Blinder and Bhagwati debate at Harvard

Is offshoring a big deal, requiring us to significantly enhance safety nets, rethink the future of education, and move upscale in the ladder of comparative advantage, as Blinder thinks? Or is there nothing new under the sun, as Bhagwati believes? The two held a debate this afternoon at Harvard, along with a supporting cast of four others (Richard Freeman, Doug Irwin, Lori Kletzer, and Robert Lawrence).
I thought Blinder made a good case, although I would have liked to see more on the distributional consequences of offshoring. The optimistic scenario is that offshoring will turn out to be similar to the intra-industry trade of the past (in manufacturing, and among rich countries), where we had a huge explosion of trade without sharp distributional changes. The tasks being traded were too similar. Maybe it will be no different with offshoring based on IT.
As for Bhagwati, once you stripped away his anecdotes and witticisms, what you were left with was--well, honestly, I am not sure what you had left . Bhagwati's main worry seems to be that Blinder's concerns will empower protectionists. As Richard Freeman put it in his comments, he is fighting the last war, which doesn't exactly move us forward. Lawrence (and to some extent Irwin) made the counter-arguments much more effectively. They both argued that the adjustments will be slower and less momentous.
But the most important point, I felt, was made by Lori Kletzer. She argued powerfully that we had to get real about doing something about the distributional and adjustment costs of trade regardless of whether IT-based offshoring is as big a deal as Blinder claims. Globalization is in trouble as it is. And as she also put it, if you are thinking like this, it does not necessarily mean that you are anti-trade.

Comments

[TheJew]

The main concern I have with regard to the Washington Consensus (i.e. open trade will always help development) is that there may be important externalities in non-agricultural work, and open trade with cash-crop producing economies may suppress the ability of these economies to develop the scale economies necessary to transition into manufacturing. This seems like the only argument that can be made against the WC, and it seems at least as strong as the argument from Comparative Advantage, especially in the cases of serious persistent poverty in Sub-Saharan Africa and Central America (excluding both northern North America and southern South America).

From your earlier post it seems that you, like most of the profession, are downplaying or ignoring it simply because its irreducible complexity cannot be compressed by symbolic rather then verbal expression. Either that, or because it is old news (20 years or so) for economists, you don’t talk about it, despite widespread popular ignorance (even among the protesting crowd).

[-james]

Each job counted in any report or estimate on lost jobs due to off shoring represents a family probably very much like mine. My wife and I have four kids between us, and I work in IT.

I lost my IT job in December of 2004 due to "down sizing" and have not found a permanent job since. I've been working odd jobs and consulting when I can. I went from $5,500 to about $1,000 a month when I lost my job. There were and I expect will be more months when I don't make anything. I can’t afford family health insurance because we have to eat. Catastrophic coverage starts at about $350 a month. 35% of my meager earnings are too much when I've got school uniforms to purchase, a car payment, and rent to pay (not to mention food). I had to default on credit cards and I haven't been paying my school loans back either, all total ~ $45,000 in debt I'm trying to repay.

Okay, I'm a tad bitter! I made too much money according to Medicaid to get my family on a Government medical program, and I want to work. I'll do anything. I'll work in convenience stores, and as a delivery driver when I'm between contract IT jobs now. My wife was recently hospitalized for 1 day and had some tests done and the bill is over $14,000. We don't own a home anymore and we're just sinking farther and farther into the pit of despair!

So offshore outsourcing is expected to put 3 to 15 million people out of work here in the US. Using 4.3 people per family that’s 12.9 to 64.5, million people pretty much like me, directly affected by this little thing called off shoring. What's 675 Billion dollars in defaulted credit card debt and loans going to do to our economy? I got lucky and sold my house for more than I owed. Let's say half of those who get the shaft can't sell and their house and clear their mortgage. What's 7.5 million defaulting home loans going to do?

Personally, I don't think anything will change until the Government starts feeling the effects through lost revenue and additional burdens on existing systems. If we're out of work then the government is not getting the payroll revenue they expected to. Don't forget, we were part of the upper middle class earning 65 to 150K a year. now we're creeping along just above the poverty line. We were part of the people who are the financial fat cows of America they love to take advantage of. (they make enough to be a significant tax source and too dumb not too spend more than they earn) . How are we being replaced in our economy?

Please tell your students there are stories behind each and every one of those people counted. It's not some game or a theoretical number. Those are lives. I don't think I am, or 64.5 million other people in our country are an acceptable loss for greater profits.

Reference:

"The Offshoring Numbers Game" http://www.americanprogress.org/issues/2004/06/b100515.html

[Dan Olner]

Has anyone ever proposed filming these lectures and making them publicly available? That would be fantastic...

[dissent]

James,
Thank you for posting about your painful situation. So often economists get on a moral high horse about how "free" trade and offshoring is a Good Thing because we are reducing poverty in developing nations. They are in an ivory tower and don't see how they are producing poverty here at home. Worse, they justify impoverishing their fellow citizens because they think their moral duty to the poor elsewhere trumps their responsibility to you and your family. The more we speak up, the harder it will be for them to justify the ongoing destruction of the American middle class.

[Alex Culiuc]

Prof. Blinder described a problem that is fits squarely in the H-O framework. His argument in two sentences: (i) transaction costs of information-rich services came lowered due to ICT and (ii) lots of labor pouring into the world economy from China, India and ex-Soviet countries. Even if only a small fraction of that labor is endowed with competitive human capital, it should still drive down white collar wages and/or reduce jobs in the US. I was surprised that Bhagwati hasn’t once acknowledged the fact that this argument is at least theoretically sound. I expected a completely different level of argumentation from an economist of his caliber…

Prof. Lawrence’s rebuttal was great, but his message, in the end does not fully discard Blinder’s argument. He showed that the integration of human capital from large developing countries will be slow and the flexible US labor market will have plenty of time to adjust to it [N.B. But what about the more rigid European labor markets? After all, Europe is affected by BRIC’s development just as much as the US…]. So be it, the problem is not as big as Blinder wanted us to believe, but that doesn’t mean that it’s completely absent.

Lawrence offered another argument against Blinder’s case. Increased trade in services will necessarily create new jobs in the U.S. services export industries (unless the U.S. manages to sustain an even larger current account deficit, but there’s a limit to everything)… This may nullify Blinder’s recommendations for rethinking education, but will it help James (comment #3) and others like him? Will these new service jobs go to displaced white collar workers or to new ones? Something tells me the former is more likely. For example, one could speculate that a young worker is a faster learner, and therefore has an inherent advantage over an old one, especially if work experience in the outsourced sector is not applicable in the new sectors. [N.B. Is there empirical evidence on this subject? How does unemployment duration evolve with age in dynamic industries vs. traditional ones?] Lawrence just restated the fact that the net gains from trade are positive, but brushed aside the potential distributional impact. In other words, he committed the sin that Blinder was incriminating with trade economists: mention the distributional concerns in the 14th minute of the lecture and never come back to the subject again.

I felt that Blinder fell somewhat short in the policy recommendations department. The educational reform proposals were highly speculative and unconvincing. The other recommendations fall into the “more of the same” category: TAA (ineffective so far), better safety nets and R&D policy. In addition, one should factor in the efficiency costs associated with expanded safety nets and the higher taxes necessary to finance these initiatives…

[jdrietz]

James, your personal situation is tragic, and I wish you and your family all of the best. Please don't take the rest of my post as a personal affront.

Just as there are faces behind the offshoring statistics in developed western countries, there are faces on the other side of the ocean, too. I have spent considerable time in Eastern Europe, where some of my family is from, and many of the Balkan countries are only now starting to pull themselves out of poverty. When I say poverty, I think of my 84 year old grandmother who lived alone in a small village with no running water, an outdoor toilet (it snows there during most of the winter), unreliable electricity, no local hospital or doctor, and a pension of about $50 a month. She is able to survive because some of her grandchildren have been fortunate enough to get decent jobs in larger cities (making more than than the monthly average wage of about $200), one of whom works at an outsourcing firm and another who immigrated to the U.S. and became a software engineer.

I'm not trying to start a "my family is poorer than your family" tit for tat, but rather I am pointing out that when we say there is a bigger picture to look at, we need to make sure we look at the ENTIRE picture. I think an important question to ask ourselves is how do we determine where to draw the geographic boundaries? What if I lose my job to someone from a poorer region of the same country, or perhaps a poorer neighborhood in the same metro area, because this person is willing to work for less? Are these scenarios much different than losing my job to someone in another country?

[radek]

As for Bhagwati, once you stripped away his anecdotes and witticisms, what you were left with was--well, honestly, I am not sure what you had left . Bhagwati's main worry seems to be that Blinder's concerns will empower protectionists.

Which is still a pretty good argument. The general public has a pretty good grasp on the fact that offshoring might lead to redistribution. It's the intuitive part of the overall effect. What it tends to have trouble with is grasping the fact that trade or offshoring leads to overall economic gains. Going by the median commentator on your typical left-of-center blog the general belief is that free trade or off-shoring leads to "losses for the nation overall, redistribution towards the rich and anyone who says otherwise is either a paid lackey of the corporations or a stooge of the Chinese". Of course the protectionist right thinks exactly the same thing. The redistribution part is true and any honest free traded admits as much. But it is only part of the story. The other part is the one which most people have a hard time believing but which is as true as the first part and which is the one that economists have some work to do in their role as public commentators. Ricardo's difficult idea is still difficult. The other aspect of all this is that most people have a very distorted view of how much of a role international factors have on both aggregate income and growth. The US is a big and diversified economy and both the gains from trade and the redistribution effects these imply (and one is a corallary of the other) are small compared to the total.

If you tell people "trade increaes overall welfare BUT IT ALSO INVOLVES REDISTRIBUTION!!!!!" they won't hear the first part. They'll hear the shouting because it fits in with their pre-conceived ideological (be they right wing or left wing) biases. But surely, part of the job of the economic polemicists is not just to confirm the true-but-already-known but to illuminate the not-so-obvious.

Bhagwati is right even if he doesn't make his point in a rhetorically aesthetic manner.

[KP]

James,

Have you applied to any of the Indian IT companies? They are desparately looking to hire in huge numbers if you are qualified. Visas for working in India are also easy to get. The salary to expect is around $2000 a month but that is a fortune given costs in India, including private, English language schools. (not to mention maids and chauffers). And with a year or two of experience as well as familiarity with working in the US, you could get a position back in the US cordinating with an offshore team.

The only thing you lose is your bitterness, I guess!

[jdrietz]

Radek -

I will add to your point and take it a step further.

The redistribution is temporary. Workers laid off due to trade do find new jobs as long as their domestic economy is dynamic (i.e. a free market). Imports become cheaper, and after a possible initial increase, the price of export goods drops, too. In the long run, everyone is better off.

That isn't too say there isn't some sharp short-term pain. I believe trade should be liberalized in a multi-step process so as to reduce this pain as much as possible. No "shock economics."

[D.]

James' story is an unfortunate but perfect example of how a well developed safety net would help us reap the benefits from globalization. It's all a matter of redistributing some of the winners' profits towards those affected by the process, namely in the form of unemployment benefits, state-provided universal healthcare, and improved public education. A positive externality of this kind of social policy would be to let international markets work while sparing us from traumatic experiences like James', to whom I wish the best of luck in resolving his situation.

[dissent]

The comments above illustrate why "free" market economists so often disgust me. There is a level of political and social cluelessness that boggles the mind. Shades of Ayn Rand, anyone?

Earth to "free" marketers: No it is not appropriate to suggest to a perfect stranger with a set of kids who has crashed into destitution that he should pack up and go to India. What, are you 12?

No it is not appropriate to talk about your poverty stricken relatives in some undeveloped country and suggest that by contemplating their lot, a father and bread winner should develop acceptance for how his family has been trashed by American capitalism.

Sheesh. You guys need to take meds for Aspbergers, or something. Actually, if there were such meds, these theories would probably never have been developed.

[dissent]

dissent,

I don't think anyone is suggesting that James should be particularly happy with his lot, because frankly it sucks. But why should the world economic system always favor James? It is reasonable for James to be angry that he has lost his job, but it is very unethical for him to attempt to use the power of the government to improve it at the expense of others and at a net loss to the world.

[happyjuggler0]

First off, not to be callous, but there will always be people like James who at least have a temporary personal downturn, even under some "perfect" system. The key is what system on an overall basis helps the most people to improve as much as possible, and hurts the fewest people and minimizes their pain.

If 100% pure free trade turns out to be that system, then so be it, and there is nothing reprehensible about someone who advocates such a system even knowing there are some losers as a result. If there are fewer losers than otherwise would have been the case, then all else being equal it is superior.

I find it interesting that James is/was in the IT industry though. If ever there was a job destroying industry, that is it. For example, many bookstores have gone out of business due to Amazon.com and the infrstructure that made it possible? This doesn't mean that the IT industry ought to be avoided, but to say that someone who loses a job due to technology deserves more proetection than someone who loses a job due to stupid management is a dubious one in my opinion, as are so-called protections for thos ewho lose a job due to international trade. Either protect everyone, or protect no one, or protect only those who earned below a certain threshold, or scale the compensation. The cause of the job loss ought to be irrelevant.

[Raj]

Dr. Rodrik, could you please direct us to any transcript of the debate. Thank you.

[Jonathan Goldberg]

"As for Bhagwati, once you stripped away his anecdotes and witticisms, what you were left with was--well, honestly, I am not sure what you had left . Bhagwati's main worry seems to be that Blinder's concerns will empower protectionists.

Which is still a pretty good argument. The general public has a pretty good grasp on the fact that offshoring might lead to redistribution. It's the intuitive part of the overall effect. What it tends to have trouble with is grasping the fact that trade or offshoring leads to overall economic gains."

No, it is not a pretty good arguement. It is not acceptable to lie or supress the truth because the consequences of the lie being believed will in your opinion be good ones.

As for the associated question of whether and how much American policy makers, who presumably are responsible for and to American people/voters, should consider the concerns of the poor abroad: if I knew things like that I'd be smart.

[-james]

I thank all of you for the spirited discussion. While my current situation isn’t all that great, I will become a better person for going through it. I think it’s a lesson everyone needs to learn early:

PLAN FOR THE UNEXPECTED

Why do we (the masses) always ignore the advice of those who know better, and think a booming economy will continue to boom? And in the same light why do we think a failing one will continue on a downward spiral?

To KP – No, I’ve not applied to Indian companies. My family situation makes moving to India impractical, and "No" I did not take offense to your suggestion. In this economy we must consider all options. One thing I’ve learned from IT is we all must constantly adapt and change or get left behind. To make a long story short, I was adapting and the market went a different direction. Now I’ve got to spend a few years catching back up.

Again, thank you all for your replies.

[mark]

Ok, so James, we're all supposed to pitch in and help because you made some bad career choices and didn't plan ahead? You yourself said that part of being in IT is adapting and changing. Hadn't you heard about offshoring before? Isn't it incumbent upon you to keep your skills up to date? I'm an application developer and I keep my eye on that stuff just like you should have been doing. I'm using a fairly outdated language and I know that I'm undertaking a degree of risk. However, if my company decides to offshore my job, I'm not going to get all bitter about it. Companies are not created to create jobs. They are created to make profits by serving customers. And if they can serve customers well by hiring someone to do what I do at a third of the hourly cost, then what right do I have to be bitter about it? Did they sign a contract with me that said they created this job just for me and that I had an inherent right to it as long as I desired to have it? Of course not. My employer is not my mommy. My employer does not love me and does not have to. All they need to do is pay me for the work I've done, and that's it.

If you find this line of reasoning harsh, then why don't you do this: start your own consulting company and hire 10 or 20 people. What will you pay them with? You need customers to do that, don't you. But wait, I thought companies are there just to give us jobs. So then, you shouldn't worry about the customers part, just do the compassionate thing and start hiring, right away. And pay them a good wage, too. Nobody can afford cars, houses, daycare, and health care on their own. I'd budget at least $120k for each employee, because nobody can live on less than $80k plus benefits anymore. And make sure they have vacation and leave and all that stuff. And if any of them need more, then have an open door policy for them to come in and tell you what a cheapskate you are for withholding from them what they truly need.

Come to think of it, I'm going to take my own advice and start a company. I've always wanted to start a coffee shop, so I'm asking all the kind-hearted readers of this blog to contribute to the start-up costs of my coffee shop. At least they can't offshore a coffee shop, right? I'm going to start it as a union shop, and pay $35 an hour to start with full benefits. Cool! And if it fails, don't worry about all the money you sent me, it was well spent on a fellow American's career choice. Of course, I'll need unemployment benefits, universal health care for my wife and kids, and enrollment in a training program to help me get back on my feet again in this draconian economy we've got going here. I'm sure the government training center will point me in the direction of some highly useful, high-demand skills that will launch me right into that next career. Government agencies are always so good about anticipating the future, I'm sure they'll know what field I should go into next. I love this system! And I love all of you for supporting me through all these changes. If only we still made televisions in this country, maybe I could go work on an assembly line somewhere. That's really great work. I'm sorry that there isn't more manufacturing done in America because it's so darn rewarding to work on a line and screw stuff together. I dream that my kids could do something like that, but dang it, they just don't make jobs like that anymore. I know for myself that I'd be glad to pay 5-6k for an american made flat screen tv if it meant that I could work on an assembly line.

Oh well, what a nice dream. In the mean time, keep in mind that your safety net ideas involve real people, not nets. The safety net you talk about means taking more money out of my pocket, and that's really uncool when you realize that I've got the same exact situation you do: a wife and four kids. So why should my kid give up xyz because of your situation? That doesn't make any sense. Especially when you are in a highly volatile field to begin with, and even moreso when you have time to write lengthy posts on your own blog (which I visited). Why should I want the government to take even more money from me and give it to you? That will in turn allow me to save less, which will in turn render me more vulnerable to any hard times my family goes through. I don't see how any citizen has a right to expect that all other citizens will pitch in and help him during down times. Where is that right? Who gave any of you a right to expect a portion of what your neighbor earns? That's just plain greed and covetousness. Asking for charity, that's one thing. But expecting the government to redistribute wealth (steal money and give to others) is really disgusting. It's like getting the bully of the class to go take the rich kid's money and keep part of it for himself and give the rest to you.

One more thing: do you own any goods made in the far east? Clothing? Shoes? A stereo? A TV? I'd expect to see you owning 100% american made, american manufactured goods, or else you're also GUILTY of contributing to the loss of some poor american factory worker's job. Ever eat fruit from mexico or somewhere else south of the border? Shame on you!!! Don't you care about the plight of the american farmer? How cruel can you be?! As a matter of fact, why aren't you buying as much food as possible from the farmer's market every weekend? why not keep the money in your own state...your own county... why not grow your own veggies in your own back yard? Trading with other people, especially those who live far away from you, is inherently evil and you need to repent of it now!!! Turn from your free-trading, capitalist ways and be done!!! Encourage your city to start it's own auto industry. Why should a guy from Austin, TX buy a car made by a guy from Detroit?! It's disgusting!! That Texas money needs to stay in Texas! And vice versa. 2/3 of America's beef comes from Texas. That means forty nine other states suffer from an imabalance of beef exports!!! Oh, the shame of it!!!! Think of all the jobs that have been lost in Delaware thanks to those cattle ranchers from texas or car manufacturers in Detroit or software developers in Seattle!!

I can't take it anymore. I'm going to sit under my desk and cry myself to sleep. Would anyone here care to pay for my psychiatric care? I don't think I can afford it. After all, no one plans to have a breakdown. It just happened to me.