Yep, The "War on Terror" requires them to change too many concepts they hold.
I happened to catch Schumer and Roberts on a panel being broadcast on CSPAN today. Schumer was his usual slimy self. I don't understand how he gets elected. Kept saying, "well, I don't understand this too well. I rely on the smart people I talk to." "New Republic"
WHAT ON EARTH IS CHUCK SCHUMER TALKING ABOUT?: Today seems to be first-rate economist day on The New York Times op-ed page. You've got Paul Krugman writing about the dangers of runaway deficits. You've got Joe Stiglitz writing about the failures of NAFTA. And you've got Chuck Schumer and Paul Craig Roberts rethinking the theoretical underpinnings of free trade. Oh, wait. Chuck Schumer and Paul Craig Roberts aren't actually first-rate economists. And boy does it show in their piece.
Schumer and Roberts point out that one of the assumptions underlying the theoretical case for free trade is that "factors of production" (like capital and labor) aren't easily transported across borders (a phenomenon known as "factor immobility"). They further point out that, thanks to information technology, this assumption no longer holds--to take their example, a "New York securities firm plans to replace its team of 800 American software engineers, who each earns about $150,000 per year, with an equally competent team in India earning an average of only $20,000." As a result, they conclude, the theoretical case for trade has been invalidated. QED.
At this point it's worth pointing out that so-called factor immobility is NOT, in fact, one of the assumptions underlying the theoretical case for trade--at least not the way Schumer and Roberts seem to think it is. To see this, let's back up for a second. At its broadest level, the point of free trade is to expand the size of the global economic pie by eliminating production inefficiencies, which arise when one country tries to produce everything itself using only the "endowments" of capital and labor (i.e., machines and workers) it has within its borders. Now, there are two ways you can eliminate these inefficiencies: When it's not so easy to move machines and workers across borders, countries can specialize in the goods they produce most efficiently, which they then trade with one another. (We'll be more precise about what we mean by "most efficiently" in a second.) When it is easy to move machines and workers across borders, you don't have to specialize (at least not by country) and trade, because every country already has access to the most efficient machines and workers.
Put differently, you can either trade machines and workers (which is basically what you're doing when you're outsourcing), or you can trade the goods these machines and workers make. But, as a theoretical proposition, the two scenarios are EXACTLY THE SAME: They both maximize productive efficiency. Indeed, one of the great accomplishments of international trade theory, post David Ricardo, was to prove mathematically that trade in goods accomplishes the exact same thing, efficiency-wise, as trade in machines and workers. (It's been a while, but we seem to remember that this falls out of the so-called "Heckscher-Ohlin" theorem--which holds that countries export the good whose production is intensive in the factor they have an abundance of. Hey, this stuff either turns you on or it doesn't ...)
Schumer and Roberts, it turns out, have hopelessly confused ends and means. The end we're striving for here is production efficiency. Trade just happens to be the way you get there when work isn't easily outsourced. In that sense, suggesting that outsourcing undermines the case for free trade is a bit like saying natural immunity to the flu would undermine the theoretical case for a flu vaccine. True, natural immunity would make the flu vaccine unnecessary as a practical matter. But it wouldn't do anything to the theoretical case for a flu vaccine--which is that vaccination is the best way to bring about immunity when people don't naturally have it. Likewise, being able to outsource everything (which will never happen) would make trade unnecessary as a practical matter, but it wouldn't do a thing to the theoretical case.
Not that any of this directly answers the basic question Schumer and Roberts pose, which is: Will there be any more white-collar jobs left in this country once information technology makes it possible for the Indians and Chinese to do them for us? But here, too, Schumer and Roberts whiff badly.
The key conceptual mistake they make is their misunderstanding of the principle of comparative advantage. Here's the relevant graf:
The case for free trade is based on the British economist David Ricardo's principle of "comparative advantage"--the idea that each nation should specialize in what it does best and trade with others for other needs. If each country focused on its comparative advantage, productivity would be highest and every nation would share part of a bigger global economic pie. [Emphasis added.]
Um, not exactly. Comparative advantage, though frequently confused with absolute advantage, is actually a concept about relative relationships, not absolute ones. What the principle of comparative advantage actually implies is that each nation should specialize in what it does best relative to all the other things it could be doing and then trade with others for other needs. At its most basic level, comparative advantage is about opportunity cost: The country with the lowest opportunity cost of producing a good (i.e., the cost of producing that good in terms of other goods) should specialize in production of that good.
Let's take the example of software, since it seems to be on everyone's mind. Suppose that the only two goods in the world are T-shirts and computer software. For the sake of simplicity, let's say it costs us $10 to produce a single T-shirt, and $100 to produce a computer program. And let's also say it costs the Indians $5 to produce a single T-shirt, and $95 to produce a single computer program. In other words, the Indians can produce both T-shirts and computer programs more efficiently than we can.
Does that mean that the Indians will produce everything and that we'll produce nothing--and that, before long, the Indians will own us and the only kind of rice you'll ever be able to get in the United States is basmati...? (Sorry, we get a little carried away with this stuff sometimes.) The answer is, emphatically, NO. The reason is that it's still in both countries' interest to specialize in the good they have a lower opportunity cost of producing. In this case, we can produce 10 T-shirts for every computer program. The Indians can produce 19 T-shirts for every computer program. Since it only costs us 10 T-shirts to produce a computer program versus the Indians' 19, we should specialize in production of computer programs and trade them to the Indians for T-shirts (which will be cheaper for us when acquired through trade than when produced locally). They, on the other hand, should specialize in production of T-shirts and trade them to us for computer programs (ditto on the logic).
Obviously, the real world isn't quite this neat. And, even if it was, the fact that we could one day find ourselves in a situation where our comparative advantage lies in a low-value good like T-shirts rather than a high-value good like software isn't exactly comforting. Still, as long as we enjoy a comparative advantage in enough high-value goods--which will be the case as long as our workforce remains incredibly well-educated and high-skilled relative to India's and China's, which should be our top policy priority and which, even if it wasn't, is going to be the case for decades (when was the last time you checked the literacy rate of India?)--then all the doom and gloom you hear from people like Schumer and Roberts is way overstated.
There are real globalization-related issues we need to address--most importantly, the dislocation caused when whole industries cease to be efficient, and the speed with which we allow that to happen. But the theoretical foundation of the case for free trade isn't one of them.
posted 9:00 p.m.
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