Thursday, September 09, 2004
Paul Samuelson weighs in on the outsourcing debate
According to the New York Times, Paul Samuelson, the legendary economist, has joined the debate on outsourcing with a journal article that challenges the conventional wisdom (among most well known mainstream economists) on the benefits of outsourcing to the U.S. economy.
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."
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. But doesn't purchasing cheaper call-center or programming services from abroad reduce input costs for various industries, delivering a net benefit to the economy? Not necessarily, Mr. Samuelson replied. To put things in simplified terms, he explained in the interview, "being able to purchase groceries 20 percent cheaper at Wal-Mart does not necessarily make up for the wage losses."
The global spread of lower-cost computing and Internet communications breaks down the old geographic boundaries between labor markets, he noted, and could accelerate the pressure on wages across large swaths of the service economy. "If you don't believe that changes the average wages in America, then you believe in the tooth fairy," Mr. Samuelson said.
The NYT also has a response from Jagdish Bhagwati, one of Samuelson's best known students and leading light of the free-trade movement.
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 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.
Mr. Bhagwati and his co-authors write that such an assessment of the education systems of India and China "almost borders on the ludicrous." In an interview, Mr. Bhagwati said, "You have a lot of people, but that doesn't mean they are qualified. That sort of thinking is really generalizing based on the kind of Indian and Chinese people who manage to make it to Silicon Valley."
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.
Arnold Kling links to the response published by Bhagwati, T.N.Srinivasan and Arvind Panagariya. Kling also provides the gist of the trio's argument (since it is a 44 page document).
The authors point out that some of the concern is not about trade per se but about the accumulation of capital and know-how in China and India. They suggest that this could harm the U.S. if it reduces trade by eliminating the division of labor. That is, suppose that the U.S. stays stagnant, but China and India learn how to do everything that we know how to do. Then they will no longer export cheap goods to us, and we will lose. This, they claim, is what Samuelson's theoretical paper describes. If so, then it does not really describe outsourcing.
It sounds as though Bhagwati and company think that Samuelson's article is a bait-and-switch. The bait is outsourcing, but he then switches to a model of relative stagnation, in which the U.S. stops doing things that increase productivity while other countries rapidly increase theirs, leading to less comparative advantage and trade.
My problem with Samuelson's piece is rather more mundane. What is the alternative to outsourcing, given that he himself agrees that protectionism is not the answer? I agree the real beneficiaries of globalisation (if it plays out free and fair) will probably be countries like India and China and not the United States. But what can you do about it? I have said several times on this blog that the answer, from an American perspective, must lie in policy changes as both Samuelson and Bhagwati suggest. But how easy is that going to be? You can take a horse to the water, but you cant make it drink, can you?
PS: Given Samuelson's awesome reputation, get ready to hear a lot more about this debate once his piece is published. I'd like to hear Krugman, for example, weigh in on this.
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."
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. But doesn't purchasing cheaper call-center or programming services from abroad reduce input costs for various industries, delivering a net benefit to the economy? Not necessarily, Mr. Samuelson replied. To put things in simplified terms, he explained in the interview, "being able to purchase groceries 20 percent cheaper at Wal-Mart does not necessarily make up for the wage losses."
The global spread of lower-cost computing and Internet communications breaks down the old geographic boundaries between labor markets, he noted, and could accelerate the pressure on wages across large swaths of the service economy. "If you don't believe that changes the average wages in America, then you believe in the tooth fairy," Mr. Samuelson said.
The NYT also has a response from Jagdish Bhagwati, one of Samuelson's best known students and leading light of the free-trade movement.
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 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.
Mr. Bhagwati and his co-authors write that such an assessment of the education systems of India and China "almost borders on the ludicrous." In an interview, Mr. Bhagwati said, "You have a lot of people, but that doesn't mean they are qualified. That sort of thinking is really generalizing based on the kind of Indian and Chinese people who manage to make it to Silicon Valley."
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.
Arnold Kling links to the response published by Bhagwati, T.N.Srinivasan and Arvind Panagariya. Kling also provides the gist of the trio's argument (since it is a 44 page document).
The authors point out that some of the concern is not about trade per se but about the accumulation of capital and know-how in China and India. They suggest that this could harm the U.S. if it reduces trade by eliminating the division of labor. That is, suppose that the U.S. stays stagnant, but China and India learn how to do everything that we know how to do. Then they will no longer export cheap goods to us, and we will lose. This, they claim, is what Samuelson's theoretical paper describes. If so, then it does not really describe outsourcing.
It sounds as though Bhagwati and company think that Samuelson's article is a bait-and-switch. The bait is outsourcing, but he then switches to a model of relative stagnation, in which the U.S. stops doing things that increase productivity while other countries rapidly increase theirs, leading to less comparative advantage and trade.
My problem with Samuelson's piece is rather more mundane. What is the alternative to outsourcing, given that he himself agrees that protectionism is not the answer? I agree the real beneficiaries of globalisation (if it plays out free and fair) will probably be countries like India and China and not the United States. But what can you do about it? I have said several times on this blog that the answer, from an American perspective, must lie in policy changes as both Samuelson and Bhagwati suggest. But how easy is that going to be? You can take a horse to the water, but you cant make it drink, can you?
PS: Given Samuelson's awesome reputation, get ready to hear a lot more about this debate once his piece is published. I'd like to hear Krugman, for example, weigh in on this.
