Monday, May 7, 2007

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Do I have blinders about Blinder?

Over the weekend, Alan Blinder once again vented his concerns about the future of offshoring, this time in the Washington Post:

[T]wo powerful, historical forces are driving these changes, and both are virtually certain to grow stronger over time.

The first is technology, especially information and communications technology, which has been improving at an astonishing pace in recent decades. As the technology advances, the quality of now-familiar modes of communication (such as telephones, videoconferencing and the Internet) will improve, and entirely new forms of communication may be invented. One clear implication of the upward march of technology is that a widening array of services will become deliverable electronically from afar. And it's not just low-skill services such as key punching, transcription and telemarketing. It's also high-skill services such as radiology, architecture and engineering -- maybe even college teaching.

The second driver is the entry of about 1.5 billion "new" workers into the world economy. These folks aren't new to the world, of course. But they live in places such as China, India and the former Soviet bloc -- countries that used to stand outside the world economy. For those who say, "Sure, but most of them are low-skilled workers," I have two answers. First, even a small percentage of 1.5 billion people is a lot of folks. And second, India and China will certainly educate hundreds of millions more in the coming decades. So there will be a lot of willing and able people available to do the jobs that technology will move offshore.

Looking at these two historic forces from the perspective of the world as a whole, one can only get a warm feeling. Improvements in technology will raise living standards, just as they have since the dawn of the Industrial Revolution. And the availability of millions of new electronically deliverable service jobs in, say, India and China will help alleviate poverty on a mass scale. Offshoring will also reduce costs and boost productivity in the United States. So repeat after me: Globalization is good for the world. Which is where economists usually stop.

And where my alleged apostasy starts.

For these same forces don't look so benign from the viewpoint of an American computer programmer or accountant. They've done what they were told to do: They went to college and prepared for well-paid careers with bountiful employment opportunities. But now their bosses are eyeing legions of well-qualified, English-speaking programmers and accountants in India, for example, who will happily work for a fraction of what Americans earn. Such prospective competition puts a damper on wage increases. And if the jobs do move offshore, displaced American workers may lose not only their jobs but also their pensions and health insurance. These people can be forgiven if they have doubts about the virtues of globalization.

We economists assure folks that things will be all right in the end. Both Americans and Indians will be better off. I think that's right. The basic principles of free trade that Adam Smith and David Ricardo taught us two centuries ago remain valid today: Just like people, nations benefit by specializing in the tasks they do best and trading with other nations for the rest. There's nothing new here theoretically.

But I would argue that there's something new about the coming transition to service offshoring. Those two powerful forces mentioned earlier -- technological advancement and the rise of China and India -- suggest that this particular transition will be large, lengthy and painful.

I've read Blinder's longer paper on this topic, and I must confess -- again -- that I don't see how he's coming to this "large, lengthy and painful" conclusion. As Greg Mankiw points out:
Alan says the transition to the new equilibrium will be "large, lengthy and painful." When he spoke at Harvard last week, he said the transition would take about 30 years. But the very length of the transition will make it less painful. Over the course of a generation, workers can gradually retire from shrinking industries, and new workers can be trained for the growing industries that take their place. Of course, some individuals will experience painful transitions, but that is always the case in a dynamic market economy. I don't expect future transitions to be macroeconomically different than past transitions. Even if imports as a percentage of GDP continue to rise as Alan predicts, I would nonetheless expect the average rate of unemployment for the U.S. economy to be about the same over the next thirty years as it has been over the past thirty.

After the Blinder-Bhagwati debate last week, there was a dinner at the Harvard Faculty Club at which Ben Friedman asked Alan a good question: Now that Alan has had this epiphany about offshoring, does he favor economic policies any different than he favored a decade ago? Alan thought about the question for a moment and then said no. I found that answer reassuring. My fear is that many politicians reading Alan's work on offshore outsourcing will not come to the same conclusion.

This brings us to a point that Dani Rodrik raised earlier in the week about what happens when economists start debating public policy:
Finally, let me note the irony in how a discussion on free trade among economists quickly ends up being a debate on its politics—that is, a debate on whether this or that trade policy which on economic grounds is actually desirable can also be politically feasible. We are way beyond our area of expertise. Your hand-waving is as good as mine.

Scratch any strongly-held view about free trade, and you will find (typically) unexamined political assumptions underneath. Even if we do not end up agreeing, the value of the present exchange is that it is getting us to reveal what those assumptions are.

If you eliminate the word "free" from both paragraphs, then I agree 100 percent with Rodrik.

By economist standards, Alan Blinder is remarkably sophisticated about the ways in which politics and economics intersect. What puzzles me, therefore, is why he is making Cassandra-like noises about a phenomenon that does not justify such warnings if it takes place over several decades (and there's decent evidence that this is the case). As a political scientist, I have two hypotheses:

1) Blinder believes that the political effects of increased offshoring will be substantial enough to make the current tide of protectionist sentiment seem like a baby wave. To prevent a stronger backlash, he feels it necessary to warn people with Very Scary Numbers to prompt action.

2) Blinder believes that the United States should more closely resemble the Scandanavian countries in being both economically open and more socially democratic. Since a direct political campaign for a European-style social welfare state will not fly in the U.S., he feels it necessary to use Very Scary Numbers about trade as a backdoor tactic.

My concern is that however well-intentioned Blinder's tactics might be, he's overlooking another possible outcome of his self-proclaimed apostasy, which is that it empowers economic populists with the mantle of intellectual respectability. Saying that upwards of 40 million jobs will be threatened by offshoring sounds scary, even if the data as of yet doesn't show those jobs have actually been offshored. As some other economists have observed, entrenched interests will always exploit these kind of economic fears to implement policies that serve their own interests. Furthermore, some political scientists have pointed out that these protectionist policies will also be far from transparent.

Maybe Blinder is speaking truth to power and I am simply adopting too static a view of trade policy. But I can't shake the feeling that Blinder has adopted the Jeffrey Sachs theory of political change.

UPDATE: Robin Toner has an excellent front-pager in the New York Times today that gets at how these political questions are playing out among House Democrats. Some of them clearly share the Blinder view of what to do. What disturbs me, however, are passages like this:

Since the Democrats took control of the committee in January, the 75-year-old Mr. [Sander] Levin has met with restless Democratic freshmen who helped their party regain the majority by promising to “do something” about the job losses caused by a globalized economy — and who now want to deliver....

Mr. Levin and his fellow Democrats face a political backlash on trade and globalization as intense as it has been in years, a point underscored by the freshman class of 2006. Across the industrial heartland and the Northeast, those freshman campaigned on a scathing critique of American trade policies. How could Americans compete against workers in developing countries, they asked, while maintaining decent wages, health benefits and pensions?

“It’s an issue near and dear to our hearts, and one we feel we need to deliver change on,” said Representative Betty Sutton, a Democrat from northeast Ohio.

Whenever a politician presents a demand or proffers a promise to "do something" about trade, I get hives.

posted by Dan on 05.07.07 at 11:49 PM


Prof Drezner, It seems to me that more and more you stand alone in your blind faith in free trade and comparative advantage. Maybe you should reevaluate. In the long run, it is probably true that everyone will be better off. But Keynes said it best: In the long run, we're all dead. In the meantime, there are millions of American programmers, accountants, architects, radiologists, etc, etc that are losing their jobs to Indians and Chinese, and (for the moment) there are no good-paying jobs for these people. This is not the opinion of a wild-eyed protectionist. For years, US median income has been falling, even though the average is increasing. It doesn't take a PhD in stats to figure out what that means. Also, from a macro-econ point of view, it seems clear that an increase in labor supply would depress wages and increase return on capital, which is exactly what is happening in the developed world. I am NOT suggesting that we restrain trade. I am suggesting that we search for ways to make American workers more competitive. What is wrong with recognizing the pain this transition is causing to our neighbors? When Tufts starts offering courses teleconferenced from Bangalore, will you finally understand?

posted by: OpenBorderMan on 05.07.07 at 11:49 PM [permalink]


Long time reader. I appreciate your site. However, something about free trade advocacy is not adding up. I refer you to

where the story about IBM's offshoring (a fair trade, no?) is up to 779 comments and growing. Sample some of the direct anecdotal evidence from the very unhappy IBMers. I am an IT employee in a automotive in Detroit and we are hearing the same horror stories.

This article was, interestingly, linked by a commenter at Kevin Drum's site.

My view so far: Management focused on a simple cost model is destroying the corporate knowlege base and may be forcing nationwide job changes that will guarentee a political response.

I just don't think your free trade statistics are taking into account the income distribution shift that offshoring is driving. We get cheaper goods and services, but our aging wage earning population is getting less overall value. Not everyone can be an entrepreneur and we can't all make a living selling each other real estate.

Where in your models is the part about providing a place for the work-a-day joes? Even if they do get educated for the information age jobs, they are still undercut by lower priced labor overseas (where our embedded societal costs are often skimped on or eliminated). This in itself is a negation of hard won political victories here.

Illegal immigration is cutting into the unskilled labor pool here and H1B and offshoring is hitting the middle to top earners.

Could it be that you are not measuring the the full economic system in your models?

posted by: jdwill on 05.07.07 at 11:49 PM [permalink]

"In the meantime, there are millions of American programmers, accountants, architects, radiologists, etc, etc that are losing their jobs to Indians and Chinese, and (for the moment) there are no good-paying jobs for these people."

Really? Millions? For whom there are no good-paying jobs? Is the unemployment rate for programmers, accountants, architects, and radiologists really sky high? Do you have the data? ANY data? Because I develop software for a living, I'm just not hearing about millions out on the streets.

posted by: Slocum on 05.07.07 at 11:49 PM [permalink]

No Slocum, I do not have specific unemployment data by profession, not that it would help much if it were available. Your personal experience notwithstanding, surely you are aware that lots of jobs HAVE been outsourced overseas. What do those laid off people do? How do they pay their mortgage and their children's education? Answer: They take any job they can get. Now the following part is just a guess, but it's based on dept of labor stats and backed by my observation of friends who were "outsourced." Most of the new jobs created in the US are in retail sales. Now personally, I think these folks are much worse off for the exchange, even if they can get a bargain on a new TV at Walmart.

As for my personal experience: My business has been impacted dramatically, because my clients have forced me to compete with Asian contractors for the same business. I've embraced the new world order and I'm in a whole new business. Everyone that used to work for me is employed again. I'm sorry to say that only one is making more money than before, and in the same line of work. I'm glad that things are going well for you. You and Dan Drezner are doing just fine and therefore, for you, the problem does not exist.

Now unlike many people who are critical of globalization, I do not think we should restrict trade. I agree that in the end, free trade works well for almost everyone. The difference is that personally I am more concerned for displaced US workers than for the asians. I think we should try to find a way to help US workers compete in the global market. This would not have to take the form of tariffs or handouts. We can compete the same way other countries do: with an educated workforce and fiscal discipline.

Or you can pretend the problem doesn't exist until the pink slip arrives.


posted by: OpenBorderMan on 05.07.07 at 11:49 PM [permalink]

Bio-Medical Development is next.

When you lose the ability to practice the profession fruitfully in this country that you spent years obtaining a graduate degree to get, the whole "retraining" argument doesn't come across so well.

posted by: Babar on 05.07.07 at 11:49 PM [permalink]

Hmmmm, so the tenured professors aren't worried about offshoring in the short term.

I wonder why not?

By the same token, though, the workers who have now become plumbers, builders, etc., should be happy, too. Maybe its good the programmers who invented the internet now get to reap the whirlwind a bit, eh?

I think Blinder's point is simply that we should watch out for the consequences of offshoring...while in the long term they will be good, but in the short term they could be bad...

One thing we could do to help the situation is to press these emerging economies to fully open their doors to our products. China wouldn't have their own brands of cars if they hadn't forced foreign companies to have joint-partners, etc.

posted by: Aaron on 05.07.07 at 11:49 PM [permalink]

and yes, I am aware Dan may not have tenure. My point is that when you have to compete head on with China, its not fun, and you will get a lot of gray hairs.

Here's a nice example: If you want to sell to Walmart as an importer, guess where you have to go to sell them products now?

If you said Bentonville, you would be wrong. You have to fly to Shenzhen.

posted by: Aaron on 05.07.07 at 11:49 PM [permalink]

Take a look at soft real wages, lost pensions, lost health care coverage, underemployment, home foreclosures (not bubble related)forced early retirements and a whole raft of symptoms.

If you have a secure job it is a transition, if you are one of the losers you have a tragedy.

40 million jobs are not going overseas. This does not mean the problem does not exist for blue collar (and increasingly) white collar America.

Tough to argue that increased trade is a panacea without significant transition costs and pain.

posted by: save_the_rustbelt on 05.07.07 at 11:49 PM [permalink]

I don't think Dan has blinders on regarding trade, but as I've written here before do believe he like many academic economists is a little unhealthily disposed to look for good news that supports his faith in trade liberalization while dismissing contraindications as mere "adjustments" in the world's commerce.

He isn't the only one to look past facts that disturb an easy explanation of what trade means. Most of those American workers forced out of well-paid jobs over the last quarter-century were displaced because their own employers made serious business mistakes, or because they chose to replace expensive labor with cheaper capital. China and India had nothing to do with it.

But they are significant factors now, and China in particular is a big enough factor to raise doubt as to whether steering a steady course toward more liberal global trade rules is all we need to do anymore. As Robert Samuelson explains in the Post today, China is pursuing a mercantilist trade policy -- a losing game in the long run, but in the short term a policy that deliberately increases employment in China while undercutting wages in other countries. It won't be just the United States that reacts negatively to an undervalued yuan and subsidies to state-run exporting industries the longer they continue in China, and sermons on the benefits of free trade won't answer.

I can't speak to any secret agendas Blinder may have. I don't know that he has any at all, and he wouldn't need to in order to recognize that the struggle of trade liberalization vs. rank protectionism as not the same today as it was in the 1950s, or even the 1980s.

posted by: Zathras on 05.07.07 at 11:49 PM [permalink]

I'd add one thing to the above post, lest I appear to be saying that the only thing that has changed is China. American workers are likely paying a price now because businesses, especially publicly-trade corporations, are being managed differently now that executive compensation is so often tied to short-term company performance as reflected in stock prices. Executives are probably more likely now to look at shedding labor to cuts costs in terms of its benefit for the next quarter, with less concern about the implications three to five years down the road when they may have moved on to another company. Offshoring isn't the only thing that would look more attractive if this were correct (so, in many cases, would mergers), but I wonder if when we talk about a particular offshoring move "not working out" we are able to distinguish how well it worked for the company involved from how it worked for the leadership at the time the offshoring was first undertaken.

posted by: Zathras on 05.07.07 at 11:49 PM [permalink]

No Slocum, I do not have specific unemployment data by profession

I didn't think so.

not that it would help much if it were available.

Why wouldn't it help? You've claimed that there many "accountants, architects, radiologists" among those laid off. But it seems that you don't have even anecdotes about those categories.

Your personal experience notwithstanding, surely you are aware that lots of jobs HAVE been outsourced overseas. What do those laid off people do? How do they pay their mortgage and their children's education? Answer: They take any job they can get.

I've been in the computer industry for over 20 years. I've seen many rounds of layoffs due to changing business conditions and mergers and acquisitions. For the laid off employees it makes no difference whether they were laid off because revenues didn't meet expectations or because the parent company bought another company and is going to cancel the product line they work on, or because of outsourcing, or whatever.

Do laid-off workers often make less? Yes, quite often they do. Why? Well, over the years I've seen many, many people paid ridiculous amounts of money to do not-really-terribly-complicated things just because of shortages. Windows programmers when Windows was new (late 80s early 90s), Web site designers (mid-late 90s), Y2K programmers, and so on. I've also seen rounds of layoffs where the managers took the opportunity to get rid of their 'dead wood' -- people who weren't earning their salaries and were, therefore, highly unlikely to find anyone else to pay them as much.

Most of the new jobs created in the US are in retail sales.

More than 50% of new jobs in the U.S. are in retail sales? B.S.

My business has been impacted dramatically, because my clients have forced me to compete with Asian contractors for the same business.

Yes, well, the business of high-paid Windows programmers was impacted dramatically when large numbers of people learned how to do event-driven, GUI programming. The businesses of high-paid web designers was impacted dramatically when everybody and his brother in law learned to design web pages. Does it really matter that the new competitors are Indian or Chinese?

And whether you like it or not (and, hell, whether we erect trade barriers or not), software is a global business and the Indians and Chinese can get into it if they're able. And companies that do not take advantage of Indian and Chinese talent are going to lose out to companies that do.

But all of that said, and even given the rise of Indian and Chinese IT, U.S. programmers are not currently experiencing either high unemployment or low wages. Yes, life can be tough for middle-aged programmers with outdated skills who have big mortgages and kids in college who find themselves laid off. But that's true regardless of the reason for the layoffs and 'outsourcing' is only one reason among many that companies lay off developers. The computer industry is fast-changing, and companies grow and shrink all the time (and hire workers and lay them off).

posted by: Slocum on 05.07.07 at 11:49 PM [permalink]

Slocum, I too have read stories about people with a hot skill that are in the right place at the right time and their fortunes rise and fall dramtically. On the other hand, the employees that my company laid off (and others that I know of) were not overpaid or out-of-date, but they were middle aged. As near I can tell, their only crime was being Americans and suddenly forced to compete with workers in a country were the standard of living is substantially lower. I and many others adapted and did well. Others are in deep shit through no fault of their own. I hope you never have to face this prospect yourself. Good luck.

posted by: OpenBorderMan on 05.07.07 at 11:49 PM [permalink]

Comments by ‘Slocum’ are right and most other comments are wrong and misplaced.

I have been programmer ever since my post graduation in 1989; started making living by exporting ‘software services’ from India when the offshoring wave was yet to catch in India; then folded my business in India because I could not afford any programmers for my business; came to USA in 1997 and rode the DotCom boom and have survived that bust; all in Silicon Valley. I am quite content to be a USA citizen and still work competitively in Valley along with so many coworkers in India.

So it is sad to say so much misinformation and lack of understanding is going on here. I will not be able to put forward a coherent theory about all this in short space as like a competent Economist might do; but I will simply list the points in this regard.

1. I am not alone in Valley who is able to make living here despite the cut throat competition of engineers from India. In fact so many of them are successful even not being entrepreneur – plain vanilla engineers. The reason is skill set acquired by these engineers is simply not available outside USA in many cases. How are you going to get programmers who have worked with all versions of Java and JBoss with all the latest technology quite well understood? Those are in short supply in India as well as here. So companies simply pay for the competence wherever it is available. Companies are not averse to spend that money at a high cost location if the value addition is justified.
2. Have you read quarterly reports of Indian IT biggies (Infosys, TCS, Wipro and Satyam)? The single most important aspect what a Bombay Stock Exchange Broker looks at it is the footnote of quarterly employee turnover (say apart from the Rupee Dollar exchange rate). What it indicates is these businesses are operating under tremendous shortages of skilled engineers and managers. For many of those people salaries are comparable to what you may pay to such skill set in Valley. In short it is true global market for skill sets. Not for nothing Mathematicians from French topnotch institute would command premium anywhere in the world – despite French economy not doing that well.
3. Why are these economists losing their sleeps about Programmers and Accountants? Do you know stories of Nuclear Physicists? That was boom profession when Cold War was in full force, Defense funding was high and Nuclear Industry was not totally a bad word in America. After 1989, these Nuclear Physicist and Physics Ph.D. technologists started to loose lot of jobs. The first company I joined in 1997 had shortage of web programmers so much so that it had 3 Physics Ph.D. holders happily working as programmers. And now that America cranked out its first new Nuclear Power Plant after almost 30 years, do you think we are going to have enough engineers in that field? Of course not.
4. Next, how do you produce all these Alternative Energy industries in ‘offshore’ manner? Who is that fool who is saying those Billions in India and China will provide these Alternative Energies to USA and rest of the world? How on Earth are you going to have that industry without having qualified Physicists and Chemists and Electrical Engineers; all 100% working within America? Go and read public papers published by Indian Government which keeps on hopelessly watching perennial decrease in number of university students in Physics and Mathematics; leave alone the quality issue. Every one over there wants to go Engineering – because they will do the offshore jobs – but then there is no competent talent to develop and execute this Alternative Energy industry. You Economists and Media people keep on missing the virtuous possibilities of this industry and just get engaged in creating noise about irrelevant issues. Check Germany and Japan for their competitive edge in Solar Technology over Americans. Engineer / Labor costs are higher than USA and USA does not have any less competent technologists. Still these countries are excelling in these technologies along with respectable employment generation.
5. One Valley engineer lost his job in the DotCom bust and he simply started the business of contracting to install solar panels in Valley. His is company called ‘Akeena Solar’ employing hundreds of people now.
6. Agreed, not all may be in the position of acquiring sophisticated skills all the time. But is it not the topic for policy makers about how to continuously educate / train people? USA is still having tremendous shortage of Nursing personnel and all Nursing Colleges are bursting at seams by the students who are scrambling for that profession. The word is out that there is shortage and jobs are plenty and hence people are going there. Some Doctor professions will come under offshoring pressure. But the biggest reason will be the mess of American Health Care System, part of which is forcing Doctors to pay for higher education for around 12 years before earning a dime where as rest of the world does that in 6 years. If the costs do not come down, ‘medical travel’ will get boost and people will start getting preplanned surgeries from India and Global Insurances and Corporations will buy those services. Lawyers will work out the deals. The point is there are so many policy battles which need to be worked out for employment generation; harping on ‘offshoring’ is misplaced.
7. Look at Sarkozy election in France – he did not sale any rosy stories to French people. But people still voted him knowing that the way forward is hard work. I do not think we Americans are any dumber than French. Which means, when rightly and honestly explained; Americans will understand the benefits of offshoring and all the adjustments one has to do due to Globalization. Fear mongering is not the way. For Economists to worry that ‘oh, how these bad politicians and gullible public will face this crisis’ is simply arrogant.
8. Concrete suggestion for workers displaced by offshoring or by any loss of job is – offer basic medical insurance for that worker and her family for a year or so. We only give 6 months of Unemployment allowance. In addition there should be 12 months of some basic medical coverage. That will be a big help for these displaced workers to concentrate on new opportunities. I am speaking this because, I have personally gone through that ordeal.

posted by: Umesh Patil on 05.07.07 at 11:49 PM [permalink]

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