Wednesday, August 20, 2003

Brad DeLong has interesting things to say about offshore outsourcing and employment:

So what, then, is the impact on the American economy when Singapore educates its people to become competent network developers, or India educates its people to become competent help-center technicians? It's not that jobs leak away. Remember: trade balances. Indians want rupees, not dollars: they will only sell us as much as we can pay for in rupees, and the only way we get rupees is by selling things to Indians. The things we sell to Indians are either goods and services exports, or capital exports--Indians buying financial assets or real property in America, the sale of which is used to finance domestic investment spending. Either way (if the Federal Reserve does its job) Americans' demand for imports made in other countries is recycled into foreign demand that employs Americans in industries that export goods, export services, make producers equipment, or build structures. This is a consequence of Say's law--an economic principle which is usually true, sometimes false, but which it is the Federal Reserve's business to make as true as possible as much of the time as possible. This means that nightmare scenarios--3.3 million high-tech jobs moving overseas--are beyond the bounds of short-run probability. The current account plus the capital account must balance: if the work that used to be done here by 3.3 million people is to be done there, that means that our export industries here must employ an extra 3.3 million people as well.


I think that the correct policy response is the one outlined by Robert Reich in his Work of Nations of a decade and a half ago: First, get our people out of industry segments where we are about to lose comparative advantage and where wages are about to take a big dive--this is the reason we Democrats like various forms of Trade Adjustment Assistance, for those who work in such industries are about to get shafted and have done nothing to deserve it (and have the ability to impose enormous costs on the rest of us through trade barriers if the political dice roll their way). Second, make sure the public investments in basic research are there to spark applied research and development to create new industries and new forms of high-tech in which our labor and our capital can be very productive (NIH, NSF, DARPA anyone?). Third, remember that the principal determinants of our prosperity and our productivity come from within: get public investment in infrastructure right, private savings and investment high, and investment in education high as well.

Everything Brad says here is obviously true, with one notable exception - it isn't obvious, or even likely, that for every X jobs that go abroad, domestic exporters "must" create another X jobs to service the demand they generate. For one thing, the new jobs created could well be much higher paying than the old ones, so much so that the actual number of new export-industry jobs created falls well short of the number lost to foreign competition. Of course, even these high-paid domestic workers have to spend their dollars at some point, so the number of jobs created in the economy taken as a whole will likely be greater than those lost.

Also thought-provoking is the following statement by one commentator in response to Brad's post:

As a policymaker who works on trade policy, and who has the scars to prove it, I have always vote for free trade policies, something not easy for a Democrat. After all, it's one of the few mathematically provable public goods. I often lurk on this site and appreciate the economic analysis it provides. The question that no one answers, though, is that, yes, the Fed sets employment rates, and, yes, consumers benefit, and, yes, we should follow Reich's advice. But the distribution of losses is concentrated in areas least able to adjust. I represent a rural area, and it's not much of a solution to tell people to move to San Francisco or Miami. And the loss of jobs for the high-school educated, which once provided for a stable middle-class, is just devastating. I'd like for someone to point me to some literature in the field that talks about the possible downsides to trade from a geographic perspective. Brad's mentioning of Suez and the rural South hits home. From my angle, that seems apropos of the moment.

There is no questioning the argument that free-trade is a good thing for both parties. The problem is that while the benefits typically accrue in a diffuse manner to all consumers within a nation's borders, the losers are often concentrated in some way, whether geographically, by education, or by some other yardstick. The question then arises - how do we compensate the potential losers from free-trade so that they don't act to prevent it occuring? It is unreasonable to expect a man faced with the loss of a roof over the heads of his family members to accept an argument that runs "But it's for the good of the country!"

If there is one reason why I favor Joe Lieberman over the rest of the Democratic party presidential candidates, it is that he seems to be the only one of the lot who understands the importance of free-trade, as well as the need to help the immediate losers from trade retrain themselves to take on other employment. It is clearly both cheaper and more helpful in the long run to give workers who lose their jobs to outsourcing the means to gain new skills than it is to forego the benefits of trade altogether, in the manner that Bush has done by pandering to the steel industry. I've seen estimates of up to $750,000 per job for the cost of Bush's steel tariffs to the American economy - a full 4-year scholarship to the Ivy League would cost less than $150,000, or a mere fifth of that.