Monday, February 28, 2011

On Outsourcing, Protectionism and Robot Insurance

About a week ago, Princeton's Uwe Reinhardt wrote in the New York Times about the amazing victory that is the almost-universal acceptance among economists of "the theory that every country gains by unfettered international trade."  Reinhardt explains:
Relative to a status quo of no or limited international trade, permitting full free trade across borders will leave in its wake some immediate losers, but citizens who gain from such trade gain much more than the losers lose. On a net basis, therefore, each nation gains over all from such trade.

Economists assert that over the longer run, the owners of businesses that lose their markets in international competition and their employees will shift into new economic endeavors in which they can function more competitively.
Yet despite these benefits, Reinhardt asserts that there may be a problem with free trade, even among some economists, when national boundaries and identity are considered:
In their work, economists are typically are not nationalistic. National boundaries mean little to them, other than that much data happen to be collected on a national basis. Whether a fellow American gains from a trade or someone in Shanghai does not make any difference to most economists, nor does it matter to them where the losers from global competition live, in America or elsewhere.

I say most economists, because here and there one can find some who do seem to worry about how fellow Americans fare in the matter of free trade.

In a widely noted column in The Washington Post, “Free Trade’s Great, but Offshoring Rattles Me,” for example, my Princeton colleague Alan Blinder wrote:

"I’m a free trader down to my toes. Always have been. Yet lately, I’m being treated as a heretic by many of my fellow economists. Why? Because I have stuck my neck out and predicted that the offshoring of service jobs from rich countries such as the United States to poor countries such as India may pose major problems for tens of millions of American workers over the coming decades. In fact, I think offshoring may be the biggest political issue in economics for a generation. When I say this, many of my fellow free traders react with a mixture of disbelief, pity and hostility. Blinder, have you lost your mind?"

Professor Blinder has estimated that 30 million to 40 million jobs in the United States are potentially offshorable — including those of scientists, mathematicians, radiologists and editors on the high end of the market, and those of telephone operators, clerks and typists on the low end. He says he is rattled by the question of how our country will cope with this phenomenon, especially in view of our tattered social safety net.

“That is why I am going public with my concerns now,” he concludes. “If we economists stubbornly insist on chanting ‘free trade is good for you’ to people who know that it is not, we will quickly become irrelevant to the public debate. Compared with that, a little apostasy should be welcome.”
While Blinder's concerns certainly sound plausible enough, they're actually rife with problems.  First, I don't know what free traders Blinder's been talking to, but I simply can't imagine that a single one of them would react with shock and horror at the basic idea that an increasing number of Americans will face international competitive pressures in the next few years.  It seems far more plausible, however, that those free traders would respond with the totally obvious observation that, while those job pressures might occur and might make many Americans nervous, the economist's job is to explain, through empirical, anecdotal and historical evidence, why such anxiety is unfounded.  Of course, this is a difficult challenge, but it's no different from what occurs now with respect to American manufacturing jobs, and the alternative (protectionism) has proven again and again to be an abject failure.

Second, Blinder's concerns ignore reality: while there might be 30-40 million "potentially offshorable" services jobs out there, those jobs aren't, you know, actually being outsourced.  For example, the WSJ's political diary noted last week that fears of Indian outsourcing are far more fiction than fact:
NBC's "Outsourced" is a situation-comedy about an American call center that's been relocated to India. The show is ranked No. 85 on Nielsen's recent list of prime-time network television programs, suggesting perhaps that the theme of jobs shipped to India isn't resonating with American viewers. Maybe that's because the Indians are sending us more work than we're sending to them.

During a recent visit to The Wall Street Journal, Indian Ambassador to the U.S. Meera Shankar pointed out that America actually runs a small trade surplus -- yes, a surplus -- in services with India. Total two-way trade between the countries amounts to roughly $38 billion annually in services, with U.S. exports of financial, accounting and other business services slightly exceeding India's famous provisioning of information technology assistance, call centers and the like. Meanwhile, the roughly $50 billion two-way trade in goods yields a modest surplus for India, putting the overall U.S.-India trading relationship in almost perfect balance, for those who fret about such things.

Yet Washington continues to restrict a particular Indian import that carries enormous benefits for America: talent. Ms. Shankar reports that for Indian engineers applying for a so-called H-1B visa, reserved for those with high-tech skills wishing to work in the U.S., the application is so lengthy that "it's almost a novel that you have to write." Policy makers would be wise to give skilled engineers an easier path to join our labor force. The innovations they create will encourage India and the rest of the world to outsource even more production to the U.S.
Other studies show that outsourcing has proven, in the aggregate, to be beneficial for the American economy.  In short: yes, outsourcing occurs, but it's nothing to be worried about from both a theoretical and practical perspective.  So any attempts to stop or mitigate it waste valuable resources and distract us from far more important issues (like our very real failures re: education or high-skilled immigration).

In this way, Blinder's dire warnings, and any protectionist responses based on them, remind me of that classic SNL skit where Old Glory Insurance shows horrible/hilarious scenes of robot attacks in order to sell elderly citizens insurance against such acts of (again, hilarious) robo-violence.  Blinder and many protectionists are peddling fake anxiety and, unsurprisingly, the only solutions are the unnecessary (indeed, costly!) insurance that they're selling.

Awesome.  The same goes for outsourcing and trade (although not nearly as humorously).  Yes, it's real and it happens every day, but it's hardly the great menace that some would have us believe, and in both theory and practice it's a net plus for the American economy.  So until economists have some actual proof that free trade is harmful, maybe it's best for them to, you know, tell the American people the truth about trade and outsourcing rather than placate their misplaced fears and sell them insurance against an extremely unlikely calamity.

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