This just in...D&S reads the news (#9)

by Dollars and Sense

The ninth in a series of blog entries by D&S collective member Larry Peterson.

Last Wednesday, at Harvard, former Federal Reserve governor and current Princeton economics professor Alan Blinder engaged Jagdish Bhagwati of Columbia University in a debate on the costs and benefits of the phenomenon known as offshoring (the tendency of companies legally domiciled in one country—usually a rich one—to shift production capacity to another country—almost always poorer, often considerably so—in order to reduce production costs). Blinder has been in the center of controversy regarding the topic since he published last March in Foreign Affairs. In the article, he claimed that his research indicated that the susceptibility of jobs to offshoring could no longer be correlated to levels of education and income (higher education and income being less correlated to offshorability) as had been the case hitherto; instead, correlations were increasingly being made with the mere capacity of work to be rendered or transmitted digitally. Accordingly, he noted, large segments of the workforce in the US are becoming—at an alarmingly rapid pace—vulnerable to job dislocation; and those affected are increasingly more politically active higher-earners. This being the case, Blinder warned, there is a real threat of reversal to the freeing of trade that has taken place in the last few decades if measures weren’t taken to somehow reduce the disruption. The article attracted a good deal of discussion and criticism (attacks on offshoring and other presumably efficiency making measures being generally looked at as heretical in mainstream economics), but the debate was re-ignited in late March when the Wall Street Journal did a front-page profile of Blinder which centered on his controversial thesis: hence the event at Harvard.

Opposing Blinder was Jagdish Bhagwati, one of the most renowned trade theorists in the world, who has over the years developed a reputation as a fire-and-brimstone, if sophisticated, advocate of free trade. His concept of “kaleidoscopic comparative advantage” constitutes an attempt to adapt the classical theory of comparative advantage (a good summary is by Paul Krugman), dating back to David Ricardo in the early nineteenth century (gains from trade accrue to all parties if trading partners specialize in what they’re best at producing, even if certain of the parties have an absolute advantage in producing everything), to modern conditions. In the Ricardian formulation, labor is the only relevant factor of production—and a relatively anchored one at that--and gains from trade tended to be long-term and cumulative. Bhagwati’s formulation takes into account capital and much higher labor mobility and suggests that comparative advantage, formerly viewed as long-term and relatively constant, is better seen under modern conditions as a far more fleeting and volatile affair, but one whose benefits remain incontestable for all.

The debate, despite the fact that the topic generates so much apprehension in the wider society, was a decidedly lighthearted affair: numerous (and generally rather lame), indeed excessive, jocular allusions to the various participants were received with almost footstomping enthusiasm by a crowd that tended toward the sycophantic. Clearly, the Harvard crowd did not share the fears of many of the rest of us, no matter what side of the academic debate they found themselves on. Blinder led off by making it clear that he had no quarrel with the notion of comparative advantage, and did not favor the implementation of any policies which would restrict trade in any way; he was only concerned with developing measures which would ease the transition for those adversely affected by trade rather than artificially protecting their jobs. He then laid out his claim and touched upon the rationale of his study. Based regression modeling, he came up with a figures that astonished even as conventional a macroeconomist as he: that 30-40 million jobs are susceptible to offshoring in the next decade or two, and that 14% of wage losses are already accounted for by the phenomenon. He sees two forces of unprecedented power driving this phenomenon: exceptionally rapid and far-reaching technological change (which has itself reduced capital costs—especially computing power—drastically, consistently and quickly), and the incorporation of the equivalent of three enormous trading blocs—the Soviet Union and its satellites, China and India--into the global labor supply. These forces act in the following way: lower capital (remember, many capital goods are getting cheaper all the time) to labor (the supply of which has exploded) ratios mean that wages will be less in relation to the return on capital (as capital becomes the scarcer factor of production, and thereby commands a premium). And these gigantic forces aren’t going away anytime soon; in fact, they will certainly become farther-reaching. That being the case, policy responses must be developed now. Economists and policymakers are in for a real shock if they fail to do so, now.

As for actual policy proposals, Blinder mentions three: first, improvement of the safety net; second, better and more appropriate training for the jobs that will tend to remain insulated from the threat of offshoring, especially “high end personal services,” which can only be performed locally; and “taking advantage of comparative advantage in the right way,” or focusing training and development on areas in which the US currently has an overwhelming advantage (especially high technology), or can quickly create one in response to market demand (using aspects of the same technology). If these proposals are adopted, Blinder thinks, the loss of “impersonal services” to offshoring should neither result in unbearable pain for those affected or loss of productivity and growth in the economy in general: everybody will win.

Bhagwati’s response was largely beside the point and even incomprehensible. It amounted to the claim that there is simply no hard evidence that the costs of offshoring have outweighed the benefits, or will do so in the future. He accused Blinder of simply equating mere offshorability with actual job losses, an absurd claim given the fact that Blinder had just gone to some pains to explain the distinction between personal and impersonal services. He did make the important point that huge price differentials exist between markets for complicated and even unknowable reasons, and hence that offshorability will not necessarily translate into nearly as many job losses as might be apparent. As for Blinder’s methodology, Bhagwati didn’t mention any specific complaints, but merely noted that even if Blinder’s numbers are correct, the fact the US economy creates and destroys so many jobs every year shows that there’s nothing specific about offshoring that doesn’t apply to other factors (especially technical change), and that it should not be singled out as the focal point for policy tinkering.

Bhagwati has in the past been emphatic in expressing concerns for the world’s poor, and in rightly documenting the enormous disadvantages they face due to restriction of market access in the developed countries from subsidies (which poor countries can’t afford) and intellectual property protection (which Bhagwati believes to be no more or less than another case of market-restricting rent-seeking) in particular. For some reason he felt no compulsion to voice these concerns in any detail at Harvard. Instead, he noted that, in important respects, trade flows between the developed and undeveloped worlds are decidedly one-way: there are no economists migrating from Harvard to Delhi, for instance; it’s all the other way round. All the more reason not to fear offshoring in particular, and globalization in general: there will always be room here for certain kinds of work, and supporting industries to meet the needs of those engages in such pursuits. This suggested nonchalance about the vulnerability of the working classes in the developed countries that bordered on the crass. But he outdid this by actually saying that there was no need for additional measures to aid the displaced in the US because a safety net has existed for those adversely affected by trade since the Kennedy administration. Blinder had just finished showing how that this legislation, and other half-measures adopted since then, can hardly be taken seriously in terms of their adequacy, then or now. Maybe that was in keeping with the valid point that workers even in the US have something to fall back on, something that workers in developing countries can only envy. But, again, he resisted the chance to bring the plight of the poor world into the discussion. Never mind the idea of-God forbid-looking at the interests of the poor and disadvantaged in both the rich and poor countries as one, rather than as diverse and competing.

What Bhagwati did recommend by way of policy initiatives differed from Blinder in an important respect: while Blinder sought to make training more specialized, Bhagwati felt that the exact opposite needed to be emphasized: in a world in which the focal points of comparative advantage were constantly shifting and being reconfigured, considerations of flexibility demand that education be more general than specific. That two of the most prominent economists in the world can disagree so fundamentally something so basic in both their prescriptions suggests strongly that education is far too important a matter to be left to economists.

Four commentators were chosen to give their impressions of the opposing viewpoints. Only two of them, Lori Kletzer of the University of California at Santa Cruz and Richard Freeman of Harvard, really had anything interesting to say. Kletzer re-ran Blinder’s numbers with one important change in parameters and came up with a radically different result: offshoring still does correlate strongly with income and education levels. But she confirmed the 40 million figure concerning the number of jobs susceptible to offshoring. She noted that statistics regarding job change are notoriously primitive, more appropriate to the age of factory production and widget counting than commerce at the speed of light and multitasking. Her talk provided a much--needed reality check, and was probably the high point of the entire event. Freeman, bizarrely if refreshingly attired in a fedora during the entire debate, started by making a point that should be obvious to everyone, but is often overlooked: that opening to trade is almost always accompanied by an increase in the size of the informal economy; and that alone should indicate that redoubled efforts to shore up the safety net are very much in order as trade grows. He went further and noted that an appropriate level of protection will not come cheap; and that elites disproportionately benefiting from globalization should be put on notice that increases in taxation-big increases-will be an opportunity cost for their outsized gains. Not that this is likely to happen, needless to say. But that isn’t the only objection one can make to Freeman’s generally well-meant comments, and, by extension, to the far more limited recommendations of Blinder and Bhagwati; all of them focus on reactive measures to assuage the pain of displacement, and none of them really focus on ways in which worker’s participation in the workplace can be nurtured and intensified (with productivity levels accordingly rising in tandem), outside of the erratic training proposals. One is left with the impression that these economists are more interested in shunting disadvantaged workers out of the way and keeping them quiet than engaging them in a globalization that benefits all, as they claim to be doing.

I left the debate with a number of questions (there were no questions taken from the floor, as time allotted for that purpose had lapsed). First and foremost on my mind was something that struck me when I read Blinder’s Foreign Affairs article last spring: isn’t all this emphasis on face-to-face services suspiciously suggestive of the Malthusian view, generally rejected out of hand by mainstream economists, that spending by the wealthy on luxuries is necessary to prevent gluts in the labor market? And this is no mere academic quibble: one of the distinguishing features of the contemporary economy consists in the fact that its wealthiest members work, and are some of the most educated and productive participants in the economy; in former times this was not so. By catering to these people--who would represent the most stable demand for high end services in the economy—and providing them with everything from healthcare to recreation and education and mere timesaving devices, service workers are essentially giving them the means to increase their competitive advantage over everyone else, many of whom are finding the same services, if provided publicly, failing in quality--if not absent altogether—or skyrocketing in price. In this sense, the developments and measures regarded as most positive for working people by our economists will prove doubly regressive: along with relatively less security, new service workers will provide the rich with the means not only to realize the gains from globalization associated with their present displacement, but indeed to increase their gains in the future. Where qualifications turn into privilege is the way a sociologist (I forget which one) recently put it.

Another question I had concerned productivity. According to “Baumol’s Law,” services by their very nature are less productive than manufacturing, generally speaking. The usual illustration goes like this: you don’t want those providing you with a service to economize; you want the full treatment, in other words. So, you don’t want your waiter, say, to run away in a mad dash to get your order; instead, you want him to display the bottle and remark learnedly on the vintage of the wine. Another strange fact about our economy’s recent performance (until very recently) concerns the fact that productivity levels have been stellar, and this in an economy which is 70% services. If Baumol’s “law” still holds, how is this possible? And if it doesn’t, isn’t the celebration of services on the part of economists just a bit disingenuous? For the shift to services would mean a decline in productivity, and hence, if not augmented by longer hours, in living standards. For a country with current account and budget deficits the sizes of ours, any loss of productivity (and hence attractiveness to foreign investors financing the deficits) should be quite worrying to economists, one would think. Indeed, a further question for Blinder would be this: Given the above illustration of Baumol’s law, aren’t “high end personal services” precisely the type of services in which productivity gains will be hardest to realize? And, if not, why? Indeed, could such a difference with impersonal services be quantified or measured in the first place?

Finally, I would ask all the participants about some of the odder aspects of globalization: that a huge percentage of world trade consists of transfers between multinationals and their foreign subsidiaries, and that another huge chunk is in like goods: trade in more or less the same thing. Don’t these peculiarities force us to go beyond even the “kaleidoscopic” notion of comparative advantage?

At the end of the day, the debate was really a klunker. I should have known. In fact, the thing is a perfect allegory. Unlike the distinguished participants, and most of the audience, I had to take time off from work to go to the event, and had to make up the time by working three extra hours the next day. So, by substituting my time—and the compensation I would receive for it by working—my warm body in a seat at Harvard potentially increased in a miniscule way, but one subject to network effects and the increasing returns characteristic of the latter, the social and intellectual capital of the participants, who were being paid—directly and indirectly (free publicity for their books, etc) to be there. What better illustration of the world the economists and elites have in store for us is there? And, to cap it all off, I’m the one who is supposed to be more flexible!

Labels: Alan Blinder, Baumol’s Law, Jagdish Bhagwati, offshoring

 

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5/07/2007 11:53:00 AM