Brad DeLong's Semi-Daily Journal (2004)

Excellent article, Brad.

As my Dad always said:

WHEN THE GOING GETS TOUGH< THE TOUGH GET GOING.

Adrian

"WHEN THE GOING GETS TOUGH, THE TOUGH GET GOING."

Tell me Brad, How do economists take into account the salutory effects of ambition, character and steadfastness on a society?

Adrian

Like most discussions of what we now call 'outsourcing' this one dwells on blackboard economic 'laws,' concluding two things: global, open-market forces are good (see Ricardo); the political backlash is a problem because ill-informed, short-term considerations will drive autarkic policies.

The history of globalization is as I understand it more nuanced. O'Rourke & Williamson (1999) argue that C19 globalization undid itself because while (per Ricardo) it produced a convergence of wages in the open-market world, rich countries suffered considerably. O'R. and W.: "resource-rich, labour-scarce countries underwent rising inequality, and resource-poor, labour-abundant countries underwent falling inequality." (177)

O'R. and W. go on tentatively to argue wrt the present, "Some things never change, and that fact implies a warning. Globalization and convergence ceased between 1913 and 1950. The inequality trends that globalization seems to have produced in the rich nations may have been partly responsible for the interwar retreat...." (183) They cite Borjas (1994) finding much the same for the 1990s US.

Which suggests that Drezner's diagnosis -- "The problem of offshore outsourcing is less one of economics than of psychology -- people feel that their jobs are threatened." -- is wrong. There may be a policy need to alleviate real -- non-psychological -- inequality, lest protectionism return.

Or, to put it another way: yes, Ricardo is right in the long run but (say it all together now) "in the long run we are all dead," and in the near term we need jobs, not just happier psychology.

When Daniel Drezner gives a damn about anyone who is looking for decent work and hurting, then I will consider giving a damn about what is otherwise an article of smug heartless rubbish.

http://www.nytimes.com/2004/03/23/nyregion/23hunger.html

Agencies Say Hunger on Rise Outside Cities Across Region
By ADRIENNE LU

Come payday, the tough choices begin for Roxie Jackson. Her salary as a physical therapist's assistant has sustained her family of five in the middle-class suburb of Bloomfield, N.J., since her husband lost his job two years ago and income from her second job, with Mary Kay, declined before she eventually left it. So each week, Ms. Jackson weighs which bills she must pay and which must wait. And one factor is ever-present in her budget deliberations: hunger.

"My refrigerator and cupboard have been bare more than once," said Ms. Jackson, 35, who said that her home telephone has been disconnected since last year because she could not afford to pay for both utilities and groceries. "It's still a struggle."

According to hunger experts and federal statistics, a growing number of suburban families are struggling to put food on their tables.

Nationally, the rate of households facing limited or uncertain availability of food, what the federal government calls food insecurity, has been rising, reaching its highest point in four years. From 1999 to 2002, the latest year for which figures are available, the number of such households rose by about 15 percent, or about 1.5 million, according to the United States Department of Agriculture, bringing the number to just over 12 million. On the surface, hunger may seem more severe and more intractable in the hearts of the largest cities. But experts say that more and more people who live in suburban and outlying areas are also having to make hard choices that sometimes leave them scrambling for their next meal.

Nationwide, the number of suburban households facing food shortages rose by roughly a quarter-million from 2001 to 2002....

"But believing that offshore outsourcing causes unemployment is the economic equivalent of believing that the sun revolves around the earth: intuitively compelling but clearly wrong."

Duh.

Let us see if Drezner actually support measures to help displaced workers and the taxes to pay for them. Direct aid does not work becuase it is too hard to figure out who was actually displaced. So the only real solutions are programs like national health insurance, investments in community colleges for retraining, and other programs that will help cushion the blow. Drezner will support none of these.
So what he is really saying is that in the cause of increasing the incomes of the top 1% (that is where the gains on the increased economic growth will go) we should be willing to tolerate additional harm to everybody else. Even if job losses aren't that high, there are very large losses to the individuals involved in job transition, little things like getting your mortgage foreclosed.
Taking that further, what he is saying is that we should value a dollar of extra income to the Bill Gate's of the world at very close to the same worth as a dollar of income to the "Lucky Duckies."

What is your plan? If you don't have one, get one at:

http://www.cfeps.org/

A job for everyone that is willing to work.

Where is the talk of need for decent minimum wages and benefits, for fiscal policy aimed at job creation? Where? Outsource-insource, workers matter and not everywhere emphasizing that is disgraceful.

http://www.nytimes.com/2004/03/23/nyregion/23hunger.html

Hunger in the suburbs is far from a new phenomenon. But today, those showing up at suburban food pantries and soup kitchens throughout the metropolitan region are more likely than ever to include working families, experts say.

"There's a changing face of hunger, in the sense that more working people need help now than before," said Meara Nigro, a spokeswoman for the Community Food Bank of New Jersey.

Charlene Nickle, 52, for example, has turned to the Human Needs Food Pantry in Montclair, N.J., where she lives, to help feed the three grandchildren she raises, who are 8, 10 and 14. Each week, she visits the pantry to pick up fresh fruits, vegetables and meats, when they are available, along with canned goods, rice, powdered milk and cereal.

"It really, really makes a great big difference in my food budget," she said.

Before she took custody of her grandchildren in 1999, Ms. Nickle worked as a secretary. To take care of the children after school, she said, she quit her job and took a pay cut to became a home health aide.

Patty Dowling, executive director of Shoreline Soup Kitchens, which serves 11 coastal towns in Connecticut, estimates that 80 percent of her clients are working, mostly in low-wage jobs with no benefits.

"There are all sorts of invisible people here that folks just refuse to see - it could be gardeners, people living in the back of restaurants, lawn people, it could be the person working at the local grocery store who's making minimum wage," she said....

This isn't actually true. It is an economic problem as well. Changing terms of trade can have a negative impact on the US economy. That doesn't meant that the answer is "no free trade" or "no outsourcing," but the truth is that changing economic conditions in the rest of the world can have a net negative impact on the us economy.

As a non-economist, the thing I wonder about in this arena is the effect of acceleration of change. I'd be interested in knowing whether economic theories deal with this, or if it's considered external to economics.

Specifically, it seems to me that whether or not it makes any difference to "the economy" in the long run, it makes a lot of difference to participants how fast jobs and career fields disappear and new ones arise.

Back in the old-old days, these kinds of changes happened over many generations, and not to many fields at once. They might be gradual, but even if there was a big shock, though it might really suck for those directly affected, most other fields were not undergoing simultaneous change, and the descendents of those affected can shift to something else.

When such changes took a generation or so, that was also reasonably bearable. You couldn't make a good living doing what your father did, but you sought out new things. The people in mid-career when the changes happened might really suffer, and locations might suffer as the younger generation left in search of better prospects, but there you have it.

But when these changes happen more than once in the course of a career, it impacts upward mobility much more seriously. If you have to start over in a completely new career a couple of times in your life, you're unlikely to advance as far as your forebears who could stay in one field. You're more likely to spend your later years at a much reduced income level.

Does economics have any answer to this? It is my understanding that economics is predicated on the idea that the economy is an aggregation of people largely pursuing their own self-interest. If globalization benefits "the economy" to the detriment of everyone except those who greatly benefit from corporate profits, why would economics predict that people who make up the economy will pursue that course?

Paul Krugman
NYTimes
2/27/04

It's bad economics to pretend that free trade is good for everyone, all the time. "Trade often produces losers as well as winners," declares the best-selling textbook in international economics (by Maurice Obstfeld and yours truly). The accelerated pace of globalization means more losers as well as more winners; workers' fears that they will lose their jobs to Chinese factories and Indian call centers aren't irrational.

Addressing those fears isn't protectionist. On the contrary, it's an essential part of any realistic political strategy in support of world trade....

First and foremost, we need more jobs. U.S. employment is at least four million short of where it should be. Imports and outsourcing didn't cause that shortfall, but if the job gap doesn't start closing soon, protectionist pressures will become irresistible.

Beyond that, we need to do much more to help workers who lose their jobs. It didn't help the cause of free trade when Republican leaders in Congress recently allowed extended unemployment benefits to expire, even though employment is lower and long-term unemployment higher than when those benefits were introduced.

And in the longer run, we need universal health insurance. Social justice aside, it would be a lot easier to make the case for free trade and free markets in general if, like every other major advanced country, we had a system in which workers kept their health coverage even when they happened to lose their jobs.

The point is that free trade is politically viable only if it's backed by effective job creation measures and a strong domestic social safety net. And that suggests that free traders should be more worried by the prospect that the policies of the current administration will continue than by the possibility of a Democratic replacement.

Put it this way: there's a reason why the two U.S. presidents who did the most to promote growth in world trade were Franklin Roosevelt and Harry Truman, while the two most protectionist presidents of the last 70 years have been Ronald Reagan and, yes, George W. Bush.

I'm of two minds about outsourcing. On one hand, yes, it's part of trade, something that can be done more efficiently elsewhere should be done there, etc. However, there's something that's been bothering me about this latest round of outsourcing. It isn't the economic slump - it is the ease with which jobs can now migrate globally.

Back in the '80s and '90s, as a young up 'n coming developer, I dreamed of the day that telecommuting would let me shed the horrible 1+ hour commute times that I was facing, allowing me to work from the comfort of my own home (and bathrobe!), freeing up time for other things. Alas, corporate society does not like that idea, as the Pointy Haired Boss wants my ass present and accounted for, not just an electronic ghost in the machine.

And now that I'm older and wiser, I kinda agree with the idea. Work should be done at work, not at home.

But, the "telecommuting" infrastructure, in the form of the Internet, was built out, internationalized, and made accessible by people all over the world. This makes it incredibly easy to move any non-production work to any location, without an incredible amount of pain.

Imagine moving x-ray analysis to Bangladesh before the Internet.

Imagine moving any document-intensive process (x-ray analysis, tax refunds, sales/support call centers, etc.) to the other side of the world before the Internet.

Now, for all intents and purposes, the barrier to relocating white-collar jobs has dropped to near zero. All it takes is a reasonably well-educated populace, a good Internet connection, a relatively stable (democratic and free are not necessary) government, and you’re good to go.

And that spells major trouble for the vast majority of people in the United States. Even if we come up with the “next big thing” – the actual work behind it will be easily outsourced to the cheapest labor source, which at this point isn’t the United States. So, you’ll have a few people that came up with the idea, and they might be getting rich (depends on who ends up with the patent), and the vast majority of U.S. citizens, squeaking by on jobs at Wal-Mart and Costco, as the country rapidly heads towards the infamous Shoe-salesmen event horizon of Douglas Adams parody. Everybody will be trying to sell everybody else something, and not actually have anything of real value – since everything of value will be imported from outside of the United States.

It’s not a future I want my children to grow up in.

Now, I might be missing something - hell, I *HOPE* I’m missing something - but I think that the Internet has brought a serious and dramatic structural change to the world economy, that will have reverberations throughout the world for years to come, most of them not very good for the rank and file worker in the United States.

If anybody can disabuse me of this notion, I would much appreciate it. If not, well, time to go get ready for the revolution that “Wealth and Democracy” author Kevin Phillips thinks is near.

Drezner’s article is beside the point. The discussion should begin and end with job displacement. As some posters here, and many posters to your previous articles, have complained, the issue isn’t the gains from trade--which almost everyone, even many ardent anti-globalizers in their Chinese tubesocks, understand--but rather the costs of job displacement.

I’d like to know if anyone’s done TOTAL costing of displacement! It would start with the opportunity cost of the money paid into the tax base by the workers for roads and schools near the factory, before it ran out of town like a cheating spouse. Then there’s the costs of borrowing to cover ongoing household expenses no longer covered by paycheck. Then, hospitalizations after job loss aren’t supposed to be more numerous, but nobody’s looked at stress-related illnesses, even though anti-depressant consumption is skyrocketing. Do we factor in costs of divorce? What are the social costs of breaking up the extended family, of rending stable neighborhoods? (Why the hell do we have, percentage-wise, the largest prison population?--and how much is it costing to keep?) What are the transaction costs of finding a job, moving to a new area, buying (if you can!) another house, getting the kids re-enrolled?

And nobody much cares to note that the studies show that the average return to previous wage level is much delayed, and if you are older you might not get back up there at all...

THIS ALL is what should be accounted against the uptick in efficiency, the “better life for all”, and is never! Didn’t anybody read their Coase, their John Commoner? Why? Because rich people at the top can still hold their lives together?

Really it is hard to avoid the conclusion that the whole claim for comparative advantage is a very nice “first-order” tool from economics, as another poster to your website once very neatly put it (and even as such, it has nothing to do with the distribution of income) but is beside the mark of short-term conditions.

There was some evidence from his comments that Kerry smells this, but it’s coming out a bit backward, and we can only hope that you economists and political scientists stop mucking around with simplistics and get to some solid proposals that a candidate can adopt, to help displaced workers now and every time. The whole “best thing is to do no harm” (Drezner, again) is just an insult--intellectual, emotional.

Bob Herbert
NYTimes
12/27/03

IBM has sent a holiday chill through its U.S. employees with its plans to ship thousands of high-paying white-collar jobs overseas to lower-paid foreign workers.

"People are upset and angry," said Arnie Marchetti, a 37-year-old computer technician at IBM's Southbury, Connecticut, office whose wife gave birth to their first child in August.

The company has not made any announcements, and the employees do not know who will be affected, or when. The uncertainty about whose jobs may be sent to India or China, the two main countries in the current plans, has raised workers' anxiety in some cases to an excruciating level. "I understand that this is a lightning rod issue in the industry," an IBM spokesman told me. "It's a lightning rod issue to people in our company, I suppose. But I don't think anybody expects us to issue blanket statements to the work force about projections."

Referring to employees who may be affected by the plans, he said, "We deal with them as they need to know." ...

When I offshore 14 positions, my costs go down. But what happens to the demand facing me? Those 14 persons are no longer employed and what they have been trained to do is no longer available in this country. If they can be "retrained", so can someone in Mexico, India, China, etc. The law of comparative advantage (cough, sputter) only works in macro, not micro. Those 14 persons have no comparative advantage they can use.

Lee, unless I'm mistaken, every one of the costs you enumerate results when technological change results in the destruction of an old industry as well. Does that mean that, as you seem to be arguing for, we should prevent companies from investing in labor-saving technology, or in new technologies more generally, as well?

First of all excellent posts, especially from the genial Dr. Krugman by Anne. PK is right- that free trade and open markets is not just a way to go, it's the ONLY way to run an economy that's not shooting yourself in the foot. However, what to do with the displaced? Now we have got to start seeing some essential things like universal health care, better unemployment benefits, subsidization of adult retraining and education, small business loan support, etc. Public education, as well, should be a big priority. Otherwise, with the current ideals of the republican agenda, we will see ourselves living in a country with a small business elite in cahoots with a corrupt government, paying nothing in taxes, with a huge reserve of underemployed, uneducated masses to serve hand and foot. Then we can complete the cycle and have a third-world style economy that doesn't need outsourcing anymore. Maybe that is Grover Norquist's plan after all...

I don't believe we've EVER seen an administration (Democrat or Republican) in this country that's done anything for people whose job were displaced. Especially now that the displaced jobs are relatively higher waged ones, I don't see any movement in congress to care for those whose jobs were displaced.

As a rational actor, I can't see why I shouldn't vote for protectionist policies, given the lack of safety nets inherent in American society.

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

Foreign government intervention keeps the value of the dollar artificially high

Recently released data from the Bureau of Economic Analysis show that the trade deficit is now 4.9% of the total U.S. gross domestic product. A major contribution to the rising trade deficit is the influence of foreign governments on the value of the dollar.

Redshift is concerned about the "effect of acceleration of change." Me too. Accepting for the moment the field of dreams theory that "jobs will come back," we still have to ponder just when that might happen. What do cycle lengths, positive feedback loops, etc. have to do with the problem at hand?

Some economic theories do deal with such, among them those held by the likes of Brian Arthur and collaborators in Complexity Theory. Many economic theories do not, and I wonder aloud how much they have to do with real world problems. I also worry that we may be lead astray by true-believers in outdated economic theory with too much power to practice their economic magic or witchcraft.

Robert A. Blecker’s “Financial Globalization, Exchange Rates, and International Trade (2003) http://www.american.edu/cas/econ/faculty/blecker/financial-revised.pdf argues some of the same but from the perspective of a post-Keynesian, rather than a complexity theorist.

Blecker says as introduction: "International economists entered into the brave new world of financial globalization and floating exchange rates with analytical apparatus inherited from the past that ill equipped them to anticipate what that new wolrd that they had promoted would actually be like ... extreme volatility of exchange rates, persistent violations of purchasing power parity, chronic trade imbalances, repeated financial crises, and more internationally correlated business cycles...."

Specifially, regarding job losses he says "popular concerns over trade deficits causing job losses are often dismissed as unfounded because trade imbalances are held to be self-eliminating. ... In the face of obvious evidence that exchange rates don't behave this way and that trade imbalances can persist, the argument sometimes shifts to the view that current account deficits that are offset by equal capital account surpluses are not a problem. In this view, countries that have chronic trade deficits for goods and services simply have a 'comparative advantage'in selling their assets, or can be seen as exhibiting a preferecne for current consumption over future consumption in an intertemporal context. ... the fact that chronic trade imbalances sustained by persistent capital flows invalidated the traditonal theory of comparative advantage for trade in goods and services seems to go unnoticed."

This is just one of many of Blecker's many points arguing that contemporary economic poilicy and practice is flawed. Is Blecker off-base, or rightfully challenging us to get our economic house in order?

Steve Carr:

There's one obvious difference. Technological upgrades would involve new investment spending, most likely within the domestic economy, and, while reducing employment in an industry, it also functions to raise the rate of productivity there. And, of course, that would most likely be motivated by cost-savings with respect to high prevailing wages, absent which such upgrades would be less likely to occur. By contrast, outsourcing/international labor arbitrage would involve much less by way of domestic capital spending and would likely involve no improvement in productivity for the industry, but likely lesser productivity. And, of course, the wages that would be paid out, which, in the case of domestic technological upgrades would likely increase for remaining workers, will not be paid out in the domestic economy and will be paid out at a much lesser rate. So though you may very well argue that the domestic economy will readily adjust, some of the emollients that would facilitate such readjustment would be missing.

An economics that treats the "factors" of production as equally substitutable and equally fungible manages to ignore the power differential between corporate capital and labor and the effects it can have. For one thing, "international labor arbitrage" can tend to increase the oligopolistic concentration of market power on the part of those corporations strategically positioned to take advantage of it and hence their extractive capacities with respect to the distributive function of markets. On the other hand, the differential distribution of income between wages and profits can have a large effect on the level of demand in an economy, the rate of growth and the subsequent course of its development, including how future growth will be distributed. Also, a growing concentration of wealth can squeeze the capacity of government to raise revenue to fund programs and policies that compensate for some of these effects, since corporate profits, given the strategic resources of corporations, are much more difficult to tax, as witnessed by the steadily declining share of the corporate tax burden in the last 50 years. And it should be added, that what is at stake is not just the distribution of incomes, but, as well, the distribution of risks. And a large imbalance in the distribution of risks between its bearers and their relative capacities can have deleterious consequences for the functionning of the whole. I don't, of course, have any solutions to propose to these problems and, in particular, don't think protectionism would work. But any proposed solution should begin with a clear and realistic analysis.

Steve Carr, you misunderstand: I'm not against free trade nor technological change. I'm saying Drezner's aricle is old snoring news of much help to no one who's hurting, and that current politics instead demands a major policy application for DISPLACED WORKERS. Although in passing I wonder about the cost-benefits of it all, when EVERYTHING is costed in, and I can't find a reference to anyone who has studied this in total... I wonder whether gains to efficiency, or new technologies, are always worth the IMMEDIATE trade-off, when they could come a bit later, with some better alleviation of the externalities and transaction costs. Example: when AT&T was a public monopoly, they would occasionally RETRAIN large sections of their own workforce (what a concept!) for a rolling series of new technologies evaluated as a package. Result: phone service got progressively better, rates went down continuously, and people had stable jobs. I read yesterday phone rates are going UP. Why not retrain workers where they stand, even if it delays the introduction of new technologies a little while, and thereby save the untallied costs? (Of course, economics as currently taught says that the greater economic growth from cutthroat labor arbitrage will enable more spending to take care of these little things. I wonder about that too, since the results appear to be equivocal.)

Your comment brings up an interesting point: polls show that people don't actually mind so much losing their jobs to better technologies (although, as above, I personally think it's often shabby) but they HATE LIKE HELL losing jobs to cheaper foreign workers. Could it be that after all they paid into making the system work right, they feel used and abused? Exactly what it the cost of this? Would it reduce future productivity?

Also, it would be nice for economists (and political scientists, in Drezner's case) to stop touting the gains to trade without, in the same breath, always stating that the distribution of income must separately be addressed. It's becoming dishonorable. Plus the threads clog up with dozens of commenters needlessly reminding us of this or that indecency--so it's INEFFICIENT, too.

I would like to repeat my offer, made on this site a few weeks ago, to put $1000 in escrow to be given to any reputable economist on this site who can successfully defend the following proposition:
THAT, based on standard neoclassical (HO)trade theory, free trade between a relatively small, but rich high-wage country like the United States with much more populous low-wage countries like China and India, will -- other things being equal -- NOT tend to lower the average real wage of workers in the rich country necessary to maintain full employment, ASSUMING NO MEASURES ARE TAKEN in the rich country to redistribute income from capital to labor -- as for example, by raising taxes on unearned income and using the proceeds to subsidize wages.

The debate will be conducted by dueling (but reasonably concise) quotes posted to this site, taken from the classic text World Trade & Payments by Caves and Jones, with a group of twelve intellegent but unbiased readers of this blog acting as jury.

(Unbiased here means no left-wingers on the jury, defined as people who don't believe in, or understand in theory, how a market system is supposed to work; it also means no academic economists, or graduate students in economics with academic aspirations, who might be contrained by academic dogma on the subject of free trade.)

I will trust Brad DeLong to hold the money, and also to select the jury, provided the jury members will attest to their open-mindedness as to the question at issue.

This would seem to be an easy way for a reputable economist to pick up a thousand dollars, and at the same time a make an important point in a public arena -- but only if he is confidant he has theory on his side.

Are there any takers out there?

Trade is not going to China and elsewhere because their wages reflect the most productive place to invest money, but because it is the place where slave labor conditions are keeping wages down artificially.

If foreign workers have the right to demand the maximum wages THEY want, through free collective bargaining, then I support full trade with anyone on the basis of all workers getting the full fruits of their labor and all goods being produced at the point where labor costs are the lowest and productivity is the highest based on those costs.

But until that point, trade with China (and many other places) is a cancer on global labor conditions, growing by the day and driving all workers in a race to the bottom, as US employers demand that US workers compete with slave labor or lose their jobs.

That is not acceptable and must end.

The problem isn't globalization; it's the increasaing inequality of wealth and income. But I'm willing to hold up the former as a cudgel to force action in response to the latter.

It's pretty clear to me that the benefits of globalization, both in the 1990s and now, overwhelmingly went to those with large blocks of stock in the corporations that benefited the most.

I'm for globalization as long as it's accompanied by things like universal health care, a return to inexpensive state university educations, and a much more progressive tax system. But until that happens, you can do with free trade what Earl Weaver said to do with the sac bunt.

The issue isn't whether to trade or not. The issue is fair trade vs. slave trade. I believe that American workers are as creative and product as any workers, anyhwhere. I believe that my skills surpass those of 99.999% of any workers outside the United States. But hell, how do I compete with a SLAVE?!

Answer: I can't. No more than free farm workers could compete with slaves in the American South prior to the American Civil War. All that has happened is that we've re-created the Southern slave plantation overseas, with American CEO's cracking the whip on those darkies on the Outsourced Plantation. It's not a healthy situation, and not one that we can allow to persist if we want to have a nation of free men rather than a nation of slaves.

- BadTux the Free (for now) Penguin

"Trade is not going to China and elsewhere because their wages reflect the most productive place to invest money, but because it is the place where slave labor conditions are keeping wages down artificially."

To be blunt, HORSESHIT.

This argument had some respectability when it was about people working in sweatshops and factories. But the recent panic is over "white-collar" outsourcing, and the favorite examples are call centers, IT companies, and so forth in India.

Those Indian workers are NOT working under poor conditions. By Indian standards, they are VERY WELL PAID. Bangalore is a BOOM TOWN. An Indian contractor I work with recently moved back to the Bangalore office because he would rather work there (at a much lower salary) than in Silicon Valley.

What absolutely should not be ignored about white-collar outsourcing is it isn't going to exploited slave laborers, it is going to create both good jobs, and an increasing technology industry, in poor countries such as India.

It would be nice if a few of the supposed humanitarians here could extend their fondness for the workers to workers who are outside the line in the sand that defines the United States.

For Luke Lea

Your bet is easy to win if you mean present a reasonable theoretical model where real wages rise in both places.

Here's a quick sketch

suppose everyone in country A can only work 10 hours a day, but needs to spend 4 hours a day on low productivity substinance type work called A1, and the remaining 6 hours are available for high productivity work called A2. Just pair each of the workers from country A with someone from country B that would be happy to recieve a wage equal to the marginal productivity of their labor in producing A1 (i.e. better than their alternative in country B). With everyone in Country A now free to work 10 hours on A2, they can easy afford to pay these workers and their net average wage and standard of living rises. Same for country B. Q.E.D.

The whole concept of comparative advantage is based on the same principal, eventhough the 6/4 split is arbitrary. Basing the labor tade on a pairing is also unrealistic, but the free market would perform the same matching effect. How do we know that there issome work in country A that those in country B would find to increase in their wage and those in country A also would be happy to turn over to them? Must be, or else thre would be no incentive to trade in the first place.

I don't get the point of using 'the classic text World Trade & Payments by Caves and Jones' but hopefully I still get the $1000-- to be donated to my favorite charity. Heck, give it to the United Way or the YMCA. That is OK too.

RT, I don't think your argument about the 1990s fits the facts at all. In the first place, we know that American corporate investment in low-wage countries was relatively small, certainly much smaller than American investment in Europe, etc. Are you against investing in Europe, too? Just as important, throughout the 1990s the U.S. was the world's biggest recipient of foreign direct investment. That's foreign money, invested in the U.S., building factories, etc., employing American workers. When you talk about globalization, you're talking about American workers building Hondas, Mercedes, and BMWs as much as anything else.

Then there's the curious fact that the 1990s -- and in particular the second half of the decade, after the passage of NAFTA and the establishment of the WTP -- saw the only sustained growth in incomes and wages for most Americans since the early 1970s. For average American workers, the late 1990s were the best times in thirty years or so, and that was with an aggressively pro-free-trade administration in office. How do you square the idea that globalization is necessarily bad for American workers with these facts?

"Come payday, the tough choices begin for Roxie Jackson. Her salary as a physical therapist's assistant has sustained her family of five in the middle-class suburb of Bloomfield, N.J., since her husband lost his job two years ago..."

'Discouraged' job-seekers are mentioned here on a regular basis. I don't get it. I was laid off during the banking downsizing of the early 90's. When the unemployment ran out (and it wasn't enough to live on in the first place), I went out and got a terrible job at about one-third of my previous salary, which leads me to the statement referenced above.

Roxie has a husband who has been unemployed for two years. If her five (!) children are hungry, why doesn't he take any job he can get?

"The creation of new jobs overseas will eventually lead to more jobs and higher incomes in the United States."

The logic of this escapes me. Is it that because something happened in the past, it will therefore always happen? Sounds like the old "stocks always go up" argument to me.

Ian, wouldn't the existence of slave labor (in China, say, I've never heard of any in India) force down wages overall in that country, even if an outsourced job doesn't go to forced labor?

It seems interesting that Republicans are calling off shoring of jobs a problem only of a political nature, when it is they, themselves who created the politics of it. Namely, in an economy where there is tremendous inequality between being in one of the favored jobs, and everything else, reduction, even by one, of the chance at a favored position, is a tremendous blow to whoever takes it. There life, literally, is ruined, or held back for half a decade as they overcome the burden. It is the logic which allowed Republicans to cry "reverse discrimination!". Not that many people lost out to AA candidates, and in many cases the slot openned for the AA candidate would not have existed otherwise, but every person on the bubble knows that the difference between getting into the prestigious school - by however little - and everything else, is quite large.

The more closed, unequal and cronyistic the society, the more this threshold causes pain.

The reason that offshoring won't go away is not that it is "merely" political, but that it is proof that something is wrong in the system. CEO salaries are not going down, on the contrary, after three years of dismal earnings, now propped up by low interest rates - salaries are cresting near the boom years, with lower taxes on those salaries.

Offshoring, in otherwords, is absolute proof that the entire spiel about risk driven economics producing more competition is, and always ways, a complete fabrication intended to do no more than benefit the wealthy. The people taking the risk, it is clear, are the workers at the bottom, not the wealthy at the top. The people getting the rewards are the wealthy, who are clearly far less at risk than everyone else.

Offshoring is such a proof, because it is, in fact, a symptom of too much money concentrated at the top.

To explain - offshoring is capital intensive - it requires a huge amount of building, development and time, it requires pulverizing functioning infrastructure here, to put it there. This requires money. In a normal economy, one with competitive pressures to ship new and better equipment faster, the work that would be shipped overseas would be balanced against time pressures here.

Without those time pressures, and with a massive accumulation of capital at the top - offshoring is disproportionately attractive, since the downside - longer lead times and cycle times - is almost non-existent. No one is in much of a hurry.

The solution is rather simple: if there were a supply of new work being created here, with stock options and chances for advancement, no one would care that screen painting and scripting was being done elsewhere. We'd even like it as dollars expand around the world, making it possible for us to increase money supply faster than otherwise would be possible and still have low inflation.

Offshoring then stands in, in a single symbol, for the massive borrowing spree to give money to the rich - let's not call it a tax cut, since we are already paying hire taxes in the form of devaluation of the dollar - and the slowing down of the economy.

In 2000, much of the country, afraid they were being left behind economically by the boom in the cities, voted for Bush to slam on the brakes. He did this, and slaughtered the goose that was laying golden eggs. Now it is becoming clear that that engine of growth was helpign everyone, and there is not enough money on the planet to use tax breaks to make up for the lost growth that the entreprenuerial economy used to generate.

The solution is simple. It's called modern liberalism. One of the principle ideas of modern liberalism and the progressive taxation system was that it took money from areas of high liquidity - that is taxing the high ground rent of labor in cities - and moved it out into the country side. People became convinced, for a variety of reasons that this was "taking their money". In fact, since it was taxing ground rent, effectively, it did not injure the real economy.

This system was taken apart in the 1980's, as people were willing to do anything to hold themselves above water in an inflationary environment where they had no labor pricing power. The end result is exactly the same as the first time this economics was tried - money pooled up in cities in a boom - since cities have that high concentration of both demand and potential supply - and the countryside suffered.

The answer, then, is to restore a steeply progressive tax system, undo the regressivization of the tax system, and use government to force high end demand that will, again, push the market into a situation where time is important again. At which point offshoring will reach a reasonable equalibrium as a way of unloading work which does not have to be done with a high time pressure, and thus freeing up capital - human and otherwise - here for more profitable pursuits.

As long as we are in a down shifted economy, there will be only one pressure - to cut costs, which will fall entirely on the professional and working class in America, while the profits will pool in the hands of a few at the top - as they are already.

mdb begins:
"Suppose everyone in country A can only work 10 hours a day, but needs to spend 4 hours a day on low productivity substinance type work called A1, and the remaining 6 hours are available for high productivity work called A2. . .

Is mdb a reputable economist?

mdb:

Though I find Luke Lea's characterization of the U.S.A. as a relatively small country a bit odd, as opposed to China and India being huge countries, I do believe that the H.-O. model for free trade does draw the fundamental conclusion that its gains will tend to accrue to those "factors" in each country that are relatively most abundant in each country, which is to say, in a country with a large supply of low-wage labor the gains from trade accrue to wages, whereas in a country well-endowed with capital and thus high productivity, capital intensive labor, the gains from trade tend to accrue to capital, thus implying that free trade tends toward the lowering of wages in the wealthier capital-intensive country. If I recall correctly, the H.-O. model also stipulates as a key premise that both trading countries also have the same production possibilities horizon or function, which does not seem a realistic claim when comparing the U.S.A. to Mexico, let alone China. At the unofficial Krugman website, there is a short essay by Krugman, using the magnitudes of the trade flow with poorer countries and a "factor" labeled low-wage labor to sketch a simple model purporting to show that only a small part of any relative or absolute decrease in wage levels in the U.S.A. could be attributed to trade with developing nations. But there is also posted a much longer piece there by James Galbraith refuting Krugman's claim and showing in much greater detail the ways and routes by which downward pressure on wages occurs through such trade.

I don't think that there would be at all very many people commenting at this site who are flatly opposed to free trade/globalization, who favor protectionist measures, or who fail to understand the basic argument of comparative advantage. Arguments are over the effects and problems associated with free trade/globalization and the nature of its regime as currently implemented and practiced. For the sake of clarity, I think three different things should be distinguished under the rubric of "globalization": 1) the free flow of international financial flows without any controls, which can have destabilizing effects and generate problems, particularly with respect to distortions of the exchange-rate mechanism, as a commenter alluded to above; 2) the globalization of production on the part of multinational corporations, with their strategic capacities to arbitrage labor markets and extort government preferments and subsidies, since a large proportion of what is labelled as international trade is infra-corporate transfers by multinationals or sub-contracting by their organizational networks; and 3) trade in goods between countries based on their domestic endowments of capital, resources and labor skills, which was the classical instance of the argument for free trade. How the first two phenomena impact the third and what in so-called free trade agreements actually concerns free trade rather than other agendas and, especially, the disabling of capacities for governments to deal with their own economies in matters other than protective tariffs is what is in question. Saying that international trade would not occur if there were no incentives for it to occur does not even begin to address what those incentives are or how they are self-regulating or regulated. Were the losers from free trade to be compensated for their losses from the gains of its winners, in the manner of the Hicks-Kaldor criterion, (though such a scheme would actually be impossible to devise since Hick-Kaldor does not guarantee transitivity), the incentives for trade would be far less. For multinational corporations, the incentives for international trade could be to escape from taxes, regulations, and the demands of labor, while cutting costs to maintain or boost profits in the deflationary international environment that their own actions and the policies that facilitate them bring about.

Yawn. This article is just the usual pro-offshoring sermon. It's the exact same thing we've all heard a thousand times before, and less and less persuasive each time. Drezner, as usual, pays lip service to "cushioning the process for displaced workers", but of course no one really cares enough about this to make it a quid pro quo of trade policy. (Most of his commentators on his blog are more honest, and basically say that the middle class should go fuck themselves if they can't compete with Indians.) As long as this remains just pious platitudes, why should middle America support sending their jobs overseas?

Brad quotes: But believing that offshore outsourcing causes unemployment is the economic equivalent of believing that the sun revolves around the earth: intuitively compelling but clearly wrong.

How many times do we need to show that 10% of American IT and call-center industry is ALREADY OUTSOURCED and the trend continues unabated. These days US IT hiring is done in India. We are in the same position as US consumer electronics industry 20 years ago: there was unemployment, there was offshoring, a bunch of "economists" said they were unrelated and than the industry was gone. The difference is that at that time consumer electronics engineers could go into hardware or software industry. Today in United States NOT A SINGLE ENGINEERING FIELD IS EXPANDING.

Hope is not a policy. This applies as well to new jobs (who is silly enough to think they will be high paying) as to believing that the Iraqis will greet US soldiers with flags and cheers.

mdb says:

suppose everyone in country A can only work 10 hours a day, but needs to spend 4 hours a day on low productivity substinance type work called A1, and the remaining 6 hours are available for high productivity work called A2. Just pair each of the workers from country A with someone from country B that would be happy to recieve a wage equal to the marginal productivity of their labor in producing A1 (i.e. better than their alternative in country B). With everyone in Country A now free to work 10 hours on A2, they can easy afford to pay these workers and their net average wage and standard of living rises. Same for country B. Q.E.D.

Assume that there are five times as many people in country B than in A, and they are just as capable of doing the high value work for 1/5th the price if the machinery is shipped in. Assume the machinery is inexpensive (call centers/software writing).

We lose.

I think that things will get so bad that we will have protectionism back. We still have the vote after all and if jobs and incomes don't pick back up the vote will be used to demand protectionist measures. The answer to all of this is to simply buy American made products when at all possible. I do and have found their quality to be higher than products made elsewhere. Americans are too individualistic and don't care about others not in their immediate circle. Maybe if those IT guys had brought a Caddy instead of a Lexus more of us in America might have jobs. I have a Ford and a GM and they both run wonderfully. They are also designed to fit American tastes and height requirements better. Let's get together and act for the good of the whole instead of the good of the individual only!!!!!!!!!!!!!!!!!!!!!

I must say that these free trade arguments remind me of some famous political statements of the last few years concerning being greeted as Liberators and not having sex with that woman. SPIN ON GUYS!!!!!!!!!!!

Eli, are you honestly suggesting that losing call-center jobs is endangering the health of the U.S. economy? It is, of course, true that if you had a call-center job and it went abroad to India, that hurts. But this is, as I suggested in my response to Lee, no different from when people lose jobs because of technological change or corporate investment in productivity-enhancing technologies. (John, it's true that capital investment tends to raise the wages of remaining workers, but I see no reason why the same isn't true of the gains that companies reap from outsourcing, although they may be captured by consumers instead.) The United States has never in its history treated someone's job as his or her property. We have always had the freest labor markets in the world, always made it easy for companies to shut down plants, lay off employees, move employees, etc. We have also been the most dynamic and innovative economy in the world. Altering the first fact will unquestionably alter the second. It will also almost certainly increase unemployment (as it has in Europe), and discourage foreign investment here. Is this really a trade we should make to protect call-center and programming jobs, especially when we didn't make that trade to protect autoworker or shipbuilder jobs?

Brad's thesis is a classic Beltway-ism, that is, anyone who has served inside the Beltway (Brad under Clinton's Treasury) can be counted on to hold stasic that POV until the rivers run dry, even though it was Clinton's group who pushed the whole international trade thing, lowering trade barriers, WTO, lowest common denominator, and while they were at it, let in 100,000 H-1B technical workers each year, far more than the TOTAL of all US university graduates in the day. Before the bubble was popped, IT was going-gone.

So Brad should have no problem upping the H-1B ceiling one more time, and posting UC Berkeley ass't professorships @ $35,000 a year to Chinese scholars, who speak English as well as Brad, can no doubt run circles around Brad in Keynesian economics, Say's Law and neo-social democratic theory, and would *kill* to make 35,000 US$'s.

If it threatens UC's tenured salaries, hey, not to worry! There's no correlation, right, Brad? Every good job going overseas creates three new ones here at home! ... "independent contractor" slots at Wal-Mart's, odd hours and no benefits.

If you're not SSBI, then welcome to the machine.

Past performance doesn't guarantee future gains!
How many times have you heard that? QWest tried Indian call centers in the late 1990's, and now the FCC is forcing QWest to pay $19M a year to their disgruntled and ripped-off customers.

Former Indian outsourcing trainees say all they were trained to do is take the call, assure the caller, try to determine their exact complaint, try to diminish any client liability for that complaint, and if that doesn't work, transfer the caller to another trainee. Massage therapy. They had no action-authority, just a hand job.

Microsoft can only get away with its Indian IT because Microsoft writes crap software in huge bumbling blocks of code that snap, crackle, pop. No serious software code development is going on in India, at least not by US-owned producers.

While bankrupt US states are like whores crying outside the back door in the early morning rain, that may soon change with anti-outsourcing rules.
Boeing can only get away with employing Aeroflot and Japanese workers because Washington State has given up every income tax and unemployment insurance concession possible to them, just to be able to say the 777 comes from Puget Sound.

Same with the Chinese. Sure, they can pump out what one post called, "dark-plastic wampum", and now they're trying to Rust Belt their way into the major leagues, but they're already in smog city, out of metallurgical coal, and scouring the world for scrap iron to melt down. China is much closer to The Jungle, than Atlas Shrugged.

All is well! There are jobs if you aren't too proud to work. I've swabbed decks. You can too. It's only a temporary setback on the trail.

Brad is wrong in his assertion, but will end up being right, in an unintended way. The outsource experiment will fail from its own inertia. All the greedy middlemen will muck things up. Even the Sorceror's Apprentice had to eat and sleep.

Yes Steve, I am saying that losing call center jobs is hurting, and badly hurting those areas of the country with not much else going on (why do you think they located there?)

There was an article in the Washington Post ~ a month ago describing some Appalachian town which lost the last employer of any size, a call center. You could see the citizens lining up for their euthenasia

By itself not crippling nationally yet, but taken together with significant loss of manufacturing and increasing loss of software jobs, significant. Something does not have to be a killer by itself, to be a killer in combination with other things. And o, BTW, it is different, because the jobs are just gone with nothing to replace them, no new technology, nada so it ain't like technological unemployment.

One of my points is that it is trivially easy to strip jobs out of the US because workers have no legal interest in their jobs and we would all be better off if this were modified, not to the European standard perhaps, but certainly to the level of a civilized country (Sorry, very USENET that, but irresistable).

In closing thanks to Paul Henry who reminds me that there is not much call these days for 24/7 stock market trading, for much the reason he describes, people realized it was a 24/7 opportunity to lose money.

I don't know what it means to say "no new technology, nada so it ain't like technological unemployment." When the mechanized reaper or the mechanized cotton picker were introduced, those agricultural jobs were gone with nothing to replace them. They were just as gone as the call-center jobs are now. To find new jobs people left their homes and migrated. There is no difference between that and what's happening now.

Actually, that's not true. There is a difference now: the jobs that people are likely to find if they leave Appalachia are not in factories but in security or food preparation or home health care. Are these good jobs? By no stretch of the imagination. Are they worse than call-center jobs? No. They're about the same.

The point isn't that losing these jobs doesn't hurt the areas of the country that are losing them. But we should not make national policy on the basis of what's happening to certain areas of the country. Nor should we give workers a "legal interest" in their jobs. That's not a characteristic of a civilized country. It's a characteristic of a moribund one. In fact, what we need is to severe the connection between employment and people's basic requirements. So, universal, non-job-based health insurance. Portable pensions. Lower social security taxes paid by corporations (while raising income taxes on the upper-middle class and the wealthy). Increased EITC. We also need to invest seriously in public colleges and expand Pell Grants and student loans. I also think there's a strong case to be made for subsidizing adult education. And all this should be done while remaining completely committed to free trade.

Steve Carr:

Some of the point of my first post was that trade based on comparative advantage and technological capital improvement both improve aggregate productivity, yes, but that is an analogy and not an identity. And whereas trade may lower the domestic price level on some goods, that will be distributed across the board differently than wage distributions- i.e. wealthy people as well as unemployed people will be able to take advantage of those decreases in prices, to paraphrase Anatole France. And furthermore, there is reason to believe, on the basis of the oligopolistic structure of many markets, that price decreases/cost savings will not wholely be passed on to consumers. Similarly, if wage labor is suffering downward pressure, even those relatively skilled and lucky workers who benefit from improvements in their working capital will experience that pressure, such that the gains in increased productivity will less likely be redistributed to their remuneration. Distributions count as much as aggregates in considering economic effects, and to say that there is no macroeconomic problem with our current economic regime,- (which term, of course, extends well beyond the narrow issue of free trade),- sounds suspiciously like handwaving to me.

I didn't respond to your post about the Clinton boom, but to cite a few years of wage improvement in a full-employment boom in the face of a 3 decade long stagnation or diminution of wages is hardly persuasive. The main accomplishment of the Clinton boom, which, alas, proved unsustainable, as far as I am concerned, was to mop up some of the previous public debt overhang, from the previous years of utterly crappy rightwing economic policy. But that regime with its reparative effects is no longer with us. We're back to more of the same crappy rightwing economic policy. And to knock the Europeans is a tired old ploy. Many European economies have a higher productivity rate than we do, even without the benefit of hedonic pricing, and part of their lower per capita GDP is a result of a choice to work fewer hours, whereas their unemployment rates are reported as U6 rather than U3 rates. I have no doubt that they could use some reforms in the way their employment policies structure in costs for increased marginal employment, but their slow growth rate has other sources as well, such as the costs of German unification at an unrealistic and indigestible "ein fuer eins" rate, combined with the move to the Euro and the ill-conceived "stability pact" and a rapidly aging demographics. Pointing to their difficulties does nothing to validate the adequacy of neo-classical economics, any more than pointing to our glorious past guarantees us future returns. Besides, I'm sure the Europeans have plenty of bright economists wrestling with their problems. Perhaps you could ask Monsieur Stijns.

Steve Carr writes: In fact, what we need is to severe the connection between employment and people's basic requirements. So, universal, non-job-based health insurance. Portable pensions. Lower social security taxes paid by corporations (while raising income taxes on the upper-middle class and the wealthy). Increased EITC. We also need to invest seriously in public colleges and expand Pell Grants and student loans. I also think there's a strong case to be made for subsidizing adult education.

What you advocate is redistribution. To provide services you would have to raise taxes. What your opponents advocate is redistribution. Companies that do outsourcing pay extra outsourcing tax and prices rise a bit. In the classical case less good is produced. In the software case the incremental cost of making one more CD with $100000 software is near-zero. You might argue that less software gets written but the industry is so volatile (just Oracle-PeopleSoft merger is going to make hundreds of years of software engineering work obsolete) that the effect is negligible. Most importantly, the chance of raising taxes to provide universal health care and education is zero. Why propose the solution you know have no chance to be implemented?

The chance of raising taxes to provide universal health care and education is not zero. It's zero in 2004, perhaps. But the overpowering need for these things -- and business' growing, and understandable, unwillingness to foot the bill for our bizarrely structured health-care system -- make them, I think, inevitable.

The reason to push for them is because they're the right things to push for. Having the government tell businesses whom they can or cannot hire or how they can and cannot invest their capital, on the other hand, is absolutely the wrong thing to push for. Its economic consequences will not be negligible. They will be major. Just as important, it's not something we want the state to be doing. Let the market create the wealth and, when it's necessary, let the government redistribute it afterward.

John Chalasz,

You sound like a reputable economist, possibly. Your first paragraph, in particular was lucid. Two quick points: doesn't Krugman's contention that trade has accounted for only a small part of wage erosion refer to the period before Nafta and Gatt? I know he used to make that point back in the early 1990's, but has he updated the
argument? In any case, just because there are other things pushing wages down too --labor-saving technology, immigration -- is no reason to discount the importance of trade, especially now that China and India are really getting
geared.
On the question of compensation, I know that the traditional answer has always been that it was impractical to target the winners and losers, if only because they were scattered among various industries and sectors of the economy.
But when the comparative advantage is a matter of relative factor endowments (ie, capital-population ratios), the problem is simplified: the winners are generally the wealthiest members of society, and the losers everybody else.
Progressive taxation (of consumption preferrably) and graduated wage subsidies would seem to be the most reasonable remedy.

John, actually very little (and perhaps nothing) of what I said about labor markets proceeds from neoclassical assumptions. There is, after all, no real place for dynamism or innovation in a traditional neoclassical model. I do think that Europe's rigid labor markets have contributed to its economic woes -- and I don't think anyone seriously denies they've kept unemployment higher than it would otherwise have been -- but that's not the real strike against giving employees a legal interest in their jobs. We want flexible labor markets because we want capital to be able to seek out and act upon new opportunities as quickly and efficiently as possible, and because we want to encourage risky investments in technological innovation. These things cannot happen in an environment in which workers have rights to their jobs. To take only the most extreme example, if people in start-ups have property rights, of whatever sort, in their jobs, there would be many fewer start-ups, and we would, as a society, be collectively much worse off as a result.

As for European productivity rates, they are, in comparison with the U.S., artificially boosted by their significantly higher unemployment. If America eliminated its ten million most unproductive jobs -- or however many it would take to get the unemployment rate up to what it is in France -- our productivity would be significantly higher, too.

Steve Carr writes: Its economic consequences will not be negligible. They will be major.

I am talking specifically IT industry. There is no relationship between the input (labor) and the cost of producing an extra unit. So where the major consequences are coming from?

Ian Montgomerie: "Those Indian workers are NOT working under poor conditions. By Indian standards, they are VERY WELL PAID. ..."

"By Indian standards"? The author that you responded to may have meant that tech workers are held under slave conditions, which they are not (at least by "Indian standards"), but why do you think they are paid princely? Could it be because the lower-rung people that are producing products and providing services for them are working in conditions closer to servitude?

"Bangalore is a BOOM TOWN. An Indian contractor I work with recently moved back to the Bangalore office because he would rather work there (at a much lower salary) than in Silicon Valley."

I can confirm both from my own experience. The reason is not just financial -- as I learnt from conversations with Indian coworkers, Indians tend to have a strong focus on family, and long for their own culture. Some of them feel isolated in the Bay Area, and want to go back to India mostly for cultural and family reasons, or because they don't want their kids to grow up in the US (!), but want to raise them in their traditional culture. What I have also heard is that a number of them planned to come to the US just for a number of years, and time is up, and there is no more (growth) opportunity here (plausible), but the opportunity is now in Bangalore. Furthermore, to be frank, many of those who had the college educations that qualified them for US jobs are used to the family having servants, and have a hard time managing here without those. When they go back to India, they don't have to pay 1/2 million plus for a 50-year old wood-frame shack, but get a good residence for less, and can employ a small army of servants for cooking, cleaning, driving, nannies, etc.

"... it is going to create both good jobs, and an increasing technology industry, in poor countries such as India."

I think nobody is seriously contesting that. Neither do I; I'm coming from a previously underprivileged country, having had exposure to Western arrogance, and I think I can empathize with both sides.

Luke Lea:

Sorry to disappoint you, but I'm a wage earner, just as I think you are. The citations from the unofficial Krugman site I think were from the late 90's- I'm not sure- but you can go there and check it out. (It used to be on the DeLong blogroll and, at any rate, its the site of Krugman's biggest fan.) I'm casting about for understanding and answers just as you are, but just to take some stabs at the issues, I don't think any direct scheme of compensation would be feasible, though I do think, that in an "ideal" world, a program of public policy, which, of course, means government action, direct or indirect, would prove helpful and am waiting upon our economist friends to start up with the specifics. Also, as I posted at this site,- I think last week- I think the current Bush economic regime exacerbates the problems of trade. In particular, running massive deficits to support tax cuts for capital interests fails to stimulate domestic demand and increases our reliance on foreign capital, but, since Asian Central Banks are intent on supporting our trade deficit to sustain their currency values and maintain their exports to us, rather than just converting domestic tax obligations into interest-bearing debt, in effect, such policies are freeing up capital for FDI abroad, perhaps in production platforms in Asia, further augmenting what looks like an unsustainable imbalance in international trade. (My prior post was in response to someone posting that, inspite of the fact that the U.S.A. had a net indebtedness of -$2.6 trillion in 2002, the net returns on U.S. foreign investment was $255 billion, whereas the net returns on foreign investment in the U.S.A. was $251 billion, so we were purportedly getting all this investment for free. I begged to disagree and offered an alternative interpretation of the figures.) Where the continuation of these policies will lead us is perhaps anybody's guess, but I'm not smelling roses.

Steve Carr writes: To take only the most extreme example, if people in start-ups have property rights, of whatever sort, in their jobs, there would be many fewer start-ups, and we would, as a society, be collectively much worse off as a result.

Startups have equity - a right to the share of the results of the company. In the company of 20-50 people it is directly linked with the results of one's own job - the main reason people put 60+ hours a week.

And the startup case illustrates nicely why you are wrong: if an employee has no stake he does no work. If you have no stake in the company results, if you see hard-working people thrown out while the company is doing great so it can make its quarterly numbers, the best the company can expect from you is that you'd show up on time.

John C. Halasz,

In that case, I hope Brad puts you on the jury.

Bubba makes the point but let me expand a bit on Steve Carr's

"We want flexible labor markets because we want capital to be able to seek out and act upon new opportunities as quickly and efficiently as possible, and because we want to encourage risky investments in technological innovation. These things cannot happen in an environment in which workers have rights to their jobs."

Which means you are quite happy if that capital establishes itself wherever, and leaves everyone here unemployed. Other comments have pointed out that Ricardo's ideas depend on capital being immobile. Today it is not. What I am proposing is not that people have an absolute possession of their jobs, but more in the line of everyone having a rolling employment contract for two years or so. Care to address that?

Steve keeps referring to the fate of the agricultural worker after the cotton gin. Well, of course a lot of those workers were slaves and kept on being slaves for another sixty or so years, but let us not pick on that sore. In fact what happened is not what Steve believes.

Previous to the gin a single person could only clean one pound of cotton per day, afterwards, fifty. The net effect was to bring more people into cotton farming and processing. Cotton, which was a sideline for subsistance farmers became a major cash crop. In the US at least, mechanization of agriculture (including most importantly improved plows) opened up vast areas to farming by smallholders, and increased the number of people in farming.

Notice that in these cases, the effect was to improve the standing of the domestic farmer and mechanic. Whitney did not assemble his machines in China, send the billing business to India, buy his steel from England (well maybe). The mills that wove the cotton into fiber were in New England, not Bangladesh, and so on.

CM - Excellent comment and with the caste culture in India, I suspect that those Indians that made it to the US were of the upper caste and are now returning to India to "pick up the old ways".

My only problem with the Indian and Chinese outsourcing has been that a large amount of the success of these immigrants was as a result of Government programs to help out Native Americans and African Americans. However, the Indians and Chinese, who have strong familiar and cultural ties, are shipping US taxpayer capital to the home country. If the Native Americans and African Americans were the only beneficiaries of these Government programs, then at least the US taxpayer would not have financed the outsourcing of jobs for "true" Americans (true in the sense they have no place/family to immigrate back too). Maybe the US deserves it, hell we stole this land and imported slaves, and maybe it is time for our own medicine. However, it seems to me that the people that are going to suffer the most will be the same groups that suffered the most during America's rise.

I have no problem with outsourcing, but it has been fueled by my tax dollars. If corporations fuel it and I vote by buying their stock, then that is fair.

Eli, at least respond to my real argument, not something you've imagined. I never mentioned the "cotton gin," because I wasn't talking about the impact of the cotton gin, nor I was talking about the 19th century. I was talking about the mechanization of agriculture in the 20th century, which introduced things like the wheat combine, self-tying hay and straw balers, mechanized cotton picker and, of course, the tractor. That mechanization massively reduced the amount of labor needed to work a given piece of land, and threw millions out of work. That was a change far more massive than anything we're seeing today. Your position seems to be that we would have been better off had we limited farm' ability to introduce new technology, and forced them to keep workers in the fields for two years even though there were machines available that could do the job far more quickly and efficiently. I think this is simply wrong. The American economy would be far smaller and weaker, and far less inventive, than it is today if we had had laws guaranteeing workers their jobs.

No, I would not be happy if all the capital left and Americans were all unemployed, but it's not happening, and it's not going to happen. As long as capital is available and relatively inexpensive, and the prospect for profit exists, there will be work to do. In the last thirty years, America has created more than thirty million jobs (net), integrated women into the workforce, and absorbed the biggest flood of immigrants since before the 1920s. I'm baffled by the idea that this suggests, at all, that capital is threatening to leave everyone unemployed.

By the way, as has been pointed out before, the case for comparative advantage does not rest on the assumption that capital is immobile. Ricardo did assume, in his original thesis, factor immobility, but it has long since been proved that comparative advantage holds even in a world with mobile factors.

Steve Carr writes: Your position seems to be that we would have been better off had we limited farm' ability to introduce new technology, and forced them to keep workers in the fields for two years even though there were machines available that could do the job far more quickly and efficiently.

You misunderstood the position. The position is that the field hands that lost their jobs due to mechanization should receive compensation that would allow them to move and retrain. And the logical source of that compensation is a tax on farms that take advantage of mechanization, rather than the tax on everybody.

And by the way you did not answer my question: with the incremental unit cost of near-zero what basis do you have for saying that taxing engineering outsourcing (as opposed to taxing everyone to get the same benefits) will have major effect?

Steve Carr notes: "the case for comparative advantage does not rest on the assumption that capital is immobile. Ricardo did assume, in his original thesis, factor immobility, but it has long since been proved that comparative advantage holds even in a world with mobile factors."

Can you (or others) help some of us who are a bit less well-read to better understand this "proof" (a couple of notable hyperlinks would help). Also, what are the contemporary assumptions that underlie theories of comparative advantage? And how well do those assumptions hold up in the world in which we live?

thanks, dave.

Bubba, the logical source for compensation for displaced farm workers is not the farm that mechanizes. Businesses do not owe their workers jobs, any more than workers owe businesses their labor. If a business wants to shut down, or invest in new technology, it should be able to do so freely, just as workers who want to quit should be able to do so. That's the only way to maximize productive investment and keep markets as efficient as possible. Paying for retraining, etc., is a social responsibility. The state should pay for it.

There's also a practical question here, too. If businesses have to pay compensation for displacing workers, they will hire fewer workers to begin with. I don't see how this is a social good. Finally, taxing businesses really means taxing consumers. Here again, I fail to see the logic that says that people who shop, for instance, at Wal-Mart, should be forced to pay higher prices to help retrain textile workers. It seems far more just to use revenues raised by a progressive income tax to pay for the retraining.

As for the outsourcing question, it's not clear to me why you think the particular economics of the industry should shape national policy. From a political/ethical perspective, there's no good reason to treat programmers differently from steelworkers or textile workers. An outsourced job is an outsourced job. If we're not going to tax textile manufacturers (and I don't think we should), there's no logic in taxing software companies. But in any case I'm not sure I follow the logic of your argument. Software companies have to pay hefty upfront labor costs in order to develop programs. If those costs become significantly higher -- as they would be in any scheme that required companies to pay compensation for outsourcing -- they will develop fewer programs, or they will employ fewer people in writing the programs they do develop and just work them harder, or (as in the case of startups), they just won't start up at all. The fact that software is cheaply replicable is irrelevant to this point. Your argument suggests that software companies should be indifferent to the cost of labor. But if this were the case, they wouldn't be bothering to outsource.

Stirling Newberry wrote, "One of the principle ideas of modern liberalism and the progressive taxation system was that it took money from areas of high liquidity - that is taxing the high ground rent of labor in cities - and moved it out into the country side."

What is "ground rent of labor"?

Really, what should be done is taxing away *Ricardian land rents*, which are otherwise just a government handout to landowners. Taxing away Ricardian rents is a win-win: it both promotes efficient use of resources (no more land held idly by speculators) and is, on average, more equitable (to the extent that land is held by the wealthy).

"THAT, based on standard neoclassical (HO)trade theory, free trade between a relatively small, but rich high-wage country like the United States with much more populous low-wage countries like China and India ... "

Heckscher-Ohlin assumes identical production technology with homogeneous factors in the two countries. Under these assumptions, free trade equalizes factor prices: wages and interest rates in the two countries become equal. If this result is all you are asserting, you are completely correct, and you deserve to win at the expense of anyone dumb enough to accept your wager. Congratulations.

Now U.S. real output per worker in 2000 was 10.4 times the Indian level, according to the Penn World Tables. With identical production technology, this discrepancy in labor productivity can be due only to the difference in capital endowment. How big a difference? Using a Cobb-Douglas production function with a labor share of 0.7, the U.S. capital stock per worker must be about 2400 times the Indian, and real return to capital in India about 240 times the U.S. level.

It just isn't so. U.S. wages are not higher just because of a higher capital endowment, but also because of better labor quality and better technology.

Where's Teddy R when you need him?

Daniel: Thanks, you beat me to the punch. When people talk about factor price equalization they have to keep in mind what the factors really are. In the case of labor it's effective units of labor, not hours of labor. Human capital and institutions matter a great deal for productivity even with freer trade, and this is why we're richer than China and India. It sure isn't capital intensity.

Keep this all in perspective though; increased trade in textiles and such can particularly nice for poor people, but reasonably good education and macroeconomic policy are more important to pull people out of poverty. Trade is a second-order issue compared to these things, particularly education quality. Alas, there are even bigger impediments to improving education than to expanding trade.

Steve Carr writes: Paying for retraining, etc., is a social responsibility. The state should pay for it.

It should but it won't. US is not moving to single-payer health insurance, education and medical services are getting more expensive every year and unemployment assistance is a very short-term proposition. You do not have a choice of taxing outsourcing or setting up a social safety net. You have a choice of leaving things as is (and leaving outsourced employees high and dry - most likely) and a small chance of a special foreign labor tax that would go to retraining, health and live expenses of those displaced by outsourcing.

Steve Carr writes: If businesses have to pay compensation for displacing workers, they will hire fewer workers to begin with.
...
As for the outsourcing question, it's not clear to me why you think the particular economics of the industry should shape national policy.

As it happens, it is the industry doing outsourcing. Several people suggested we discuss the effects of outsourcing of economics professors but it does not seem to be a problem at this time. And the key about IT industry is that the labor cost does not affect the incremental unit price. The number of CDs produced with Oracle or Windows is the same whether outsourcing is taxed or not.

read this and you'll get Luke Lea's joke...

http://webapp.utexas.edu/blogs/archives/bleiter/000969.html#000969

didn't notice regular links were disabled

For Luke Lea wrt my claim for the $1000:

I am a reputable economist. I prefer to be anonymous in blogs but I will reach you by email as I think you ask with sincerity. But you probably won’t like what I write below. I now see your H-O, no redistribution from capital owners catch.

For Eli Rabett wrt 'Assume ...the machinery is inexpensive... We lose.'

In some sense you are right too, based on your assumptions, but you did not close the loop. You need to explain 'trade'. Where would country B be selling what they produce? and what would they receive in return if they produced the whole 10 hours of work product in my example. They could not sell it to country A because they have no income. They could sell between themselves, but that's not trade and would have no effect on country A.

Maybe I was too tricky with my 'How do we know that there is some work in country A that those in country B would find to increase in their wage and those in country A also would be happy to turn over to them? Must be, or else there would be no incentive to trade in the first place.'

And I also know that in reality some in the US lose do to free trade because they have nothing more to offer in the labor market that what low wage country workers offer (simply a story of higher supply lower equivalent price fro complete substitutes-- wages in this case).

But also, if the free trade story was as flawed as other posters here claim, the unemployment rate in the US would have been 10% throughout the 1990s when the trade deficit was also large. Furthermore, in 2004 I would have to pay someone more than $10+ a hour to cut my lawn (actually I do it myself, I need the exercise, but you get the point).

For Danile Lam:

Yeah, in H-O factor prices equalize with equal technology, but they equalize to produce higher total social welfare in both countries if they have different endowments or specialties of any kind ! But you are right, with H-O model, Luke allows only one conclusion that wages in the two countries move toward each other with the high wage country falling (My favorite web explanation is http://internationalecon.com/v1.0/ch60/60c010.html)

But let’s be realistic and realize that there must be a reason for trade! They have something we want, they have something I want, and technology is not equal or so easily transferable and the dynamics of trade are technology-enhancing for all.

Finally, Luke, why assume NO MEASURES ARE TAKEN in the rich country to redistribute income from capital to labor. Capital should prefer this over protectionism and a shut down of trade. Thankfully you did not make it a $1000 bet, but a gift with no downside risk for me.

'Of course' is cyanide of the mind.

Victurus te saluto - He who is about to win salutes you

Relata refero - I tell what I have been told. (Herodotos)

Aliena nobis, nostra plus aliis placent - Other people's things are more pleasing to us, and ours to other people. (Publilius Syrus)

Sane ego te vocavi. Forsitan capedictum tuum desit - I did call. Maybe your answering machine is broken

Nullum saeculum magnis ingeniis clausum est - No generation is closed to great talents. (Seneca)

Pueri pueri, pueri puerilia tractant - Children are children, (therefore) children do childish things

Propino fibi salutem! - Cheers!