Of all the surprising things to have happened on this weblog, the comment reaction to what I saw as an innocuous post quoting Jared Bernstein on outsourcing was the most surprising. The assertion that outsourcing was more benign if it put downward pressure on the incomes of the yuppie rich than if it put downward pressure on the incomes of the working class drew the most fire.
But I think I'm right. And here's why:
A Finger Exercise:
Let's try a finger exercise to evaluate the effects of expanded international trade via "outsourcing" on an economy. We'll set up a simple model--not a realistic model, an unrealistic model, a model that has only the features we absolutely need to understand the principal impacts of expanded trade on an economy.
Begin with the assumption that the economy has two kinds of people in it--workers and yuppies. Workers make things, or transport things, or provide services like gardening of hairdressing. All workers are alike, and let's assume that each of them earns a fixed amount of 40,000 thalers a year. Yuppies are doctors, investment advisors, lawyers, moviemakers, et cetera. The population is made up of 75% workers and 25% yuppies.
Both workers and yuppies spend half their incomes on things made by workers, and the other half on things made by yuppies. That means that 50% of the income flows to the 75% of the population who are workers, and thus that a worker earns 2/3 of the average income. 50% of the income flows to the 25% of the population who are yuppies, and thus that a yuppie earns twice the average income--three times the working-class income, or 120,000 thalers a year.
Each worker, with his or her 40,000 thalers, thus can afford to buy and consume 20,000 thalers of worker-products--the stuff made by 1/2 a worker--and 20,000 thalers of yuppie-products--the stuff made by 1/6 a yuppie. Each yuppie, with his or her 120,000 thalers, thus can afford to buy and consume 60,000 thalers of worker-products--the stuff made by 1 1/2 workers--and 60,000 thalers of yuppie-products--the stuff made by 1/2 a yuppie.
That's how the economy works in the absence of "outsourcing" and trade in general.
Adding Trade-and-Outsourcing:
Now let's add foreigners to the model. And let's consider two cases, in the first of which foreigners have a comparative advantage in making yuppie-products, and in the second of which foreigners have a comparative advantage in making worker-products. Let's consider the first case.
Case 1:
Foreigners are willing to buy (or sell) worker-products at a price of 40,000 thalers for one worker's annual output. Foreigners are unproductive at making yuppie-products: it requires five of them to produce as much as one yuppie can make. But foreigners are also badly paid: foreigners making yuppie-products are paid 20,000 thalers a year, so that it costs only 100,000 thalers a year to "outsource" one yuppie's worth of work.
What does this international trade--this "outsourcing"--do to the economy's equilibrium?
First of all, people start buying yuppie-products made overseas: they are cheaper, after all. The fall in demand causes the domestic prices of yuppie-products to fall, and that causes the incomes of yuppies to fall. When yuppie incomes fall to 100,000 thalers a year there is no longer downward pressure on them from foreign competition, and they stabilize.
Workers still spend 20,000 thalers a year on worker-products, and still get the goods and services produced by 1/2 a worker. They still spend 20,000 thalers a year on yuppie-products, but with the new lower prices of yuppie-products they can thus buy the products made by 1/5 a yuppie, not 1/6. Their real standard of living has thus been boosted by 1/30 of a yuppie's annual production. At the old pre-trade prices, this is 4,000 thalers a year--a real 10% boost in workers' standard of living.
Yuppies now have lower incomes: they can only spend 50,000 thalers a year on worker-products (the amount made by 1 1/4 workers), and they can only spend 50,000 thalers a year on yuppie-products (but the price decline means that this still buys them the output of 1/2 a yuppie). Yuppie real incomes have fallen by 1/4 of a worker's production--that's 10,000 thalers a year--a real 8.3% decline in yuppies' standard of living.
Now we can evaluate this change in four ways:
(1) Let's look at the worst-off--the workers. Their real incomes have risen by 4,000 thalers a year. That's a good thing.
(2) Let's look at total national product. The 75% of the population of the workers have seen their incomes rise by $4,000 thalers a year; the 25% of the population who are yuppies have seen their real incomes fall by $10,000 thalers a year. That means that the average person's real income has risen by $500 thalers a year. That's a good thing.
(3) Let's assert the psychological law that no matter how rich or poor you are that equal percentage increments to your income have equal effects on your material well-being. 75% of the population has seen their real incomes rise by 10%. 25% of the population has seen their real incomes fall by 8.3%. The average proportional increase is 5.4%. That's a good thing.
(4) Let's look just at the rich yuppies, because they are the people we see on TV and who give big campaign contributions. Their incomes have fallen by 10%. Bummer.
Case 2:
Now let's consider the second case, in which foreigners have a comparative advantage in making worker-products and a disadvantage in making yuppie-products. Let's model this by assuming that foreigners have a strong demand for yuppie-products and are willing to pay 150,000 thaler's for a year's production. And let's keep the assumption that foreigners are willing to buy or sell worker-products for 40,000 thalers for one worker's annual output. What now is the effect of trade on equilibrium?
First of all, strong foreign demand for yuppie-products pushes their prices up and yuppie incomes up to 150,000 thalers a year. Yuppies then buy 75,000 worth of worker-products--1 7/8 workers' worth--and 75,000 worth of yuppie products--1/2 a yuppie's worth because of the higher prices. Their real annual purchases have gone up by 3/8 of a worker's production--an increase in their real annual incomes of some 15,000 thalers each.
Workers are still earning 40,000 thalers, still spending 20,000 on worker-products (and buying the output of 1/2 a worker), and still spending 20,000 on yuppie-products. But the higher price of yuppie goods means that this buys them not 1/6 of a yuppie's production, but only 2/15. Their annual purchases have fallen by 1/30 of a yuppie's annual production--a fall in their real standard of living of some 4,000 thalers each.
Once again, we can evaluate this change in four ways.
(1) Let's look at the worst-off--the workers. Their real incomes have fallen by 4,000 thalers a year. That's not good.
(2) Let's look at total national product. The 75% of the population of the workers have seen their incomes fall by $4,000 thalers a year; the 25% of the population who are yuppies have seen their real incomes rise by $15,000 thalers a year. That means that the average person's real income has risen by $750 thalers a year. That's a good thing.
(3) Let's assert the psychological law that no matter how rich or poor you are that equal percentage increments to your income have equal effects on your material well-being. 75% of the population has seen their real incomes fall by 10%. 25% of the population has seen their real incomes rise by 12.5%. The average proportional fall is 4.4%. That's not good.
(4) Let's look just at the rich yuppies, because they are the people we see on TV and who give big campaign contributions. Their incomes have risen by 12.5%. Hooray!
Evaluation:
Let me note one hidden assumption: full employment. The Classical Economists used to argue for a theoretical principle called Say's Law: supply creates its own demand, so the economy will naturally return to full employment, and we don't have to worry about the effect of trade on the number of jobs. It turns out that Say's Law is false in theory, but it is the job of the Federal Reserve to make it true in practice. If you are unhappy with the overall level of employment, complain about the Federal Reserve's monetary policy (and about the president and Congress's fiscal policy), not about trade.
Now, what's our bottom line going to be? It seems pretty clear to me that in the first case--in which workers' incomes go up, average incomes go up, the average proportional change in incomes is greater than zero, and only yuppies suffer--that trade leads to a better society. It is richer and more equal. If you were placed behind a veil of ignorance (i.e., did not know whether you were a worker or a yuppie) and asked to choose whether you would rather live in the no-trade or the trade-and-outsourcing economy, you would almost surely choose the trade-and-outsourcing economy. Yuppies do suffer as a result of trade and outsourcing, but they are already doing well: do they have any just claim to maintain their (large) share of the income distribution? I don't see any reason to block outsourcing or to require that it be accompanied by public policies to enrich yuppies.
The second case is harder. Workers' real incomes fall, total national product rises, the average proportional change in incomes is negative, yuppies make out like bandits. We have a richer and more unequal society as a result of trade and outsourcing. But the rising tide has not lifted all boats: it has swamped most.
Here there is a very strong case for the proposition that trade liberalization needs to be accompanied by redistributional social insurance schemes in order for it to count as an increase in overall social welfare.
What principles emerge from this exercise?
(1) Markets are powerful social allocation mechanisms, with many virtues--and trade-and-outsourcing are at bottom just another use of markets to let people decide from whom they want to buy and to whom they want to sell.
(2) In the absence of big externalities, unhappiness with what market systems produce is usually unhappiness about not the volume of production but the process of distribution.
(3) When expanded trade leads foreigners to compete with the relatively rich, the distributional consequences are benign.
(4) When expanded trade leads foreigners to compete with the relatively poor, the distributional consequnces are not benign.
In this context, it is interesting that the journalistic upset about outsourcing appears to arise because of the impression that foreigners are competing with the relatively rich--radiologists, programmers, et cetera. I believe that we should worry a lot more about outsourcing if it puts downward pressure on the salaries of the working class than if it puts downward pressure on the incomes of the yuppie class. But that's not what's in the journalistic zeitgeist.
Posted by DeLong at April 7, 2004 10:50 AM | TrackBack | | Other weblogs commenting on this posthttp://www.nytimes.com/2004/04/06/business/worldbusiness/06trade.html
Central American Deal Ignites a Trade Debate
By ELIZABETH BECKER
SAN SALVADOR - Marina del Carmen Leiva, a 32-year-old mother, struggles to keep her job earning $152 every month bent over sewing machines, making clothes for famous American brand-name companies.
The pressure to produce garments quickly is so great, she says, that she and her co-workers are regularly refused permission to visit the bathroom or get a drink of water for fear it would slow the line.
"If they would just treat us like human beings, even without raising the minimum wage, my life would be better," said Mrs. del Carmen Leiva, a slender, dark-eyed woman who is the sole supporter of her three children.
With the Bush administration asking Congress to approve the Central American Free Trade Agreement late this spring, the next big battle over the politically explosive issue of trade will revolve around people like Mrs. del Carmen Leiva and their labor rights....
Cafta would create a free trade zone between the United States and the five Central American nations, immediately dropping most duties for imports. It would also help prepare the textile industry in all the countries for stiff international competition next year, especially from China, when the global textile quota system is eliminated under an global trade agreement. The Central American nations opened their protected insurance, telecommunications and agricultural sectors to American competition, but the United States resisted requests to reduce its annual $19 billion in agriculture subsidies or allow more immigration....
http://www.nytimes.com/2004/04/07/international/asia/07beggars.html
China Is Paying a Price of Modernization: More Beggars
By JIM YARDLEY
BEIJING - His fingernails are lined with dirt as Zhang Tianhuo, 76, crouches on the stairs at the subway stop and shakes his empty noodle bowl. On another stairwell, Wang Xiujun, 70, rattles his tin cup. An old man with bent teeth has staked out yet another landing, and a wizened farmer has secured a spot near the entrance.
A short walk away, three ragged mothers watch without shame as their tiny children flock to patrons outside a coffee shop, pleading with dirty faces and shaking empty cups. "I have no choice," one mother, Zhang Yali, explained about why she allowed her 4-year-old son to beg. "The money we get lets us survive and eat."
For many years, beggars were rarely seen in the showcase cities of this country that still calls itself a socialist state. Image-conscious city officials ordered the police to arrest panhandlers and other homeless people, many of whom had traveled illegally from the destitute countryside.
But in the past six months, the number of beggars in Beijing and other Chinese cities has exploded. Their presence is another reminder of the growing divide between rich and poor in China as it rapidly switches to a market economy. But it is also an unanticipated result of a major civil rights victory last year - a curb on police arrest powers.
The rise of begging has also raised a pragmatic question all too familiar in the West: What should be done about them? ...
Isn't this model missing a third, and important class? The Upper Crust Class that gains from the yuppies losses? This doesn't sound like a freer society. It sounds like modern feudalism.
Posted by: Chibi on April 7, 2004 11:33 AMhttp://www.nytimes.com/2004/04/05/opinion/05HERB.html
We're More Productive. Who Gets the Money?
By BOB HERBERT
It's like running on a treadmill that keeps increasing its speed. You have to go faster and faster just to stay in place. Or, as a factory worker said many years ago, 'You can work 'til you drop dead, but you won't get ahead.'
American workers have been remarkably productive in recent years, but they are getting fewer and fewer of the benefits of this increased productivity. While the economy, as measured by the gross domestic product, has been strong for some time now, ordinary workers have gotten little more than the back of the hand from employers who have pocketed an unprecedented share of the cash from this burst of economic growth.
What is happening is nothing short of historic. The American workers' share of the increase in national income since November 2001, the end of the last recession, is the lowest on record. Employers took the money and ran. This is extraordinary, but very few people are talking about it, which tells you something about the hold that corporate interests have on the national conversation.
The situation is summed up in the long, unwieldy but very revealing title of a new study from the Center for Labor Market Studies at Northeastern University: 'The Unprecedented Rising Tide of Corporate Profits and the Simultaneous Ebbing of Labor Compensation - Gainers and Losers from the National Economic Recovery in 2002 and 2003.'
Andrew Sum, the center's director and lead author of the study, said: 'This is the first time we've ever had a case where two years into a recovery, corporate profits got a larger share of the growth of national income than labor did. Normally labor gets about 65 percent and corporate profits about 15 to 18 percent. This time profits got 41 percent and labor [meaning all forms of employee compensation, including wages, benefits, salaries and the percentage of payroll taxes paid by employers] got 38 percent.'
The study said: 'In no other recovery from a post-World War II recession did corporate profits ever account for as much as 20 percent of the growth in national income. And at no time did corporate profits ever increase by a greater amount than labor compensation.' ...
Posted by: anne on April 7, 2004 11:48 AMhttp://www.epinet.org/content.cfm/webfeatures_snapshots_04062004
'Insourcing' is not the answer
It has been suggested that U.S. jobs lost to outsourcing are offset by the millions of American workers hired by foreign companies. In fact, this insourcing has resulted in the loss of 2.78 million U.S. jobs in foreign-owned firms between 1991 and 2001
Posted by: anne on April 7, 2004 11:56 AMhttp://www.epinet.org/content.cfm/webfeatures_snapshots_04072004
Insourcing worsens U.S. trade balance
Not only does insourcing fail to balance out the jobs lost to outsourcing, but it also leads to soaring U.S. trade deficits.
Posted by: anne on April 7, 2004 11:57 AM1. A nicely done pedagogical piece. My one quibble is that it won't be obvious to people why modeling the low-wage competition case can be done by having foreigners willing to pay more for yuppie products. (As a macroeconomist, wouldn't you agree that people find it easier to grok a decrease in the nominal than in the real wage?) It would be more intuitive if, as in the yuppie case, the foreign workers just worked for less. I think your present formulation is a needless barrier between the reader and your point.
2. What about this question: suppose you felt that our political system makes it easier to fight the regressive distributive effects of expanding free trade through restricting trade, rather than taxing and redistributing the gains for trade. (It's been argued, for instance, that the US market-liberal mindset is relatively congenial to protectionism, which doesn't involve active intrusion in any domestic markets or doing any overt redistribution, which compensating trade losers might involve.) Would you still argue for free trade then? Shouldn't those likely to be hurt by expanded trade at a minimum demand their compensation before, not after, they stop fighting to block it?
Posted by: David W. on April 7, 2004 11:57 AMhttp://www.epinet.org/content.cfm/webfeatures_snapshots_archive_03242004
High-paying software jobs being moved abroad
Software jobs, which pay some of the highest wages in America, have fallen sharply since 2000. These jobs have disappeared despite the fact that software sales to U.S. businesses in 2003 were up 4% over 2000. Comprehensive data on the number of U.S. software jobs that have moved overseas is hard to come by, but persuasive indirect evidence points towards the significant movement of software jobs to India (the most prominent of many countries to which U.S. software work is being moved).
Posted by: anne on April 7, 2004 12:18 PMhttp://www.epinet.org/content.cfm/webfeatures_snapshots_archive_03292004
Soaring increase in high-tech exports from China erodes U.S. employment
It is often argued that free trade benefits all countries because it allows them to specialize in goods for which they have a comparative advantage, yielding increased efficiency and productivity in each economy. In the United States, economists and public officials frequently claim that trade will reduce production of low-tech goods such as textiles and apparel and increase production of high-tech goods in which the United States has a comparative advantage.
For example, in a recent address in Washington, D.C., World Trade Organization (WTO) Director Supachai Panitchpakdi said that for every U.S. job threatened by imports, a growing number of high-paid, high-skilled jobs are created by exports.
The theory of comparative advantage suggests that low-wage countries such as China should specialize in low-tech goods such as textiles, apparel, toys, and furniture. However, as shown in the figure below, China has rapidly increased the share of middle- and high-tech products in its exports during a period in which its total exports nearly tripled....
Posted by: anne on April 7, 2004 12:19 PMModels should be simple but not simple-minded. This model doesn't seem to characterize the outsourcing we are seeing in the IT marketplace. Do the low wage workers directly consume the output of the better paid "yuppie" IT workers? No. IT workers (mostly) produce goods consumed by corporations. The goods allow the corporations to operate at lower cost. The lower costs might result in lower cost goods (improving the lot of the low wage folk as well as the high wage folk in the model you propose) or it might result in retained earnings that get invested in the US, creating more jobs. Or it might be invested abroad, creating more jobs there. Or it might be used to increase the compensation of the corporate managers, or it might be supplied as dividends to enrich the investors. None of these options is included in your model. Don't you think your model needs improvement?
Posted by: cafl on April 7, 2004 12:23 PMOr what if the very substantial demand leakage of a 5%GDP trade deficit makes it physically impossible to achieve full employment, even at historically low interest rates?
I suppose, of course, the answer is for _all_ wages to fall, but I doubt that the fall in import prices will compensate. Good luck selling this to the public.
Posted by: marku on April 7, 2004 12:32 PMChibi's objection ignores your preface about the nature and purpose of the model, but otherwise makes a good point. In today's tax-political environment, it looks like we are shaping up a competition between the income-tax-paying classes (yuppies) and the classes in dire need of retirement benefits (workers). The rich are going to miss the fun.
It seems to me that the workers have already been through their "outsourcing" trial, in the form of straightforward importation of manufactured goods. Now, it is the flowering of the service sector, the massive expansion of transmittability and tradability of services, that has put yuppies in the crosshairs. When will the rich have their turn? Well, since their function seems to be to arrange the political system so that they benefit in fair weather and in foul, maybe they won't get a turn. So they have to miss the fun twice, once because they aren't in the game - don't produce goods or services (that anyone other than stock holders consumer), so can't find their pay cut by trade - once during the contest over redistribution. So sad.
Posted by: K Harris on April 7, 2004 12:35 PMK Harris
Just the point. There simply are no adaquate middle class worker protections against job loss due to out-sourcing or wage and benefit limitations. The wealthiest reap the gains of company earnings that are bolstered by out-sourcing. The wealthiest will have no turn. Remember, capital gains taxes are at 15%.
Posted by: anne on April 7, 2004 12:46 PMOK, I'm really showing my dislike of standard economic reasoning, but this model doesn't prove anything. There are obviously alternative models, and somewhere there has to be an argument that this model captures what is really going on (or just the important parts of what is going on). Can such an argument be produced? I don't think so.
So what we have is a model purporting to explain what we should or should not think about real events in the economy, but there is no way to evaluate whether the model pictures reality well enough where it *can* say anything significant about these events.
Posted by: Andrew Boucher on April 7, 2004 12:48 PMAhhh. Workers and Yuppies. Don't you just love a model that spins itself?
How about labeling the two groups SweatShopVictims and WhatWeAllWantOurKidsToBes?
Our country used to make tangible stuff. Not so many of us do that anymore, and fewer will be doing it tomorrow. But that used to be ok because there was all this service stuff, most of it involved in the design and manufacture of intellectual property. These jobs pay well, the work environment is stimulating and pleasant, and you can do them for a lifetime without major body systems wearing out. Now, perhaps, these jobs are going... Models are great, but I think this one needs some refinement.
Posted by: Nat on April 7, 2004 01:42 PMRemember how radical the tax law changes have been. Dividend and capital gains at 15%, heading to no inheritance tax, and so on. We are out-sourcing for the good of the wealthiest, for the good of corporate earnings, a bit for lower prices, but at the large expense of the middle class.
Posted by: anne on April 7, 2004 01:48 PMNice try. You did not get wrist-slapped for "The assertion that outsourcing was more benign if it put downward pressure on the incomes of the yuppie rich than if it put downward pressure on the incomes of the working class drew the most fire."
You got wrist slapped for the assertion that the productivity gains from outsourcing would result in raising the incomes for the working class. Most of your critics (myself included) suspect that working class wages may even be suppressed by internal competition, and that a "feudal elite" may capture the majority of the gains.
You actually seemed to be agreeing with us in your earlier posting of an article/speech draft.
Not to beat this too hard -- except you tried to weasel out by misrepresenting your critics to make them (us) seem less cogent. Your more recent writings are excellent and interesting.
That's ok, you do better at admitting mistakes than either GWB or The Econoomist.
Posted by: John Faughnan on April 7, 2004 01:51 PMBrilliant article, Brad.
Remember the situation I told you about where I wanted to hire a project manager at $35k to start at an employment fair back in 2000 when a prospect sniffed that she could get $80k at a software firm for the same duties?
Isn't it possible that there was a bubble in yuppie salaries before 911 and that its' bursting - accelerated by outsourcing - will actually result in more jobs created as yuppies become more affordable to potential employers?
Adrian
Posted by: Adrian Spidle on April 7, 2004 02:10 PMGive us fair labor and enviornmental standards that are well enforced in trade partners, and bargaining power and a decent safety net for middle class labor and all will be well.
A series of articles on Chinese labor problems:
http://www.nytimes.com/2003/12/29/international/asia/29CHIN.html?ex=1081483200&en=685727ee9021f5d4&ei=5070
When Chinese Workers Unite, the Bosses Often Run the Union
By JOSEPH KAHN
SHENZHEN, China — The hall had all the trappings of a solemn political ceremony in Communist China, a dais with officials and executives in the seats of honor, ballot collectors and ballot counters, and a big red banner that announced a "democratic union election."
Liao Yuanxin, the local chief of the government's All-China Federation of Trade Unions, listed candidates to represent workers of Neil Pryde, a foreign-run sportswear factory. For union committee member: two workers and two company managers. For vice chairman: the human resources director. For chairman: Huang Hongguang, a top factory boss.
Left off the dais, and off the list, was Liu Youlin, a dogged 29-year-old clothing cutter who had campaigned, petitioned and agitated until officials agreed to set up the union. But according to his account and those of other workers present, he made himself heard.
"I object to the factory manager being named head of the union," Mr. Liu shouted from the floor, interrupting Mr. Liao's address. "A boss cannot represent workers."
When the vote proceeded anyway, fellow workers protested by denying the requisite 50 percent majority to all but the two worker candidates, rendering the new union leaderless — and effectively stillborn....
Posted by: anne on April 7, 2004 02:14 PMVery nice example, although it seems to happen in a strange place, where companies aren't owned by anybody. Maybe a communist country? It makes the model a bit less useful. ¿Could you Brad explain why you insist on seeing this as only a blue collar-white collar affair and excluding all the other factors from the equation?
Posted by: Carlos on April 7, 2004 02:42 PMJohn Faughnan wrote:
"You got wrist slapped for the assertion that the productivity gains from outsourcing
would result in raising the incomes for the working class."
But, that is what happens in the model BdL presented. The "workers" (or "SweatShopVictims") experience a real increase in their standard of living in Case 1.
John Faughnan added:
"Most of your critics (myself included) suspect that working class wages may even
be suppressed by internal competition, and that a 'feudal elite' may capture the
majority of the gains."
It is true that Brad's model would have to be expanded in detail to include a reflection on the possibility of a "feudal elite" (or "MemberOfTheUpperCrustClass") capturing the returns instead of the "workers." Can you describe a larger model that adds this group and how they capture the benefits? Like BdL's model, the simpler you can make it while capturing the key effect you want to capture, the better. It might even work with just two domestic groups, the "feudal elite" and "others".
Posted by: Tom on April 7, 2004 02:58 PMThis question is out of place, and for that, I apologize. But I am curious, is Gene Epstein, quoted by Idiot Boy Don Luskin because he bashes Paul Krugman, on his stupid site, right here?
http://online.wsj.com/barrons/article_print/0,,SB108094907731273152,00.html
Posted by: Brian on April 7, 2004 03:21 PMOK I understand the model with no foreign trade. You have a 2X2 matrix A
.5 .5
.5 .5
and the solution to the closed model is
A col_vector(Y_worker, Y_yuppie)= col_vector(Y_worker, Y_yuppie)
A has eigenvalues 0,1 so it has a (up to scale) unique fixed point. BTW this is a simple case of the Perron Frobenius Theorem.
Now in case 1, it would appear that the only function of imports is to depress the wages of yuppies. This works even foreigners produce 0 yuppie goods. But isn't the model really indeterminate? In other words, there doesn't seem to be a unique solution to the allocation of the market between domestic yuppie suppliers and foreign suppliers. I guess one needs some additional equilibrium consideration coming from the economics of the problem.
However, I am more troubled by other assumptions implicit in this kind of model, namely the fact that human lifetimes are not infinitely pliable.
Posted by: CSTAR on April 7, 2004 03:33 PMAdrian:
"Brilliant article, Brad.
Remember the situation I told you about where I wanted to hire a project manager at $35k to start at an employment fair back in 2000 when a prospect sniffed that she could get $80k at a software firm for the same duties?"
I don't recall that. Are you claiming that you are or were a manager? Riiiiiiiiiigggggghhhht.
"Isn't it possible that there was a bubble in yuppie salaries before 911 and that its' bursting - accelerated by outsourcing - will actually result in more jobs created as yuppies become more affordable to potential employers?"
Well, how have the past few years been, in terms of new hiring and new wages?
Posted by: Barry on April 7, 2004 03:48 PMI still have yet to see any of the "outsourcing is somehow bad for third world workers" types address the fundamental fact that this is totally wrong. IT outsourcing doesn't go to child labor or wage slaves or whatever and it doesn't get third world workers into no-skill factory hellhole jobs.
On the contrary it is an excellent contributor to the economic wellbeing of countries such as China and India. "Outsourced" jobs are middle class or better in those countries, they are skilled, and they contribute to the development of productive businesses that can compete in the world market.
And speaking as a silicon valley software engineer, I am shocked at how many of the people who worried that American workers would lose their jobs and get pushed into poverty by the transfer of jobs to some "wage slave" in the third world who barely benefitted, react EXACTLY THE SAME to the situation of extremely well off employable IT types losing some jobs at the expense of putting those same good, middle to upper middle class IT jobs into a poor developing country.
Because all the major arguments (or should I say rationalizations) used to justify the horror at third world manufacturing, don't apply to IT outsourcing.
IT workers who lose their jobs in the US are not going to become some sort of permanently unemployed underclass. During normal economic times (for example, once the current recession is over) IT workers are in high demand and have skills that translate to many different kinds of work. And I don't mean Wal-Mart work... in the long term, there is no worry that IT workers will suffer higher unemployment. It's not even likely that there will be substantial salary losses, since at the same time that outsourcing is going on, the long term demand for IT labor will recover and continue to increase.
And from the perspective of the countries getting these job opportunities, there is no significant downside. They're good jobs which provide a good standard of living, and they lead to increasingly self-sustaining economic development and better integration with the high technology world market.
And of course as Brad points out, in the case of outsourcing the lower prices going to the consumer are captured by everyone, but the downward wage pressure applies primarily to workers who are very well off and have very high wages to begin with.
Weakening of "yuppie" bargaining power may lead to an increase in corporate profits - maybe - but frankly that only happens because US domestic policy is so insanely biased toward corporate profits, executive perks, and lowering the tax burden on the rich. The effect of outsourcing on this balance will be utterly insignificant compared to domestic policies such as the Bush income and capital gains tax cuts, the estate tax rollback, the policy of not expensing stock options, and so on. Working for change on those fronts is ENTIRELY politically possible, in fact moreso than anything that would actually cause a serious reduction in outsourcing.
And unlike working against outsourcing, repealing the tax breaks on the wealthy doesn't totally fuck over the emerging Indian and Chinese middle classes and their tech industries.
This is a stupid model.
It admits from the outset that it is "unrealistic". If it is not realistic, just what the hell is it good for?
In any case, the empirical evidence speaks for itself. Has there been a recorded increase in the wages received by low-paid workers in the past few years? Somehow I doubt it.
Bob Herbert's NYT column today points out that wages are receiving a lower share of higher output than at any time since World War II. Lower prices due to outsourcing aren't going to raise low-wage workers' living standards. They're going to higher corporate profits and executive compensation. Rather conveniently, executives aren't being outsourced.
You can make the case that outsourcing does more good for India and China than it hurts the US. You can also argue that poor countries need these jobs more than we do.
But you CANNOT argue that outsourcing will help American workers. That is just nonsense that flies in the fact of the experience of the past quarter century. Real wages have been flat for a long time, while most of the economy's gains accrue to a tiny elite at the top.
Posted by: Tyrone on April 7, 2004 05:29 PMAdrian Spidle: "Remember the situation I told you about where I wanted to hire a project manager at $35k to start at an employment fair back in 2000 when a prospect sniffed that she could get $80k at a software firm for the same duties?"
$35K at the commonly assumed 2080 hours works out to $16.83 per hour. What kind of project did you want to get managed for that?
Imagine an economy that produces only two things: hot dogs and buns. Consumers in this economy insist that every hot dog come with a bun, and vice versa. And labor is the only input to production.
OK, timeout. Before we go any further, I need to ask what you think of an essay that begins this way. Does it sound silly to you? Were you about to turn the virtual page, figuring that this couldn't be about anything important?
One of the points of this column is to illustrate a paradox: You can't do serious economics unless you are willing to be playful. Economic theory is not a collection of dictums laid down by pompous authority figures. Mainly, it is a menagerie of thought experiments--parables, if you like--that are intended to capture the logic of economic processes in a simplified way. In the end, of course, ideas must be tested against the facts. But even to know what facts are relevant, you must play with those ideas in hypothetical settings. And I use the word "play" advisedly: Innovative thinkers, in economics and other disciplines, often have a pronounced whimsical streak.
It so happens that I am about to use my hot-dog-and-bun example to talk about technology, jobs, and the future of capitalism. Readers who feel that big subjects can only be properly addressed in big books--which present big ideas, using big words--will find my intellectual style offensive. Such people imagine that when they write or quote such books, they are being profound. But more often than not, they're being profoundly foolish. And the best way to avoid such foolishness is to play around with a thought experiment or two.
From Paul Krugman's "The Accidental Theorist"
http://www.pkarchive.org/theory/hotdog.html
Tyrone ought to give it a read.
Where are the owners in this model?
The model also assumes there is perfect competition.
--
Many in the comments have challenge Brad, because the reality is that low wage workers are not getting higher real wages. But, this does not mean he is wrong; the outsourcing of tech jobs is probably not a big effect on the economy overall. So, you would not see any wage effect, or any effect would be far outweighted by other changes in the economy, like technological changes, or manufacturing offshoring.
The example shows why so many people do not see any reason to pursue advanced degrees. If they can forsee that their wages will be depressed by workers in India or China, why should they put themselves to the effort and expense to learn the discipline of medicine? Why should they study Hilbert spaces or the mathematics of folding proteins?
There are some of us who are driven by the intellectual pleasure of such work, and maybe we will do it even if it is not a plausible route to a stable financial future, assuming we can find some place in the United States to pursue the work. This model does not capture people driven by non-monetary goals. I seriously doubt that there are enough of them to provide the economic growth we desperately need.
Posted by: masaccio on April 7, 2004 08:02 PM"It turns out that Say's Law is false in theory, but it is the job of the Federal Reserve to make it true in practice."
I thought what holds true in theory could fail in practice and what fails in theory definitely fails in practice?
Posted by: bulent on April 7, 2004 08:09 PMDoesn't this model ignore the real issue -- policy-driven differentials in the cost of living cross-nationally?
In a country like the United States, an enormous amount of wealth is insulated from competition by the institutional framework of the economy. Assuming the cost of goods/services in these sectors falls LESS SLOWLY than the nominal wages of the lower classes, does it matter if things like consumer electronics become increasingly cheap in real terms? Health care and IPods are not exactly fungible.
No wonder the middle classes are increasingly frantic: pushed towards the working poor they are understandably yelping about conditions at the bottom. The problem isn't outsourcing at all, it is selective outsourcing.
Preferring monetary policy over fiscal policy to stimulate aggregate demand probably doesn't help either.
Posted by: trevelyan on April 7, 2004 10:02 PMBrad writes: Foreigners are unproductive at making yuppie-products: it requires five of them to produce as much as one yuppie can make. But foreigners are also badly paid: foreigners making yuppie-products are paid 20,000 thalers a year, so that it costs only 100,000 thalers a year to "outsource" one yuppie's worth of work.
Choose your assumptions right and you can "prove" anything. If foreign yuppie is paid 1/6 of a domestic one and his productivity is 1/5 (Brad's world), yuppies as a group lose 20% of income. However if foreign yuppie is paid 1/6 of domesitc one and 1/3 as productive (real world), yuppies as a group loose 50% of income and consumption of worker products drops by 1/4. So the workers are now paid 30K and yuppies 60K.
Now, this real world is not quite real yet - it assumes the salaries are not sticky at all. Lets assume they are 50% sticky. Yuppies now are paid 90K and run 50% unemployment, workers are paid 35K and run 15% unemployment - not so good. Of course we can go further and consider that unemployed yuppies become workers but I guess the point is clear: garbagge (assumptions) in - garabagge (conclusions) out.
bulent: Long time no read. Welcome back.
Brad: The assumption of full employment is indeed heroic. Also there are not just worker workers and yuppie workers, but also people collecting rents of all sorts and descriptions. The latter are not easily outsourced, and a good part of cost reductions in labor expenses will be soaked up by rent extraction and the financial system. The real income of workers will increase to the extent that they get price reductions on discretionary items at some percentage and forgo healthcare in exchange.
Very, very nice article on outsourcing Brad. One of the best I've read.
Posted by: Ian Welsh on April 7, 2004 10:08 PMI think I riffed on the original version of this thread on how outsourcing was at least in part a response to a disinflationary environment, evoking cost-cutting, price-reducing strategies by multinational oligopolists. Which would suggest a retention of the gains by those same together with an increase in their market power, as well as, correspondingly, their power over their work-force. This would also imply through an increase in the rate of profit, especially when competitive pressures were reduced through successful increases in market share and a relaxation of competition under lowered demand conditions, leading to an increase in the cost/price differential, to an increase in the market valuation of capital. Though, on the other hand, assuming such a fantasy were at all plausible, we'd be heading into a deflationary spiral.
Also, doesn't the domestic multiplier effect depend to some considerable extent on the velocity of its circulation? So, if domestic demand is sent abroad, since U.S. dollars are effectively an international currency, paying for oil and other commodities and financing bilateral trade between third parties, it might be some time before they arrive back past the Statue of Liberty, and most probably in the form of Arab sheiks investing in Wall St. instruments or foreign central backs depositing in treasuries to control their exchange rates. The stimulative effect of exports might be a long time in coming, especially so long as we continue with trade deficits/capital imports.
So not only should Prof. DeLong have complicated his model by including guppies, yuppies and pirhannas, but it should also be compared with alternative models, such as, e.g., a closed economy with aggressive fiscal demand stimulation, as the size of effects in unrealistic models should yield some comparative quantitative estimates. Though we wouldn't want him to wear himself out in spreading his beneficent intelligence.
Posted by: john c. halasz on April 8, 2004 12:06 AMAnyone know of any studies that reliably show the informational gap between the time when the comparative advantage of outsourcing has stabilized to the acting upon that information in halting outsourcing?
Posted by: bryan on April 8, 2004 01:04 AMGo Calton!
Several of the posts criticize Brad’s model for not including this or that. I even mention the absence of a capitalist class. Perhaps it needs to be pointed out that a 2 sector model, with no issues of worker longevity, no taxes, and so forth, is a heck of a lot easier to READ, as well as to write.
Brad had a point to make. It is one of many points that need thinking about, but it is just a whole lot easier to do this sort of stuff, and to take in this sort of stuff, by breaking it down into its simplest building blocks. So, please, don’t mistake a standard effort at making things clear, used throughout the economics teaching business, for an attempt to lay out all the factors. Want more factors? Do more simple models.
And by the way, jumping up and down and saying it’s just WRONG, can’t be true, blah. blah, misses another objective of those who try to understand complex systems by looking at simple models of the components. In all that complexity, it is very easy to make mistaken attributions of causality. There was a period of growth in trade and a flattening out of income, so trade is bad for income growth? Umm,…maybe there was an influx of workers at the same time, helping to hold down wages. Maybe trade held down prices so that, whatever happened to nominal wages, real wages grew (except in the trade competing sectors). Looking at the pieces, one at a time, in simple models, will probably go a long way to figuring out what caused what.
Signs that the "jobless recovery" is starting to generate jobs after all should not prevent our looking at some of the factors in the earlier slow growth of employment while the economy was growing vigorously otherwise.
Although the unemployment rate has been at near record lows, despite the slow growth of employment, this has been because of people who simply dropped out of the labor force, and were therefore not counted as unemployed. But think about it. Can you or I simply drop out of the labor force?
Of course not. We have bills to pay. Who can drop out then? Usually either those who are rich, those who are willing to live on handouts or young people still living with or off their parents.
According to the March 22nd issue of BusinessWeek magazine, "almost all" of the decline in the number of people seeking work "has occurred in the 16- to 24-year-old age group." Labor force participation among people older than that has continued to be what it usually is.
In other words, people who have to support themselves and their families were not the ones dropping out of the labor force. When things get tough for younger people, they can turn to mom and dad. Others turn to the taxpayers.
There is another aspect to this, however. Jobs have long been harder for young people to find. Some might say that this is due to their lesser skills and experience. But there is no inherent reason why low-skill people should be any less employable at low wages than high-skill people are at high wages.
The difference is that the government sets a lower limit to the movement of wages and also mandates working conditions and other benefits that are the same for everyone. All these things cost money and in effect make the minimum wage higher.
These things that cost employers money and cost workers jobs do not, however, cost anything to those who pass laws that enable the legislators to feel good about themselves and look good to the voters. These costs do not get counted.
California in general, and San Francisco in particular, think nothing of piling on goodies that employers are required to provide. Costs are no deterrent to the politicians, who can always call the goodies "rights" or part of business' "social responsibilities."
That kind of rhetoric is sufficient for those who have been through the dumbed-down education of our times. Costs, consequences, logic and evidence are concepts that are too old-fashioned for those who are in tune with our times.
The ability to ignore costs is at the heart of the attraction of government for some and of the expansion of government over time. Anything that might conceivably be of some benefit to someone, sometime, is worth doing, if someone else is paying.
In our own lives, we pass up all sorts of benefits when we decide that they are just not worth their cost. Maybe we would like to have a new car or add another room onto the house or take a vacation in the Caribbean but it may not be worth what it would cost.
So we keep driving the old jalopy, get used to not having a den and take in a few ball games during the summer instead of going on a cruise. Life is full of trade-offs when it is your own money.
Not so when it is the taxpayers' money or -- better yet -- money that business is forced to spend, which does not even show up on the government's budget.
One of the reasons costs do not get counted is that costs are often confused with prices. All the political noises being made about importing pharmaceutical drugs from Canada, or other schemes to reduce drug prices, do not face up to the 800-pound gorilla staring us in the face -- the $800 million it costs to develop a new drug.
You can control the price of drugs all you want, whether by imports from Canada or in numerous other ways, but if that $800 million is not covered, you are not going to keep getting new drugs created at the same pace. That's when sick people will pay the real cost in needless pain and preventable deaths.
But the politicians do not have to count any such costs, especially if those costs materialize only after the next election.
] Choose your assumptions right and you can "prove" anything. If foreign yuppie is paid 1/6 of a domestic one and his productivity is 1/5 (Brad's world), yuppies as a group lose 20% of income. However if foreign yuppie is paid 1/6 of domesitc one and 1/3 as productive (real world), yuppies as a group loose 50% of income and consumption of worker products drops by 1/4. So the workers are now paid 30K and yuppies 60K.
You have the same workers producing 1/4 less goods. Sure, if you introduce an arbitrary 1/4 drop in worker productivity, then the result is that everyone is worse off - but that is hardly surprising. Hardly a likely outcome, either.
This simple model assumes that unemployment is negligible, and that we can export other goods in trade for the yuppie goods imported. In practice the main problem is whether these are true. I think Brad has at least made the point that, if the trade system is working as it should, then yuppie outsourcing is even more beneficial than trade in raw materials or manafactured goods. The problems remain the same problems that trade has always had: will there be deficits or unemployment.
Posted by: cph on April 8, 2004 07:58 AMI noticed the model was all labor and no capital? Tell me you're kidding if you say that doesn't make a difference.
Posted by: Luke Lea on April 8, 2004 08:19 AMK Harris:
Point granted as far as it goes. But whether Prof. DeLong's little parable points to any real effect would depend on its quantitatve parameters, no? And the size of that effect, as well as its import, would depend on the overall environment in which it occurs. His argument works entirely through the purchasing power of "real" rather than nominal wages or, in other words, through price reductions. But there is some slippage and illusion between the real economy and the nominal monetary economy, which itself has real effects. Which is why one doesn't want to enter into a deflationary spiral, any more than one would wish for hyper-inflation, especially when debt loads are high, interest rates are rock bottom, and there is no room for maneuver.
I don't think outsourcing of IT jobs is as yet some sort of unmitigated catastrophe, by any means, since the size of the trend is not all that great. But I do think it's worthwhile to point out that the lack of any effective demand stimulus policy by the Bush administration not only doesn't counterbalance for its effects, but actually increases the tendency. Sharp tax cuts for capital-generated wealth at a time when productivity rates are apparently booming and the costs of real capital goods are declining, while running large deficits that require large capital account surpluses and thus virtually presuppose that foreign financial interests will accomodate them, do tend toward an environment in which outsourcing is almost required of corporations. The Bush administration's policy is to do what its base wants, in order to hold on to power, and its base is the know-nothing Christian right and the corporate elite, who are currently ponying up $200+ million to finance Bush's "infomercials". So it would be reasonable to assume that these policies tending toward these conditions are what the corporate elite, in aggregate, would want and to wonder why they would want such policies and resulting conditions.
It may be that disinflation has bottomed out at 1.25% and that, with employment picking up, the U.S. economy is out of the woods. Or maybe some "unforseen" shocks,- say, an implosion in Iraq, an oil price shock, spreading recession in the EU and a dollar crisis due to the East Asians going off their dollar peg-, could set off a deflationary spiral and stagnation. I would have no way of assessing the balance of risks or making any predictions. But rather than focusing on a punctilio of trade theory, perhaps some attention should be paid to the actual economic environment and to the opportunity costs,- (both in the technical and the figurative senses),- of current policies, as well as, to the questions of what policy mix would be required to have an effective and equitable open economy with free trade and what are the political likelihoods of such policies being effected, since in the absence of such effective proposals, both the economic risks and the political tendencies are liable to trend elsewhere.
Posted by: john c. halasz on April 8, 2004 08:29 AM" Say's Law: supply creates its own demand..."
Actually, Say's Law is that, supply IS (implicit)demand.
Posted by: Patrick R. Sullivan on April 8, 2004 10:20 AMBrad Gets it Wrong Again
First off, the computer programmers and call center people are all working class. Either you're on the dole, you work for a living, or you're a capitalist and make your money from your assets (instead of from your labor).
Moving out the better jobs reduces or eliminates the possibility of SOCIAL MOBILITY. The whole US economy works on the basis of anxiety about poverty and hope for a better future. Without hope for a better future, all people have is their anxiety.
Ask yourself just one question: Would you advise a high-school senior to go to college to major in Computer Science or Engineering? What are they going to do when they graduate college? Colleges report that applications are already down in technical areas. Off-shoring tech jobs results in REDUCING the educational level of the US.
Brad's whole yuppie vs worker analysis is just a way of saying that reducing the prices of expensive goods does more to raise the standard of living than reducing the prices of goods that are already cheap. So this is supposed to be worth the loss of technological leadership and the consequent lowering of educational standards? This is supposed to be worth the risk to security of having financial and medical records skipping about the worlds networks, subject to who knows what government-sponsored hackers?
And the supposed reduction in the cost of goods is not as large as Brad claims. The international companies and the off-shoring employment agencies will profiteer from the lowered cost of doing business, rather than pass all the savings on to their customers. And the profits generated will not necessarily be re-invested in the US.
The analysis also fails completely to take into consideration the new feature of tech off-shoring as compared to the "Rust belt" off-shoring of previous decades.
When the rust belt jobs went to Asia, Asian companies were competing with US companies on a head to head basis in the marketplace. This has great ideological weight in the US culture. Winning fair and square is good. Even if it costs to lose. And US citizens knew that we had the US companies on our side in the battle, and there was always a chance of winning the next match in the marketplace. Look at how the US responded to the challange from Japan.
The tech jobs going to India and China are led by US companies opening up overseas branches to do work previously done in the US. The very companies we work for became the enemy. The bedrock of the US economy turned tail and ran. The American worker has no allies in the economic battle in the marketplace. There is no next match to look forward to.
Posted by: Warren on April 8, 2004 02:34 PMI'm sorry I've arrived so late to this conversation, but I have to say something doesn't jive about Brad's model.
The most upsetting problem, is case 1 and case 2 seem to be an apples to oranges changes in the model. In case 1 Brad models outsourcing pressure on Yuppies by dropping Yuppie goods/salary price, shouldn't Brad use the same method when modeling outsourcing pressure of Worker produced goods in case 2?
Some back of the napkin math ->
I have carrying changes similar to case 1 into case 2, the salary/cost drop for Workers goods (about 1/6) would translate into Workers salaries of 33333 thalers. Yuppies purchase power would be .5 Yuppie products (No change from default case) and 1.8 Workers (Increase of .3 from default).
Workers purchase power would be .139 for yuppie products (drop off .03) and .5 Workers products (nochange).
Looking at these numbers, outsourcing of Workers products allows a substantial increase in Yuppie demand for wWrkers products (.3) which would most likely swallow up any lost in Workers purchasing power for Yuppie goods (-.03).
Additionally, in case 1 (Yuppies outsourced), you've said the downward demand pressure will lower Yuppies wages/prices but didn't address how this lowering of Yuppies wages would also lower Yuppies demand for Worker goods. Since Yuppies demand for worker goods drops from 1.5 to 1.25, does that mean the overall demand for Workers goods has been depressed and cost of Worker produced good would rise and negativly effect demand for Yuppie goods?
Has my lack of economics education cuases an error in my calculations or conculsions?
I think Brad's model, like all free market models, fails because it treats human labor like any other commodity item. This line of thinking explains why anyone in a large corporation feels equivalent to a copier or application server.
Workers in the U.S. have had to fight long and hard just to get the basic protections we fight for granted now. Child labor laws, safety laws, environmental laws, working hour restrictions, etc. all came into being after many people fought for them over decades. Many gave their lives for these causes.
Now that the U.S. has some semblance of respectable working conditions, big business sends the jobs overseas. This isn't just about the free market concept of labor finding its cheapest source. On the contrary, it's about corporate America giving the unions and the people who fought for the laws above the middle finger and starting or retaining companies (not people) in Asia that don't have to abide by any of these laws.
Wake up Brad! If you want to talk about macroeconomics, then at least consider the big picture. By avoiding the costs of the American work environment, Asian (and other) countries offer cheaper labor simply because these places haven't risen to our level yet. Heck, Wal-Mart's in China right now complaining that wages are too high and firing workers who get sick or ask for anything out of the ordinary.
This isn't a free market, it's a captive market run by the rich and you're paving the way for future profits.
The Immorality of the Modern Free Market
http://www.tomfairlie.com/home/2003/12/the_immorality_.html
The problem in your model is that you separate your two cases, when in reality they are combined, so in reality the offshore outsourcing effect compounds in ways your model does not describe.
"let's consider two cases, in the first of which foreigners have a comparative advantage in making yuppie-products, and in the second of which foreigners have a comparative advantage in making worker-products."
In reality, foreigners have a comparative advantage in making BOTH yuppie-products AND worker-products.
This harkens back to something mentioned above: your distinction between workers and yuppies is invalid. Yuppies are workers.
The comparative advantage here is low wages and low cost of living for foreigners, and it puts downward pressure on American wages across the board.
The evidence on wages supports my view.
Posted by: camille roy on April 8, 2004 03:29 PM"I noticed the model was all labor and no capital? Tell me you're kidding if you say that doesn't make a difference."
This sounds like a perfect exercise to follow the presentation of such a simple model, so I will give it a go. What happens if the factors of production include, along with worker-labor and yuppie-labor, also capital that is mobile between the two sectors? I will consider only Brad's Case 1.
As foreign supply pushes down the price of yuppie-products, the return to capital in yuppie industries falls along with yuppie wages. This causes capital to flow out of the yuppie industries and into the worker industries. This causes yuppie output to fall and worker output to rise.
Workers now benefit even more from outsourcing than in the no-capital case: not only has outsourcing caused the price of their products to rise relative to yuppie products; it has also increased their productivity by giving them more capital to work with, raising their income even more.
Yuppies now lose even more from outsourcing than in the no-capital case: not only has outsourcing caused the price of their products to fall relative to worker products; it has also impaired their productivity by taking away some capital from them, depressing their income even more.
As for the capitalists, the effect is ambiguous: they gain if worker industries are more capital-intensive than yuppie industries, and they lose if the opposite is the case.
So the introduction of capital does not alter Brad's conclusions, but makes thems stronger. Yuppies still lose, and by more than they do in the original model. Workers still win, and by more than they do in the original model. The result that some seem to fear, that the workers will be impoverished while the capitalists capture all the gains, does not happen.
Finally, someone asked a question about how demand for products will change. Brad has been careful to spell out the simplifying assumption that product prices are set in the world market: that is why he specifies that foreigners are willing to buy one year of a worker's output at a price of 40,000 thalers as well as that they are willing to sell one year of a yuppie's output for 100,000 thalers.
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