Monday, April 05, 2004

DeLong Rethinks Outsourcing

Thinking About Outsourcing: Archive Entry From Brad DeLong's Webjournal
... As Paul Krugman puts it, free trade is a salable policy only if accompanied by a well-built social safety net and confidence in full employment. Our safety net is full of holes, and confidence right now that employment will be full is shaky. Preserving free trade in the 1970s and 1980s was a near-run thing, even though the magnitude of imports was not that great and the shock to America's distribution of income and employment not that large.

This is worth thinking hard about, for when "outsourcing" truly arrives--whether in one or two or three decades--it is likely to deliver a shock an order of magnitude larger to the American economy.

Consider: the income gaps in the case of "outsourcing" will be much greater than in the case of trade in manufactured goods. The income gap between Japan in and America in the 1970s was a matter of one-to-two. The income gap between India and America tomorrow will be one-to-ten. On the one hand, economists will say that the gains from trade will thereby be that much greater for the economy as a whole. On the other hand, the potential downward pressure on loser workers in rich countries will be that much greater as well.

Consider: trade in services potentially affects a much larger proportion of the labor force. Sectoral trade deficits in manufactured goods have rarely, rarely exceeded 3% of GDP. But what is the upper limit to the sectoral trade deficit in long-distance document-image pushing?

Consider: the assault by manufactured imports on American mass-production manufacturing in the 1970s and 1980s was something done to American workers and firms standing together. The process of outsourcing will look very different: it will be something done by internationalized American firms to American workers. The politics of GM, Ford, and UAW asking for help together to deal with foreign competition will be very different from the politics produced by workers vs. CEOs.

And, conversely, consider India. Put 10 million people in India to work at $26,000 a year providing white-collar services to the industrial core, and you have boosted India's standard of living by 50%. And you have displaced only 4% of the potential target industries, for there are 240 million service-sector workers in the First World today.

Because this is an economic transformation that is going to hit not in one shot next year but over the course of the next generation, we have plenty of time: time to build the social safety net, the education and retraining programs, the social and economic institutions needed to turn the coming of trade in white-collar services from a win-lose to a win-win affair for America and Americans; time to rebuild confidence that employment will be full and the duration of unemployment spells short. But we will need all this time, because the magnitude of the approaching economic trade shock will be much larger than anything in our historical memory.

DeLong wrote a silly and quick blog entry on outsourcing. He was justly berated in the comments. This reads like a thoughtful response to his reader's comments.

He believes the impact from cognitive outsourcing will be relatively small over the next 1-3 years, but quite large 10 years from now. That's interesting, because on that timescale the great boomer die off will be starting, and there will be a great vacuum "at the top". He didn't consider the demographic trends, but I wonder if he's right about the timescale they may be a countervailing force.

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