February 13, 2004

George W. Bush Once Again Leads from the Rear

From Friday's Wall Street Journal:

Bush Plays Down Outsourcing Praise By JACKIE CALMES Staff Reporter of THE WALL STREET JOURNAL: BUSH SEEKS distance from his economist's praise for outsourcing jobs.: At an economic forum in Harrisburg, Pa., Thursday, he complains, "There are still some people looking for work because jobs have gone overseas, and we need to act in this country." Still, Democrats keep up attacks on Mankiw's remarks that sending service jobs overseas is "a plus" over time for the economy.

As I said, it's to Greg Mankiw's credit that he's out front on free trade given how "wet" George W. Bush, Richard Cheney, and the rest of the administration are on the issue.

Posted by DeLong at February 13, 2004 01:00 AM | TrackBack


Yes. I don't like how Democrats are going about trade issues. Anyone who has a brain is primarily mad about Dubya because of his hypocrisy / lies (yes, there should be no taboos about that!). If the Dems give in demagogy, not only do they loose they soul, but they sell off their main selling point, and are commiting themselves to bad policies. The next presidency has to be the presidency of honesty, otherwise, I really believe democracy (<> Democrat power) is going to be in danger. In other words, it is time for the Dems to show grown-up Republicans that they are committed to stand for what is good for their country in spite of ideology and populism. They are riding on a "political capital" wave, they can afford it and should show Americans that one can lead the country without abusing the people's trust. In short, they should and have to show themselves to be the moral opposite of this White House.

Posted by: Jean-Philippe Stijns on February 12, 2004 08:47 PM


"Deeper thoughts": let's raise the stakes*, i.e. say you aggree that America(TM) needs to be on top of world trade, that it cannot back down in front of competition (which is true - for its own good). That it has to 'lead' the world economically if it is to maintain its moral and geopolotically authority (neeeded more than ever). And let's make economic doctrine come true. Yes, there ARE costs to competition, and people who suffer from competition deserve our compation and should be lavishly retrained and supported, all for the good of America, no kidding.

* I have a soft spot for Mankiw for having said this, but I sincerely believe this is a political trap. A fair one though, one that Dems have to rise up to. Our morale is up, bro's, good, but we're still up and coming challengers, and nothing more so far, peopl

Posted by: Jean-Philippe Stijns on February 12, 2004 09:05 PM


Before opening the tap on the tear ducts for the Dems and their wayward drift, perhaps one might pause and think why Gore lost WVa?

As to "retraining" that is simply the rest of us paying for the damage that those who move the jobs did for their own profit. Let us instead tax them for the retraining, unemployment insurance plus. If they don't want to pay, they don't want to sell in the US. Otherwise (and I really prefer this) give employees some rights to holding their jobs.

Posted by: Eli Rabett on February 12, 2004 09:15 PM


The best you can say is Mankiw used a poor choice of words. The Clinton deal on trade was that he would sign off on NAFTA but pursue policies that would create better jobs domestically. This was accepted with a little grumbling because jobs were plentiful.

Now jobs are not plentiful. The Bush fiscal policy fails to address in any meaningful way the domestic jobs situation. So Mankiw finds himself in the position of trumpeting free trade and the inevitable transfer of some jobs overseas, but he has nothing to offer unemployed American workers but the Bush tax cuts clown show. If Mankiw could point to jobs creation programs and all the money for retraining, building infrastructure and preparing workers for the future, he would sound much less like a heartless Scrooge. However, there is nothing positive the Bush administration has done for American workers so the Mankiw statement becomes untenable. Even the GOP is piling on.

Yes it is wrong to criticize Mankiw and Bush for free trade policy when it is their jobs policy that is MIA. At the same time, is it so out of line for Democrats and a whole lot of GOP Congressmen to object to the export of jobs in the absence of creating replacement jobs? If you look at the policy details, you will find that the Democrats that are criticizing Bush policy are proposing real job training and infrastructure programs more than calling for trade restrictions. If Mankiw were being honest, he would have told Congress that, "yes jobs are being exported and are continuing to be exported. There is nothing we can do about that. What we can do is to rescind the tax cuts and replace them with a domestic jobs and infrastructure program. However, Mankiw cannot be honest. Therefore he sounds like a clown.

The voters only understand that Bush policy is leading to job loss. They don't know who to blame. To get political change, that anger has to be channeled into the election. Once in office, the new leadership will have to decide how to govern. They don't always govern as they campaign. Clinton reversed himself on a middle class tax cut and a Democrat can keep trade open if there is an increase in jobs and a credible domestic jobs program.

Posted by: bakho on February 12, 2004 09:17 PM


... and above all, let's find ourselves in a poistion where we can hold Dubya (among other things) accountable for his free trade promises, which bought him the venerable (but not negligeable) backing from the Economist (during the campain, that is.)

Posted by: Jean-Philippe Stijns on February 12, 2004 09:20 PM


I am hearing criticism of Bush jobs policy but not war whoops of anti-free trade.

From the Kerry website:

"Kerry has proposed creating jobs through a new manufacturing jobs credit, by investing in new energy industries, restoring technology, and stopping layoffs in education.

...He isn’t afraid to crack down on corporations that are hiding their money in Bermuda to avoid paying their fair share and will end special tax giveaways to companies that ship jobs abroad.

That does not sound anti-free trade to me.

Here is the Dean version:

"Our laid off workers need retraining more than ever, and yet George Bush has proposed more than $1.5 billion dollars in cuts to job training.

.... As President, I'll start a fund to create at least a million jobs rebuilding America in the first two years. We'll train workers for the new economy, raise the minimum wage to $7, and give people fair overtime pay and unemployment benefits. We'll invest in small businesses, which create 70 percent of our jobs and don't send them out of their communities. And we'll have a tough policy on trade, to keep jobs here and protect labor and environmental standards.

OK so Dean is a little more negative on free trade, but still his emphasis is on domestic jobs program.

OK, so maybe Edwards is a little less free trade:

Negotiate Fair Deals For American Workers

Free trade has to be fair trade. As president, Edwards will be a tough negotiator on trade, and will only negotiate trade Agreements that meet these basic principles:

Agreements should be fair and enforceable.

Agreements should have strong labor and environmental protections.

Agreements should have real, tangible benefits for U.S. businesses and U.S. workers.

Both sides should give up something, not just America.

Stand Up for U.S. Trade Rights

Our country needs to enforce the trade agreements that we have on the books.

For example, we run a $100 billion trade deficit with China - the largest in history between any two nations - in part because of lax Chinese trade law enforcement. It's time to hold other countries to their commitments.
Keep Companies At Home

Some in Washington are pushing tax proposals that could encourage corporations to move overseas at the same time as they protect tax cuts for corporations that renounce their U.S. citizenship.

Edwards believes that at a time when we have lost more than 2 million manufacturing jobs, we should keep jobs here at home.

He will give a 10 percent tax cut to corporations that produce goods here and keep jobs at home. Edwards will stop corporations from getting tax cuts for renouncing their citizenship."

But seriously, the Dems have to cover their ass on trade or risk getting beat up by the Greens as GOP light. None of the Dems is "anti-free trade" and certainly no more anti-free trade than Mr. Steel Tariffs.

Posted by: bakho on February 12, 2004 09:36 PM




Go visit Joe Trippi's new Blog and read his statements. It's at ChangeForAmerica.com

This is an excerpt:

"I think it is great to think about running good people seeking change at the local level -- but I also think once we find someone at the local level we want to put out a national alert to all who care about our cause and get that candidate the support they need to beat this system."


Posted by: Demosthenos - TGO Freedom of Speech on February 13, 2004 01:43 AM


Let me play devil's advocate here. The case for free trade, and for capitalism in general, is based on theory. All well and good -- I believe in theory. But theory is based on assumptions. One assumption we seldom hear about these days is perfect competition: no economic actor is large enough to effect the price. On the Mom-and-Pop level this is still true to some extent, but our "get big or get out" economy is moving further and further away from the ideal. How can I believe the free trade mantra when a key underlying assumption is wasting away?

Posted by: Amos Newcombe on February 13, 2004 04:50 AM


A few years ago I was dating my Member of Parliament, Lynn MacDonald, and she made a remark that I treasure: Canada's fourth political party is the Blue Democrats, but they only have two members, Roy Romanow and David Lloyd-Jones.

Roy was later elected Premier of famously socialist Saskatchewan for three terms, and went on to chair the eponymous Royal Commission on solving Canadian medicine's problems ("invest more in capital assets," basically). I remain at odds with the New Democrats over free trade, which I support and they, under the influence of many no-knothings, plus the Steelworkers and the Auto Workers, the country's two biggest beneficiaries of free trade, sorta mindlessly oppose.

This is a toughie for Democrats in the States, too. Obviously Mankiw is right -- the young Krugman to the contrary -- and Kerry et al. are playing with demagogery by tending toward saying the opposite.

Posted by: David Lloyd-Jones on February 13, 2004 04:59 AM


Re: A.Newcombe: the case for capitalism does not rest on perfect competition, which is a theoretical construct of the neoclassical school of economics that has never borne any relation to reality. It reaches its apogee of unreality in the Arrow-Debreu model.
The case for capitalism is made best by the Austrian school - it maximizes economic freedom, allows for experimentation so that the winners are those who pass the market test. Like evolution, it is blind to the misfortunes of the losers.

Posted by: PEmberton on February 13, 2004 06:02 AM


Well, what are the feasible alternatives that we can get? And which is better? Small temporary protectionism on trade in services that will probably be relaxed once a sensible fiscal policy is established, or more things like the steel tariff?
I think constructive proposals are better than moral outrage here. How about trading temporary policies on trade in services for doing away with the US sugar barriers? The former will fall quickly once the job market tightens, while the latter seem to be immortal. After the US is history and a new civilization replaces us, I bet there will still be a protected domestic sugar industry.

Posted by: jml on February 13, 2004 06:08 AM



I disagree the notion that Mankiw used a poor choice of words but I'm glad you said that in a way. The press and the pols are painting this as if Mankiw said something he really was not saying. And now the press paints the picture that Mankiw is backing off from his comments. IMHO, he is only restating his position clearly despite the soundbite misrepresentations of his position the press and pols are all too good at spinning. Talking about the efficiency benefits of trade is not the same thing as saying there are no costs. Ah but the soundbite machine chews up sensible discussions.

Posted by: Harold McClure on February 13, 2004 06:12 AM


I agree with Harold McClure. But the administration's policies have created an atmosphere where the media soundbites have an eager audience. If there were more sensible discussion of fiscal and jobs policy, or a more sensible policy, it might be different. But it isn't, and I say, too bad for the US admin.

Posted by: jml on February 13, 2004 06:32 AM


Let's get real, folks. Those of us whose jobs are threatend by outsourcing neither want nor need these offers of retraining or compensation that get bandied about. The only way to get out of this rut is a global re-balancing of capacity. Those who produce should consume in equal proportion.

We're at a point where there's overcapacity in manuafacturing and certain services worldwide. So what are our poorest trading partners doing? Adding capacity, ensuring that theirs gets used by keeping their currencies cheap and ours expensive. The US has been saying "We support free trade," but everyone else hears "We'll countenance your neo-mercantilism." And, as a result, middle class Americans are discovering first-hand what "overcapacity" looks like for the high-cost producer.

There are really two options here: Introduce positive controls that lessen and eventually elminate our ridiculous CA deficit, or end free trade. If the US stops running a deficit, the rest of the world will have to stop ignoring the interests of it's own consumers and end the distortionary export drives. If not, then I don't think there's a limit to the destruction of our own tradeables sector. And I don't think that that's politically sustainable for very long.

But let's look at it from another angle: Is this system really good for the world's poor? It looks like it is, and I'd generally argue that really has been, at least in Asia. But is it sustainable? For the sake of argument, assume that the US maintains it central role, and free trade remains in place.

The rest of the world now grows at the same rate as the US. If some very large countries continue to grow at 7-8% while the US continues to hold fixed at 20% percent of the world economy, the world will run out of stimulus for export-led growth rather quickly. Since the EU and Japan don't constitute major sources of new demand, and to my knowledge no country has graduated from export-led growth to import-led consumption, this point cannot be long removed.

I won't attempt to predict when the music stops, whether the dollar collapses to cause it or whether it happens in slow-mo, but I suspect that the result will be "A lot of Japans." Japan's economy is one of "export-led stagnation," a country clinging to past glories rather than adapting to changed circumstances. East Asia is full of countries trying to keep their currencies just ever so slightly above those of their lower-tier, less developed neighbors. Now South Asia has joined in. Goodie. To believe that the leaders of these countries will voluntarily submit to some sort of Roachian re-balancing, at the expense of their own hypertrophic export sectors, is to place faith in political mass-suicide. Don't bet on it. If there is rebalancing, it will not be of their own accord.

The US, however, has the independent ability to act. And judging by the damage now being done to our export and import-competing sectors and our middle class, action is not very far off. Because people are articulating the problems with the system (an unbalanced world system) but almost no one is discussing controls that provide some positive assurance of changing it, change will take the form of protectionism and that will be the end of this era of free trade.

Remember that the current world system did _not_ come down from the mountain with Moses on stone tablets. It was put in place largely by Keynes and Harry Dexter White after WWII. Nixon de-linked the dollar from gold. Now that the current system is running into really obvious problems, the potential for individual action is just as great. We really don't need protectionists calling the shots, but so far only Warren Buffet has suggested the kind of controls we would otherwise need. And he's fallen on deaf ears, I'm afraid.

Controls can address either the asymetric flows of goods or the flows of capital, as these are merely the flip side of the same coin. What they should not do is protect specific groups or industries. Someone just needs to promote them, to stop complaining about problems and start doing something about them. Folks like Brad are chearleading free trade, while doing nothing to stop it's downfall. And if free trade dies here, say bye-bye to it elsewhere.

Brad - remember your recent post about the problems with NAFTA? Find some way to encourage rich Mexicans to invest in their own country, and not in us. An investment tax that can be gradually raised until common sense results occur, for instance. We need their capital flows and surplus trade flows as much as a privileged young lad "needs" a trust fund. And just like that young lad, we're squandering what is given to us.

Posted by: Hugh Strong on February 13, 2004 07:20 AM


The issue is that the Bush Administration has lost credability as a creator of jobs for Americans. After all we have lost more then 2,000,000 jobs over the Bush term. The fact that jobs that were once considered good jobs in America, not just manufacturing jobs, but now also doctors and Wall Street Analysis and compputer programing jobs are also going overseas. What do we as Americans get in return some goods and services at lower costs and longer hold times. If the only jobs that are not hands on that are at risk such as Radiologists who read x-rays that can now be sent digitally anywhere whose jobs are now at risk. Interestingly aren't these the same jobs that software companies complained they needed foreigner workers because there were no Americans available to do the work

Posted by: Karl on February 13, 2004 07:30 AM


Efficiency or not, the US trade position is in dire trouble. New Census numbers out this morning show the merchandise trade deficit creeping up over 5% of GDP, led by fossil fuel imports (up in volume and price), burgeoning deficits with China--particularly in advanced technology products.

And the more we increase trade, the worse it gets due to the export and import price elasticities. So, the US economy is structured to yield continually growing deficits--that is, until the level of deficits gets to big to bear for the foreigners who graciously finance these deficits, and it all comes crashing down. As Greenspan warned on Wednesday, "given the already-substantial accumulation of dollar-denominated debt, foreign investors, both private
and official, may become less willing to absorb ever-growing claims on U.S. residents."

Despite the conventional wisdom, these off-shored jobs and economic activities do include high-skill, high-tech, high-value added processes.

Unfortunately, the leading solution to the trade miasma (bringing down the value of the dollar) and the US economic agenda are paradoxically at odds. The dollar has fallen a little bit over the past 24 or so months, but not against the currecies which matter in Asia, which comprise half of the overall US trade deficit and where FX rates are fixed or heavily managed. The question of who bears the cost of adjustment is always a political one (and thus merits a political solution). So far, the Europeans have been made to bear the brunt of the adjustment for the imbalances between the US and Asia.

While it's clear to just about everyone that China (and Japan) are hording dollars to prevent an appreciation, the Bush admin has been unwilling to (or is too inept to) engage in international financial diplomacy to bring the dollar back to sustainable levels a la the Plaza Accord in 1985.

Meanwhile MNCs and the White House (and economists in the ivory tower) want to see more outsourcing, in which the inflated value of the dollar vis a vis the Yuan, etc. is creating tremendous opportunities for profit for companies who pay for labor and other inputs in undervalued local currencies, while earning over valued dollar revenues by selling their products back to the US.

Posted by: Adam on February 13, 2004 08:17 AM


"Unfortunately, the leading solution to the trade miasma (bringing down the value of the dollar) "

Devaluing the dollar to get out of an over importation bind is like drinking your way to sobriety.

Posted by: Stirling Newberry on February 13, 2004 08:27 AM


I've generally preferred Edwards to Kerry, and I'm disappointed to see the trade demagoguery picking up in his campaign.

It's finding some sympathetic ground among liberal columnists, too:


Posted by: seedub on February 13, 2004 08:43 AM


"Meanwhile MNCs and the White House (and economists in the ivory tower) want to see more outsourcing, in which the inflated value of the dollar vis a vis the Yuan, etc. is creating tremendous opportunities for profit for companies who pay for labor and other inputs in undervalued local currencies, while earning over valued dollar revenues by selling their products back to the US."

This is the heart of the misunderstanding many people have. The Yuan is not undervalued, on the contrary - it is overvalued, as much of the internal commerce inside of China is heavily subsidized - particularly food. This comes from the huge pension problem - lots of retirees drawing state pensions which amount to a few dollars a month. These people have to eat and so on, so prices are kept artificially low.

Find what is overpriced, and what is underpriced - and rebalance them. This will snap the import/export balance into the correct shape, and from there import reduction begins to make sense for its own sake. Until then, imports will be overconsumed as a way of avoiding what is overpriced in the home economy.

Posted by: Stirling Newberry on February 13, 2004 09:02 AM


So, what f*cking skills am I supposed to get retraining for? Should I get a nursing degree because that's where the jobs are? Get real. I don't need retraining. I am a software engineer, and I *CAN* already compete on skills with anyone in the world (just take my word for it). The reason I don't have a job is because businesses can pay someone in another country far less than.... You all know the story... I can't compete on wages because of the cost of living here. I have no fear of competing with those in higher-standard-of-living countries. If the jobs are in the UK, Australia, Canada, fine, I will move there. I don't want to move to Ukraine, or India. Why should they have the jobs? Is there something about Ukraine that makes them better suited for software development? Ha. My options appear to be:

(1) become a nurse
(2) start a software company that outsources the engineering
(3) move to India
(4) hope and pray that we get leaders that can fix this problem

If you economists (I'm looking at you Brad!) think that old-school totally-free trade in this new world is still a plus for this country, you have your head in the sand! Or, still buried in your old textbooks.

Seriously Brad, you need to reconsider the effects of free trade in a world that can outsource any consulting, creative or engineering job using digital communications to the country with the lowest cost of labor.

Posted by: Johnny Keynes on February 13, 2004 09:02 AM


The new trade report means 4th Q real GDP and productivity growth will be revised down about a 0.5 percentage point.

Outsouring is the symptom, not the disease.
The disease is a lack of savings and a federal deficit absorbing 25% of domestic savings.

We are on road to massive dollar weakness leading
to higher rates and inflation. Under current policies only way to improve trade balance --
dependence on foreign capital -- is a major recession.Given import elasticities that is the only way to cut imports.

The electorate has to be shown that outsouring and
massive trade defict is a product of supply-side
economics. When the core economic problem is over consumption and lack of savings a massive
structural defict only makes the problem worse.
Brad, that is what Rubinomics demonstrated in the 1990s. The federal surplus --increased savings --
of the 1990s showed how it works because the 1990s was the only time since we started the
experiment in voodoo in 1980 that the US has experienced real prosperity.

We need to counter the supply side propaganda
with truth squads to get the truth out to the American people. They claim that voodoo economics worked in the 1980s, and that is just not true.
The 1980s actually was a period of sub-par growth
and well being --- real per capita income growth is the 1980s was only about half of the long run trend.

Your complains about the press needs to be redirected to one of providing reporters a cadre of economists they can turn to to get a different
perspective on admin claims. Now, they turn to wall street economist or right wing think tanks for the most part, but their analysis is biased. Street economists are paid to be bullish
and provide reasons to buy stocks -- their clients ,professional money managers, do not want to hear anything else and bearish economists are fired. Most academic economists are not on top of current economic developments close enough to provide reporters the quick down and dirty quotes they need to work under short deadlines.

So reporters need a cadre of sources that are close to current development and can quickly provide them with alternative views that they can cite. That is way the system works and we need to use the system just like the advocates of voodoo economics ahve learned to use the system.

Posted by: spencer on February 13, 2004 09:09 AM


I read these posts, and I think most of you are well aware of the problems facing our economy, and especially job losses. And, it seems none of us wants to completely abandon free trade in capitalist economy. The problem is that the current situation is a natural event. I listened to Greenspan on C-SPAN (never realized that rhymes) yesterday, and he too said that education was the single biggest tool for transitioning our workers. He pointed to what America did with our education system to help all those people move off the farms and into the factories, further, he pointed to this as a successful model of education to aid in economic transitions.

I agree, but I think he could have gone further with this thought. For instance the educational system we set up, and still have in place, educates our children in the skills needed to work for someone else. And yet,he like all economists and politicians site the small business owner and entrepreneur as the spine of our economy. Our current education system makes no sense in that light. We need to begin teaching entrepreneurship in high schools. It should be blended in as major part of our curriculum. People can no longer expect to work for an employer, and especially not the same employer, and often not even in the same field, all their working lives. Entrepreneurial skills such as negotiating, knowing the value of the skills they bring to the table, understanding the bottom line morality of businesses, etc. coupled w/ a broader education and specialized education, is what is needed.

Also, I would appreciate some of you economists commenting and criticising the potential economic transition mechanism I am currently trying to come to grips w/ at http://rogueanalyst.blogspot.com/.

Posted by: Rick on February 13, 2004 09:26 AM


Johnny Keynes: "Why should they have the jobs?"

This will give you no consolation, but as everybody with enough corporate experience should be able to attest, the criterion of "better" or "preferrable" is not necessarily competence in your subject matter, but your _perceived_ contribution to filling corporate coffers or making your superiors (appear) successful.

The people that you supposedly compete with in Eastern Europe, India, or China are just people like you who want to pursue happiness and have a decent life. They are overall not technically more or less competent, but that's not the primary ranking criterion. It's the wages they look at, probably ignoring overhead costs like for increased international travel, or the hard to measure indirect costs that come out of reduced oversight and miscommunication.

To further illustrate the corporate mindset, when discussing assignment of some project to an already overcommitted group, I personally heard a remark along the lines of "let's give this to the Asia team; if they can do it, great, if not, at least we have not wasted a lot of money".

Posted by: cm on February 13, 2004 09:29 AM



Thanks and yes Bush allows soundbites to drive out real policy discussions. While he may be worse than others, he did not start this fad.

Posted by: Harold McClure on February 13, 2004 09:34 AM


"Seriously Brad, you need to reconsider the effects of free trade in a world that can outsource any consulting, creative or engineering job using digital communications to the country with the lowest cost of labor."
-- Johnny Keynes

If companies are moving jobs to countries with the lowest cost of labor, why aren't these jobs going to Africans or Haitains?

Posted by: EcoDude on February 13, 2004 09:53 AM


It's worth checking out the transcript of Lou Dobbs Tonight from last night on CNN:
He takes on Jim Glassman on the issue of offshoring. I can't believe the stuff that is coming from Lou Dobbs. The times they are a'changing, folks:

DOBBS: You talk like a cult member. There's a mantra, you say market, you say largest and dynamic.

GLASSMAN: I don't think I've said market yet.

DOBBS: And it simply removes the need for rationality.
DOBBS: Here are the facts. Half a trillion dollars in a current account deficit. Hundreds of thousands of jobs being shipped overseas, as you acknowledge, by cheap labor costs.

GLASSMAN: I don't consider it shipped overseas. That's not what's happening.

DOBBS: You may not, that's my word. And the fact is, it is exactly what is happening and why you won't acknowledge that is beyond me. Where do you want the United States economy to be in ten years? You can't talk about jobs to retrain.

... and so on.

Posted by: camille roy on February 13, 2004 09:59 AM


"Seriously Brad, you need to reconsider the effects of free trade in a world that can outsource any consulting, creative or engineering job using digital communications to the country with the lowest cost of labor."
-- Johnny Keynes

"If companies are moving jobs to countries with the lowest cost of labor, why aren't these jobs going to Africans or Haitains?"

You're right, EcoDude - it's not the lowest cost of labor, but the lowest cost of labor which can do the job well enough, with 'well enough' partially a function of labor costs.

This still means that the effective cost of a BS-trained engineer or programmer is heading towards $US 10K/year, for any job which can be offshored.

Posted by: Barry on February 13, 2004 10:14 AM



China's internal and external economies are two different worlds. Moreover, there is very little import penetration of foreign goods into China's domestic economy--mainly due to NTBs. So I don't find it too useful to compare prices between the two. What we're talking about is the relative price of goods produced for the US market in China vs goods produced for the US market in the US and elsewhere, which of course is the $-Yuan FX rate.

Granted that if China were to liberalize its capital account, the Yuan would likely depreciate because of the problems with China's pensions, and more broadly the financial sector overhang, to which you allude. But capital account liberalization isn't a really likely scenario. Barring that, the stockpiling of some $380 billion in reserves (selling Yuan, buying dollars) is clearly relieving the upward pressure on the yuan from China's rapid growth.

The FX rate problem is of course not only with China, but none of the other countries are going to budge until China does.

Posted by: Adam on February 13, 2004 10:20 AM


I think I agree with a comment upthread. Regardless of the merits of outsourcing, anybody, Republican or Democrat, that went on a crusade to support it would be asking for trouble.

Posted by: Tim H. on February 13, 2004 10:39 AM


It was enscribed above:

Devaluing the dollar to get out of an over importation bind is like drinking your way to sobriety.

But it's the classical solution. A weaker dollar makes foreign goods more expensive, discouraging imports, and domestic goods cheaper abroad, encouraging exports. Eventually (hypothetically) the two balance.

Why is this wrong?

Posted by: Jonathan Goldberg on February 13, 2004 11:04 AM


Camille Roy

Thanks for the Dobbs-Glassman exchange. I feel sorry for Glassman as I have seen Dobbs do this before. He's turned into a Sean Hannity or Bill O'Reilly type that just cuts off discussion as he spews his anti-trade rhetoric. I used to like Mr. Dobbs' show but he's gone bonkers IMHO.

Posted by: Harold McClure on February 13, 2004 11:05 AM


The solution to getting a good policy to job outsourcing, is to start outsourcing CEO positions to India for a $100k/yr instead of the $20mil/yr paid to CEOs here. Once that fear hits the top of the domestic food chain, then I think you will see a real effort to develop policy. Shareholders have the power to force companies to look elsewhere for executive talent. It won't work in companies where a small group of investors control 51% of the stock and are united behind a CEO, but even in this situation there really is no reason on their part to hire American. The same economic rationale that outsources the middle mgmt and lower jobs, should work at the top.

What does a million dollar per year CEO retrain for anyway?

Posted by: Rick on February 13, 2004 11:24 AM


Hi Greg, it's me Paul...!

Posted by: Picono-Kclast on February 13, 2004 11:54 AM


You know, I got in an argument on this blog with someone once, about why Brad was not advocating moving his position overseas to take advantage of lower labor costs. This person kept attaking me, I simply didn't understand that Brad had to compete against all these people to get his job. This completely ignores the fact that Mr. DeLong is currently in a position that protects him from free trade, whether he will admit it or not. It is also a fact that it would be very easy to move these academic positions overseas and use the internet to teach the classes. The institutions would be able to lower their costs, making higher education more affordable for all Americans. Yet I do not see ANY academic economist advocating it. I wonder why that is.

Posted by: Steve C on February 13, 2004 12:05 PM


Several direct questions for Brad:

(1) It has been admitted that even if the country as a whole may be better off with job exporting (which is debatable, but let's pass that over for now), some groups will, if not compensated, be net losers in this game. What programs, if any, would you propose to ease the pain of offshoring and free trade on specific groups of Americans who are negatively affected by it? Please be specific.

(2) What do you think the political feasibility is of the programs (if any) that you would recommend?

(3) How would you respond to a point made by another poster in one of these threads that there is no realistic possibility that the losers of offshoring will be compensated in any way, and that therefore it is rational for the individuals in these groups to oppose it even if it results in a theoretical benefit to the country as a whole? Is it your assertion that they should sacrifice the well-being of themselves and their families for the enrichment of others? If so, what do you think is the political feasibility of *that* over the long term?

The point that I am making is that free trade is only viable over the long term if most of the American people are reasonably happy with their job situation and prospects. Economic rationalizations saying how things *should* work out only go so far, when they are clearly *not* working out right now, and there is no sign that they will any time in the near future. If you want to fight protectionism and the anti-offshoring movement, you'd better get cracking on the creation of good jobs.

Posted by: Firebug on February 13, 2004 12:20 PM


Steve C:
Maybe 9/11 immigration policies will change things in a few years, but there are lots of foreign graduate students who are very competitive in the US academic and prof servcies job market. So I just don't see the guy as being protected from competition in intl trade in services. There are lots of US citizen grad students who end up working in foreign countries, too.

Posted by: jml on February 13, 2004 12:45 PM


I also thingk Firebug's questions are good ones that free trad advocates need to think about.

Posted by: jml on February 13, 2004 12:46 PM


more good Roachian analysis from Morgan Stanley:
One of the pillars of trade theory is that wealthy industrial economies like America’s can be broken down into two basic segments of activity — tradables and nontradables. International competition has long been confined to the tradable goods, or manufacturing sector. By contrast, the nontradables sector was largely shielded from tough competitive pressures, thereby providing shelter to the 80% of America’s private sector workforce that toil in services. Consequently, as competitive pressures drove down prices in tradable goods, the bulk of the economy and its workforce benefited from the resulting expansion of purchasing power. Advanced, knowledge-based economies thrive on this distinction between tradables and nontradables — manufacturing and services.

That critical distinction has now been blurred. In days of yore, it used to be that services had to be delivered in person, on site. Cross-border trade in services was unheard of. Now, courtesy of the Internet, that critical assumption has been turned inside out. There is now real-time connectivity between the knowledge content of offshore white-collar workers and parent companies in the West. That is a truly transforming event — it essentially converts many nontradables into tradables.

Maybe it’s just a coincidence, but it turns out that the private services sector has accounted for 5.3 million jobs of the cyclical shortfall in total private hiring, by our reckoning. That underscores the extraordinary pressures that are now bearing down on what had long been the most powerful element of the Great American Job Machine. Not surprisingly, at the same time, the IT-enabled services export industry has sprung to life in places like India. Meanwhile, US businesses, still operating in a no-pricing-leverage climate, have little choice other than to continue in their unrelenting efforts to take out excess costs. The IT-enabled global labor arbitrage provides high-wage companies in the developed world with a new and very powerful means to execute that option. That means is offshoring.

Offshoring is seen as but a bump in the road for theorists like Mankiw. The presumption in this case is that an innovation-led, flexible US economy is able to uncover new sources of job creation that can fill the void left by this cross-border labor arbitrage. Yet that may be a heroic assumption for the foreseeable future. As nontradables become tradable, America’s once shielded white-collar workers face increasingly intense competition from increasingly well-educated foreign workers. And as skill sets converge around the world, the quick and seamless regeneration of hiring that underpins the theory of free trade starts to seem like an increasingly unrealistic assumption.

So, what do we DO????

Posted by: camille roy on February 13, 2004 01:15 PM


J Goldberg: The reason devaluation is such a bad option is that for it to work it takes a combination of one of two things --inflation
as relative prices change and recession as purchasing power of domestic consumers plunges
so as to lead to a drop in demand.

For US to move fairly rapidly to reduce the trade deficit was almost certainly imply a fairly sever
recession. Note, the current account deficit at
5% of GDP implies that domestic consumption exceeds domestic production by 5%. Bulls, and many Republicans traditionally tend to think
trade imbalances can be resolved by export expansion. But it never seems to work that way.

No large advanced country as ever ran a trade deficit this large for any length of time. But when less developed countries have done it -- and history is full of examples in Latin America -- it almost always end in a major recession as Argentina just demonstrated. Because our debt is in dollars and the dollar is the worlds reserve currency it
will be different for the US -- but it still is
likely to be very unpleasant.

Posted by: spencer on February 13, 2004 01:16 PM


I think there is a point here that the people who worry about trade costing domestic jobs are missing. Pretend the US could somehow prevent outsourcing of services (an idea whose inherent unlikeliness should be apparent to anyone familiar with the internet). You can't protect your export markets--why should a third country buy expensive stuff from the US instead of cheap stuff from China. Refusing to use cheaper foreign sources is a recipe for becoming hopelessly uncompetitive in export markets, and even in less-protected import markets (it is called negative effective protection--see India, 1948-1990). For instance, you would presumably see the embedded and packaged software industries leave the US in their entirety. It is true that people with particular existing jobs could benefit, but probably not for all that long.

People who are calling for currency adjustment may be right--it may be that the dollar needs to fall substantially more to get trade flows closer to a sustainable basis, but remember what you are asking for--lower standards of living for Americans as a group, as they have to pay more for energy, minerals, coffee, clothes, toys, BMW's, etc. Probably some of that needs to happen--we do have a $500B trade defict-- but it is far from costless. Right now foreigners are subsidizing our consumption to a significant extent.

Posted by: Matt Wilbert on February 13, 2004 01:30 PM


Do yourselves an intellectual favor this weekend. Read this:


And this:


And this:


And this:


And this:


Read those things S-L-O-W-L-Y and carefully.

THINK. Think, think about them.

Think S-L-O-W-L-Y and CAREFULLY about them....

Posted by: Mike on February 13, 2004 01:33 PM


You said above, "Capitalism, like evolution, is blind to the misfortunes of the losers." Are we merely opposums then, mewling in the dark, and fighting over bones?

Capitalism, unlike evolution, allows the self-aggrandizement of a 5% elite within a competing population of organisms to starve the other 95%.

Global capitalism, unlike evolution, allows the self-aggrandizement of a 5% elite within a competing population of organisms, AND further 5% elites in ALL OTHER populations, to starve the remaining 95% of humanity, as it sterilizes and desertifies the ground on which it breeds.

Laissez faire global capitalism, then, is a concept more akin to mold outgrowing its jar, to rotten apples falling from their tree, to the
swirl of bot flies as the final maggot hatches, and to the vast conflagration that destroys the epochal forest, and all living beings therein.

Capitalism's business model IS the forest fire! The natural human economic model is barter. For tens of millenia, a free exchange of value given for value received, permaculture, and knowledge. Where did capitalism come from, anyway, except the English Industrial Revolution, following on the Christian Colonialism and Slave Trades. Great role models! Go suck on a gun barrel!!

What are corporations but lawless barbarian mercenaries and pirate slave traders, answering to no God. In the days of sailing ships and English law, these outlaws would've been chained together in manacles, and marched to a hanging.

Why then even dialogue with the Devil? Set the Dickensonian rules: no starvation, no slavery, then work up some barter-fairian way to get things right. Screw the oligarchists and their slave chain! They don't own us, at least not yet.

If Fiorina wants to outsource her corporation and offshore to China, then screw their crappy computers, slap a tariff on them as junk. If Gates wants to move his programmers to India and his corporation to the Isle of Man, then screw their crappy operating system, slap a tariff on, and any time that you catch one of them skulking around in the US, send them off to Guantanemo.
They are nothing less than global terrorists.

This is OUR land and OUR resources and OUR treasure that these oligarchs are plundering!

What'd Gandhi say? There is more than enough food in the world to feed everyone. It's not the failure of the harvest, it's the failure of mankind. Let's kick Gandhi up a notch this time.

There is simply no way to amalgamate a 1st world country economy with a 3rd world country labor- pool without destroying the valuation of the 1st world country, and the people of the 3rd world.

Capitalistas are doing a good job of trying to! It's a bankrupt belief system! You don't need it!! Live free and barter, off the grid, before there's nothing left to barter but our souls.

Posted by: John Maynard on February 14, 2004 02:11 AM


A very interesting and instructive discussion.
I want to get the most out of it by commenting on more . For now I only want to emphasize the importance of the remarks from spencer:

"Your complains about the press needs to be redirected to one of providing reporters a cadre of economists they can turn to to get a different
perspective on admin claims. Now, they turn to wall street economist or right wing think tanks for the most part, but their analysis is biased. "

It's not just reporters. If you are a serious politician not overly ideologically bound and not being a noble-prize winner in economics (like me and by the way: every politician) you want to turn to "serious conscientious economists".
That's not easy. Most high-level economists have a political agenda too outshining the economic debate per se.
The comments here are helpful but unfortunately -although understandably- most discussions are only initiated by our host and seldom led by him. (or a team).

Posted by: FransGroenendijk on February 14, 2004 02:52 AM


I would like some of the economists here, the ones who "know" that the free trade argument is "obviously" right, to sketch for me the America they foresee in ten years if this continues.

Here's what I see:
1) manufacturing - all in China and not coming back.
2) services - largely in India and not coming back.

What's left?
Immovable industries - construction, computer network installation, etc. The question is who will be able to afford these services?

"Creative services" Advertising, filmmaking, music, etc. (Please note that the actual production of films, even when the story is set in the United States, frequently is done elsewhere).

Out and out criminality a la Russia as the economy fails to function.

The concept that America should be the country that invents stuff and farms out the production of what it invents is a non-starter. It is not sustainable and it leaves out 98% of the US population. There's a reason these ideas aren't flying politically. People know they aren't working. You cannot continue to impose these regimes without destroying democracy.

The high-tech industry was nurtured with government largesse. The R&D on the Internet was paid for with tax dollars. Even after the Internet was given to corporations, high-tech was given immense tax breaks because it was an engine of job creation. The habit of giving to high-tech continued with the H1B fiasco, because of campaign contributions, even though now the initial reason for this largesse, job creation, was negated by this rules. This probably sped up the trend to outsouring the software industry by ten years. What's wrong with demanding some quid pro quo for the help given?

It is simply not politically sustainable to continue this regime until its defenders can offer some security to Americans as to what their future will look like. You economists may regret this as theoretically retrograde. But rather than pushing the free trade regime off the cliff, you need to be figuring out the least harmful ways of backing away from it.

In the nineties, there was a service sector to cushion the blow from the loss of the manufacturing sector. No such cushion exists now. Forget the nineties. They have little to teach us in this situation.

Have some humility. Admit that your theories may be wrong, impractical, in need of some adjustment. Human nature will not tolerate a lifetime of being buffeted from career to career to career. Deal with that. Otherwise you wind up sounding like the "pure marxists" who refused to back away from their theory when it stopped working.

Posted by: Steve Cohen on February 14, 2004 11:54 AM


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