of "high-tech" jobs that have been "exported" -- a word that jobs somehow inherently belong here rather than somewhere else -- is simply too small to have any meaningful impact on the U.S. economy, which makes Roach's assertions about "global labor arbitrage" completely overblown. Morgan Stanley's own study suggests that India's entire IT-services industry will do $17 billion in export sales in 2008 -- five years from now. That's roughly 40% of what we spend on, oh, pet food right now. Roach simultaneously calls an employment increase of 57,000 "puny" but points to a table of job cuts totaling about half that as evidence of a threat to the entire U.S. economy. The estimate of 650,000 IT professionals in India is also much higher than most other estimates -- Fortune, in a recent piece, put the number at 350,000.

The most egregious thing in the Roach article (a piece which, unfortunately, has been cited in many places) is his discussion of GE's "70-70-70" plan. Roach writes that GE has the goal of "outsourcing 70% of its headcount" and "pushing 70% of that offshore," meaning that GE plans to put 49% of its current headcount offshore (and roughly 35% of it in India). Now, there's nothing wrong with this plan -- it's obviously in the world's interest for the Indian economy to keep growing fast, and GE investing there would help. But it's not GE's plan (which was, in any case, articulated by Jack Welch, and we don't know if Jeff Immelt has continued the strategy). Welch's plan was for 70% of GE's "software work" to be outsourced. Now, I don't how much software work GE does, but it certainly does not account for the vast majority of GE's work. So this statistic is completely deceiving. (One might argue that since Roach's piece begins with a discussion of IT outsourcing, it's implicit that that is what he's discussing, but it's clearly not, since he mentions GE's "global workforce of 313,000," which is obviously not limited to IT professionals.)

Here's a cite for a discussion of 70-70-70 from within GE: http://www.ge.com/in/w657.htm

Posted by: James Surowiecki on December 11, 2003 05:31 PM

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Anna:

Nice rebuttal to those who think professional economists for free trade don't care about U.S. workers. I can only add Robert Mundell's old ineffectiveness of commercial policy theorem. If the land of Gorilla uses restrictions on imports but let's its currency float, then Gorilla dollars appreciate which reduces the demand for Gorilla product exports. I guess the trade protectionist don't realize that we also care about job prospects for American workers who might be considering working for the export sector. But then I had to add the humor of your Gorilla example to liven up Mundell's 40 year old theorem. Wonderful tale you had there!

Posted by: Harold McClure on December 11, 2003 05:35 PM

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The idea that it's mainly low-level jobs that have been outsourced so far is not faith-based. In fact, it's not even an idea -- it's reality. Look at the jobs that have been shipped to India and the vast majority of them are exactly what The Economist says they are, back-office and call-center jobs.

More to the point, the number of "high-tech" jobs that have been "exported" -- a word that jobs somehow inherently belong here rather than somewhere else -- is simply too small to have any meaningful impact on the U.S. economy, which makes Roach's assertions about "global labor arbitrage" completely overblown. Morgan Stanley's own study suggests that India's entire IT-services industry will do $17 billion in export sales in 2008 -- five years from now. That's roughly 40% of what we spend on, oh, pet food right now. Roach simultaneously calls an employment increase of 57,000 "puny" but points to a table of job cuts totaling about half that as evidence of a threat to the entire U.S. economy. The estimate of 650,000 IT professionals in India is also much higher than most other estimates -- Fortune, in a recent piece, put the number at 350,000.

The most egregious thing in the Roach article (a piece which, unfortunately, has been cited in many places) is his discussion of GE's "70-70-70" plan. Roach writes that GE has the goal of "outsourcing 70% of its headcount" and "pushing 70% of that offshore," meaning that GE plans to put 49% of its current headcount offshore (and roughly 35% of it in India). Now, there's nothing wrong with this plan -- it's obviously in the world's interest for the Indian economy to keep growing fast, and GE investing there would help. But it's not GE's plan (which was, in any case, articulated by Jack Welch, and we don't know if Jeff Immelt has continued the strategy). Welch's plan was for 70% of GE's "software work" to be outsourced. Now, I don't how much software work GE does, but it certainly does not account for the vast majority of GE's work. So this statistic is completely deceiving. (One might argue that since Roach's piece begins with a discussion of IT outsourcing, it's implicit that that is what he's discussing, but it's clearly not, since he mentions GE's "global workforce of 313,000," which is obviously not limited to IT professionals.)

Here's a cite for a discussion of 70-70-70 from within GE: http://www.ge.com/in/w657.htm

Posted by: James Surowiecki on December 11, 2003 05:36 PM

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Ok, I started coming here because I would like to learn more about economics. My point is I know little at this point. However, that's not going to stop me from putting my foot in my mouth. I do have a comment on the above back and forth about outsourcing low-level jobs to India and such. People speak about these jobs like they are no loss. Well, you know what, they are a loss to those people who don't have the education to get one of those high-level jobs. What about those people? I mean, do economists think that there are no under educated or below the poverty line people in this country that would love to be trained to do this instead of working at McDonalds?

RC

Posted by: RC on December 11, 2003 06:11 PM

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Anyone who knows anything about comparative advantage, and basic economics, knows that free trade can always benefit all parties, and that tariffs are almost always a terrible idea. It is an open question, however, what to do with the increasingly unemployed semi-literate unskilled workers we have as a result of offshoring. At local company pillowtex, for example, several thousand people were just laid off, many of whom don't even have high-school degrees, can't read, or are borderline retarded. What are we going to do with people who can't do high value-add jobs? It's a tough question.

Posted by: Steve on December 11, 2003 06:24 PM

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RC said it. The idea that the US can afford to lose any jobs is interesting. It assumes that better jobs are going to replace those jobs. The supposition that people are better off because of cheap Chinese goods is tiresome - unemployed people are not better off because goods are cheaper.

Posted by: Ian Welsh on December 11, 2003 06:26 PM

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This is OT, but it should be noted..

Bush may be selectable, but he's definitely unelectable.

Posted by: bam on December 11, 2003 06:45 PM

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People who lose their jobs to foreign labor competition should still support globalization. I think globalization is wonderful. For an Austrian perspective:
http://arbyte.us/essays/Glory_of_Globalization.html

Posted by: Kyle Markley on December 11, 2003 06:52 PM

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Dear Dr. Delong,

Thank you for your great blog. However, even Paul Krugman says:

"competition from newly industrializing economies does hurt some workers in advanced countries. I could tell you how sensible government policies could minimize this cost, but since we don't have those policies and aren't about to get them, free trade is, in reality, a morally ambiguous issue.

***And someone in my situation has to acknowledge being in a particularly weak moral position, since they aren't yet having newspaper columns written in Bangalore.***"

Posted by: AReader on December 11, 2003 06:58 PM

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Why is the supposition about cheaper Chinese goods "tiresome"? If the vast majority of Americans benefit from cheaper Chinese goods, and a small number of Americans lose their jobs because of Chinese imports (a statement I'll accept here for the sake of argument) how is it not in the best interests of the nation as a whole to trade with China?

Krugman is clearly right about there being sensible policies to minimize the cost of trade adjustment, and I'm in favor of them (as long as they're short-term policies). But frankly I don't really understand the point about newspaper columnists being invulnerable to free trade. They may not be having columns outsourced yet, but is there any profession that can be done more easily anywhere in the world than writing a column, especially one that, like Krugman's, depends on no on-site reporting? Krugman could write that column from anywhere. The fact that most magazines and papers concentrate on national or even local matters does mean that reporters have a certain measure of insulation from globalization (though certainly less than barbers, carpenters, and tens of millions of other service workers). But as the world becomes connected, I think it's inevitable that newspapers and magazines will seek out the best columnists, regardless of where they're located.

Posted by: James Surowiecki on December 11, 2003 07:11 PM

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It seems to me that if fiscal and monetary policy cannot maintain full employment, then yes, a company transfering a lot of jobs to India really is a job loss. Beggar-thy-neighbor protectionism seems like it could be good policy if your normal business-cycle control systems are feeble enough.

Of course, right now, since we're in the beginning of a recovery, it looks like our business cycle control systems don't need help via import restriction. Still, I'm not sure we're in a good enough employment situation that you can unambiguously say that offshore outsourcing ISN'T a job loss either. If unemployment were at 4-5%, THEN it's a job shift, since import restrictions would simply mean fewer exports via tighter monetary policy.

Posted by: Julian Elson on December 11, 2003 08:10 PM

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Getting jobs out around the world is the best thing that can be done in our time.

Arise ye prisoners of starvation: get to work on time.

Posted by: David Lloyd-Jones on December 11, 2003 08:20 PM

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>>However, even Paul Krugman says: "competition from newly industrializing economies does hurt some workers in advanced countries."<<

Yes. It hurts some. It helps others. Job shift, not job loss...

Posted by: Brad DeLong on December 11, 2003 08:25 PM

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>>It seems to me that if fiscal and monetary policy cannot maintain full employment, then yes, a company transfering a lot of jobs to India really is a job loss.<<


Yes. That's the point of writing, "As long, that is, as the Federal Reserve does a reasonably good job of turning Say's Law from an ideology-soaked theory into a practical rule of thumb."

Posted by: Brad DeLong on December 11, 2003 08:27 PM

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It used to be thought, by perfectly respectable political economists, that an important goal of political economy is to assure an order in which ordinary people, of ordinary mental and physical capacities and of ordinary attainments, might have the chance to live decently and provide for their families, all within the law, and to exercise their full due as citizens. Or so I was told.

The market is an asymptotic indicator of what people want to do. It is not God.

Posted by: Altoid on December 11, 2003 08:40 PM

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It may be different for government spending than for business spending. What is the loss of income tax generating in the government area vs. the cost savings of shipping it to a cheaper place overseas? If there are low skilled or unemployed people or people on welfare who may take these jobs that is another consideration. Isn't there some kind of money multiplier for taxes like they do for money supply that would also apply to this?

Also, I think it's kind of mean to say "are those call center jobs the ones we want to keep" because then you are really making value judgments about people's work, and yes there are times when someone may value a polite efficient call center person more than they value an economist. Plus, one of the fastest growing areas of U.S. employment is in the hotel and restaurant business, so you can't really say yes it's just super to have more room cleaners, bartenders, and wait staff, but it's really really bad to have call center people here, because they should really get off their duffs and do something better with their lives.

Then you get to the issue that others have pointed out- how much can you believe those Economist reports? Of course if you survey a tech industry leader they are never going to say they have all the skilled workers they need at a good price- they are going to want to flood the market even more so they can pay less, it only stands to reason. You can't expect honest kinds of answers from that kind of superficial research. There's an obvious problem when you get such opposite answers from Economist and that other economist that disagreed, and people are going to wonder what is the truth.

Then there is the statement "dollars paid to Indian call-center workers show up as demand for Americal exports or as funding for investments in America."

Well, as more and more U.S. businesses export jobs overseas, particularly in manufacturing, exactly what is it that they are supposed to demand that will provide jobs here? So they buy our stocks and bonds and real estate and drive up the prices, so that our pay scale needs to be higher, which means that we lose more jobs, and since we don't have anything to sell they buy more real estate, etc? Plus you have the feds and most people here wanting the asset prices to be as high as possible, and it will just keep going on like that.

It's not that people are opposed to developing the poorer countries, but that these plans seem to have been based a lot on wishful thinking and the assumption that any and all jobs could be exported overseas, and be replaced by other jobs. But a lot of people doubt that will happen soon, and meanwhile how is the U.S. median income doing? Housing prices going up and median income going in the toilet? That doesn't look good.

Posted by: northernLights on December 11, 2003 10:02 PM

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I'm no economist mind you, but I was curious about a possible implication of this:

"The fact that trade balances--that dollars paid to Indian call-center workers show up as demand for American exports or as funding for investments in America*--means that the Economist is doing a bad thing when it talks about "job loss" rather than "job shift." Bad Economist! Go lie down now!! No biscuit for you!!!"

Since America's trade deficit is not balanced by the export of American goods, but is instead balanced by investments in $-denominated assets and by savings of $s, I don't see why there would necessarily be a job transfer. Instead, it seems that offshoring primarily benefits wealthy businessmen doubly by increasing profits (through a reduction in labor costs) and by increasing the value of their stock portfolios, from which they can extract hefty untaxed dividends.

Of course, the other big winners are the Indians, Chinese, etc. I think that off-shoring is by and large a good thing as long as the U.S. has offsetting policies that benefit laborers in the U.S.

Posted by: SeanK on December 11, 2003 10:48 PM

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>>However, even Paul Krugman says: "competition from newly industrializing economies does hurt some workers in advanced countries."<<

"Yes. It hurts some. It helps others. Job shift, not job loss..."

Dear Mr DeLong,
Love your blog, but this is bogus. In fact the stream of consciousness in this thread, in so far as it characterizes these out sourced jobs as low-skill jobs we may be better off without, is bogus. (The ivory tower mentality reflects poorly on your profession.) I am speaking from the line of fire, as a silicon valley software engineer with over a decade of advanced lab experience in the best companies in the valley. I know what's going on and it is ugly. The wages dropping like a stone etc, etc. I know the companies around here are sending work off-shore as fast as they can and I know that there are very few replacement jobs. Job losses here are around 300K and there is nothing on the horizon for these highly trained unemployed. Roach gets slammed here but he is the ONLY ONE I have read whose sense of the situation reflects reality on the ground. The rest of y'all are armchair generals.

Now why exactly is the American middle class supposed to go for free-trade? We are supposed to appreciate that the destruction of our livelihoods, with all that entails, is in the good cause of allowing non-Americans to become prosperous? As the wealthy in this country get vastly richer, of course, from all the savings they obtain by eliminating their domestic payroll. If this is really all your economic theories have to offer, maybe it's time to dust off Das Kapital.

Seriously, I think you economists are on shaky ground when you assert your theories justify running your fellow citizens into the ground. Especially in this new era, when your unemployed fellow citizen may have a much stronger background in hard sciences than you do, giving him or her an ironic but rather bitter appreciation of what a hunch factory economics really is.

Posted by: camille roy on December 11, 2003 10:59 PM

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The volume of jobs that exported have had a huge impact on one small sector: Macintosh software development.

There's much, much less work these days for Americans doing custom Macintosh software development. Projects are heading offshore at an alarming rate, to companies that have no expertise or even experience doing Macintosh development. (Though they certainly claim they do! Particularly to people who don't have the knowledge necessary to evaluate those claims!)

Why? Because some people believe that programming is a "low-skill" job and that somehow you can do requirements analysis and design completely and in advance and actually get a good product regardless of the quality of the people doing the programming.

It doesn't work like that; you get the best, most economically efficient result using "high-skill" developers who perform all of the "stages" of development at once, together, in close collaboration with the customer, iteratively rather than in a waterfall. (See "Extreme Programming Explained" by Kent Beck for some idea of what I'm talking about.) Instead of hiring 20 people at $20/hour halfway around the world you hire 6 people at $100/hour within two or three time zones of you; in the end you get a better result faster leading to lower overall costs and time to market benefits.

But just try explaining this to someone who thinks software developers are interchangeable low-skill cogs not much advanced beyond typists.

Knowledge matters. Experience matters. Skills matter. Location matters. Offshoring, fundamentally, is about pretending none of that does. It's not about trying to find the best value, it's about trying to find the lowest price. And it's destroying what was once a vibrant developer community.

(And please, it's not about whether third-world developers can be as good as first-world developers. They certainly can. The question is whether the developers who are getting the work at these third-world outsourcing shops are better. And all the evidence I've seen from reading technical newsgroups and bulletin boards where they ask questions is that they're worse. At least in the Macintosh world.)

Posted by: Chris Hanson on December 11, 2003 11:13 PM

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The volume of jobs that exported have had a huge impact on one small sector: Macintosh software development.

There's much, much less work these days for Americans doing custom Macintosh software development. Projects are heading offshore at an alarming rate, to companies that have no expertise or even experience doing Macintosh development. (Though they certainly claim they do! Particularly to people who don't have the knowledge necessary to evaluate those claims!)

Why? Because some people believe that programming is a "low-skill" job and that somehow you can do requirements analysis and design completely and in advance and actually get a good product regardless of the quality of the people doing the programming.

It doesn't work like that; you get the best, most economically efficient result using "high-skill" developers who perform all of the "stages" of development at once, together, in close collaboration with the customer, iteratively rather than in a waterfall. (See "Extreme Programming Explained" by Kent Beck for some idea of what I'm talking about.) Instead of hiring 20 people at $20/hour halfway around the world you hire 6 people at $100/hour within two or three time zones of you; in the end you get a better result faster leading to lower overall costs and time to market benefits.

But just try explaining this to someone who thinks software developers are interchangeable low-skill cogs not much advanced beyond typists.

Knowledge matters. Experience matters. Skills matter. Location matters. Offshoring, fundamentally, is about pretending none of that does. It's not about trying to find the best value, it's about trying to find the lowest price. And it's destroying what was once a vibrant developer community.

(And please, it's not about whether third-world developers can be as good as first-world developers. They certainly can. The question is whether the developers who are getting the work at these third-world outsourcing shops are better. And all the evidence I've seen from reading technical newsgroups and bulletin boards where they ask questions is that they're worse. At least in the Macintosh world.)

Posted by: Chris Hanson on December 11, 2003 11:15 PM

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The case for globalization, free trade and offshoring has been made, exhaustively, by those very people who believe they will never suffer its consequences. It all sounds wonderful from the corporate suite or the ivory tower, and the side effects--long-term unemployment, underemployment, and the destruction of families and lives in this country--are just numbers on a spread sheet. That darker reality hasn't yet impinged on the carpeted hush of the corridors of power.

We can argue whether or not the loss of call-center jobs is significant, but it will surely be followed by other undoubtedly significant losses. The gap between the very rich and the rest of us will widen and hasten our slide toward corporatism and oligarchy.

It's too bad there isn't a cell on those spreadsheets to add in the value of human dignity. Likewise the value of full employment at a living wage. Or fairness. Or the negative value of resentment and, finally, rage.

Somehow we've succumbed to the worship of false gods: Growth, and its consort, Efficiency. They were benign as demi-gods, but at the head of the pantheon they are a fearsome duo that demand more and more sacrifice to feed their limitless appetite. It's not enough to make a profit; it must be a bigger profit. It's not enough to cut waste; we must cut jobs and make one person do the work of three.

When we've hollowed out the middle class, who will support this towering structure of privilege and consumption? The programmers in India will not be buying SubZero refrigerators and monster SUVs on their $8K/year. And as the wages rise in China, all those cheap rugs and clothes won't be so cheap anymore.

Why does no one seem to see where all this is leading? Is it willful? Is it just utter self-interest for the short term profit? Is it so much intellectual and ego investment in a theory that we refuse to recognize the omens of disaster?

Posted by: SG on December 11, 2003 11:16 PM

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(Sorry for the duplicate posts, Safari timed out on me and I didn't see my post when I reloaded this page in another window.)

Posted by: Chris Hanson on December 11, 2003 11:27 PM

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This wasn't the most significant comment on this thread, but it was the funniest:

James Surowiecki: "But as the world becomes connected, I think it's inevitable that newspapers and magazines will seek out the best columnists, regardless of where they're located."

That's like saying that Hollywood is going to start using all Eastern Europeans for its matinee idols, because they have the best actors. A column in the NY Times or the Wall Street Journal is not read only because of the words therein, but because the readers have certain impressions of the author and feel some identification therewith. George Will and Thomas Friedman could write exactly the same words and yet not have the desired effect on their readers if the squibs below their columns described them as being from... say... France.

Posted by: Eli on December 11, 2003 11:37 PM

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Posted by Steve, above:
"Anyone who knows anything about comparative advantage, and basic economics, knows that free trade can always benefit all parties..."
He followed with:
"At local company pillowtex, for example, several thousand people were just laid off, many of whom don't even have high-school degrees, can't read, or are borderline retarded. What are we going to do with people who can't do high value-add jobs?"

Offhand, I'd say those people are some of the parties who didn't benefit from free trade. I don't think they're interested in basic economics, comparative advantage, or the theory du jour of the dismal science. Oh, but I forgot. Those people don't count as actual "parties." They're not corporate executives, shareholders, lobbyists or foreign ministers.

Posted by: SG on December 11, 2003 11:51 PM

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Where is the evidence that incomes are "going in the toilet"? Median household income fell 3.4% between 1999 and 2002: http://www.census.gov/hhes/income/income02/prs03asc.html, thanks to the recession and the slow bounceback. But median income rose 10% between 1995 and 1999, and remains 8% higher than it was in 1995. By contrast, median income rose just 2% between 1986 and 1995: http://www.census.gov/hhes/income/histinc/h08.htmlMiddle-class incomes are in much better shape than people believed would be possible a decade ago, when Krugman was writing about an "age of diminished expectations" and the Times was pronouncing on the "downsizing of America." So where is the evidence that we are hollowing out the middle class?

I do think Chris Hanson is right that businesses are overestimating, dramatically, the ease with which outsourcing, particularly of things like software development, can be pulled off. One of the real insights from organizational theory in the past decade is how much knowledge is tacit and experiential, and how hard it is to transfer that or hold on to it when you try to move to a more virtual organizational structure. I suspect that many companies will end up reconsidering the so-called "gains" from outsourcing and recognize that the transaction costs often outweigh the benefits.

Posted by: James Surowiecki on December 12, 2003 12:02 AM

____

Do you mean a matinee idol like, say, Arnold Schwarzenegger? Or perhaps a model like Paulina Porizkova? Or Heidi Klum? Or Kate Moss? Or Gisele Bundchen?

The idea that readers can only have "some identification" with people from their own country is preposterous. This entire thread was started by Brad's long citation from The Economist, which is a British magazine. I don't see anyone having too much trouble reading it or taking it seriously. Or take Thomas Friedman. He seems to spend most of his time traveling around the world. Is it really essential for his column that he be based in America?

Implicit (or I should say explicit) in your dismissal of this idea as laughable is the assumption that American readers will only ever trust American writers. Maybe. But I don't believe nationalism is the wave of the future.

Posted by: James Surowiecki on December 12, 2003 12:29 AM

____

Are you comfortable having your MRI scan transmitted to India to be read by an Indian radiologist? Remember personal confidential medical information goes along with it. Are you comfortable having your accountant transmit your personal confidential financial information to an overseas accountant who will prepare your tax return? You will be billed as if your accountant did the work here. Recently a Pakistani medical transcriber blackmailed a US company by threatening to post confidential medical information on the Internet unless she was paid.

“Craig Barrett, the chief executive of Intel, a chipmaker and a big employer of Indian engineers, says that America's main problem is a lack of suitably educated engineering graduates.”

He really means suitably cheap, submissive and young (under 30) engineers. If there were a shortage, then salaries would be rising not falling. If there were a shortage then it would be easy to find an engineering job, but it’s not. And it’s impossible if you’re over 50. How come about ½ (even in 1999) of computer science graduates ended up on company help lines if there was a shortage?

Finally don’t tenured college professors enjoy a form of protectionism? Why should there be barriers to hiring and firing college professors? Wouldn’t the taxpayers be better off if the University of California could replace it’s tenured faculty with cheaper H1bs?

Posted by: A. Zarkov on December 12, 2003 12:38 AM

____

The more I think about it, Hollywood is actually an excellent example of an industry that has looked abroad for labor, taking jobs that Americans could have gone and given them instead to foreigners, and that has demonstrated how Americans seem to have no trouble accepting the cultural/intellectual work of foreigners. Think of the Golden Age of Hollywood cinema, from roughly the early 1930s through the early 1950s, when the studio system broke up. A sizeable chunk of Hollywood's most important directors and writers were foreigners (most of them from Central or Eastern Europe), including Billy Wilder, Douglas Sirk, Fritz Lang, Michael Curtiz, Ernst Lubitsch, Otto Preminger, and Karl Freund. In the 1970s, Eastern European directors like Polanski, Milos Forman, and Karel Reisz were key to the Hollywood New Wave.

The trend pretty much died out in the 1980s, but think about today. Peter Jackson is from New Zealand. Alfonso Cuaron (who's filming the new Harry Potter movie) is from Mexico, as is Alejandro Gonzalez Inarritu. Peter Weir is from Australia. Paul Verhoeven is Dutch. John Woo is from Hong Kong. Ang Lee is from Taiwan. And many of the most important cinematographers of the last thirty years or so have been foreign: Nestor Almendros, Vittorio Storaro, Janusz Kaminski, Phillipe Rousselot, Vilmos Szigmond, etc.

I guess the idea that Americans could take the work of foreigners as seriously as that of Americans really is just hilarious.

Posted by: James Surowiecki on December 12, 2003 12:59 AM

____

Median wage figures are merely partial, uninflected evidence of economic well-being, particularly when they stop at 2001, as on that link. How many people are holding down two or three McJobs to make what they were making when their real jobs were lost to downsizing or offshoring? How many people are spending more of their income on housing and health insurance, with nothing left for discretionary purchases? A 20% jump in health insurance sure eats up that net 8% gain over eight years. Wal-Mart's report that buyers are still seeking the lowest-priced items in every category suggests that not only are buyers fearful of overspending, but that what little cash they have is being stretched to the limit.

I would suggest that economists stop reading government statistics and start getting out for a stroll down Main Street or through the mall. It may not be scientific, but it is instructive. I live in the most middle of middle-class towns and there is not a lot of optimism to be found. Those who have jobs are worried they'll lose them, and those who've been laid off are hunkered down trying to hold on to what they've worked so hard to get. Hovering over all of this is the miasma of fear and doubt about our course in the world, the exploding Bush deficits, and the suspicion that someone's getting away with highway robbery.

Has there been one headline in the past three years that has said "Fortune-500 Company XYZ announces it will be hiring 5,000 new workers?" No. Almost every headline has been about jobs, measured in the thousands, being lost or shipped offshore. Are we to rejoice because, as the Times reported yesterday, 18% of the jobs created since August are in the "restaurant business?" Are we to trust that, as "some economists say," these are a precursor to a rebound in real jobs?

There is an emotional component to economies and societies that will not show up on any spread sheet. It may not be susceptible to measurement, but that does not make it less real.

Posted by: SG on December 12, 2003 01:00 AM

____

"American exports or as funding for investments in America"
America exports?!
Oh wait, you mean movies.... :=)

"Anyone who knows anything about comparative advantage, and basic economics, knows that free trade can always benefit all parties"

I guess this depends on how you define the parties.

Posted by: bryan on December 12, 2003 01:10 AM

____

I hope the comparison between the software industry and Hollywood is a joke. I don't think there's a disgruntled horde of displaced American directors or actors ready to complain about Peter Jackson and Cate Blanchett. And the possibility that Hollywood grunts might lose their skills because they are underemployed doesn't have quite the same impact on the nation's security and economic wellbeing as a similar blight on our software engineers.

Posted by: SG on December 12, 2003 01:20 AM

____

The first link in the post about median incomes included data through 2002.

I don't disagree that Americans are concerned about the future, though I think that has far more to do with 9/11 than with the long-term prospects for the economy, which are excellent (or would be if we would stop cutting taxes and close the deficit). But if Americans are really drowning in a miasma of fear and doubt, and if they're clinging to every dollar, why are they spending so much money? Consumer spending was up 6.4% in the third quarter. It was up 4.5% in November. (All numbers are annualized.) And people are not buying just small items. Car sales were up 16% in November, and electronics and appliances were up 14.3%. Are we really supposed to dismiss these numbers? If you want to know how people really feel, you're better off looking at what they're doing, not what they're saying.

Health care costs are too high. The average family cost for health care is $2412: http://www.starnewspapers.com/star/spnews/all/07-af9.htm, which is about 6% of median household income. (That overstates the percentage, since many households are single individuals, whose average cost is $508.) But a 20% increase in something which makes up 6% of total income amounts to a 1.2% decline in relative income. That does not eat up the net gain of 8%.

The point of all this is not that everything is fine. There are real issues to be dealt with regarding the shift of jobs out of dying industries like the textile industry. But those are problems that we've been dealing with for the past half century (sometimes dealing with them well, more often not). There's no evidence that the problems today are worse or more traumatic than before. And again, the middle class is better off today than it has been at any time since the early 1970s.

Posted by: James Surowiecki on December 12, 2003 01:23 AM

____

Actually, the Hollywood post was in regards to the discussion of whether newspapers and magazines could someday hire non-American columnists and still be successful. I think the Hollywood record suggests they could. And I actually left out probably the biggest example: Alfred Hitchcock.

I'm not sure, though, why American directors and actors wouldn't be as justified as software engineers in complaining about losing jobs to foreigners. If the idea is that what can be done by Americans should be done by Americans, the principle seems identical in both cases. And I don't believe that outsourcing software work threatens either our national security or our economic wellbeing, so that's not a difference between Hollywood and software.

Oh, and before dumping on Craig Barrett of Intel, consider that eight of Intel's eleven main chip factories are actually in the U.S., and that the company invests billions of dollars every year here. Last fall, it opened a new $2.2 billion fab in Albuquerque: http://www.abqjournal.com/AED/789169biz10-22-02.htm. So at least when it comes to manufacturing, it seems to be creating jobs, not sending them abroad.

Posted by: James Surowiecki on December 12, 2003 01:41 AM

____

Gee, I'd like some of that $2,412 health care. The annual cost for health insurance for my family of three is $11,244, and not only are premiums going up in January, but co-payments are doubling in every category, including prescription drugs. Of course, this is the group rate for very fine coverage. We'll probably have to opt out and get the el-cheapo HMO, which in these parts costs around $9,100/year for a family of three.

Consumer spending was up in the third quarter? I don't doubt it. People were spending the Bush tax largesse. They're also piling on debt.

I contend that there's more to the story than numbers. You are right, everything is not fine, but it's not fine in systemic ways that are damaging the long-term economic health of this country.

Posted by: SG on December 12, 2003 01:49 AM

____

James, I am going to bed. It's nearly 5 AM. I think we can agree to disagree.

Posted by: SG on December 12, 2003 02:00 AM

____

"...the Economist is doing a bad thing when it talks about "job loss" rather than "job shift."" That's pretty Clintonesque. It's a "job loss" if you're the one who's lost his job.

"Are these call-center jobs really the ones we want to keep?" Why not go full hog and say what seems to mean: does America want to keep people whose only qualification is a call-center job? Get rid of them! Export them to India! Jobs for PhDs only and to Hell with the rest! Jeepers, and some people wonder how we got stuck with Bush, who at least has the sense to pretend he cares about the underclass.

Posted by: Andrew Boucher on December 12, 2003 04:31 AM

____

Should Edison have been stopped from inventing the light bulb because that helped put a lot of candlemakers out of business? Or is job loss ok if it's due to technological advance? Krugman has written that technology is responsible for more pressure on jobs than third world competition. Stopping call centres in India won't stop job losses in America.

Oh, and if jobs cannot be exported / shifted, America better find some way to employ all those Honda / Mercedes etc employees currently working in the US. We want those jobs back.

Posted by: John S on December 12, 2003 06:18 AM

____

I have to take exception to the view Brad expresses here, and has expressed before that the Fed determines the level of unemployment and therefore trade can only cause job shifting. Now, I believe in free trade and I don't think protectionism is an alternative. But technological change in general (whether due to trade or not) can cause structural unemployment at a pace that fiscal and monetary policy can't keep up with. People have to be retrained and some will have to relocate and people don't do this at the drop of a hat - there are lags here that no amount of stimulus can eliminate. The idea that Keynesian demand management can accomplish everything seems pollyannish.

Posted by: Phil P on December 12, 2003 06:29 AM

____

I know lots of people who would be glad to have $8/hour call center jobs. These people are not qualified for highly skilled jobs that require postgraduate degrees. According to logic of the market, they can starve on the street. That would be the result of sending all the grunt-work overseas.

Posted by: rps on December 12, 2003 06:38 AM

____

Brad and the rest of the pro free traders are right. Job losses in
computer programmers are already showing themselves to be merely job
shifts.

http://www.nytimes.com/2003/12/10/business/10FOOD.html?hp

Restaurant Hiring May Lead the Way to Wider Job Gains

"The restaurant industry has gone on a hiring spree over the last four
months, suggesting that broader gains in the job market could be on
the way.

Since the beginning of August, the restaurant business, which includes
everything from McDonald's to corner bars to four-star restaurants,
has accounted for 18 percent of the 300,000 jobs created in the
nation."

Posted by: Dan the Man on December 12, 2003 06:51 AM

____

The Economist really pisses me off with their glib statements and insults towards American workers. In an earlier article about Dell and their offshore call centers, they made a statement to the effect that Dell really shouldn't be concerned about call quality in India because their Texas call centers probably more or less sucked as well. No evidence, no first hand experience, just a glib insult and tossing the American line worker on the scrap heap.

Now in this article they say there are probably not enough qualified American engineers to do technical work in the U.S.. Not a shred of evidence, just some statement from the Intel CEO that they do not even quote. I can say that I know plenty of sharp American engineers and programmers, several of whom who have had a damn hard time finding work these past few years. Unless the Economist is referring to some specialized type of PhD level expertise, I have no idea what they are talking about. But of course the Economist doesn't do research and beyond a generalized world view they don't sweat the details, they just toss around glib statements and insults.

Posted by: Joe Blog on December 12, 2003 06:53 AM

____

That's like saying that Hollywood is going to start using all Eastern Europeans for its matinee idols, because they have the best actors. A column in the NY Times or the Wall Street Journal is not read only because of the words therein, but because the readers have certain impressions of the author and feel some identification therewith. George Will and Thomas Friedman could write exactly the same words and yet not have the desired effect on their readers if the squibs below their columns described them as being from... say... France.

Posted by: Eli on December 11, 2003 11:37 PM

Eli, James has already answered your post fairly well. I would add that a very recent "Hollywood" blockbuster was made by a New Zealand crew with a bunch of European actors. I regularly read news sources from around the globe because they provide better information. The Economist is one of those sources.

___


The notion that technology companies are outsourcing jobs that are so low-level we don't need them is FAITH-BASED. The idea that we are going to replace these jobs with more advanced technology management jobs is FAITH-BASED.

Posted by: camille roy on December 11, 2003 04:55 PM

camille, it is a faith based on the actual experience of the last several hundred millenia of human existence. Buggy whip manufacturers moved on to higher tech employment. Agricultural workers found other jobs and their standard of living increased. Textile jobs shifted from England, to New England, to the South, to the Caribbean, and now to the Far East. The jobs lost are much easier to point to than the jobs gained, but the effect is always the same. There is a job shift.

____


Krugman is clearly right about there being sensible policies to minimize the cost of trade adjustment, and I'm in favor of them (as long as they're short-term policies).

Posted by: James Surowiecki on December 11, 2003 07:11 PM

James, why only short term? Aren't the transfers permanent? It seems that the structural changes in U.S. companies over the 70s were most likely the real culprit in low median wage gain over the period, but wage rate arbitrage could have had a fair hand. (I personally have not studied the issue very closely.) If tax transfers turn out to be the best way to compensate for a permanent redistribution of income, why should they only be short term?

____


I have to take exception to the view Brad expresses here, and has expressed before that the Fed determines the level of unemployment and therefore trade can only cause job shifting. Now, I believe in free trade and I don't think protectionism is an alternative. But technological change in general (whether due to trade or not) can cause structural unemployment at a pace that fiscal and monetary policy can't keep up with. People have to be retrained and some will have to relocate and people don't do this at the drop of a hat - there are lags here that no amount of stimulus can eliminate. The idea that Keynesian demand management can accomplish everything seems pollyannish.

Posted by: Phil P on December 12, 2003 06:29 AM

Phil, it appears that the U.S. was in a bubble induced balance sheet recession over the last few years. Many companies were not going to increase investment spending until they cleaned up their balance sheets. Fiscal and monetary policy designed to induce investment in this instance was unlikely be effective stimulus. Not just any Keynesian policy will do. Still our fixated political thinking is a bigger problem. Did the President's plan change at all from its orginal surplus reduction design?

Posted by: Stan on December 12, 2003 07:50 AM

____

As I was reading this thread, it struck me that I don't know how people want to stop the outsourcing to overseas locations of call-center or back-office jobs. Would it be illegal for a company to employ foreigners? Do you want to raise the price of international phone calls? You can't use tariffs or quotas (at least not as far as I can tell) to stop transactions which essentially involve phone lines. So what should be done?

Posted by: Steve Carr on December 12, 2003 07:50 AM

____

I usually keep my mouth shut on trade issues here, partly because I'm not sure what I think, partly because I'm not equipped to argue at the level required here, and partly because it's a lost cause at this particular site.

Nonetheless: when a state outsources an operation intended to help welfare recipients, what's the message? Isn't it a pretty clear one?:

"The market has declared that you are worthless. You will never have a job. Everything that you are able to do can be done cheaper by someone else. Even we don't want to hire you. Nobody does. Nobody ever will."

Free trade DOES have its victims -- above all, unskilled labor in places with a high cost of living relative to the rest of the world. That's a considerable group.

Some welfare recipients can have their skills brought up, but not all. And some welfare recipients (developmentally-disabled, etc.) are unemployable in any economy.

But many are just low-skilled workers. They're the losers here. They don't share in the general good. Not all unskilled jobs can be exported, but a lot of them can.

Posted by: Zizka on December 12, 2003 07:50 AM

____

Location: somewhere
time: bc a hell of a long time ago.
topic: invention of the wheel

Conversation goes something like this:

This new wheel thing is a disaster! What about all the low wage jobs it will destroy!(people who carry stuff on their backs) What will they do for a living! These wheel backers are destroying all the low wage jobs!

Posted by: William on December 12, 2003 07:53 AM

____

On Hollywood:

First, while I whole-heartedly support the idolization of Gisele Bündchen, she's Brazilian, not Eastern European.

Secondly, I think Hollywood is a perfect example of the benefits of outsourcing overseas, and not just because so many foreigners work in LA. Many "Hollywood" films have been shot in Mexico, and I understand that Toronto (and Vancouver, too, I think) is very popular to film in because a) it's cheaper and b) everyone speaks English.

As the story goes that after the Mexican debt default of '82, and US companies were holding peso-denominated assets they couldn't convert into dollars; a bunch of these assets were sold to Hollywood studios who used them to finance the productions of movies in Mexico. Don't ask me to remember studios or films... it's been a couple of years since grad school...

Posted by: due torre on December 12, 2003 08:25 AM

____

I wonder how many of the nativist India-bashers in this thread consider themselves to be unprejudiced people who care for the welfare of the third world? Until, of course, the moment somebody in a third world country might raise themselves out of grinding poverty by virtue of outcompeting someone in the US for a job, whereupon that Indian is not a person but Them.

Posted by: Ian Montgomerie on December 12, 2003 08:52 AM

____

Part of the problem in this kind of exchange, I think, is that both sides (pro-trade liberalisation and anti-) are sometimes talking past one another.

It is indeed generally true, as the eponymous buggy-whip manufacturers example illustrates, that the replacement of outmoded forms of manufacturing by newer ones is a net positive for the economy as a whole. A rising tide lifts all boats, and all that.

It is also undeniably true that while there are winners and losers in such a game, and that the net result is positive for all players, that the losers in this game often pay huge and irredeemable costs.

Not all buggy-whip makers were retrained as car mechanics, and buggy-whip makers who died in poverty would not have regarded the coming of the automobile as an unqualified success. Their views may have been in the minority, but were nevertheless valid.

I think most steel worker supporting tariffs would like a stronger economy, but not at the expense of their livelihood. This does not detract from the macro-economic argument against trade tariffs, but neither does it invalidate the steelworkers' position. Most people are not prepared to accept a slight rise in general prosperity for the society on average if it means that they themselves have to take a sharp drop in living standards. This is not a stupid or counterintuitive position to hold, it is a pragmatic one.

This goes, I think, to the core of social democracy: matching the benefits of liberalisation, with the need to cushion the impact on those worst-affected. In order for such discussions to be productive, it is not wise to ignore either the general benefits of trade liberalisation, or the very specific disadvantages which some segments of the electorate face as a consequence.

Posted by: Elliott Oti on December 12, 2003 09:00 AM

____

One of my points was regarding whether states would actually save money by outsourcing these types of jobs, when you consider the tax revenue collected on the money spent on the actual jobs, the additional tax revenue collected by the government unit on money the people would spend in the state from having those jobs, creating additional revenue, the cost savings if the people were on welfare, the cost savings if the people were on Medicaid and had work-related health insurance. The issue is so much more complex than just who can do it cheaper.

We are not really talking about the wheel versus not using the wheel. The issue is that ALL OTHER THINGS BEING EQUAL who can do the job better, and as long as all other things are not equal there are going to be problems. I think that it is a waste of U.S. talent to have jobs go overseas because living costs are such that they can live on $10,000/year or less and then have a talented computer person become a low paid service employee because they cannot afford to go back to school. That explains a lot of the resentment felt by people in the tech sector, yes economists, you did feed them a line of bull when you say things like invest in an education in the up and coming thing of the tech market, well they did, only it didn't work out for very long. Smart people are not really going to believe you when you come up with the next "up and coming" thing.

Plus there are some definite disconnects that people have a very hard time dealing with. For example, consider the recently touted nanotechnology route. Perhaps there are many other applications this technology will have besides manufacturing, but if all the manufacturing is located overseas, what is the purpose of doing any research investment here if the applications will all be applied in other countries?

Furthermore, won't any research tend to be located in the countries that have the particular industries at hand and close by, and can work with the researchers? If you follow the economist assumptions, it is perfectly OK to have an economy dominated by service workers and retail, at the lowest wages possible, and is that going to provide a productive research relationship between academia and industry, and maintain a world leadership position?

Posted by: northernLights on December 12, 2003 09:06 AM

____

Hoy! Me has a quesiton:

Suppose, just suppose, that these whatchamacallit "call center" operations did not go offshore, instead, they were completely automated.

I mean suppose these call center jobs were lost to software, not to workers in India, with exactly the same effects on American call center workers. (If it is going to make you happy, assume that the conputers hosting that software is located in US; but that won't make helluva difference, I can tell you.)

What would you say to that?

More importantly, what would you do about it?

Most importantly, what would you do to help the call center workers who just lost their jobs to software?

Hint: The answer might have to do with Dubya losing election for sure, for reason of proven and complete failure of his economic model -- and therefore his political model too, inclduing foreign affairs and adventures.

Posted by: Bulent Sayin on December 12, 2003 09:14 AM

____

Come on now, Brad. I'm no economist, but I know that only a small fraction of "dollars paid to Indian call-center workers" will ever "show up as demand for American exports or as funding for investments in America." I believe in free trade, and I don't think scapegoating India (or China) gets us anywhere, but I don't think you've made a persuasive argument here.

Posted by: Gabe on December 12, 2003 09:16 AM

____

Come on now, Brad. I'm no economist, but I know that only a small fraction of "dollars paid to Indian call-center workers" will ever "show up as demand for American exports or as funding for investments in America." Why wouldn't they spend it buying domestic products or financing investments in Russia or Singapore? I believe in free trade, and I don't think scapegoating India (or China) gets us anywhere, but I don't think you've made a persuasive argument for it here.

Posted by: Gabe on December 12, 2003 09:23 AM

____

From William:

"Location: somewhere
time: bc a hell of a long time ago.
topic: invention of the wheel

Conversation goes something like this:

This new wheel thing is a disaster! What about all the low wage jobs it will destroy!(people who carry stuff on their backs) What will they do for a living! These wheel backers are destroying all the low wage jobs!"

William, could you figure out how to be a little bit more knee-jerk stupid? I realize that what you just said is the automatic response of dumb freemarketers to the expression of any doubts whatsoever about free trade, but for that very reason, **everyone here has already heard it many times**.

There are some things to think about here, and that's what everyone else is trying to do.

Posted by: Zizka on December 12, 2003 09:27 AM

____

As an IT worker in a call center, I'm just a bit nervous.

I live in Eastern Washington state, which was already stumbling through the transition away from a resource extraction based economy. Now the few tech companies which came in have gone under, and the call center business is also stumbling. Many of my friends were working for a company with a Microsoft tech support contract, which this summer went to a company in Bangalore. Now most of them are unemployed, desperately looking for comparable employment. They were denied Department of Labor retraining funds, I guess because they were already skilled enough... in a field which has completely left this country, at least in this area.

I acknowledge that globalization is inevitable, and that trade barriers cause more damage than they prevent. But then I look at my friends who are wondering how they're going to pay their mortgages, and I think that as a society we need to pay a little more attention to alleviating the pain of globalization.

Posted by: Ab_Normal on December 12, 2003 09:29 AM

____

I'd like to second Elliott Oti. Job-export and job-location issues are generally being looked at by professional economists as extremely macro-level phenomena. But job export is not experienced that way by at least two groups of people: those whose jobs are exported, and those who export the jobs.

For that reason, this is not a question that is in any way separable from income distribution and other political-economic issues of a national economy, at least not in the real world.

Economists need to find better language to recognize this.

Posted by: Altoid on December 12, 2003 09:42 AM

____

Whoops! I somehow managed to overlook the bit on Say's Law and the Fed when I first read it.

Posted by: Julian Elson on December 12, 2003 10:20 AM

____

"Lawmakers in New Jersey have proposed a bill to stop firms using foreign workers to fulfil state contracts. Public pressure forced the state to bring back a helpline for welfare recipients that had been outsourced to India. "

I think it's painfully ironic that States busily clearing their welfare rolls are outsourcing excellent entry-level opportunities for those new workers.

Posted by: anton on December 12, 2003 10:25 AM

____

Zizka,
Actually, I don't think there is much to think about here. The issue is pretty cut and dried for the majority of economists. And yes, I think I will listen to economists like Prof. Delong, instead of fiction authors, "Schismatic Generalists", politicians, and others.
Put me down on the side that thinks that high productivity increases are good for the economy. That ncreased trade is good for the economy, the world's and ours. That the pain of free trade should be met by aid for displaced workers, not trade barriers, and that things may turn out ok in the future.

Posted by: William on December 12, 2003 10:28 AM

____

Stan wrote:

"camille, it is a faith based on the actual experience of the last several hundred millenia of human existence. Buggy whip manufacturers moved on to higher tech employment. Agricultural workers found other jobs and their standard of living increased. Textile jobs shifted from England, to New England, to the South, to the Caribbean, and now to the Far East. The jobs lost are much easier to point to than the jobs gained, but the effect is always the same. There is a job shift.

Every time I read something like this I think of what the financial planners say in regards to the stock market-"Past performance is no guarantee of future results"!! The econs do need to explain something though. At the height of the manufacturing exodus, I heard the mantra over and over, "don't worry we'll do the high-tech value added jobs-we don't need manufacturing". That paradigm seems to be broken. So, what is it, either these high-tech job losses matter, or the econs were just blowing smoke.(or more like smoking it)

Posted by: Steve on December 12, 2003 10:36 AM

____

"Put me down on the side that thinks that high productivity increases are good for the economy. That ncreased trade is good for the economy, the world's and ours. That the pain of free trade should be met by aid for displaced workers, not trade barriers, and that things may turn out ok in the future."

Sentiments I wholly agree with. I hasten to say however that in a democracy if free trade proponents wish the electorate to take their proposals seriously, they must reciprocate by taking the electorate's fears seriously as well.

In your wheel-versus-carriers example, the carriers' fears of being put out of work are very well-founded, and mocking them serves no constructive purpose other than to set the stage for confrontation.

Posted by: Elliott Oti on December 12, 2003 10:37 AM

____

>Actually, I don't think there is much to think about here. The issue
>is pretty cut and dried for the majority of economists. And yes, I
>think I will listen to economists like Prof. Delong, instead of
>fiction authors, "Schismatic Generalists", politicians, and others.
>Put me down on the side that thinks that high productivity increases
>are good for the economy.

Uh, we weren't talking about "good for the economy." We were talking
about people having jobs ie employment.

And to quote Brad Delong about the relationship between productivity and
employment

http://www.j-bradford-delong.net/movable_type/archives/001226.html

"Bad employment news today. The unemployment rate jumps three-tenths
of a percentage point to six percent, and seasonally-adjusted nonfarm
payrolls fall by 40000.

The root of the problem is that the speed of the recovery in output
is relatively slow, and that potential output is growing so d*****
fast becauseproductivity growth is high."

Posted by: Dan the Man on December 12, 2003 10:47 AM

____

Not to beat a dead horse, but I wanted to try to recover some crumb of value from my very poorly stated Hollywood analogy - and James' response to it made me more curious to understand his point of view.

First, if I really wanted to salvage the analogy, I should have said: yes, there is a century-old tradition of Americans enjoying movies made with foreign actors (by the way, I never said a thing about directors - indeed, that would've made it the lamest analogy in the world, but let's avoid the straw men if possible). But that doesn't threaten the spots that continue to be reserved for the Tom Cruise or Brad Pitt type. For every movie in which Arnold Schwarzenegger plays a Chicago cop, there are 100 movies in which Chicago cops and German peasants and French-Indian fur trappers and Irish playwrights and Egyptian kings and cowboys and Neanderthals are all played by Tom Cruise and Brad Pitt. These guys have their good points but they're not the best actors the world has to offer, and certainly not the most cost-effective. They are not being outsourced; they apparently fill a need for a certain kind of stereotypically all-American guy. This is a small niche - the rules are obviously different for character actors, comedians, etc. - but it persists.

(And I don't think people like Cate Blanchett [my imaginary girlfriend] or Jude Law [my imaginary boyfriend] are really exceptions - there's a long tradition of native-English-speaking actors being regarded as equivalent to Americans if they can manage the accent, so that can't be counted as a sign of increasing internationalism among American audiences.)

Getting back to James, though - I still don't think he really addressed Krugman's point. Obviously some newspaper material could be written by anyone anywhere. But commentary on American politics is perceived differently depending on where it's coming from. Not necessarily "where" in the sense of where the writer is spending his time - although that does make a difference (Friedman has been coasting on his Middle East credentials for years, but he seems to make only brief visits there now to gather anecdotes, and it shows) - but whether the writer can most credibly claim to be speaking from an inside or outside perspective. If you read the Economist, and you notice that most of the commentary on what's going on in the US and what the US ought to do is written by people who are not in the US... that's not really a surprise, is it; it's part of what you read it for.

I can't tell whether James is saying that no one would really notice if the same were true on the New York Times editorial page and if Dan Rather signed off every night from Mexico, because the American mass media audience really just cares about ideas and good writing, or what. I can't tell if he's just talking about how telecommunications would allow Krugman to write his own column from, say, Bangalore (thus allowing the Times to pay him peanuts), while still drawing on his own background and credentials... or replacing Krugman himself with an Indian economist of similar stature. In either case, it's technically possible but how much of a political persuader could he be? The column would carry an effective subtitle, "Criticism of US policy by someone who prefers to live somewhere else." It might contain equally valid opinions but they are by no means interchangeable. Call this tired old nationalism or what you will, I think it's reality.

So, yes, the idea that Krugman or Friedman or any brand-name pundit currently being called upon to opine about globalization is really in any danger of losing his job to an overseas pundit, or even imagines for one second that he is in such danger, is laughable.

Posted by: Eli on December 12, 2003 10:56 AM

____

Not to beat a dead horse, but I wanted to try to recover some crumb of value from my very poorly stated Hollywood analogy - and James' response to it made me more curious to understand his point of view.

First, if I really wanted to salvage the analogy, I should have said: yes, there is a century-old tradition of Americans enjoying movies made with foreign actors (by the way, I never said a thing about directors - indeed, that would've made it the lamest analogy in the world, but let's avoid the straw men if possible). But that doesn't threaten the spots that continue to be reserved for the Tom Cruise or Brad Pitt type. For every movie in which Arnold Schwarzenegger plays a Chicago cop, there are 100 movies in which Chicago cops and German peasants and French-Indian fur trappers and Irish playwrights and Egyptian kings and cowboys and Neanderthals are all played by Tom Cruise and Brad Pitt. These guys have their good points but they're not the best actors the world has to offer, and certainly not the most cost-effective. They are not being outsourced; they apparently fill a need for a certain kind of stereotypically all-American guy. This is a small niche - the rules are obviously different for character actors, comedians, etc. - but it persists.

(And I don't think people like Cate Blanchett [my imaginary girlfriend] or Jude Law [my imaginary boyfriend] are really exceptions - there's a long tradition of native-English-speaking actors being regarded as equivalent to Americans if they can manage the accent, so that can't be counted as a sign of increasing internationalism among American audiences.)

Getting back to James, though - I still don't think he really addressed Krugman's point. Obviously some newspaper material could be written by anyone anywhere. But commentary on American politics is perceived differently depending on where it's coming from. Not necessarily "where" in the sense of where the writer is spending his time - although that does make a difference (Friedman has been coasting on his Middle East credentials for years, but he seems to make only brief visits there now to gather anecdotes, and it shows) - but whether the writer can most credibly claim to be speaking from an inside or outside perspective. If you read the Economist, and you notice that most of the commentary on what's going on in the US and what the US ought to do is written by people who are not in the US... that's not really a surprise, is it; it's part of what you read it for.

I can't tell whether James is saying that no one would really notice if the same were true on the New York Times editorial page and if Dan Rather signed off every night from Mexico, because the American mass media audience really just cares about ideas and good writing, or what. I can't tell if he's just talking about how telecommunications would allow Krugman to write his own column from, say, Bangalore (thus allowing the Times to pay him peanuts), while still drawing on his own background and credentials... or replacing Krugman himself with an Indian economist of similar stature. In either case, it's technically possible but how much of a political persuader could he be? The column would carry an effective subtitle, "Criticism of US policy by someone who prefers to live somewhere else." It might contain equally valid opinions but they are by no means interchangeable. Call this tired old nationalism or what you will, I think it's reality.

So, yes, the idea that Krugman or Friedman or any brand-name pundit currently being called upon to opine about globalization is really in any danger of losing his job to an overseas pundit, or even imagines for one second that he is in such danger, is laughable.

Posted by: Eli on December 12, 2003 11:01 AM

____

"Sorry, Dr. de Long. I cannot see ANY circumstances under which exporting jobs is a good thing. "

Well, all of the recent net job loss is in manufacturing, which indeed competes with foreigners in a way domestic service businesses do not.

But I don't understand, just where are we suuposedly exporting these jobs *to*? The data is confusing...

~~ quote ~~

It turns out that manufacturing jobs have been disappearing all over the world ... since 1995, more than 22 million factory jobs have disppeared [worldwide].

In fact, the United States has not even been the biggest loser. Between 1995 and 2002, we lost about 11 percent of our manufacturing jobs ....

Here's the real surprise. China saw a 15 percent drop. China, which is fast becoming the manufacturing capital of the world, has been losing millions of factory jobs...

http://www.prospect.org/webfeatures/2003/11/reich-r-11-05.html
~~~~

So China is exporting jobs a lot faster than it imports them! Even faster than the US!

But where is humanity so foolishly exporting all these jobs to? And what can be the rememdy?

Tariffs on trade with Mars? Import quotas on goods from the Gamma Quadrant?

Posted by: Jim Glass on December 12, 2003 11:02 AM

____

Yikes, sorry for the long double post. I'm not sure it was all worth saying even once.

Posted by: Eli on December 12, 2003 11:10 AM

____

To Altoid and his minty brethren: What do you propose that we do then? There's a continuum of policy options, from total free trade to total protectionism (and why not stop there--let's put up barriers between states so Indiana's steel jobs don't move to California, and Californians can begin growing corn in the desert instead of websurfing).

If we were to somehow eliminate all technological change (of which trade expansion is an example), we can really cut down on transitional unemployment, but this to most people comes at too high a cost. You fail to address this problem in your posts, instead hiding behind an "economists don't care" rhetoric. In any real world situation, jobs will be created and destroyed, and there will be some unemployment. This doesn't depend on whether technological change happens on one side of a line on the ground or the other. I don't understand why people throw logic out the window as soon as international boundaries get crossed.

For the record, my best guess as to an optimal policy is to slowly reduce trade barriers, to give people time to retrain for new skills and give companies time to adjust their technology mix. There's no chance at a perfect world; it's a matter of optimizing over a constrained set of real world alternatives. I guess I'm 90% a free trader.

But it is fascinating to see how protectionists think. There are obviously different types of protectionists with different worldviews and such. From what I've seen of trade debates I'd put protectionists into several categories, in decreasing order of honesty, with this real-world tradeoff in mind:

1. People who think that the optimum over this constrained set is relatively protectionistic. A lot of development economists in the 1960's belonged to this group based on plausible models; they advised a lot of third-world countries during the transitions to independence. That didn't seem to work too well, as many would now admit.

2. People who deny that there are tradeoffs between productivity and job security. The Ralph Nader types appear to think like this; your average person on the street doesn't think of policy as a constrained optimization problem. Your average person thinks of jobs, jobs, jobs and not the allocation of scarce resources (labor, labor, labor). There's a basic unwillingness here to look at tradeoffs in life but also an apparent lack of much actual malice.

3. People who make fallacies of composition; the supporters of the recent steel tariffs are a good example of that. This is the "What's good for (company x) is good for America" crowd. Bill Greider and the leftish industrial policy folks seem to think like this. This group will have a mixture of naive business cheerleaders and members of vested interest groups such as unions and specific firms like US Steel. Dick Gephardt reminds me of this sort of thinking, or W on a bad day when he's pandering.

4. People who generally dislike business and will take any opportunity to make someone else poorer. What else do radical environmentalists, radical Christians, and radical socialists have in common? These are the folks who fetishize poverty and can't imagine a peasant in Chiapas wanting to move to the city, trading a life in subsistence farming for a marginally less unpleasant one in manufacturing. These are your social-engineering fetishists.

5. Tribalists, nationalists, and xenophobes. These are the types (Pat Buchanan in the US, Jose Bove and le Pen in France) who chafe at the thought of brown people succeeding in life and who view the world as a zero-sum battlefield. These were the worst of the Japan-bashers in the 1980s, the China and India-bashers now, and Jew-bashers pretty much all the time. Oftentimes they share the same demographic obsessions as the members of (4)--too many of them, too few of us, however "us" is defined. Underlying all of this is a sense that foreigners are somehow icky. Thankfully this is a pretty rare strain of thought in the US; let's hope it stays that way. This is not to be confused with patriotism in any way.

Are there any categories that I seem to have forgotten about? I haven't included a taxonomy of free-traders because I think that there's a more simple continuum between those who favor it for intellectual reasons (the Ricardians) and those who favor it opportunistically (exporters). There just aren't that many people who are big on free trade. I'm fascinated about this because it's one of the few things on which modern economists tend to agree, and we're a notoriously argumentative bunch.

Sorry for the brain dump, but I just finished with finals and have a lot of pent-up energy. It's fascinating to see how people think on this type of issue because it's one thing on which economists tend to disagree strongly with the rest of the population, regardless of politics. As a person making the jump myself from "the rest of the population" to the economics profession, I think that we have to do a better job bridging that gap and communicating with the masses. And who knows, maybe once in a while the masses will be right. Probably not this time though.

Posted by: Chris on December 12, 2003 11:28 AM

____

This goes, I think, to the core of social democracy: matching the benefits of liberalisation, with the need to cushion the impact on those worst-affected. In order for such discussions to be productive, it is not wise to ignore either the general benefits of trade liberalisation, or the very specific disadvantages which some segments of the electorate face as a consequence.

Posted by: Elliott Oti on December 12, 2003 09:00 AM

Elliott, I think most economists would agree. Most countries simply don't seem politically capable of addressing the differences in experience question. Those who "win" have both the motive and the means to prevent addressing the issue. As some of the above posts show many people don't understand the basics of what is happening so any answer may seem reasonable.

Fact two doesn't change fact one however. Trade is a gross positive. Protectionism is only a negative effect answer. (As several above have pointed out, there may not even be a useful way of preventing much of this trade anyhow.) Bashing the Indians and Chinese helps nobody.

Posted by: Stan on December 12, 2003 11:51 AM

____

Jim Glass:

"But where is humanity so foolishly exporting all these jobs to?"


Very good question.

And I don't think Dubya knows the answer. And if any body in his team knows the answer, I don't think they'll have the heart to break the news to him after this point.


Posted by: Bulent Sayin on December 12, 2003 11:54 AM

____

Chris

Your list seems to me to be unnecessarily stereotypical.

Free-market liberalisation has its benefits and beneficiaries, but will also have its victims. And some politicians will find a niche representing the interests of these victims. This is not necessarily either stupid or mendacious.

For instance. It is the task of unions to be concerned about the direct welfare of their members, and the industries in which they work, not about the state of the economy as a whole. It is wholly pointless to criticize steel unions for lobbying for protective tariffs: that is part of their entire raison d'etre, and that is what their members are counting on. Union workers are not worried that steel tariffs will cost the US a quarter percentage point GDP growth, they are worried that if the tariffs are lifted their companies will go bankrupt and their livelihoods be endangered.

From the point of view of a unionist it is a cost-benefit tradeoff between a slight average increase in the general good versus a sharp decline in their personal circumstances.

These trade-offs occur all the time, at all levels. Liberalisation is as much about politics as about macro-economics: it involves a combination of such factors as moral hazard, risk assessment, and optimal public welfare.

If I may bring up a much more contentious subject just to illustrate what I mean in another setting, consider eugenics. It can be argued that that, *for the general good*, short-sighted/diabetic/handicapped babies should not be allowed to survive. For the welfare of future generations it might indeed be ideal if no children are born with defects. But for a particular group - children with "defects", their parents and friends, eugenics is decidedly non-beneficial. In a democracy, such groups and their sympathisers would lobby firmly against government eugenics policy - and it would be completely rational self-interest to do so, and indeed irrational not to do so.

Now I do not wish to imply that free trade is in any way morally comparable to eugenics. I wish to point out that human behaviour is guided as often by pragmatic short-term self-interest as by long-term free-market ideology, indeed often more so. And this is reality: in a democracy you will have groups opposed to generally beneficial ideologies out of rational, pragmatic self-interested reasons: not necessarily optimal reasons, for humans are in some respects notoriously poor at risk-assessment, but not stupid reasons, nevertheless.

And while many anti-free trade types are undoubtedly stupid, irrational or mendacious, methinks you tar too broadly with your brush, and overlook the fact that politicoeconomic decisionmaking in the real world is more complex than ideology would sometimes allow.

Posted by: Elliott Oti on December 12, 2003 12:11 PM

____

'Come on now, Brad. I'm no economist, but I know that only a small fraction of "dollars paid to Indian call-center workers" will ever "show up as demand for American exports or as funding for investments in America."'

Actually the fraction is exactly 100%, as a matter of accounting identity. But it may be helpful to see how this mechanism works in the 'worst' possible case. Suppose the Indians don't spend the money on American goods or services, and don't even invest it in American assets. Instead they literally take the dollar bills and stuff them in their mattresses. What happens then?

The disappearance of the dollars from circulation causes interest rates to rise above the level targeted by Federal Reserve policy. The Fed would then (assuming that it is indeed doing a reasonbly good job of making Say's Law operational) print dollars to offset the mattress-stuffing, dollars that are available 'as funding for investments in America'. If and when the Indians decide to withdraw the cash from their mattresses and spend it, causing an excess in the money supply, the Fed would mop up the extra money and it would no longer be available to finance investment, but of course now the spending shows up as 'demand for American exports'.

Posted by: Daniel Lam on December 12, 2003 12:21 PM

____

Every time I read something like this I think of what the financial planners say in regards to the stock market-"Past performance is no guarantee of future results"!!

Posted by: Steve on December 12, 2003 10:36 AM

Steve, my imagination is limited. I could not have foreseen steam power, television, the internet, etc. Isn't there every reason to believe we will see more of the same in the future? Has there been a change to make us think this time will be the exception? Your question is totally pertinent. The answer just seems to favor the status quo so far.

Posted by: Stan on December 12, 2003 12:22 PM

____

Every time I read something like this I think of what the financial planners say in regards to the stock market-"Past performance is no guarantee of future results"!!

Posted by: Steve on December 12, 2003 10:36 AM

Steve, my imagination is limited. I could not have foreseen steam power, television, the internet, etc. Isn't there every reason to believe we will see more of the same in the future? Has there been a change to make us think this time will be the exception? Your question is totally pertinent. The answer just seems to favor the status quo so far.


Not there so I'll post it again. Likely a bad choice...

Posted by: Stan on December 12, 2003 12:56 PM

____

'in a democracy you will have groups opposed to generally beneficial ideologies out of rational, pragmatic self-interested reasons'

I can understand groups' posturing and hypocrisy in advance of the interests of their constituents. But I have more difficulty accepting individuals' deceiving themselves and believing in quite obvious falsehoods.

If my job is at risk of being outsourced to India, I would have very good reasons to oppose free trade, perhaps even to support and contribute to groups that seek protectionist policies and propagate fallacies that support such policies. But there is no way that I can really believe that free trade destroys jobs in the aggregate (as opposed to just my own job), any more than I can believe that the earth is flat.

Perhaps I would assert that free trade destroys jobs if I thought that I had a good chance of convincing my listeners of this falsehood and that this would help to advance policies that benefit me personally, but I would be doing so as a hypocrite. Now it seems quite clear to me that most protectionists, certainly those expressing their opinions in the comments here, are not acting hypocritically. Instead they seem to be intelligent people sincerely believing in what has been demonstrated again and again to be nonsense. How do they do it?

Posted by: Daniel Lam on December 12, 2003 12:58 PM

____

To build on a couple of points expressed above:

Even if you think that outsourcing is an awful thing, what policy could you propose that would not have worse consequences? If the outsourcing would really save money, you are hamstringing American businesses with higher costs against foreign competitors. If you are in danger of losing your job or your business to foreign competition, your first reaction changes from "how can I compete better?" to "who in the government can I call?", which is very destructive in the long term.

However, I have to second James Surowiecki's observation that the savings from outsourcing are often illusory. My experience has been that management is often completely unaware of the hidden costs that come from outsourcing. Once, when working for a Silicon Valley firm in a division that did manufacturing in Southeast Asia, we got a question from the factory about a problem that had been going on for weeks and had caused them to scrap hundreds of thousands of dollars of product and miss deliveries, etc. To us, the designers, the solution was immediately obvious. Had the manufacturing been local, they would have come to us immediately, and the scrap costs would have been probably 1% of that.

Shortly after that, in a meeting with upper management where the topic of off-shore manufacturing came up, I asked what costs they factored in to off-shore manufacturing. They seemed generally surprised by the question, and the only thing any one of them could come up with was added travel costs.

This is a case of the (real) costs not being easily quantifiable, while the savings are. But if you can't enter it into a spreadsheet, it can't be important, can it?

Posted by: Curt Wilson on December 12, 2003 12:58 PM

____

Elliott Oti: I agree with you that many anti-free-traders have noble goals in mind. In fact, groups (1) through (3) that I list gather a certain respect from me. There's a bit of a concern for the underdog in a lot of these cases--think of someone like Dick Gephardt. I disagree strongly with many of his proposals but I do think that he honestly has the interests of Americans in mind. Sorry if I came across as accusing people of mendacity; that's one thing that drives me nuts when others do it.

When arguing contentious issues (bring on the contention!), though, I like to be able to tell what assumptions my opponents are operating under. In the eugenics case, let's take an extreme example. It's very important to distinguish an impressionable person making a bad argument about aborting disabled babies from someone who merely enjoys killing people. They both might be in favor of aborting disabled children at birth (which I strongly oppose) but the former may wish to do this to somehow reduce suffering; and the latter merely doesn't value human life.

Depending on the opponent, then, the argument would be different. To debate the first person a consequential argument would be in order (maybe along the lines of disabled people being human too and deserving at least a chance at life) and things could remain rather civil. But there's really no debating the second person since there's nothing I can do to convince him that slaughtering people is wrong.

I guess that this is neither a type C or type M argument, from the big debate between Arnold Kling and Paul Krugman a couple of months back. I'd introduce a type A (for "Assumptions") into the mix. I'd debate Gephardt and Buchanan very differently even though they both support more protectionism and regulation in general. They both appear to believe what they say, so there's no type M argument to be made. But with Gephardt my emphasis would be on improving the lot of workers through trade, while with Buchanan the emphasis would be on how trade is not a fight to the death.

Sorry again for the long reply but this is a fascinating topic.

Posted by: Chris on December 12, 2003 12:59 PM

____

Okay, I tried writing a comment here, but it got too long and involved so I'm just putting it up on Angry Bear. The short version is that I agree with Brad. Bad Economist! But also bad (though understandable) are protectionist sentiments. Outsourcing is NOT responsible for job losses in the US right now. The state of the economy is.

Posted by: Kash on December 12, 2003 12:59 PM

____

"Minty"? Wow, that's a new one.

Look, Chris, I don't think I even offered any opinion about protectionism vs. free trade. I do, however, want economists who advocate free trade to talk simultaneously about the interests not only of states, but of people and groups within given countries who advocate free trade and other policies.

Much has been said recently about the death of the nation-state. Technology and perhaps free trade may in fact be making them obsolete. But as long as we have them, they are the primary arena for the balancing of group interests and the pursuit of interests by people who live in a given geographical area. They are political entities which tend to pursue interests favored by some who can influence them as well as their own (sort of) autonomous interests. To ignore them, as it seems to me many free-traders tend to do, is unrealistic.

Similarly, within this polity and others, there are identifiable groups that benefit from trade liberalization and others that get hurt. We've seen quite a bit about that on this thread. It is not enough simply to say that the ones who get hurt need some assistance, whether temporary or long-term. Attention needs to be paid to the ones who benefit also, because the degree of their benefit affects the position of everyone else in the society. That is a consequence of the actualization of freer trade.

At base, and here I'll betray again that I'm not anything like an economist, is that economists seem to posit a world in which growth potential is unlimited. That may be true in fact. But most people don't live in that world, but in a finite world. Not to sound like a refugee from the Club of Rome. But this comes from most people's experience that life is finite.

Is protectionism always bad? I seem to remember that the American growth rate in the 19th century and first half of the 20th were quite high, and the US was a protectionist nation then.

Posted by: Altoid on December 12, 2003 01:24 PM

____

http://www.epinet.org/content.cfm/briefingpapers_bp147

The high price of 'free' trade
NAFTA's failure has cost the United States jobs across the nation
By Robert E. Scott

Since the North American Free Trade Agreement (NAFTA) was signed in 1993, the rise in the U.S. trade deficit with Canada and Mexico through 2002 has caused the displacement of production that supported 879,280 U.S. jobs. Most of those lost jobs were high-wage positions in manufacturing industries. The loss of these jobs is just the most visible tip of NAFTA's impact on the U.S. economy. In fact, NAFTA has also contributed to rising income inequality, suppressed real wages for production workers, weakened workers' collective bargaining powers and ability to organize unions, and reduced fringe benefits.

NAFTA is a free trade and investment agreement that provided investors with a unique set of guarantees designed to stimulate foreign direct investment and the movement of factories within the hemisphere, especially from the United States to Canada and Mexico. Furthermore, no protections were contained in the core of the agreement to maintain labor or environmental standards. As a result, NAFTA tilted the economic playing field in favor of investors, and against workers and the environment, resulting in a hemispheric "race to the bottom" in wages and environmental quality....

Posted by: anne on December 12, 2003 01:31 PM

____

Wow, this discussion just took off. A couple of responses (to questions I got asked way back in the thread):

I'm not sure why Hollywood directors are not a better analogy to columnists than actors. After all, in most cases, the director has a much bigger impact on the movie than any actor does. I also think that Eli's original point has been so watered down -- foreigners who speak English well don't count as foreigners, and the columnist we're talking about are those who are opining on American politics -- that it's not really as mistaken as it was initially. But I do think the notion of the insider/outsider perspective is interesting when it comes to Krugman, because he's been quite explicit about the fact that his great strength, in his own mind, is that he's not an insider.

It's surely true that there's an innate bias toward having American writers writing columns. The newspaper and magazine businesses are hidebound. My point is that as globalization moves forward, they will change. Frankly, I don't think most people know now where CNN is broadcasting from. And as for The Economist, I have no idea where their writers are. There are no bylines on the pieces.

The reason I think trade assistance should be short-term is that I don't think it's a good thing for the economy or for society to have displaced workers living off the public dole for fifteen or twenty years. There are no guarantees to anyone when they take a job. I'm not sure why a steelworker should be entitled to care from the state that most unemployed workers don't get.

Finally, on the eugenics analogy, without sounding too libertarian here, I think the analogy is all screwed up. Eugenics is wrong because (among other reasons) it represents an unacceptable violation of the individual rights of the handicapped and their families. It's the state imposing its authority on people, supposedly for "the greater good."

Free trade is the opposite. It's protectionists who want to impose restrictions on individual liberty, by preventing people from trading with whom they want. Protectionism is a double whammy: it violates individal rights and it doesn't serve the greater good, either.

Posted by: James Surowiecki on December 12, 2003 01:34 PM

____

"Outsourcing is NOT responsible for job losses in the US right now. The state of the economy is."

Oh yeah? I don't think so. Here is the latest Stephen Roach article on the situation:
http://www.morganstanley.com/GEFdata/digests/20031212-fri.html

As for this comment...
"camille, it is a faith based on the actual experience of the last several hundred millenia of human existence. Buggy whip manufacturers moved on to higher tech employment. Agricultural workers found other jobs and their standard of living increased. Textile jobs shifted from England, to New England, to the South, to the Caribbean, and now to the Far East. The jobs lost are much easier to point to than the jobs gained, but the effect is always the same. There is a job shift."

Now this is the kind of hokum I can't stand. Let's see... the last several hundred thousand years... have proved this particular characteristic of capitalism to be, ah, universal. Before money, before cities, before agriculture, yeah right, show me how your thesis is proved.

Actually this bogus assertion is a perfect example of why I have a low opinion of much of what's dished out to the public by economists today. It's historically shallow and relies on a trite naturalism.

Posted by: camille roy on December 12, 2003 01:44 PM

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Chris

You have to bear in mind that when evaluating politicians' position on matters pertaining to free trade, that in the framework of a democracy groups with much to lose will often scream disproportionately louder than groups that stand to gain just a little bit. This has a distorting effect on political policy positions, the more so because refusal to address the plight of distressed groups alarms the rest of the electorate.

This is such a powerful effect that it is a testament to the deep roots free-market ideology has taken in the collective American consciousness, that such policies actually get serious consideration at all. This is compounded by the fact that the qualities that make a successful politician are often diametrically opposed to the policies that make for a successful policy wonk. There is so little incentive for politicians to favour policies that deliver ubiquitous but imperceptible yields, over policies that deliver to vocal, visible interest groups.

That said, given the prominence of Gephardt and Buchanan in American politics, I think personal conviction has less to do with their stated policies than the fact that they each have a "stakeout" of particular segments of the electorate, and must reflect their voters' wishes. But I may be wrong.

Posted by: Elliott Oti on December 12, 2003 02:02 PM

____

As we hashed over in great detail in another thread, labor's share of national income has remained essentially the same since the 1920s, even as the U.S. economy has undergone a series of dramatic structural shifts. At the very least, that means that the burden of proof is on those who think that something fundamentally new is happening now. And I don't see any real proof of it. In particular, it seems strange to point to software engineers as evidence of a radical change, when we know that the hiring levels of the late 1990s were the result of an unsustainable bubble-fueld expansion in technology spending. I have lots of friends who used to work for Net companies who no longer have those jobs. Why would the same not be true for software or network engineers?

Even Roach, in the very post Camille linked to, admits that it may be "a stretch to conclude that the hiring shortfall in the exposed segment of the US economy is traceable to the global labor arbitrage." To repeat myself, the numbers don't add up. Roach says that 328,000 new jobs added between August and November is puny. But the number of IT jobs outsourced in the last couple of years is many fewer than that. So why are they monumentally important while the new jobs are not?

Oh, and as far as the Robert Scott link goes, E.P.I.'s people are as reliable and trustworthy in their analyses of free trade as Stephen Moore is in his analyis of tax cuts. Which is to say, not trustworthy at all.

Posted by: James Surowiecki on December 12, 2003 02:05 PM

____

"There are no guarantees to anyone when they take a job. I'm not sure why a steelworker should be entitled to care from the state that most unemployed workers don't get."

James, I think you are conflating how it ought to be, with how it is. Steelworkers determine the shape and policies of the State just as do teachers or IT consultants; indeed unionised they may exert a disproportionately large influence compared to equal numbers of non-unionised citizens in other professions. The State is not a disembodied Martian blob, the State is the sum of its inhabitants, and this goes for both liberal democracies like the US or autocratic dictatorships like Iraq.

Insofar as this is the case, group dynamics within any State are inevitable, and it is unreasonable (not immoral, just unreasonable) to expect that all groups will subjugate their own selfish interests for the greater common good. It didn't work for pollyannish-style communism, and it won't work for pollyannish-style free-marketeerism. Public policy is more akin to trying to find an optimal state in the interactions between several dynamic, fuzzy, interconnected, partially competing groups, than a referee from Pluto impartially overseeing a game between independent individuals.

Posted by: Elliott Oti on December 12, 2003 02:18 PM

____

Elliott --

I certainly agree with you that the politics of trade are complicated, mostly because, as you (or someone) pointed out earlier, the benefits of free trade to each individual are small, while the costs to those who lose (or think they're losing) their jobs to free trade are high.

But there are two different (at least two) threads going on in this discussion. One is about the political dynamics of trade, and what can be done to ensure that the U.S. follows the best policy. The other is about what is the best policy. My point about the steelworkers was intended to answer the second question, to make it clear, that is, what the "ought to be" is before going on to deal with what is. I actually think one of the big problems -- perhaps the biggest problem -- with the discourse of trade in the U.S. is that the pro-free-trade case is not made nearly loudly or strongly enough. In particular, what's needed is a much greater emphasis on the costs to consumers that protectionism inflicts, so that every time we hear about textile workers, we also hear about low-wage restaurant employees who would have to pay twice as much for their kids' sneakers or T-shirts if there were no free trade. The costs of protectionism are, after all, not only as real as the costs of free trade: they're significantly greater.

Now, this is not, of course, going to get the steelworkers to stop agitating for tariffs and quotas. But I think the state has a better chance of adopting good policies if the terms of the debate are laid out clearly.

Posted by: James Surowiecki on December 12, 2003 02:27 PM

____

Looks like Krugman approves of certain kinds of protectionism.

http://www.pkarchive.org/column/102103.html

"Almost surely it's part of Mr. Mahathir's domestic balancing
act, something I learned about the last time he talked like
this, during the Asian financial crisis of 1997-98.

At that time, rather than accept the austerity programs recommended
by the U.S. government and the I.M.F., he loudly blamed machinations
by Western speculators, and imposed temporary controls on the
outflow of capital a step denounced by all but a handful of Western
economists. As it turned out, his economic strategy was right:
Malaysia suffered a shallower slump and achieved a quicker
recovery than its neighbors."

Posted by: Dan the Man on December 12, 2003 02:38 PM

____

Dan --

Many economists would argue that there is a difference between free trade and free capital flows. Jagdish Bhagwati, one of the (if not the) most ardent free trade advocate among professional economists, believes limiting capital flows sometimes makes sense. I don't think this constitutes support for protectionism (though Krugman, of course, became famous for demonstrating that under certain specific conditions it might make sense for a country to interfere with trade). And if you look at everything Krugman wrote about Mahathir, I don't think he would advocate the policy as a general rule of thumb. Nor do I think most economists believe that what might make sense for developing countries caught in the middle of a speculative currency crisis would make sense for the world's strongest developed economy.

Posted by: James Surowiecki on December 12, 2003 02:50 PM

____

The Economist article says: "in late November Indiana withdrew from a $15m contract with the American subsidiary of a leading Indian IT outsourcing firm."
Later Brad says: "The question these state governors should be asking themselves is, "Are these call-center jobs really the ones we want to keep?" "

The jobs in Indiana aren't call-center jobs: they are programming jobs, paying in USA $50k to $70k, in India $10k to $15k. I think a job paying upwards of $50 000 is worth keeping. However for those who have black ink as the drug of choice, it is certainly hard to resist that kind of apparent opportunity for profit.

The point that many are missing, and some programmers in this comment thread have alluded to, is that in the recent past it's been mostly call-center, low-wage jobs that went offshore. But now there's a strong movement to send programming and systems support jobs, jobs that require a four-year degree and significant post-graduate training, offshore. This is new. Shifting my job from an $70k skilled-labor one to a $25k restaurant one may be considered a 'shift' rather than a 'loss', but surely the level of employment and compensation should be considered as well ? I'm at a loss to see which group of workers in the US would be helped by this shift.

It is possible that the difficulties of outsourcing skilled jobs have not been sufficiently considered, and the quality of work from outsourcing will be a problem, as Chris Hanson noted. However by the time that becomes apparent, the jobs will be gone, and as Springsteen observed in a different context, 'them steady jobs is going, and they ain't coming back'. I don't have the faith in the invisible hands of the market that some do: I don't believe that a whole new class of well-paid skilled jobs will magically appear to replace those that went away.

The contention that there's a 'lack of suitably educated engineering graduates' is a canard which Dr. Matloff (see earlier post) has thoroughly debunked. In any case, were that the problem, would shipping jobs overseas, with its consequent depressing effects on student enrollment in engineering/science courses, really constitute a rational response ?

Posted by: Douglas on December 12, 2003 03:01 PM

____

>Many economists would argue that there is a difference between free
>trade and free capital flows.

Who cares? I used the word "protectionism" not "free trade" or
"free capital flows."

>I don't think this constitutes support for protectionism

Protectionism is a perfectly accurate term to use.

>And if you
>look at everything Krugman wrote about Mahathir, I don't think he
>would advocate the policy as a general rule of thumb.

Who cares? See the word "certain?"

>Nor do I think
>most economists believe that what might make sense for developing
>countries caught in the middle of a speculative currency crisis would
>make sense for the world's strongest developed economy.

Since the plan was denounced as applied to a developing country "by all
but a handful of Western economists" it shouldn't be surprising that
the same economists would also denounce it for non-developing countries.

Posted by: Dan the Man on December 12, 2003 03:03 PM

____

Chris,

I just got your joke, and I wasn't being sarcastic earlier about "minty" being new. I use "Altoid" as a place reference rather than as a commercial one. I've been using it long enough that I tend to forget about those curiously refreshing little pastilles.

Posted by: Altoid on December 12, 2003 03:31 PM

____

For those who say the 'low value' jobs that are sent offshore will be replaced with new jobs, which may not exist yet, I have to think they're not quite grasping the situation.

Why would Americans be hired for the new jobs? Why won't they go overseas too?

The point being, any new job categories will exist in the same economic environment, and won't somehow be magically shielded from being sent overseas where labor is cheaper.

Any company that comes up with a need for some new category of worker is going to try to move those jobs offshore ASAP.

Posted by: Jon H on December 12, 2003 04:51 PM

____

William -- well, if there's not much to think about here, you did a **damn** good job of not thinking. Which was my point.

Relief for displaced workers isn't really happening. There might be a little more of it under a Democratic administration, or there might not. That's really a red herring.

As someone said above, economists are best at the macro level. What I said is that there are a fair number of people who do not share in the society-wide benefit. And I suggested that it was very odd that a public office whose whole role is to help such people should export part of its operation, thus foreclosing one of the very few surefire things it could do to help its clients, which is to hire them.

Posted by: Zizka on December 12, 2003 05:07 PM

____

Now this is the kind of hokum I can't stand. Let's see... the last several hundred thousand years... have proved this particular characteristic of capitalism to be, ah, universal. Before money, before cities, before agriculture, yeah right, show me how your thesis is proved.

Actually this bogus assertion is a perfect example of why I have a low opinion of much of what's dished out to the public by economists today. It's historically shallow and relies on a trite naturalism.

Posted by: camille roy on December 12, 2003 01:44 PM

camille, you come back with pure trite hokum and accuse me of that sin. Climb off your soap box. I gave you examples of what has been the history of economic activity. As I asked Steve above, "Has there been a change to make us think this time will be the exception?" There are none that I know of. Feel free to provide concrete examples.

Posted by: Stan on December 12, 2003 05:10 PM

____

William -- well, if there's not much to think about here, you did a **damn** good job of not thinking. Which was my point.

Relief for displaced workers isn't really happening. There might be a little more of it under a Democratic administration, or there might not. That's really a red herring.

As someone said above, economists are best at the macro level. What I said is that there are a fair number of people who do not share in the society-wide benefit. And I suggested that it was very odd that a public office whose whole role is to help such people should export part of its operation, thus foreclosing one of the very few surefire things it could do to help its clients, which is to hire them.

Posted by: Zizka on December 12, 2003 05:12 PM

____

The reason I think trade assistance should be short-term is that I don't think it's a good thing for the economy or for society to have displaced workers living off the public dole for fifteen or twenty years. There are no guarantees to anyone when they take a job. I'm not sure why a steelworker should be entitled to care from the state that most unemployed workers don't get.

Posted by: James Surowiecki on December 12, 2003 01:34 PM

James, we both know that median income can be abitraged without impacting the total share going to labor. The transfers from trade are permanent. Why is being compensated for the transfer via public means bad? Do the transfers have to go steel workers, etc. or can they go to broader disparity reduction programs like the EITC? (I have argued for increasing the EITC but not for any trade related reason.) If the other result is a permanent wide disparity in wealth (I see no reason to believe that will be the case), why would we remove permanent transfers from the table at the outset? A bias away from permanent transfers is probably healthy for the incentive question.

Posted by: Stan on December 12, 2003 05:26 PM

____

NAFTA is a free trade and investment agreement that provided investors with a unique set of guarantees designed to stimulate foreign direct investment and the movement of factories within the hemisphere, especially from the United States to Canada and Mexico. Furthermore, no protections were contained in the core of the agreement to maintain labor or environmental standards. As a result, NAFTA tilted the economic playing field in favor of investors, and against workers and the environment, resulting in a hemispheric "race to the bottom" in wages and environmental quality....

Posted by: anne on December 12, 2003 01:31 PM

anne, I have not read this masterpiece, but I have seen plenty of horse manure like it. What parts of what he is attributing to the NAFTA would have occured without the agreement? Now assuming protectionism to save those affected jobs, figure out costs versus savings. The numbers don't add up to the claims. Not surprizingly I might add. You know more than this. Do your homework!

Posted by: Stan on December 12, 2003 05:37 PM

____

Just did some Christmas shopping in Tijuana. Isn't trade nice? OK, here are three responses in one.

Elliott: I think that Mr. Surowiecki hits it on the head; we're not really arguing about anything. You're emphasizing the political dynamics of how policy gets decided while I'm trying to figure out why people seem to believe what they do. They're two closely related but distinct ideas.

Anne: Please support your assertions regarding lower wages and a "race to the bottom" in environmental standards. For that matter, please support your (or Mr. Scott's) assertion that we've been running current account surpluse with both Mexico and Canada. That's just a strange thing to say when the data are a click away and they flatly contradict you.

Altoid: It isn't obvious that the economy will grow forever, but then again we won't last forever. But technological improvement involves getting more output per input. You can think of pollution or resource depletion as an input--they certainly have a cost. No matter whether there's an ultimate limit to growth or not (and we'll save that argument for another thread) technological improvement by itself is generally a good thing for people. More stuff and/or less cost.

There will often be temporary losers and the political process might not compensate them, and that's a valid and interesting question that Elliott is trying to approach. There's a whole branch of economics called public choice theory that deals with this sort of problem. I tend to agree with Surowiecki here that lots of focused but large interests will tend to overwhelm broad but small interests. Think of the sugar tariffs or agricultural subsidies.

I don't think I used the word "state" in any of my previous posts, for good reason. People produce goods and people consume goods. People trade. It also drives me nuts when people evaluate policy on the effect on the state rather than on the distortions in people's behavior. I'm glad that we agree on this--you have more in common with economists than you may think. I'll admit, though, that we're often not so good at communicating why we think the way we do to others.

I think that the easiest way to think about trade in people terms is to take two people with different resources; one guy has skills at making people laugh and the other guy makes good wine but is a real sourpuss. Rather than have each person split time between comedy acts and vinification, they specialize and trade. Now draw a line across the map at San Ysidro. Nothing has really changed in the logic except that now you get 102 posts on a weblog comments page from people complaining about the fact that these guys trade. "We need good-paying wine jobs for good Americans!"

I understand that if there's a cost to getting new skills (say, the county goes dry so our wine guy is out of work) there will be losers if there's any big policy change. Not just trade policy. I doubt that any real-world political system can compensate losers effectively. So there's some sort of optimization problem--there are people that will lose no matter what. How do we balance this against everybody else's gain when compensation doesn't actually happen? There are other dangers to having a large welfare state like creating a large unemployable dependent class. That's why economists seem like cold, heartless people. Nobody wants to hear this; everybody wants painless gains. Everyone wants free lunch. The optimal mix (and speed) of trade liberalization and changes to the welfare state are far from certain.

Out of curiosity, what's the geographic reference? My only guess is Alton, Illinois. Am I in the right hemisphere?

Posted by: Chris on December 12, 2003 08:44 PM

____

Sic transit gloria, etc.; Altoona, not where I'm from but where I live now. For many decades it was the main locomotive manufacturing center and location of the major locomotive overhauling and rebuilding operation and the development and testing center of the Pennsylvania Railroad. In its day Altoona was the equivalent of an advanced engineering center combined with state-of-the-art production and accounting operations.

At the time, as I don't need to remind anyone on this list, the Pennsy was the "standard railroad of the world" and pioneered the development of modern industrial processes and corporate management and accounting systems. ASTM and/or ANSI, I believe, had its origin in the PRR's testing labs.

The PRR was created by a combination of state and private initiatives and thrived, when it did, through a similar combination (to which must be added such federal encouragements as railroad post offices), and it succeeded against competition that had considerable natural advantages. It was slowly destroyed by technological and cultural change in the form of diesel traction and private cars and trucks, in combination with bad management decisions and massive federal subsidies for these changes, particularly those related to highways, cars, and air transportation.

The area slid into 30 or more years of physical and intellectual isolation and economic decline until the reign of Bud Shuster, its former representative, on the House Transportation Committee. A consummate pork-barrel politician, he temporarily redressed the longtime outflow of federal tax money from what is actually a poor area by legislating a huge amount of new highway construction. The economic decline, however, continues.

I'll take up the substance of your comments another time, it's too late here in the east. But perhaps this brief history can help explain my skepticism about purist-- or even purish-- views of any kind on issues of political economy.

Posted by: Altoid on December 12, 2003 11:15 PM

____

I am concerned that all this discussion assumes
much from Schumpeter's "creative destruction" principle as a faith based economic force. My question for Prof Delong, Does'nt the Current
Account Imbalances based on CREDIT and not increasing REAL income put all theories of JOB
markets in UNCHARTED WATERS.

Posted by: greg on December 13, 2003 06:26 AM

____

"one guy has skills at making people laugh and the other guy makes good wine but is a real sourpuss. Rather than have each person split time between comedy acts and vinification, they specialize and trade."

This is an interesting start. Let's play it out. The vintner grows grapes. He (a guy is specified) needs people to pick them, and they need a way to get to the guy's vineyards. So we need fair numbers of people available to pick and ways for them to move around. The guy needs bottles, so someone has to make the bottles and sell them, pack them and transport them. Alternatively, a large herd of goats and someone to form the skins would do. Alternatively, hardwoods and a barrel-maker with the right tools and skills. There need to be reasonable roads or other ways to make the wine and the buyers meet. And so on. And to do all this, the people involved have to have an agreed form of currency or other payment method.

Similarly for the comic: there has to be something like a club, the population density to support it, the ways for people to get to it, all the appurtenances that make it up. Or there need to be records, CDs, radio, or some way to get the comedy out to the audience. And the same currency problem arises.

So you get the idea. The difficulty I have with the example, and the approach it represents, is that it presumes far too much in the way of social and technological infrastructure or substructure or whatever you want to call it. (Cultural too, but let's set that aside.)

When you have that extensive substructure, you have people with entirely predictable vested interests. What you say about the kind of vested interests that typically prevail makes some sense.

But, and this is equally important, when you have that substructure you also have ways of doing business that people know and can extend and which, not incidentally at all, gives them a matrix in which they can innovate. No Silicon Valley without the universities, the need for what its products can do in the larger society, the means to get it there, in other words (and the immense federal subsidies that helped create the computer business and internet). These kinds of structures are at the same time restrictive and a spur to growth.

That's why it matters whether there's a state or national line between the sour vintner and the comic. The structures differ on either side. In America, state lines matter less and less, and so we often tend to delude ourselves that national boundaries are the same. (I've heard that the California line is an exception, by the way, to protect certain farming interests from pests. Should that line also be considered non-important?)

This is kind of a Burkean argument, I know, and I'm uncomfortable with the stasis it might imply. We don't want a return to tolls at every Rhine castle. On the other hand, my contention would be that it's not possible to make commercial, trade, or indeed most kinds of economic decisions without government being at least a silent element in the transaction. It's at least inescapable, in the same way that spending tax money is inescapably a redistribution, by definition. That's why it's political economy.

The country as a whole may indeed be better off because we switched from rails to cars and trucks. Certainly in gross economic metrics we are, and it may be that people are better off too. Maybe even those remaining in Altoona after the demise of the Pennsy-- regional population fell by about half between the highs and the lows.

Two points about this and I'll close. First, "temporary dislocation" can last a long time relative to human lifespan. Second, I agree that we should first be thinking about how people are affected by issues of trade and job export and other economic issues. But let's not kid ourselves that we can either take for granted the underlying structures that support whatever we want to do, or can leave the state out of the picture. It simply isn't the case that "the market" made the change from rails to cars. *Massive* public monies and specific policy decisions did it, along with individual decisions of individual people. These together created the structure in which vintners and comics operate.

Maybe we can continue this on another suitable thread if anyone's interested?

Posted by: Altoid on December 13, 2003 09:12 AM

____

Altoid: This is a long one owing to my coffee being just a bit too strong this morning. I'd like to keep this thread here just a little bit longer, but not long enough so that it gets dropped off the page.

This has turned into a very interesting (and still remarkably civil) discussion. Altoona. Of course. I grew up in Chicago, so I for one am grateful that we no longer have coal-burning engines. The locals can actually breathe nowadays. But your point is still an interesting one and I'll explore it further.

I think that you're on target talking about economies of scale--this is an interesting theory revived about 20 years ago by a guy named Krugman that could use a lot more empirical fleshing out. Political and physical infrastructure are certainly important--I grew up in Chicago (transportation choke point, also financial services) and live in San Diego now (military and tourism).

Unfortunately the theoretical case for industry-picking is a lot more compelling than the empirical one. You mentioned how scale economies were created at Altoona pretty deliberately by governments and big industrialists. But how does one go about picking these things? Tanzania some years back tried to base its economic growth on peanut farming and villagization; saying that this was a disaster is putting it mildly. They listened too much to those old development economists. How many towns have we seen (Detroit, Flint, Camden, Gary, East St. Louis...) that tried to pick industries, succeeded for a while, and have had severe problems in a changed world? Having a guy like Henry Ford control an entire city may sound nice when he's hiring, but the entire place becomes dependent on one industry. And one indisputable lesson of modern economics is that diversification of risks is almost always a good thing.

The same sort of problem goes for public choice in infrastructure. How do you keep Chicago from putting fourteen-lane highways through black neighborhoods rather than where they're most useful? How do you keep California from overirrigating the vegetable crops and sucking the Colorado River dry? I'm honestly amazed that the political process accomplishes as much as it actually does. But government failures do matter as much as market failures, with one difference. The market can't shoot you if you refuse to go along.

Of course real boundaries matter for economies of scale, but that will tend to strengthen the gains from trade in a weird way. Let's go back to the wine example. You pointed out the severe government failures that Germany has had over the years especially in terms of barriers to trade. Now suppose that the Rheinland-Pfalz decided to subsidize the growing of Riesling in order to increase exports. Labor, capital, and maybe a bit of land that would have otherwise gone into different productive uses (dark humor, maybe) now are used to make Kabinett. That's a gift to people in other countries who consume the stuff. The Germans are the ones paying for it through taxes. And they don't appear to consume too much in the way of American humor--the demand seems pretty inelastic. So nothing much changes in that market.

The costs to the pickers in California who are no longer needed (less Chardonnay being consumed) depend pretty crucially on how general their skills are and how the macro situation is. My guess is that in this example, the skills are pretty general (Show up; work really, really hard; go home and hope not to suffer from repetitive stress) so there probably wouldn't be much of a loss in wages if any. Plus, the land and capital being used to make Chardonnay could be put to other uses (beer? blogs? open-toed sandals?).

So Germany in this example has made a policy mistake--Germans are unambiguously worse off by paying higher taxes for extra wine that they don't want as much. American wine consumers are unambiguously better off. Shareholders in American wine companies, wearing the shareholder hat, are worse off, but it's more than made up for by cheap Riesling if the shareholders are diversified. And the pickers may or may not be worse off depending on the situation--how good of a substitute is their labor in other industries? This is bad news for computer programmers with nose rings, by the way. These are comparatively rich people who have a reason not to like free trade.

Notice I have omitted one thing so far. Remember my conjecture that the Germans have increased exports while not changing imports much? So Germany is now running a current account surplus and the US runs a current account deficit. This is the same thing as a capital account surplus. Germany's sending capital to the US, which will tend to raise future US income a little bit--actually by just as much as the US has to pay back in interest. So in welfare terms this deficit or surplus is not too interesting. People hear the word "deficit" and they go nuts.

This is not really much of a macro argument for good reason. Evidence suggests that the cost of trade restrictions in the US is not that big, because we don't have that many trade restrictions relative to the size and diversity of our economy. I haven't used the word "jobs" once this post because it's really a nebulous concept and not really even a good. Employment seems to be much more driven by monetary policy (the Fed) and the occasional bit of fiscal policy (the welfare state and wars in particular). Also luck. When we talk about trade shuffling factors around rather than creating or destroying them, this is what we mean. Putting labor and capital from less productive to more productive uses, in other words.

Jobs, remember, are really a bad. Almost nobody likes to work, at least on the margin. Income is a good--good Riesling is better for most people than two-buck Chuck (a staple for grad students) or Tijuana tap water. Employment is useful only so long as it generates goods. That's why productivity is nice. Business cycles, which I think most of the people here are really complaining about, are a separate problem entirely.

Posted by: Chris on December 13, 2003 11:38 AM

____

I don't really have anything more to add. But let me recommend the book 'Against the Tide' by Douglas Irwin as one that can be read with profit by anyone who wishes to argue in favor of or against free trade. It recounts the history of the idea of free trade and its evolution under attack. Paul Krugman's review is here:

http://www.pkarchive.org/economy/irwin.html

All the arguments we're having here have been made and hashed over before in one form or another. For example, to quote from Krugman's review on the most primitive argument of all: '... to someone accustomed to economic reasoning it seems utterly obvious that even if protection increases output in the protected industry it may reduce the value of output in the economy as a whole. But before Adam Smith, it turns out, nobody had clearly stated the idea that an economy must choose among competing uses of resources; and I am persuaded by Irwin's book that Smith's introduction of the concept of opportunity cost, rather than the later and more specific concept of comparative advantage, was the crucial breakthrough in trade theory.'

It is simply not easy to see employment in an industry devastated and believe that this benefits the economy as a whole, however unassailable the demonstration showing this to be the case. Especially when one's own job is among those devastated.

Posted by: Daniel Lam on December 13, 2003 11:57 AM

____

Chris and Daniel Lam, I'll need to think a little more about your posts to reply in any full way and I'm looking at too many stacks of ungraded papers to do that right now.

However, a couple of things do occur right off the top. You point out correctly that choosing the right infrastructure to develop is tricky; we all know horror stories about public investments that no rational person would have gone into. Growing hot-house cucumbers in Newfoundland is one of my personal favorites. And we can look back at the early 19th-century canals here in eastern and midwestern states. Most of them ran at a dead loss and cost the states millions.

But the annals of private investing would, I don't doubt, turn up plenty of god-awful examples of investments that should never have been made. What percentage of new businesses never survive as long as five years? Isn't it something like 60% or more? How many of the dot-coms are still around? And many of these have been pretty big investments.

Of course the one is public money and the other private (mostly). But the public/private argument always puzzles me, especially when it's presented in the form here: the government can shoot you. Well, yes it can. It can take from me in ways I can't stop. That's a strong argument for open proceedings, due process, and non-corrupt legislators.

In a lot of circumstances, though, private interests can treat me in ways that would very well make me wish they'd just shoot me and be done with it. I'm thinking of lenders and the powers they're going to have when the new bankruptcy laws are approved, or utility providers, something that ought to be very familiar to Californians.

Any entity that has real pricing power-- always impressive how this is referred to approvingly as a "franchise" on the business pages-- will make me pay what it wants if I want to live, and I can't see where it matters more than theoretically whether it's the government or a private entity. In fact, I'd prefer it to be the government, because at least I have some small chance of influencing it. A private water company isn't going to listen to a disgruntled customer. We've all gotten the "serve you better" line.

In this regard, it's interesting that the first colonial revolt of the revolutionary era was against taxes, but the one that brought on the final break was against privileges for a monopolizing commercial entity, the East India Company.

Finally, a small question-- if I understand correctly, much or most of the argument for free trade rests on comparative advantage, while the way to deal with dislocations is versatility. Doesn't this tend in some sense to be contradictory, in that comparative advantage seems to argue for specializing?

Posted by: Altoid on December 13, 2003 01:14 PM

____

Altoid: What do you teach? The problem with posting all of these replies is that it really does take up a lot of time and energy. Anyhow...

Of course there are lots of stupid ideas out there in the private sector. But people with dumb ideas have to go to capital markets and beg for money, and the upshot for investors is that a few of these thing will turn out not to be so dumb at all. That's what diversification is for--venture capital, mutual funds, and the like can pool risks so these idiosyncratic things even out.

Don't forget the government's role in explicitly protecting monopoly; how much damage has this done to our telecommunications system for instance? The local phone monopoly has gotten the bill correct one out of the past four months and it's done a pretty good job in stifling competition for broadband access. The California electricity debacle is another example as you point out--this is a screwy regulatory system that's neither free market nor monopoly but combines the worst features of both. The East India company was granted a royal monopoly, if you remember, until things got so bad that even the Hanoverians put a stop to that.

There will be natural monopolies out there (the "last mile" in telecom or in electricity generation, and maybe water distribution) but they should be dealt with on a case by case basis. The problem in reality is how to keep regulatory boards from getting "captured" by these industries and how to collect enough information so that regulation can actually improve welfare. That's surprisingly hard in practice.

Lenders don't bother me that much--I guess it's better to have subprime lenders around than the alternative, which would be some guy nicknamed Knuckles operating out of the back of his Cadillac. Maybe I lived in Chicago for too long. I don't know the specifics of the recent bankruptcy legislation so I can't comment too much, but making it hard to declare bankruptcy if done properly could reduce moral hazard and reduce interest rates for the rest of us. Depends on the actual changes at hand I suppose.

Interesting question that you ask at the end. Classically, specialization comes from trying to make the best of differences in resources--Saudi Arabia can never make ice wine and the Rhineland doesn't have oil. This is a bit of a curse of nature; oil doesn't taste very good no matter how much of a drinking problem I have and my car can't run on wine. Trade comes from trying to even out consumption based on lopsided resources. The Saudis and Germans each drink some wine (we know they do) and drive their Mercedes.

So things would be nicer if resources were more equally distributed, but they aren't. We have to make the best of things so we trade. As you point out earlier this could be endogenous but the basic point is that variety is usually a good thing.

Good luck with your paper-grading.

Posted by: Chris on December 13, 2003 07:19 PM

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All this chatter from all these pundits has got me to wondering....Hmmmmm
I wonder if Dilbert's boss will reek of curry soon or could his management style only exist in America? Too bad managers of his ilk were not themselves "offshored" together with THEIR jobs back in the 70's. Frankly, I hope they mismanage their globalization schemes as effectively as they mismanaged their respective companies to near extinction. Perhaps a bit of economic darwinism will be its own cure and its own just desserts; with a dash of corruption, a splash of fraud, and a heaping helping of skullduggary. Watch your ass-ets cowboy -- it gets interesting in these parts!

Posted by: John on December 30, 2003 01:14 PM

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