Thursday, January 8, 2004

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Now this is bad economics

The opportunity cost of debating Brad DeLong over the operationalization of data sets is that truly stupid popular economic writing can slide by unscathed. Like the Senior Senator from New York, Chuck Schumer, who on Tuesday co-authored a New York Times op-ed that said the following:

The case for free trade is based on the British economist David Ricardo's principle of "comparative advantage" — the idea that each nation should specialize in what it does best and trade with others for other needs. If each country focused on its comparative advantage, productivity would be highest and every nation would share part of a bigger global economic pie.

However, when Ricardo said that free trade would produce shared gains for all nations, he assumed that the resources used to produce goods — what he called the "factors of production" — would not be easily moved over international borders. Comparative advantage is undermined if the factors of production can relocate to wherever they are most productive: in today's case, to a relatively few countries with abundant cheap labor. In this situation, there are no longer shared gains — some countries win and others lose.

What's wrong with this statement? Let's go to Noam Scheiber at TNR's &c.:

so-called factor immobility is NOT, in fact, one of the assumptions underlying the theoretical case for trade--at least not the way Schumer and Roberts seem to think it is. To see this, let's back up for a second. At its broadest level, the point of free trade is to expand the size of the global economic pie by eliminating production inefficiencies, which arise when one country tries to produce everything itself using only the "endowments" of capital and labor (i.e., machines and workers) it has within its borders. Now, there are two ways you can eliminate these inefficiencies: When it's not so easy to move machines and workers across borders, countries can specialize in the goods they produce most efficiently, which they then trade with one another. (We'll be more precise about what we mean by "most efficiently" in a second.) When it is easy to move machines and workers across borders, you don't have to specialize (at least not by country) and trade, because every country already has access to the most efficient machines and workers.

Put differently, you can either trade machines and workers (which is basically what you're doing when you're outsourcing), or you can trade the goods these machines and workers make. But, as a theoretical proposition, the two scenarios are EXACTLY THE SAME: They both maximize productive efficiency. Indeed, one of the great accomplishments of international trade theory, post David Ricardo, was to prove mathematically that trade in goods accomplishes the exact same thing, efficiency-wise, as trade in machines and workers.

David Adesnik has more on this as well, including links on the future of employment in the computer sector. [UPDATE: DeLong comments as well].

ANOTHER UPDATE: Michael Kinsley dissects the op-ed in Slate. Among the highlights:

Schumer and Roberts cling to the free-trade label and endorse the general principle while claiming it no longer applies because "the factors of production can relocate to wherever they are most productive." In fact, that makes the theory even more compelling. If the factors of production become more productive, the whole world becomes richer. If there is some explanation of how a society can get richer by denying itself the fruits of this process (and most likely curtailing the whole process itself, as others misguidedly retaliate), Schumer and Roberts do not offer or even hint at it....

But the real difference between traditional trade in heavy earth-bound objects and 21st-century trade in weightless electronic blips, or in sheer brainpower, is that the losers in new-style trade are more likely to be people that U.S. senators and fancy economic consultants actually know. These are people with advanced degrees and high incomes. Their incomes will likely be above average for our economy even if they are driven down by competition from poorer economies. Under these circumstances, denying the benefits of free trade to the whole nation—and denying opportunity to the rising middle class in developing countries—in order to protect the incomes of a relative few seems harder to justify, not easier, than it was back in the days when our biggest fear was Japanese cars.

This last point is one I have made before. The first point is spot-on. Going back to the op-ed, here are the sinister forces that, according to Schumer and Roberts, undercut the free-trade position:

[There has been] a seismic shift in the world economy brought on by three major developments. First, new political stability is allowing capital and technology to flow far more freely around the world. Second, strong educational systems are producing tens of millions of intelligent, motivated workers in the developing world, particularly in India and China, who are as capable as the most highly educated workers in the developed world but available to work at a tiny fraction of the cost. Last, inexpensive, high-bandwidth communications make it feasible for large work forces to be located and effectively managed anywhere.

More political stability. Better education. Lower communication costs.

Yeah, I can see how this devastates the free trade position.

[What about Joe Stigltz's gloomy op-ed on NAFTA on the same day? Aren't you going to pick on him?--ed. Well, according to Mark Kleiman, I'm supposed to tread carefully on the domain of other experts. But, I will point out that even Stiglitz acknowledges that Mexico's growth in GDP per capita since NAFTA's ratification is "better than in much of the rest of Latin America". Stiglitz also overlooks the political benefits of NAFTA in democratizing Mexican politics and improving the rule of law south of the border.]

posted by Dan on 01.08.04 at 03:01 PM


“Well, according to Mark Kleiman, I'm supposed to tread carefully on the domain of other experts.”

What planet is Mark Kleiman living on? His point may very well be accurate in the hard sciences. 2+2=4 and that’s all there is to it. However, Kleiman conveniently ignores the harsh fact that professionals in the less certain Liberal Arts are far more inclined to indulge in group think. It is readily easy to succumb to the temptation to become an intellectual slut. Academic professionals are often nothing more than whores who want to “make it.” They stick their wet finger in the air to see which way the current zeitgeist wind is blowing. The credentialed professionals may not always be worthy of respect. Kleinman needs to become a bit more cynical.

Chuck Schumer merely adds further evidence to my thesis that the real Democrat Party power brokers are now committed to protectionist measures. I am reminded by the often repeated scientific experiment where the frog is unaware that he is slowly being boiled to death. The change may have been fairly subtle--but the free traders are rapidly being marginalized. The Brad DeLongs are now perceived as Bush Lite Republicans disguised in Democrat sheep skin.

posted by: David Thomson on 01.08.04 at 03:01 PM [permalink]

In answer to David Thompson's question:

I'm living on a planet where some people know more about some stuff than other people do.

I agree with Dan that it's depressing to see Schumer's name attached to such drivel.

posted by: Mark Kleiman on 01.08.04 at 03:01 PM [permalink]

Yeah, I remember this discussion -- from Econ 353 - Introduction to Macroeconomics - University of Missouri-Columbia - 1983 vintage, I believe. Had a non-tenured-track bouquet to it, straightforward and to-the-point. Jeez Louise, another barrel o' laughs disguised as informed commentary on the NYT op-ed page.

posted by: Tongue Boy on 01.08.04 at 03:01 PM [permalink]

But I wonder...people seem to be assuming that we (the U.S.) would have comparative advantage in software over t-shirts. Couldn't the exact opposite be true?

Software: almost 100% labor costs. Reduce salaries 50% and you reduce total cost by almost 50%.

T-shirts: many other costs in addition to labor--for starters, capital equipment (power looms)and transportation (inbound materials, outbound product). Reduce wages 50% and you reduce total cost by something considerably less that 50%.

posted by: David Foster on 01.08.04 at 03:01 PM [permalink]

I have a post on the practicalities of sending computer-related jobs offshore on my site here (since it's Blogger, you have to scroll down to "A Case Study in Offshore Computing").

As with many things, theoretical issues drive the discussion, while practical issues such as the two big ones I point out, time zones and differences in national character in the countries where this has to work, are neglected -- mostly because those who theorize have never seen such things up close.

I think the practical result of most such projects has been a recognition that you can waste somewhat less money by screwing projects up all in one place, rather than spreading things out.

posted by: John Bruce on 01.08.04 at 03:01 PM [permalink]

Free trade is about as close to being a litmus test issue as it gets for me. Defending it effectively requires understanding the reasons it is under attack. The several people who have responded to the Schumer/NYT piece clearly don't.

For some reason Dan and a couple of other bloggers have seen fit to quote at length from Noam Scheiber's remarkably obtuse TNR entry, the burden of which is that Schumer and Roberts have misunderstood David Ricardo. Well, folks, so what? Schumer didn't put his byline over a piece like this because he felt a need to note a shift in academic views on economic theory, but because his constituents are letting him know that what is happening in international economics now is hurting them.

Now there may be a case that his constituents are wrong, or that the ones he has talked to are not representative, or that long-term trends don't pose the threat to American living standards Schumer thinks they do. Waving the old Econ 101 textbook and shouting about theoretical propositions concerning the maximization of productive efficiency does not make a case for any of these propositions, at least not one that anyone who matters will see any reason at all to take seriously.

My personal view -- one I have come to reluctantly -- is that political support for free trade in the United States has passed its high water mark. There are a lot of reasons for this, but one of them surely is that the defenders of free trade haven't done a very good job of explaining why it continues to be important to maintaining American living standards and America's place in the world. I don't agree with Schumer, but understand his response after listening to his constituents better than I understand Drezner, Scheiber and DeLong, who appear only to listen to one another.

posted by: Zathras on 01.08.04 at 03:01 PM [permalink]

The truth that no politician dare speak is that the number of manufacturing jobs will continue to decrease over time - not just in the US but globally. Improvements in technology will continue to lead to increased automation, more short cycle manufacturing, and better inventory forecasting. This will continue to increase productivity which means fewer people will be needed to manufacture goods. I just wonder what will happen when internet shopping starts to seriously erode the labor market in America's "service economy."

posted by: James D on 01.08.04 at 03:01 PM [permalink]

I am not an economist and while I personally support the notion that lower trade barriers are generally a good thing, in defence of Schumer I seem to recall that theoretically there can be "immiserizing trade" in which the after trade prices leave one country worse off than it was before trade (e.g., producers of price elastic commodities). I'm not certain if there are any actual examples of this. However, don't trade models usually assume full resource utilization?If capital flows abroad to make foreign labor more productive and leaves domestic labor unemployed, couldn't the capital-exporting/good-importing country actually be net worse off?
Schumer may be theroetically obtuse, but the attacks on him are symptomatic of the tendency among many political scientist types to treat free trade orthodoxy as practically a matter of religious dogma and deviants as apostates and heretics. Economists [at least as I remember the ones I studied under 20 years ago]tend to treat it more as a phenomenon with a lot of empirical support but as a theoretical proposition that rests on particular sets of assumptions, which can especially influence the distribution of the gains from trade. It's curious that so many of the pol sci types often seem relatively uninterested in the latter dimension since it would seem to be about their speciality, power. Was India really better off after it opened to cotton textile imports from England? Is Argentina better off since it lowered its trade barriers?
Whatever the shortcomings of his use of theory, Schumer to his credit is at least willing to go beyond blind aherence to free trade ideological orthodoxy and consider the real consequences of what more open trade could mean to the United States.

posted by: Gene on 01.08.04 at 03:01 PM [permalink]

Maybe the contributing factors to Mexico's economic mediocrity have to do with something other than trade. Let's take a peek at the report on Mexico in the 2004 Index of Economic Freedom:

(Scoring: 1.0=free, 5.0=unfree)

Trade policy: 2.0
Fiscal burden of government: 4.0
Government intervention in economy: 3.5
Monetary policy: 3.0
Capital flows and investment: 3.0
Banking and finance: 2.0
Wages and prices: 2.0
Property rights: 3.0
Regulation: 3.0
Informal [black] market: 3.5
OVERALL: 2.9 - mostly free (barely)

Never mind NAFTA - Mexico needs free trade within its own borders.

posted by: Alan K. Henderson on 01.08.04 at 03:01 PM [permalink]

Schumer has many problems, apparently, with economics. First of all, he doesn't seem to understand that Ricardo has what one could call a "93% labor-theory of value" and that influences his thoughts on other issues. Secondly, he has no idea about the particulars of international trade. Yes, this is more theoretical book-waving. But, Schumer obviously hasn't heard of Hecksher-Ohlin or Stolper-Samuelson or any number of other trade theorems and properties. Anyway, the point is that trade is not a zero-sum game! Furthermore, Schumer doesn't even seem to think about FDI and its connection with trade, or its effects upon the economy as a whole (relatively small, depending, because FDI makes up a relatively small proportion of GDP...on the order of 10-15% in the US).

Of course, no serious student of the economy would argue for completely free trade, as that's not a self-sustaining equilibrium in a multi-period setting, but that's why we have organizations like the WTO. To help prevent trade wars and nasty things like Nash-equilibria from breaking out. And, not all sectors will benefit, but that's part of the long-run structural change of the aggregate economy. Trade increases total welfare, but some sectors will suffer as they shrink due to their relative inefficiency.

And, as a final aside, the US tends to be thought of as abundant in capital and skilled labor. Other countries have much larger endowments of unskilled labor, and that's why we tend to see a shift away from unskilled jobs in the US, depending on the industry and whatnot.

In short, Schumer has seemingly missed out on the last 200-ish years of economic literature and should really do a little bit of studying. It's a sad day when an undergraduate knows more than a Senior Senator.

posted by: Timothy on 01.08.04 at 03:01 PM [permalink]

Gene: The answer, like so many things in economics, is "it depends." I'd have to get the data and run some regressions. I'll bet that's tough data to get too, given the sources.

posted by: Timothy on 01.08.04 at 03:01 PM [permalink]

Neither of the two articles linked showing "the future of employment in the computer sector" even have the word "outsourcing" in them. I don't know the future of high tech jobs, but it's a little dubious to discuss it without even mentioning outsourcing.

posted by: Dustin on 01.08.04 at 03:01 PM [permalink]


Did you see this?

Turns out Krugman was right on this as well. Will you acknowledge it?

As Mark Kleiman said...

posted by: GT on 01.08.04 at 03:01 PM [permalink]

And we could add today's unemployment news which show how the labor force continues to contract.

I know you are not an economist but you should at least know enough not to rely on anything Luskin says.

posted by: GT on 01.08.04 at 03:01 PM [permalink]


As I pointed out to David Adesnik, the Labor department projections look suspiciously like they were largely based on bubble numbers, not post-burst numbers.

The salary information may have been updated a little bit for 2001 and, IIRC, 2002, but the long-term outlook is partying like it's 1999.

Data on typical salaries is probably easier to update than the outlook, which was probably put together based on what the IT job market did in mid-to-late 90s.

posted by: Jon H on 01.08.04 at 03:01 PM [permalink]

GT, Krugman wrote:

It was a merry Christmas for Sharper Image and Neiman Marcus, which
reported big sales increases over last year's holiday season. It was
considerably less cheery at Wal-Mart and other low-priced chains. We don't
know the final sales figures yet, but it's clear that high-end stores did
very well, while stores catering to middle- and low-income families
achieved only modest gains.

That certainly was literally true. Did Drezner dispute it?

(In any event, I'm not convinced that the relative sales increases of luxury vs non-luxury goods is proof of an income divide - I would expect demand for luxury goods to be more elastic than for non-luxury, and therefore to rebound more sharply.)

posted by: J Mann on 01.08.04 at 03:01 PM [permalink]

Schumer's stated objections are a ruse, as are, I find, most things with him. (yes, he supposedly represents me, in this People's republic of NY...)
For all of his lip service to free trade, the bottom line is, he wants nothing of the sort, because he really wants protectionism. His real objections involve, at the bottom line, the continued ability of the Union movement in the US to demand and get outrageous wages and impose crippling operational expenses on corporations. It is those factors, along with the taxes being paid by those companies, which casue businesses to look elsewhere for workers.

I doubt he or Krugman, and their Amen choir will acknowledge it.

posted by: Bithead on 01.08.04 at 03:01 PM [permalink]

I was struck by a different part of Schumer's editorial. He mentioned the farming out of radiology jobs to India. Radiology is something I know a little about, since I live in a house with a radiologist. There is currently a shortage of radiologists in the US, and the shortfall is increasing. One big reason for that is the proposals of HillaryCare, which equated having lots of specialists with having large medical bills. In order to reduce the costs of medicine, the thinking went, we should reduce the numbers of specialists. As a result of this thinking, the Clinton's administration began to favor GP's over specialists in the awarding of scholarship money. The result is a supply of radiologists which does not meet the demand.

I find it ironic that the thing Schumer is complaining about: getting cheaper medicine with fewer US radiologists, is, in a way, exactly what Hillary's task force wanted.

Dearth of radiologists

posted by: Ann on 01.08.04 at 03:01 PM [permalink]

A quick Google search of "radiologists shortage" would indicate your sister is wrong.

The shortage is a worldwide phenomenon. I guess Hillary is responsible for that?

Some of the reasons that are given for the shortage are an aging population and a dramatic growth in the use of radiology. Litigation is also given as a cause, at least for the US.

posted by: GT on 01.08.04 at 03:01 PM [permalink]

Dear all,

There's a logical flaw in assuming that the trading of goods, or the trading of labor and machines is theoretically equivalent. It's the issue of infrastructure. Suppose there was one country that was the "low-cost producer". All the workers and machines would move there. The result would be that country would build up the biggest labor and machinery reserves - production infrastructure. The production infrastructure of all other countries would be stripped. They would have no need of workers with production skills, and no need for production machinery. This of course is an obvious extreme, but it blows apart the notion that the idea of each country producing its own goods with its own machines and workers is theoretically equivalent to outsourcing workers and machines to other countries. For the record, the single country which had "all" the machines and workers after WWII was the United States - which is how we got so rich and powerful in the first place though things have changed since then. Obviously there is a huge benefit to being the production infrastructure center to the global market.

posted by: Oldman on 01.08.04 at 03:01 PM [permalink]

Mr James D,

You have a very good point. There's a notable science fiction story, that several other authors have cribbed from since, when what happens to people's lives when automation makes the majority of present human labor no longer necessary? Well the optimistic answer is that if one no longer lives by the sweat of the brow, or by the nimbleness of the hands, then one must live by the cleverness of one's brain.

We could imagine societies predominately composed of designers, analysts, authors, artists, performers, strategic managers, and project managers. It would be a heady utopia. I am not against the current trends, but I am cautious of economic modernization without forward vision. Right now people are losing jobs, but there is no forward vision of where they should go or to create an environment in which they could make up something for them to do with themselves.

In the absence of an alternative, we may hit the economic brickwall of citizens feeling disenfranchised and turning against the abstract ideals of market liberalization and globalization.

posted by: Oldman on 01.08.04 at 03:01 PM [permalink]

GT: I did what you suggested and Googled the supply of radiologists.

While I have no doubt that there may be a general lack of doctors world wide, and while I have no doubt that the increases in technology have created demands far outstripping the supply of doctors, what I found on google pretty much agreed with my sister.

Just about all the links which discussed the shortage in this country blamed, in part, the government policies of the 90's which intentionally worked to reduce the number of medical specialists, including radiologists.

It wasn't solely a Hillary Clinton idea. If you do googling on the issue of intentionally reducing the number of specialists, you'll find it was an idea proposed by lots of people in lots of places. The difference is, the Clinton administration was in a position to alter the balance of GP's vs specialists by changing the way medical schools and students got funding.

I posted a few of the links I found here.

posted by: Ann on 01.08.04 at 03:01 PM [permalink]


I don't want to hijack this thread and use our host's bandwith for something that seems to only concern us. So I'll post this and leave it at that.

Maybe I misread your original post but it seemed to me you were saying that Hillary's plan was mainly to blame for the dearth of radiologists. Yes, your Google search found some comments that seem to back this up but there are many, many more that never mention Hillary at all. In fact the second of your links mentions 10 different causes for the shortage, of which smaller number of radiology residents is only one. And even then they don't 'blame' Hillary but rather academic medicine. So I fail to see how it supports your point.

Finding the correct answer for this is beyond the scope of my interests right now. All I wanted to do is to make clear that radiology shortages, which you blame on Clinton's policies, is a wordlwide phenomenon and the great majority of explanations I found online say that other causes (mainly a dramatic jump in demand) are more important.

posted by: GT on 01.08.04 at 03:01 PM [permalink]

Just wanted to call attention to this egregiously ignorant statement:

I doubt he or Krugman, and their Amen choir will acknowledge it.

Anyone who's actually read Krugman knows that he is one of the biggest free trade defenders in academia. In the '90s, he was reviled on the far left for his advocacy of trade in Slate and in books like Peddling Prosperity. He, with Maurice Obstfeld, wrote the leading undergraduate textbook on international economics.

This commenter's analysis is about as nuanced as an eight-year-old's: evidently the only thought he was able to formulate is Krugman = bad!

What an idiot.

Meanwhile, shorter David Thomson: We should only defer to intellectuals who agree with my preexisting views. Intellectuals who disagree with me, meanwhile, are stupid. This is my version of political principle.

posted by: JP on 01.08.04 at 03:01 PM [permalink]

I was so blown away by Schumer's stupidity that I dropped my coffee. Charles Schumer and other protectionists (there's that word again) owe me a paper and a coffee mug.

posted by: Marc Scribner on 01.08.04 at 03:01 PM [permalink]

"Anyone who's actually read Krugman knows that he is one of the biggest free trade defenders in academia."

True, to a point.

However, I *also* know he is also very firmly against *anything* that the Republicans will do, up to and including anything on Free Trade. (IE; he works under the assumption Bush=Bad) Given his history, and his own writings, I suppose everything else, inclduing his devotion to 'free trade' will be sacrificed on that altar.

posted by: Bithead on 01.08.04 at 03:01 PM [permalink]

"Anyone who's actually read Krugman knows that he is one of the biggest free trade defenders in academia."

Have I said anything different? I’ve constantly harped on the fact that people like Brad DeLong, the arch defender of Paul Krugman, are free traders. So what? The question still remains is whether they will have the guts to go against the liberal academic community and support George W. Bush. Me thinks this to be most unlikely. Krugman’s visceral contempt towards the President is almost certainly a childishly immature way to say, “Look how liberal I am. “ Am I overly cynical? Well, when is the last time either Delong or Krugman have blasted the Democrat protectionists?

posted by: David Thomson on 01.08.04 at 03:01 PM [permalink]

David; the quote he was responding to is mine.

He also comment about the simplicity of my arument on the point. Comments about developing a properly nuanced argument within a 40*25 screen being like "Making Love in a Subaru" aside.... (Quick... who did that song?) .... I found the attempted defense of Krugman laughable.

And you're quite right, and we agree. Krugman's driven by his hatred of Bush more than all other factors, and therefore loses all sense when the subject comes up... including common sense on free trade.

And no, he never has taken on any of the left much less academia on the issue of trade, at least so far as I've ever seen. Then again, one needs to ask the question....who would mount such a challange that writes for a Sulzberger paper?

posted by: Bithead on 01.08.04 at 03:01 PM [permalink]

Ann- the shunting of medical students into primary care specialties did NOT begin with the Clinton administration and/or Hillary, period. I appreciate that you have an anti-Clinton agenda to espouse and you would like to use this issue to do so, but it just doesn't fit. The under/over supply of medical specialists is a complex issue and has been directly manipulated by both government and professional organizations for over 40 years. Educate yourself before you lash out about an issue you know nothing about.

posted by: E James, MD on 01.08.04 at 03:01 PM [permalink]

As a 35 year old, major *American* university trained neuroradiologist who had to decide his future in 1995, I can wholy attest that Ann is totally correct. Ath that time the threat of single payer / socialized health care from the Clintons caused universities to place enormous pressure for students to choose primary care -- to be the *gatekeeper* -- in 1995; "they'll control the patients" it was said.

The government subsidized resident training stipends [salaries] through what was then known as HCFA (Health Care Finance Administration).

They cut radiology training slots by 25-40%; our university dropped from 10 residnts a year down to 6. Combined with retiring radiologists and growth of imaging by 12%/year , we now face the shortage. Even the manpower of India cannot make a significant dent in the workload. And, as an aside, three observances: one, even the workforce of India cannot make a significant dent in the increasing workload, and, secondly, having overread many of the Wipro interpreted studies, the quality of their interpretations is such that I would not have any family members subjected to this risk just to save some money. Third, ask any imaging center about teleradiology transfer across town. Sure, it works. Reliably? No. Reliably to India? Ha.

posted by: JB on 01.08.04 at 03:01 PM [permalink]

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