Paul Craig Roberts debates Jagdish Bhagwati in the Wall Street Journal


But is it bad for the U.S.
economy?
Two economists debate the issue

By Timothy Aeppel

Wall Street Journal May 10,
2004.

DOES OFFSHORE outsourcing hurt the
U.S. economy by draining away jobs and investment, or
does it ultimately make the U.S. stronger? Is it a
cost-cutting tactic that should be encouraged, or should
it be punished in some way? The issue has become a hot
button this election year.

Framing the debate in economic
terms can be tricky, because while economic theory
offers tidy equations that lead to win-win situations,
there are losers in the real world. Workers who see
their jobs shipped overseas are hurt, even while
companies and the economy as a whole may see benefits,
such as lower prices for consumers.

It`s also problematic that the pain
is felt quickly and prominently, while benefits are
spread out over time and hard to quantify, says Haseeb
Ahmed, an economist at

Economy.com
, an economic-research company in West
Chester, Pa. Still, many economists say offshore
outsourcing is good for the U.S. for the same reasons
that free trade is beneficial for a vibrant economy.
"Arguing that outsourcing hurts is arguing that free
trade hurts,"
says Mr. Ahmed.

There are many people saying
precisely that these days, as reflected in a
protectionist wave in Congress and in conversations on
the streets of battered mill towns in North Carolina and
among unemployed computer programmers in Boston. So we
asked two economists, known for their positions on
opposite sides of this debate, to conduct an e-mail
conversation on the subject.

Jagdish N. Bhagwati is a university
professor at Columbia University in New York and a
leading expert on trade who has emerged as a defender of
offshore outsourcing. He was born in India and was
educated there as well as in England and the U.S. He
earned his Ph.D. from the Massachusetts Institute of
Technology and is currently the Andre Meyer Senior
Fellow in International Economics at the Council on
Foreign Relations in New York.

Prof. Bhagwati says the
offshore-outsourcing controversy has arisen over the
growing ability to import services from other countries
through advanced computer technology, like having
radiologists in Bangalore read X-rays taken in Boston.
It`s a form of trade, he says, and, as such, is a
positive force.

Paul Craig Roberts is a former
assistant Treasury secretary for economic policy in the
Reagan administration and was once an avid free-trader.
He`s one of a small but growing group of economists
raising warning flags about the impact of offshore
outsourcing.

Mr. Roberts, who studied in the
U.S. and England and has a Ph.D. in economics from the
University of Virginia, argues that the world may have
fundamentally changed and that economic thinking simply
hasn`t kept up. He says companies are now freer to move
capital and technology around the globe in search of
cheaper labor. And as countries like China and India
have emerged, with their vast pools of skilled and
well-educated workers, it becomes harder for any
industry to justify investing in or employing people in
the U.S. and other high-wage countries.

Mr. Roberts is currently chairman
of the Institute for Political Economy, a think tank in
Washington.

Here are excerpts from their
discussion.

MR. ROBERTS: From the
perspective of trade theory and economic- development
theory, it is hard to see the benefit to the country
whose firms outsource. With domestic capital and
technology reallocated to the employment of foreign
labor, there is less to employ domestic labor. Either
unemployment results or the remaining capital is spread
more thinly with a decline in labor productivity and
real incomes. As industries move offshore, suppliers are
forced to follow. The domestic economy becomes a
less-efficient place to produce as concentrations of
skills are diluted by movement offshore.

If outsourcing were a limited
phenomenon driven, for example, by domestic scarcity of
a few specific skills, it is possible to imagine
scenarios under which a country gains from outsourcing.
But even here caution is appropriate. For example, if
technology jobs are outsourced because of domestic
supply constraints, the mechanism for expanding domestic
supply is short-circuited. If a shortage of nurses is
met by importing foreign nurses under a visa work
program, domestic nursing schools are unlikely to
increase their enrollments.

Outsourcing is a problem for the
U.S. and First World in general, because all tradable
goods production and service jobs can be outsourced. The
higher the value added, the greater the incentive to
outsource the work to India or China where enormous
excess supplies of labor guarantee relatively low wages
for years to come. Faith that new industries and
occupations will rise to replace lost ones is
problematical, because the same incentive will encourage
replacement industries to be outsourced as well.

With excess supply overhanging
Indian and Chinese labor markets, First World wages and
salaries can fall swiftly and sharply long before Asian
wages rise. The resulting declines in employment and/or
real wages can bring political instability to First
World countries.

MR. BHAGWATI: Since arguing
over unwarranted criticisms of international trade
theory is hardly productive, let me turn instead to the
important issues at stake in the furor over the
outsourcing of online services today. First, that the
transition to new jobs is a hardship for the workers who
are losing jobs; and second, that the new jobs are less
good, that in the famous words of Vice President
Mondale, our workers will lose good jobs and we will
become a nation of "hamburger flippers." Or, in
modern parlance, that the programmers who were earning
$60,000 will wind up bagging groceries or stocking
shelves for $15,000.

Take the issue of whether we are
going to lose skilled jobs so that Mondale`s scenario is
vindicated. For starters, it did not [happen] when he
was sketching it in gory colors. Fast-food jobs
increased for sure; but by no means did they overtake
the expansion of skilled jobs. And there is little fear
of it happening now either. Look at the facts for
1999-2002. The Bureau of Labor Statistics shows that,
counting four IT-related sectors, the jobs expanded;
slowly no doubt, but contract they did not. In 2002, the
number of jobs in these sectors was over 17 million.

Contrast that with the estimate of
gross numbers of outsourced jobs: They were around
100,000 per annum, and the upper estimates of job loss
annually over the next 15 years has been put at 225,000,
which is less than 1.5% of the stock of available jobs
in 2002. I must add that the net estimates show that the
U.S. has many more people employed in services that are
exported than are "lost" in services that are imported.

And these jobs will surely expand
because the main driver of growth in our economy is our
prodigious technical change. Technical change nearly
always substitutes for unskilled labor, but it creates
new skilled jobs, both by creating new products and
processes but also because the maintenance of technology
also requires skilled labor.

THE WALL STREET JOURNAL:
Mr. Roberts, what should the U.S. do about all this? Do
you favor some sort of protectionist response?

MR. ROBERTS: To get to the
"solution" stage, we have to pass through the
"identification of the problem" stage. Jagdish says that
there is no problem, but I am concerned that comparative
advantage [theory] might be broken. [The theory says
countries should specialize in goods they`re better at
producing than other countries and then trade for things
in which they don`t have the edge.] One virtue of
comparative advantage is that a country doesn`t need a
trade strategy, because comparative advantage causes all
free-trade outcomes to be beneficial. But if comparative
advantage is broken and cannot be fixed by restoring its
premises, the U.S. needs to develop a trade strategy.

A successful trade strategy would
require careful thought from many, and require
economists first to get their minds around the problem.
Perhaps this exchange will lead in that direction.

I am calling for a policy of
thought to examine whether real-world conditions still
support the case for free trade. If real-world
conditions differ from the premises of the free-trade
case, we must learn to think differently and to develop
a strategy based on recognition of synergies between
industries and occupations and geared toward retaining
high-productivity industries.

MR. BHAGWATI: While your
approach, based on views of international trade
analytics which I believe are flawed, is not overtly
protectionist, it will take you quickly into
protectionism in reality. "Trade strategy," worked out
with "careful thought from many," can only mean, if it
means anything concrete, some sort of industrial, and
associated, managed-trade policy.

One thing you need to remember,
Craig, is that "strategic" trade and industrial policy,
devised by gifted bureaucrats and wise economists,
sounds fine in theory but is hard to work with in
practice.

MR. ROBERTS: I agree that
government policy is capable of worsening any situation.
At the same time, I am aware that economists, long
accustomed to shouting down "protectionist impulses,"
can fail to carefully examine whether changed real-world
conditions or new developments in theory undermine the
assumption that every act of free trade is beneficial.
All I am asking is that economists seriously re- examine
the case for free trade and verify that the conditions
necessary for the case still hold.

In my opinion the issue will be
settled by developments in the U.S. labor market and not
by economic debate. If there is a recovery in
high-productivity, high-value-added jobs in the U.S.,
the issue will dissipate. However, if U.S. labor
continues to be reallocated toward lower-pay,
nontradable, domestic services, the issue will come to a
head, especially as wages in domestic nontradable
services would experience downward pressure both from
entry from displaced manufacturing and knowledge workers
and from high rates of legal and illegal immigration.

WSJ: So what about the jobs, Prof.
Bhagwati? Where are the good- paying ones going to come
from in the future?

MR. BHAGWATI: Fifteen years
ago, how many of us knew that there would be an obesity
epidemic, with associated expansion in liposuction,
diabetes management, etc.? How many could have forecast
that our aging women would be increasingly flocking in
huge numbers to plastic surgeons for cosmetic surgery of
all kinds? And yet these and countless other new jobs in
unforeseen and unforeseeable occupations, requiring new
skills, have emerged and will continue to emerge.

True, we will need to extend our
adjustment assistance programs beyond manufacturing. We
will also need imaginative programs to assist the older
folks who cannot readily acquire new skills for the new
jobs. We will finally need to delink medical benefits
from employment: a change whose time has come, now that
increased exposure to trade means that flexible
responses to changing opportunities are possible.

But what we do know is that
protection will only compound manifold the difficulties
of adjustment for our skilled workers. We live in a
globalized economy where foreign firms sell in our
markets and we sell in their markets and in third
markets. If foreign governments do not share our
hysteria, and they continue to outsource (as the British
have openly said they will), several of our firms will
become seriously uncompetitive and could fold.

MR. ROBERTS: Jagdish,
retraining programs are a misplaced hope. As all
tradable goods and services production can be outsourced
today, retraining is limited to domestic services, an
increasingly crowded field, and even here foreign labor
is brought in under various work- visa programs.

I appreciate your optimism, but it
needs to be tempered with realism. According to
economist Charles McMillion`s report in the April 2
Manufacturing & Technology News, the U.S. has lost its
lead in advanced-technology products and now runs a
deficit in advanced technology with China (supposedly a
low-tech producer of clothes and shoes) that is almost
five times larger than the U.S. technology deficit with
Japan. It is not clear how a country benefits from
losing its superiority in advanced-technology products.

Neither is it clear how a country
benefits from declining incomes. Occupations where jobs
are growing pay considerably less than occupations that
are contracting. Americans are heavily in debt, and
their debts are not indexed to their incomes. With any
luck, perhaps our discussion will prevent economists and
policy makers from being caught off guard in the event
there is a deterioration in U.S. economic welfare.

WSJ: Sen. John Kerry is
proposing tax initiatives to slow offshore outsourcing.
Is that a good idea? And what about other countries: Why
isn`t this issue causing a similar uproar in Europe or
elsewhere in the developed world?

MR. ROBERTS: In the current
economic climate, "tax subsidies for hiring foreigners"
is an easy political target. As I have made clear, I
would prefer a reasoned assessment by economists to
policy crafted in a political campaign.

I believe that the First World in
general is vulnerable to employers` substituting cheaper
foreign labor for more expensive domestic labor. The
U.S. and U.K., being the most open economies, are first
to experience the impact. Japan, Germany and France are
closed by attitude if not by trade agreement. Executives
of tire companies, for example, report that it is
difficult to purchase inexpensive Korean tires in
Germany, because German tire suppliers will not sell
them. France and Japan have their own ways of
discouraging unwanted imports.

Another difference is that business
executives in Japan, France and Germany have a stronger
sense of national identity and national interest.
Perhaps this comes from being more homogeneous
populations or from the influence of a trade strategy.
Unlike U.S. executives ruled by quarterly earnings
reports, they are free to focus on long- term strategy.

Such differences and the
overburdened European welfare systems might result in
different responses to the supplies of inexpensive Asian
labor. Political reasons would probably dictate that
European employers would first turn to labor supplies in
Eastern Europe. The European internal market is a large
one. So is the North American one. There is plenty of
room within these markets and in trade between them for
specialization and division of labor.

MR. BHAGWATI: I do think
that the reactions of the British producers and
government have been very much more positive than ours.
Historians of the 19th-century British embrace of free
trade, when Britain was the biggest dog on the road,
have argued that the British politicians opted for free
trade because they expected Britain to win in open
markets. Why then does the United States, which is a
hyperpower, the Rottweiler on the road, begin screaming
protection every time trade with the poor nations, the
French poodles, is at stake: Mexico, the Far Eastern
exporters of labor-intensive goods (the "yellow peril")
and now India (the "brown peril")? I think there are two
answers.

First, our social safety net is not
as strong; and the family has been frayed, so neither
the social nor the personal safety net is available to
meet difficult problems of adjustment to import
competition. So, when the fear of job losses is high,
anxiety is immense, as now.

Second, despite its waning numbers,
the AFL-CIO has managed to get a stranglehold on the
Democrats, and it shows in their strange obsession with
covert protectionism, masked as demands for higher labor
and environmental standards in trade treaties as
preconditions for market access, and now with overt
protectionism in the shape of demands to ban outsourcing
and even direct foreign investment. Astonishingly, a
liberal leadership of the Democratic Party that
professes to better credentials on altruism in regard to
developing countries is now committed to policies that
are aimed at the developing countries which are using
the trade opportunity to work themselves out of poverty,
while a Republican president has taken the high road on
both outsourcing and on foreign investment!

In this election year, it will be
interesting to see how all this plays out. But there is
little here that does credit to our politics and our
probity.

Mr. Aeppel is a staff reporter in
The Wall Street Journal`s Pittsburgh bureau. He
can be reached at


tim.aeppel@wsj.com