Outsourcing Muddles

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.

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.

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.

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

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.

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