Outsourcing made easy
Stephen Cohen and Brad DeLong deliver their rough cut on what they think about outsourcing. With Brad's usual historical perspective he distinguishes between the short term outsourcing issue that has politicians bloviating, but will fade after this latest election cycle, and the long term, which looks pretty dire, given this country's commitment to public education, training, and (DeLong and Cohen don't mention this, but I will, as I think it is key) affordable health care.
The economists say that this wave of service trade-driven globalization will, like the last wave of goods trade-driven globalization, be a positive-sum game. There will be more winners than losers, and the winners will win more than the losers. As long as the Federal Reserve does its job to make Say's Law (the claim that the demand will always appear to soak up increases in supply, and so higher productivity means higher incomes and not higher unemployment) true in practice even though it is not true in theory, the most that the losers will suffer in the long run is a fall in their incomes. And other workers and consumers will see their incomes rise and their spending power increase to make the process taken as a whole a good thing for the country, and for the world.
The economists are right. In response to Forrester and to the wave of political upset, McKinsey (as well as others) have hurried out quick pro-"outsourcing" studies. McKinsey (using its truly proprietary--that is, opaque--methods) calculates that every $1 spent on offshoring business practices generates 50 cents in business cost reductions--which show up as higher profits and higher investment in America, generates higher exports to the offshore site, and calculates that displaced American workers do find new jobs, and suffer on average only small wage losses.
But the economists are also wrong. For we have not, we do not as a country make the investments in retraining and rebuilding needed to transfer some of the gains from the winners to the losers, and so make the process of economic change truly a win-win one. There were no regional adjustment funds provided to the cities of Lowell and Fall River Massachusetts in the 1940s and 1950s as their textile manufacturing base pulled up stakes and headed for the lower-cost Carolinas. There was little money spent on Flint and Detroit in particular and Michigan in general in the late 1970s and 1980s to cushion the economic impact of the coming of Toyotas and Hondas to America's shores. Consumers in Boston and San Francisco drove their Accords and Corollas and pocketed the gains rather than having them diverted to rebuilding the Midwest.
As Paul Krugman puts it, free trade is a salable policy only if accompanied by a well-built social safety net and confidence in full employment. Our safety net is full of holes, and confidence right now that employment will be full is shaky. Preserving free trade in the 1970s and 1980s was a near-run thing, even though the magnitude of imports was not that great and the shock to America's distribution of income and employment not that large.
This is worth thinking hard about, for when "outsourcing" truly arrives--whether in one or two or three decades--it is likely to deliver a shock an order of magnitude larger to the American economy.
Brad also quotes, approvingly and at length, David Wessel's column on the outsourcing topic this morning. He predicts that we area facing a barbell economy -- plenty of extremely high paying jobs on one end and plenty of low paying jobs on the other end, but very few (think middle class) jobs in the middle.
Speaking of jobs, over 300,000 new jobs last month (yet the unemployment age ticked up). Of course, you can't end a massive supermarket strike in Southern California every month, just to name one of the one-time events that contributed to job growth last month.
The economists say that this wave of service trade-driven globalization will, like the last wave of goods trade-driven globalization, be a positive-sum game. There will be more winners than losers, and the winners will win more than the losers. As long as the Federal Reserve does its job to make Say's Law (the claim that the demand will always appear to soak up increases in supply, and so higher productivity means higher incomes and not higher unemployment) true in practice even though it is not true in theory, the most that the losers will suffer in the long run is a fall in their incomes. And other workers and consumers will see their incomes rise and their spending power increase to make the process taken as a whole a good thing for the country, and for the world.
The economists are right. In response to Forrester and to the wave of political upset, McKinsey (as well as others) have hurried out quick pro-"outsourcing" studies. McKinsey (using its truly proprietary--that is, opaque--methods) calculates that every $1 spent on offshoring business practices generates 50 cents in business cost reductions--which show up as higher profits and higher investment in America, generates higher exports to the offshore site, and calculates that displaced American workers do find new jobs, and suffer on average only small wage losses.
But the economists are also wrong. For we have not, we do not as a country make the investments in retraining and rebuilding needed to transfer some of the gains from the winners to the losers, and so make the process of economic change truly a win-win one. There were no regional adjustment funds provided to the cities of Lowell and Fall River Massachusetts in the 1940s and 1950s as their textile manufacturing base pulled up stakes and headed for the lower-cost Carolinas. There was little money spent on Flint and Detroit in particular and Michigan in general in the late 1970s and 1980s to cushion the economic impact of the coming of Toyotas and Hondas to America's shores. Consumers in Boston and San Francisco drove their Accords and Corollas and pocketed the gains rather than having them diverted to rebuilding the Midwest.
As Paul Krugman puts it, free trade is a salable policy only if accompanied by a well-built social safety net and confidence in full employment. Our safety net is full of holes, and confidence right now that employment will be full is shaky. Preserving free trade in the 1970s and 1980s was a near-run thing, even though the magnitude of imports was not that great and the shock to America's distribution of income and employment not that large.
This is worth thinking hard about, for when "outsourcing" truly arrives--whether in one or two or three decades--it is likely to deliver a shock an order of magnitude larger to the American economy.
Brad also quotes, approvingly and at length, David Wessel's column on the outsourcing topic this morning. He predicts that we area facing a barbell economy -- plenty of extremely high paying jobs on one end and plenty of low paying jobs on the other end, but very few (think middle class) jobs in the middle.
Speaking of jobs, over 300,000 new jobs last month (yet the unemployment age ticked up). Of course, you can't end a massive supermarket strike in Southern California every month, just to name one of the one-time events that contributed to job growth last month.
posted by John at 1:44 PM
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