You can be sure that when this article is published it will be featured "front page, above the fold" in the NYT, and Lou Dobbs will talk of nothing else for a month.
Paul Samuelson's outsourcing "bombshell"
Daniel Drezner
Steve Lohr breathlessly reports in the New York Times that Nobel prize winner and undisputed godfather of modern economic theory Paul Samuelson is coming out with an article in the Journal of Economic Perspectives on outsourcing that contradicts the mainstream economic take:
At 89, Paul A. Samuelson, the Nobel Prize-winning economist and professor emeritus at the Massachusetts Institute of Technology, still seems to have plenty of intellectual edge and the ability to antagonize and amuse.
His dissent from the mainstream economic consensus about outsourcing and globalization will appear later this month in a distinguished journal, cloaked in clever phrases and theoretical equations, but clearly aimed at the orthodoxy within his profession: Alan Greenspan, chairman of the Federal Reserve; N. Gregory Mankiw, chairman of the White House Council of Economic Advisers; and Jagdish N. Bhagwati, a leading international economist and professor at Columbia University.
These heavyweights, among others, are perpetrators of what Mr. Samuelson terms "the popular polemical untruth."
Popular among economists, that is. That untruth, Mr. Samuelson asserts in an article for the Journal of Economic Perspectives, is the assumption that the laws of economics dictate that the American economy will benefit in the long run from all forms of international trade, including the outsourcing abroad of call-center and software programming jobs.
Sure, Mr. Samuelson writes, the mainstream economists acknowledge that some people will gain and others will suffer in the short term, but they quickly add that "the gains of the American winners are big enough to more than compensate for the losers."
That assumption, so widely shared by economists, is "only an innuendo," Mr. Samuelson writes. "For it is dead wrong about necessary surplus of winnings over losings."
Sounds like a radical break -- oh wait, let's get into the details:
Mr. Samuelson, who calls himself a "centrist Democrat," said his analysis did not come with a recipe of policy steps, and he emphasized that it was not meant as a justification for protectionist measures....
According to Mr. Samuelson, a low-wage nation that is rapidly improving its technology, like India or China, has the potential to change the terms of trade with America in fields like call-center services or computer programming in ways that reduce per-capita income in the United States. "The new labor-market-clearing real wage has been lowered by this version of dynamic fair free trade," Mr. Samuelson writes....
For his part, Mr. Bhagwati does not dispute the model that Mr. Samuelson presents in his article. "Paul is a great economist and a terrific theorist," he said. "And in markets like information technology services, where America has a big advantage, it is true that if skills build up abroad, that narrows our competitive advantage and our exports will be hit."
But Mr. Bhagwati, the author of "In Defense of Globalization" (Oxford University Press, 2004), says he doubts whether the Samuelson model applies broadly to the economy. "Paul and I disagree only on the realistic aspects of this," he said.
The magnified concern, Mr. Bhagwati said, is that China will take away most of American manufacturing and India will take away the high-technology services business. Looking at the small number of jobs actually sent abroad, and based on his own knowledge of developing nations, he concludes that outsourcing worries are greatly exaggerated....
The Samuelson model, Mr. Bhagwati said, yields net economic losses only when foreign nations are closing the innovation gap with the United States.
"But we can change the terms of trade by moving up the technology ladder," he said. "The U.S. is a reasonably flexible, dynamic, innovative society. That's why I'm optimistic."
The policy implications, he added, include increased investment in science, research and education. And Mr. Samuelson and Mr. Bhagwati agree that the way to buffer the adjustment for the workers who lose in the global competition is with wage insurance programs.
"You need more temporary protection for the losers," Mr. Samuelson said. "My belief is that every good cause is worth some inefficiency."
Before I throw my two cents in, let me just add the following caveats:
1) I haven't seen Samuelson's essay (anyone who's got a copy of it, e-mail it to my brand-new gmail address listed on the right);
2) I'm not an economist;
3) Paul Samuelson is way, way, way, way, way, way, way smarter than I am.
That said, this dispute boils down to a few empirical questions:
1) Just how many well-educated workers are there in China and India?
2) Will U.S. firms have an incentive to offshore sophisticated value-added work in areas where the United States has a comparative advantage?
3) Will the United States continue to be a locus for value-added innovations?
4) To what extent are wages and employment in the affected industries declining because of outsourcing as compared to technological innovation standardizing and commodifying what used to be highly complex 9and highly paid) tasks?
In the past, my answers to these questions have been a) not as many as you think; b) no, c) yes, and d) not a lot. Which is why I side with Bhagwati on the outsourcing question.
Furthermore, Samuelson appears to partially fall into the Douglas Irwin trap of firing a warning shot on outsourcing but providing little in the way of a solution that departs from those who believe outsourcing is not a problem. Indeed, Samuelson explicitly rejects the solution most favored by those who oppose outsourcing -- higher trade barriers.
So, in the end, I'm not convinced that Samuelson's dissent changes the substantive issues of debate. But as a political scientist, it is impossible to deny the extent to which Samuelson's article will reignite debate on this topic, as well as provide aid and comfort to those who wish oppose the practice of offshore outsourcing.
So let the debate be joined.
posted by Dan on 09.09.04 at 01:49 PM
Comments:
You are not an economist? But you've been blustering on and on about why outsourcing is a good thing? Does being a polisci guy give you some expertise on outsourcing? I'm asking that as a serious question, because you have been bloviating about outsourcing for a long time, and I assumed you were an economist as a result. Who else but an economist would have the b!$ls to speak so confidently on the advantages of outsourcing?
posted by: timshel on 09.09.04 at 02:34 PM [permalink]
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timshel: I have an M.A. in economics, but not a Ph.D.
posted by: Dan Drezner on 09.09.04 at 02:38 PM [permalink]
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To answer Dan's questions:
'1) Just how many well-educated workers are there in China and India?'
A lot. I was in India recently and I was amazed at the number of computer and MBA schools that seem to have sprung up. In India, education is probably even more vital to business success than the US (unless you're from a wealthy family in India, of course).
'2) Will U.S. firms have an incentive to offshore sophisticated value-added work in areas where the United States has a comparative advantage?'
No, but this work will shrink. Yes, the highest value work will remain in the US, but not all else. India and CHina are develpong expertise in manufacturing, computers, biotech and the like.
'3) Will the United States continue to be a locus for value-added innovations?'
Absolutely. Our top Universities and research labs will keep it so. Yet, how much employment is generated based purely on this most innovative work ? Its probably only a small % of the total work.
'4) To what extent are wages and employment in the affected industries declining because of outsourcing as compared to technological innovation standardizing and commodifying what used to be highly complex 9and highly paid) tasks?'
They are both factors. I think the shrnking of the employment pool may be more of a sign than wage decline.
Personally, I think globalization benefits India and China immensely. I've seen first hand the benefits in India. I think the US is hurt by it, on the balance, but I think its also inevitable. There's no real way of stopping it. The best the US can do is to minimize the inevitable disruption.
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