Arnold Kling  

Outsourcing Muddles

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Can trade make us worse off? Evidently, Nobel Laureate Paul Samuelson is going to make that claim.


Trade, in other words, may not always work to the advantage of the American economy, according to Mr. Samuelson.

In an interview last week, Mr. Samuelson said he wrote the article to "set the record straight" because "the mainstream defenses of globalization were much too simple a statement of the problem." 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.


I cannot find the Samuelson article online, but I have located a response by Jagdish Bhagwati, Arvind Panagariya, and T.N. Srinivasan.

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. If Bhagwati and company are correct, then Samuelson has done the public a disservice.

For Discussion. Under most circumstances, is the U.S. better off when productivity increases in other countries?



TRACKBACKS (6 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/119
The author at Daniel W. Drezner in a related article titled Paul Samuelson's outsourcing "bombshell" writes:
    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 ma... [Tracked on September 9, 2004 2:36 PM]
The author at The Liberal Order in a related article titled Free Trade and Politics writes:
    Sebastian Mallaby has an excellent opinion on free trade and how politicians talk out of one side of their mouths on the benefits of free trade while promoting protectionist policies for their special interests. Hence the weirdness of his administration's [Tracked on September 13, 2004 6:30 AM]
COMMENTS (6 to date)
Sam Jew writes:

I don't have the patience to read all 50 pages of the response, so I'll just take Arnold's word for it that that's the gist of the response.

I have no doubt that the direction of transnational capital is towards bringing the standard of living in India and China up to the standards of the west.

Basically, it's a no-brainer. Transnational capital is extremely risk-adverse these days, which is why interest rates remain so low. Are they going to put money into building a car factory in China or are they going to put money into a venture to build a space elevator in the U.S.?

This problem is further compounded by Bush's emphasis on dividends versus capital gains, (anti-growth) Sarbines-Oxley, (anti-risk) and option expensing rules. (anti-innovation)

To the extent that there's something the U.S. does to make itself more competitive, (aside from outsource jobs) I think you'll find that it won't be long at all before Chinese and Indians are doing it too, hence completely negating whatever this is as a competitive advantage for the U.S.

Based on the article summaries, I therefore have to favor Samuelson's interpretation of events.

Robert Schwartz writes:

I did not know Samuelson was still alive. He is 89. Milton Friedman is like 95. Is being a famous economist, like being an orchestra conductor, a tonic for longevity?

Even when he was much younger Samuelson was in the tank for Democrat Politicians. Its a pity he still feels the need to do that.

Walker writes:

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

The question then comes down to the extent to which outsourcing contributes to relative stagnation. It is not very useful to treat outsourcing as independent from the accompanying transfer of technology and skills. The link can be neglected with respect to call-center work of course but certainly not with software, biotech, etc.

Lawrance George Lux writes:
Under most circumstances, is the U.S. better off when productivity increases in other countries?

The question is not if the U.S. is better off with productivity increases in other countries. The question when talking outsourcing is: 'Can the U.S. reduce the cost of productivity per unit?' I agree with Samuelson that outsoucing is bad, if it does not reduce American productivity cost per unit. And remember that We are talking American productivity here, not simple Retail costing.

I have not read Samuelson's article, nor the Bhagwati response, though I have read the NY Times article. Bhagwati can also be remembered for advocating Freidman's South American experience, long after it was shown somewhat dubious. lgl

zzi writes:
Under most circumstances, is the U.S. better off when productivity increases in other countries?

This is a trick question of course. If the other country's productivity increases proportionately in all industries then our country will almost surely gain. WHy? Because that sort of balanced productivity growth doesn't change the pattern of comparative advantage (which is after all about relative productivity differences).
From what I can tell Samuelson is pointing out however that if their productivity growth in sectors were WE have a comparative advantage is faster than in their other sectors, then they will turn the TERMS OF TRADE against us. That will inmizerize us.
From the NYT article Samuelson is saying economists have understood this all along. He's not making a new point, just pointing out that most economists conveniently forget to mention this possibility, and instead harp on the 'gainers can compensate the losers' storyline (which happens when the terms of trade change in the opposite direction.

Lawrance George Lux writes:

My basic take on it stands on the Wholesale pricing. Ricardian Comparative Advantage has a flip side, or Ricardian Comparative Disadvantage. It is all about the maximization of Resources. Unless there is Productivity Savings greater than increase in Resources Costs for domestic productivity, then it stands as Comparative Disadvantage. lgl

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