Arnold Kling  

Trade Conference

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I attended most of this Cato Institute Conference on trade, outsourcing, and the labor market. A few notes:

Federal Reserve Board Vice-Chairman Roger Ferguson's opening speech was outstanding. I commend it to anyone who teaches undergraduate economics as a useful summary of the issues. He stole the thunder of many of the subsequent speakers.

Ferguson's speech would help my students pass this quiz.

Overall, the case in favor of leaving outsourcing alone was compelling, and it was made by Democratic economists as well as Republican ones. But journalists and politicians will not see it that way. As Alan Blinder says, Murphy's Law of Economics is that when economists most agree, no one wants to listen to them.

I have more notes on the other speakers at the conference--click "more" to continue.

For Discussion. Is the Blinder-Murphy law at work on the trade issue?

[more notes start here] Erica Groshen gave the Groshen-Potter argument for viewing this recession as unusual in the extent to which the structural component of unemployment was high relative to the cyclical-layoff component. She and CEA Chairman Greg Mankiw both dismissed any attempt to "reconcile" the payroll and household employment surveys. As Groshen put it, the household survey is only useful for estimating the behavior of ratios, such as the unemployment rate. To get to aggregate numbers, such as total employment, the BLS has to multiply by population factors that are increasingly suspect. It might be better not to even try to compute total employment from the household survey.

Groshen and Mankiw also blew off health care costs as a source for weakness in labor demand. They pointed out that overall, taking into account productivity and compensation, unit labor costs are down. I'm not completely sold on this point of view--maybe one of the reasons that productivity is higher is that firms are reducing hiring to save on health care costs.

If I were to try to make the argument more seriously, I think I would have to say something about marginal vs. average labor costs. Clearly, average unit labor costs are not high. But maybe marginal unit labor costs are high because of health costs. Now, the burden is on me to explain why marginal unit labor costs are higher relative to average unit labor costs now than they were a few years ago. At the moment, I can't justify that story.

Bloomberg's Caroline Baum, who introduced the next panel, has a simple of way of taking on what I've been referring to as make-work bias (because that is Bryan Caplan's term for it). She says that if automation costs jobs, then we should get rid of steam shovels and dig dirt with regular shovels. If that does not create enough jobs, get rid of the shovels and try using spoons...

On the panel, Michael Horrigan of the Bureau of Labor Statistics went in where angels fear to tread and attempted to forecast job market trends over the next ten years. For example, he looked at the aging of the baby boomers and made the point that their decisions about retirement will have a significant impact on U.S. labor supply. The earlier they retire, the scarcer will be labor.

Thinking about that now, my guess is that the elasticity of labor supply of boomers could be high. If you try to raise our tax rates (payroll tax rates or income tax rates), we might be a lot less interested in working.

David Wessel of the Wall Street Journal asked the question, "What would you tell an 18-year-old today about how to prepare for the job market she will face?" He did not answer the question, but it did set up Dan Pink, the next speaker. Wessel pushed the Frank Levy "barbell" thesis--that there will be high-paying jobs or low-paying jobs, but nothing in between. The idea is that any job which can be performed according to easily-articulated rules will be automated or outsourced, leaving only low-wage personal service jobs or high-salary complex jobs. The way I put it is that we'll all either be home health care aids or McKinsey consultants.

I don't buy it. It strikes me as overly pessimistic, overly academic nonsense. I think that the whole concept of a "rule-based" job is an oversimplification. Most jobs have a continuum of skill requirements, some of which are rule-based and some of which are not. Yeah, we're going to engineer more and more of the routine stuff out, but I think that in the end the job market is going to have a significant middle to it, and not look like a barbell.

Pink, author of Free Agent Nation and a forthcoming book on "The Whole Mind Economy" or something like that, is excellent with mnemonics. He made a striking prediction that India's economy would be 15 percent middle-class in a few years, and that by 2010 India will have the largest English-speaking population of any country.

Pink had some anecdotes to describe the affluence of our society. One is that there is more than one registered car per licensed driver. Another is that the self-storage industry is $12 billion.

The main thesis of his forthcoming book is that we are going to need fewer lawyers, accountants, and engineers, and more people who combine right-brain skills (artistic talent, empathy) with left-brain skills. The left-brain stuff will be outsourced to computers, if not to other countries.

The way I put it is that Pink is saying that all those tiresome, defensive speeches given by the Presidents of liberal arts colleges are actually right. Instead of your goal being to get a professional degree, you should become a liberal humanist if you want to get ahead in the world.

The all-out attack on Lou Dobbs and his outsourcing tirades came at the next panel, consisting of former Clinton adviser Martin Baily, Information Technology Association of America head Harris Miller, and Cato honcho Brink Lindsey. Baily cited his essay for McKinsey Global Institute, in which he shows that the U.S. benefits from outsourcing. In contrast, Germany may not benefit. The difference is that laid-off American workers tend to find new jobs more easily than laid-off German workers.

Miller was even more adamant. He said that exports of technology services are a big deal for our economy, and he worries that if we try to limit imports of such services it could really backfire.

Lindsey re-iterated a number of points that had been made earlier, particularly by Ferguson. He also made a point about the double standard that the public has, in which jobs lost due to automation are lamented less than jobs lost due to offshore outsourcing. Of course, we Bryan Caplan fans know that this represents anti-foreign bias.

During the question period, someone asked about Samuelson's supposed new anti-trade article. Baily described the article as I did here, and consequently he dismissed it. I could paraphrase Baily's remarks in Bentsen-Quayle terms as "I knew Paul Samuelson, I studied under Paul Samuelson, and this is no Paul Samuelson."



COMMENTS (6 to date)
shamus writes:

The corollary to Blinder-Murphy is that even when economists disagree, no one wants to listen to them. Dismal science provokes marginal attention.

Mark Horn writes:

I don't think Blinder-Murphy is in effect w.r.t. trade. I think its more the fact that there's a vocal minority. When a textile plant in N. Carolina closes because they can no longer produce cloth at the same price as a plant in Mexico, those people are loud and vocal and they know exactly what it is that caused their pain.

Meanwhile, the people who are getting all of the benefits are not aware of what's causing them. They think Walmart is fantastic that it's able to offer such low prices. No one knows that those low prices are a result of cheaper labor. Consequently they say nothing about it. And the vocal minority wins the headlines.

Personally, I think Murphy's Law has little to do with it.

Brian Farrar writes:

Apart from eating peaches and nectarines throughout January, how does Free Trade improve my life? Indeed, it is easier to convince me of the evils of Protectionism than of the benefits of Free Trade.

Having a fancier cheaper television, nectarines for Christmas or a Japenese car do not really improve my quality of life or standard of living. The speech is great and I really enjoyed reading it but these examples aren't convincing me of the benefits. My quality of life is defined by:

1. Personal Liberty (In other words, it is difficult for the state to arrest/torture/kill me or my family or take my property without a darn good reason). How does Free Trade secure my personal liberty?
2. The health of my family. How does Free Trade improve our health?? Are Japanese cars safer? Can I go to a doctor in India for 10% of the price?
3. A satisfying, dignified job which allows me to improve the life of my family (which includes allowing me to spend time with them). This was more or less touched upon in the speech, I can see that Comparative Advantage might be able create this for me, but I'm not sure, see below.
4. Access to qualty, affordable education for me and my family. How does Free Trade help me?

These are the areas in which I want to learn how Free Trade benefits me. The fact that I can buy toys, TVs, clocks and lamps, telephones and calculators and have more money than I did before does NOT impact the quality of my life. I mean, are we saying that now that I have a TV, telphone, clock, lamp and calculator in every room that now I have more money to treat my kid's recurring ear infection, reading disability and asthma? That a decrease of 8% in the price of sugar is going to increase happiness?

Ok, one last point, I said before I wasn't sure about Comparative Advantage creating nice jobs. When economists talk about job displacement they always say, "Well, we need to retrain those who have been laid off..." But has this ever been done? I have never met anyone who lost their textile manufacturing job and 5 years later was making the same or more as a Federal Reserve Board Vice Chairman. It sounds like a good idea, I like the idea, but can it be done?

Mr. King, I find your blog extremely enlightening and it improves the quality of my life more than 50 new TVs, 5 new lamps and 2 clocks. Thank goodness gracious for the Free Trade of information on this heavenly Internet.

Brad Hutchings writes:

When the politicians and journalists demagogue the trade issue or, specifically, outsourcing, just respond with "that's Smoot-Hawley thinking, Google for it if you don't know what that means". It was enough an argument to paint Pat Buchanan as the kook he was a decade ago, although we didn't have Google, and strangely enough, Smoot-Hawley was in the collective volcabulary at the time.

the other bob writes:

free trade is like mass transit...i'd love for other people to get off the highway.

sourcreamus writes:

Free trade helps improve quality of life by:
1. Improving health care: It gives you more disposable income by reducing the prices you pay for everday items. Since you have more disposable income you have more money to buy gym memberships, more nutritious foods, and more preventive doctor visits. Since everybody in the country will have more discretionary income more will be spent on healthcare overall, leading to better treatments and more doctors to choose from.
2. Satisfying jobs: Free trade means the jobs you choose from are more productive and more likely to be higher paying and less physically burdensome.
3. Education: A higher paying job and cheaper consumer goods means you have more money to pay for the education of you and your children. It also means you have more free time to pursue that education.
4. Personal Liberty: Free trade means that the government will no longer force you to buy shoddier or more expensive goods just because they are made in this country.

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