Sunday, February 15, 2004

Outsource This

Let me preface this by saying, as I have many times, that roughly speaking I'm a "free trader." And, I'm not sure quite sure how to react to the attention "outsourcing" has gotten recently. When Nike started making shoes in Indonesia, nobody called it "outsourcing." The fact that it's increasingly a white collar issue is the only new thing.

But, even as I provide my free-trader creds, I'm a bit puzzled by the number of stupid things said by the very smart Jagdish Baghwati in the New York Times.

In objecting to moving service jobs overseas, Senator Kerry is wrong on two counts. First, his economics is faulty: the practice only adds to the overall economic pie and improves the competitiveness of American companies. In a world economy, firms that forgo cheaper supplies of services are doomed to lose markets, and hence production. And companies that die out, of course, do not employ people.

Second, Mr. Kerry is making a political error. By playing to the understandable but incorrect fears of American workers that outsourcing is "taking away" jobs from Americans, he is painting the Democratic Party into the wrong corner on trade issues.

As for the second point - look, outsourcing is taking away jobs from American workers. How many jobs? I don't know. How long will those individual workers suffer from unemployment after losing those jobs? I don't know. How many of those workers will find themselves, once they return to employment, earning less money and having fewer benefits? I don't know.

As for the first point - it's a rather strange one for an economist to make, particularly one simultaneously making the opposite argument. Even Comrade Max agrees that free trade or no free trade has no impact on long run levels of employment/unemployment. Similarly - if, say, legislation were passed forbidding "outsourcing" (whatever that would mean), it too would have no effect on the long run levels. It may decrease the size of the "economic pie," and it may, as with trade, lead to temporary unemployment and impact the distribution of income. But, the same arguments which claim that increasing trade openness wouldn't, in the long run, diminish the number of jobs in the economy also tell us that "anti-trade" or "anti-outsourcing" policies wouldn't diminish them either.

And, all such arguments ignore the transition effects. Some temporary employment/underemployment can result as regulations, technology, and terms of trade change. The industry-specific skills of workers can suddenly be devalued, negatively affecting both them and potentially the overall productive capacity of the economy. Labor force participation may decline for years, as discouraged workers drop out of the labor force.

Economists need to stop having a fetish about the "size of the pie." It's one measure of welfare, but it isn't a particularly meaningful one. Absent policies to temporarily offset transitional effects and minimize distributional consequences, "free trade" is just a fetish.