The Truth Comes Out About Offshoring

On January 6, 2004, Senator Charles
Schumer (D, NY) and I scandalized the economics
profession and Washington policymakers with our New York
Times article,
Second Thoughts on Free Trade.
  We noted that
the two conditions on which the case for free trade
rests no longer exist in the present-day world and that
there was no basis for the assumption that offshoring of
US jobs was beneficial overall to Americans.

The Brookings Institution in
Washington, D.C., organized a conference, televised by
C-Span, to subject our argument to peer review, and we
easily dominated the conference.  

Business Week (March 22,
2004) was receptive to a column from me explaining the
adverse effects of offshoring, and Tim Aeppel at the
Wall Street Journal
organized an

online debate
between myself and Columbia University
trade theorist

Jagdish Bhagwati

Aeppel hoped to test the validity
of my points in the crucible of debate with a leading
academic proponent of offshoring. However, Bhagwati
evaded my argument and threatened to withdraw his
participation if my reference to the latest work in
trade theory by Ralph Gomory and William Baumol was
included in the edited version of our debate in the Wall
Street Journal (May 10, 2004).  In Global Trade and Conflicting National Interests
published in 2000 by the M.I.T. Press, Gomory and Baumol
show that the case for free trade is a special case and
had never

been one of general validity. 
Their criticism is
more far-reaching than the one made by me and Senator

Professor Bhagwati`s skill in
evading my argument told most people who read the edited
version of our debate that he could not answer me. 
Obviously, all was not well with the establishment`s
contentment with offshoring and “globalism.” 

Paul Samuelson, in many respects

dean of American economists,
wrote an article
supportive of Gomory and Baumol`s work. [Where
Ricardo and Mill Rebut and Confirm Arguments of
Mainstream Economists Supporting Globalization,

Journal of Economic Perspectives
—Summer 2004 (PDF)]
But nothing happened.  Economists simply closed ranks
and ignored the points that I brought to their attention
as well as the latest work in trade theory.  Libertarian
free trade ideologues got upset with me.  Unable to deny
that the case for free trade had lost its necessary
foundations, libertarians reduced the issue to one of
economic freedom and concluded that I was impure. 

Since 2004 I have written a number
of articles pointing out that offshoring is really labor
arbitrage and that if offshoring had the mutual economic
benefits associated with free trade, there would be US
employment growth in export and import-competitive
industries.  Instead, employment in these industries has
declined in the US but grown remarkably in Asia.  In the
21st century the US economy has been able to create net
new jobs only in

nontradable domestic services
, such as waitresses
and bartenders and health and social services. Moreover,
the growth in productivity and GDP attributed to the US
economy were inconsistent with the stagnant real incomes
of Americans.  Somehow productivity and GDP were growing
strongly, but it wasn`t showing up in the incomes of

Economists have found it difficult
to think about the issues that I have raised. 
Economists are taught that free trade is a good thing
and that anyone who disputes it is a

in the pay of some industry scheming
to raise prices that consumers have to pay. The notion
that there could be any problem with free trade is
beyond the imagination of most economists.

In addition to their unexamined
commitment to free trade, economists disbelieved my
analysis because they thought it was inconsistent with
statistics indicating high US productivity and GDP
growth.  They thought GDP and productivity statistics
trumped my use of job data. 

All of this may be about to

Susan N. Houseman,
a good but previously obscure
economist with the Upjohn Institute, has discovered a
problem in the statistical data that produces phantom US

Phantom GDP
results when cost reductions achieved by
US firms shifting production offshore are miscounted as
US GDP growth.  Phantom productivity increases occur
when gains from moving design, research and development
offshore are counted as increases in US productivity. 
Obviously, production and productivity that take place
abroad are not part of our domestic economy.

Business Week`s June 18
cover story by Michael Mandel [The
Real Cost Of Offshoring
] explains the problem
identified by Houseman.  Economist Matthew J. Slaughter,
a proponent of offshoring, says: “There are
potentially big implications.  I worry about how
pervasive this is.”
  Business Week says the
implications are big.  The cover story estimates that
40% of the gain in US manufacturing output since 2003 is
phantom GDP.  

Most likely that estimate is low. 
Consider, for example, that furniture imports have
doubled in the past few years (offshored production
counts as imports) while US jobs in furniture
manufacture have declined 21%. US statistics, however,
show that US output and productivity rose even as US
manufacturers closed their plants and no new investment
went into the industry. 

My hat is off to Business Week
It requires courage for a publication dependent on
advertising from global corporations to tell the truth
about offshoring.



Paul Craig Roberts

] was Assistant
Secretary of the Treasury in the Reagan Administration.
He is the author of

Supply-Side Revolution : An Insider`s Account of
Policymaking in Washington
and the Soviet Economy

Meltdown: Inside the Soviet Economy
and is the co-author with Lawrence M. Stratton of

The Tyranny of Good Intentions : How Prosecutors and
Bureaucrats Are Trampling the Constitution in the Name
of Justice
. Click

for Peter
Forbes Magazine interview with Roberts
about the recent epidemic of prosecutorial misconduct.