Outsourcing Redux
An Elder Challenges Outsourcing's Orthodoxy
An unlikely challenge to the economists who defend the merits of outsourcing. Paul Samuelson is, by definition, the pantheon of economists. He is, I suppose one would say, an economist's economist. I guess when you have taught the current CEA Chair (and I would hazard a guess that he's tutored at least a few other CEA members in his day), you get such plaudits.
The curious thing about economists, however, has been that no matter what their political stripes, the logic of that lesser science leads all partisans down something close to the middle of the political playing field. For that reason, I've always enjoyed reading the Economic Report to the President ... but then again, I'm a complete geek. Nothing new there.
All that aside, Samuelson's premise is not one that is easily dismissed. He's not gone over to any dark side and refuted Ricardian theory, perish the thought. But he's seemingly challenged a few pillars that have held up the debate over outsourcing and they merit a close read.
From the news version, we get this recap:
In an interview last week, Mr. Samuelson said he wrote the article to "set the record straight" because "the mainstream defenses of globalization were much too simple a statement of the problem." Mr. Samuelson, who calls himself a "centrist Democrat," said his analysis did not come with a recipe of policy steps, and he emphasized that it was not meant as a justification for protectionist measures.Up to now, he said, the gains to America have outweighed the losses from trade, but that outcome is not necessarily guaranteed in the future.
...
According to Mr. Samuelson, a low-wage nation that is rapidly improving its technology, like India or China, has the potential to change the terms of trade with America in fields like call-center services or computer programming in ways that reduce per-capita income in the United States. "The new labor-market-clearing real wage has been lowered by this version of dynamic fair free trade," Mr. Samuelson writes.
But doesn't purchasing cheaper call-center or programming services from abroad reduce input costs for various industries, delivering a net benefit to the economy? Not necessarily, Mr. Samuelson replied. To put things in simplified terms, he explained in the interview, "being able to purchase groceries 20 percent cheaper at Wal-Mart does not necessarily make up for the wage losses."
The global spread of lower-cost computing and Internet communications breaks down the old geographic boundaries between labor markets, he noted, and could accelerate the pressure on wages across large swaths of the service economy. "If you don't believe that changes the average wages in America, then you believe in the tooth fairy," Mr. Samuelson said.
His article, Mr. Samuelson added, is not a refutation of David Ricardo's 1817 theory of comparative advantage, the Magna Carta of international economics that says free trade allows economies to benefit from the efficiencies of global specialization. Mr. Samuelson said he was merely "interpreting fully and correctly Ricardoian comparative advantage theory." That interpretation, he insists, includes some "important qualifications" to the arguments of globalization's cheerleaders.
I guess I should have put the standard disclaimer at the top of this post: you either REALLY get into this sorta thing or you REALLY don't. Apologies to anyone who read this and now has the urge to lighten up their reading with a copy of Us Magazine.