anhailla

The Social Contract - Globalization Myths - What Adam Smith can Learn from Joe Sixpack



Most workers worry when an emerging nation like India or China, helped by low wages, technology imported from the U.S., and undervalued currencies, causes layoffs from good American jobs. This is a hot issue now, and will be in the decades to come.

Mainstream economists are among the few who still say: “No problem.” In February 2004 Gregory Mankiw, a Harvard professor then serving as chairman of the President’s Council of Economic Advisors, dismissed the transfer of U.S. manufacturing and service operations offshore as only “the latest manifestation of the gains from trade that economists have talked about at least from Adam Smith….More things are tradable now than in the past, and that’s a good thing.”1

Mankiw and like-minded economists—among them Alan Greenspan—admit that good jobs may be lost in the short run. But over time real GDP (both here and in China) will go up as prices fall and workers switch to jobs in which their productivity is higher.

Comparative vs. Absolute Advantage

This result is ordained by the economic law of “comparative advantage.”

But the law of comparative advantage no longer applies. It reflects conditions of the late eighteenth century, when production depended on domestic supplies of capital and labor, as well as locally available technology. Under those conditions it made sense for nations to specialize in goodsfor which they were “comparatively” well suited, and import the others. Free trade was a win-win proposition. All nations benefited.

Today capital and labor move easily across international borders. Owners of capital maximize the return on their investment by shifting production to countries where capital is scarce relative to labor—e.g., China. Similarly, workers raise their living standards by migrating to countries where labor is scarce relative to capital—e.g., the U.S. Capitalists and low-income workers reap benefits from this globalization; most American workers lose ground.

The outsourcing of American operations abroad has nothing to do with free trade based on comparative advantage. U.S. corporations are not sending capital abroad to increase their ability to compete at home. They are seeking what Paul Craig Roberts calls “absolute advantage”—the cheapest labor available. Trade based on absolute advantage implies a leveling of international wage differentials, pushing ours down and those of our trading partners up. (...what! greed isn't always good? BLASPHEMY!!)

Two recent developments made possible the supremacy of absolute advantage over comparative advantage. One is the collapse of world socialism, which opened India’s and China’s vast, under-utilized labor supply to multinational corporations. Second is the high-speed Internet, which has expanded the range of activities that can be moved offshore.
The globalization of work tends to start from the bottom up. The first jobs to be moved abroad are typically simply assembly tasks, followed by manufacturing. More recently, communications technology has expanded the range of “tradable” items to services. Service offshoring, which began with call centers and back-office operations, has moved up the value chain to computer programming, accounting, legal services, financial analysis, and health diagnostics. At the end of this progression is the work done by scientists and engineers in R&D laboratories.

Writing in Foreign Affairs (March/April 2006), Princeton economist and former Federal Reserve vice chairman Alan Blinder warns that education no longer protects U.S. workers from foreign competition: “The critical divide in the future may instead be between those types of work that are easily deliverable through a wire (or via wireless connections) with little or no diminution in quality and those that are not.” RUTROH







The crucial distinction, according to Blinder, is between personal and impersonal services. Personal services require a local presence and/or face to face contact—think of your waiter, your babysitter, your gardener, your cleaning lady, your nurse. These people can work at high-end jobs (dentist, divorce lawyer), or low-end jobs (garbage man, janitor). They are all outsource safe. Regardless of their education, their wages will be set by local market forces of supply and demand.

(Note that a disproportionate share of workers in many of these “safe” occupations are immigrants. That is no coincidence: mass immigration and outsourcing are both means of substituting cheap foreign-born labor for native-born workers.)

That brings us to workers providing “impersonal services.” This category includes people in jobs that were once bedrocks of middle-class life: accountants, assembly line workers, clerks, computer programmers, secretaries. At one time they were deemed untradable; communications technology has changed all that.

Service occupations most easily outsourced abroad are ranked by Blinder (see table below).

To obtain a ballpark figure of the number of U.S. jobs threatened by offshoring, consider the composition of the U.S. labor market at the beginning of 2007. There were 14.1 million manufacturing jobs—the vast majority producing items that can be produced abroad and shipped to the U.S. All these jobs are vulnerable. The service sector employed 115.1 million workers at the end of last year, and Blinder estimates that between 28 million and 42 million of them are susceptible to offshoring in the electronic future.

Bottom line: 42 million to 56 million U.S. jobs could be lost to offshoring.

For perspective, consider there are currently (March 2007) only 6.7 million unemployed persons in the U.S., and the immigrant workforce (legal and illegal) numbers 23 million.

Let’s assume a worst case scenario in which half of the 56 million jobs lost to outsourcing result in permanent unemployment. Based on today’s employment situation, this would raise the national unemployment rate to 19 percent—a level not seen since the Great Depression.

Corporate America, which has dismissed thousands of their U.S. employees and replaced them with foreigners, claims that the dollars saved by foreign outsourcing are reinvested stateside, creating more jobs for workers in the U.S. This pro-globalization rhetoric is repeated ad nauseam by politicians, industry lobbyists, and think-tank economists. (OH...THIS IS UTTER BULLSHIT! anyone still falling for this give the rich more money so they give us jobs garbage?)


[b]Unfortunately, there is no hard evidence to support this happy talk. (yea no shit..eh?)
During the past six years (January 2001 to January 2007) manufacturing lost 2.8 million jobs, almost 17 percent of the manufacturing labor force. Not a single manufacturing payroll classification added workers during this period. The rising trade deficit in manufactured goods—much of it due to imports from U.S.-owned facilities located abroad—is responsible for much of this decline.

From 2001 to 2006 the information sector of the U.S. economy lost 644,000 jobs, or 17.4 percent of its workforce. Computer systems design—an occupation loaded with newly graduated immigrant students—lost 105,000 jobs, or 8.5 percent of its workforce. Moreover, the government’s own labor force projections for 2004 to 2014 foresee a slowing of computer-related employment “…as the software industry begins to mature and as routine work is routinely outsourced overseas.” (See Daniel E. Hecker, “Occupational employment projections to 2014,” Monthly Labor Review, November 2005.)

The number of workers making semiconductors and electronic equipment shrank by 37 percent between 2001 and 2006. The workforce in motor vehicles and parts declined 12 percent. Furniture and related products lost 17 percent of its jobs. There were 20 percent fewer paper and paper products workers.

Engineering jobs are in decline because the manufacturing sectors that employ engineers are in decline. BLS payroll numbers show a total of 69,000 jobs created in all fields of architecture and engineering, including clerical personnel, over the 2001 to 2006 period. That comes to a mere 14,000 jobs per year. Yet U.S. employers routinely push for more visas for foreign engineering students.

In recent years U.S. job creation was limited to four areas: education and health services, state and local government, leisure and hospitality, and financial services. There was no job growth outside of these four non-tradable services.

Winners and Losers

Does globalization make the world richer? It probably does. But the real issue is the distribution of those gains.

The American economy used to look like a bell curve, with a big bulge in the middle. The bulge of middle-class jobs was the key to both our economic and political stability. Those jobs—from assembly line work to data entry to securities analysis to accounting and radiology—are either gone or are threatened by what columnist Thomas Friedman calls the “flattening” of the world.

We are in danger of moving from a bell curve economy to a bar-bell economy, with a large high end, a larger low end, and nothing in the middle. Mass immigration has swelled the left side of the bar bell. Outsourcing has enriched the owners of capital at the right side. Both trends have contributed to economic malaise at the middle of the income distribution.

Where will it end? If American workers sense they are at risk of being losers—even if those fears are overstated or ignore the benefits of cheap imports—the political consensus for encouraging further globalization will evaporate. Protectionism, capital controls, and an immigration moratorium could become politically attractive.

Hopefully we will enact policies that protect American workers before that happens.

End Note

1Quoted in Alan Blinder, “Offshoring: The Next Industrial Revolution?”, Foreign Affairs , March/April 2006.

__________________
...either I go, or that wallpaper does.

Oscar Wilde

DRS112

I can't dismiss comparative advantage so easily. Especially when you take into consideration what we have to give up to produce that product. Should we produce coffee for instance...or radios or toasters etc. etc. We cannot produce all things. But it's not the only reason for exporting....There is the factor proportions theory...the international product life cycle theory...the national competitive advantage theory...


EDIT: It's not to say that manufacturing should leave all together...because it won't...just that there was some serious problems here with productivity and wages...hell throw in quality too....because of the protectionist policies we had we had over priced(because of overpaid jobs) products that were not of high quality(because of poor management due to no incentives to change). We are seeing that trend reverse...but there is definetly a correction that is taking place....so...while we may have manufacturing jobs...they will never be the $60,000 to $90,000 jobs that they were....

And yes I know that many were only making $30,000 to $50,000...but many of those were lost due to being support industries for the ones paying far more...

anhailla

It doesn't just apply to manufacturing jobs. The article points out that it will affect all industries except for some select service industries. But we will forget that for a minute.



Companies do not always go overseas to survive a global economy, many times the motive is greed and only greed. This is the danger the article is speaking to.

It's not that you can't be a multi-millionaire dollar company here in America producing...let's say, Dog food. Let's say quality dog food..unlike what comes out of China. People like their pets, they will pay 2 extra dollars for un-poisoned dog food.

You might make a good living producing quality dogfood and selling it to your neighbors. ..but enter a "growth-based global company"

one Ceo says to another..."Hey Mike I know we made 10 million dollars last year selling quality dog food and providing quality jobs to our fellow americans.....BUT BUT
let's produce a shit, poisoned dog food in China and make 20 million dollars next year"


Bye Bye jobs...Bye bye regulations and quality. Hello rich Mr. Mike.

and by the way, Mike doesn't do shit to reinvest his profits here.

this is the danger of the "flattening" of the middle class the article is talking about.


We end up with a few Mr. Mikes and eventually no one.... can even afford dog food or a dog.

__________________
...either I go, or that wallpaper does.

Oscar Wilde

Brainpolice

Comparative advantage always applies. It's simple logic. A single nation can't generalize in every area.

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http://mises.com/blogs/brainpolice/

anhailla

Was the article saying to "generalize in every area"

Didn't the article mention the idea of this purist "comparative advantage" won't work any longer?

__________________
...either I go, or that wallpaper does.

Oscar Wilde

DRS112

Well...to be honest...people have been saying that for centuries now...it's never came true...usually it's been the justification for whatever trade restrictions...but in the end the policies failed and in the interim they slow growth while leading to higher cost goods and lower quality and less innovation. I don't know how to express it right now...Easter hangover...too much food makes me groggy.

but when did this middle class exist? Why did it exist? Just a couple of questions to answer...and to offer an answer myself, I'll take a stab at the middle class you are referring to is in the 50's and 60's? Post WWII when we were exporting like crazy? What was the wages of a middle class person at that time? What could you buy with those wages? How does that buying power compare with the poor today?

anhailla

eh..lucky you, atleast you had time to get a hangover
The idea of a middle class is how old? We would have to agree these ideas of capitalism and the dangers of it... started around the time of Adam Smith. My argument would be these ideas are very new and subject to tweaking and change...to succeed

The idea of a middle class exists, because the continuing notion that a ruling class should dominate and exploit the rest... continued to explode into revolution and war...No?

__________________
...either I go, or that wallpaper does.

Oscar Wilde

DRS112

I didn't edit anything in your post other than the part where the quotes got screwed up.(I promise)

You talking about two world wars? That were fought because of the barriers to trade that were errected....which justified the creation of the Bretton Woods agreement, the World bank and IMF to facilitate trade liberalization to avoid any similar wars in the future?

DRS112

Because I'm feeling lazy
USATODAY.com - Unpopular argument: Sending tech jobs abroad is good


Unpopular argument: Sending tech jobs abroad is good
Kevin Maney



Behind closed doors, many U.S. technology executives will say something that could get them flayed if repeated in public: Sending computer programming jobs to India and China is good for America.
Not just good for business, they believe, but good for everybody — part of a process that will raise the standard of living in the USA and make us more secure in the world.

This can be tougher to swallow than a low-fat wheat germ muffin. It's counterintuitive.

"The system works so amazingly well that it's a wonder anyone doubts it, and yet, of course, people do," says Marc Andreessen, chairman of tech services company Opsware (OPSW), and one of the few who will forthrightly say that the outsourcing trend should be cheered.

That belief is based on a widely accepted theory — the theory of comparative advantage — that goes back to David Ricardo, a brilliant 19th-century economist who seems not to be related to Ricky.

Though, as Ricky Ricardo might say, let me do some 'splainin.

Let's say the USA is really good at two different things, software programming and creating innovative technology. And let's say India is also good at both. Because Indians don't get paid nearly as much as Americans, India can do each job at a far lower cost compared with the USA.

A big fear is that if trade is free and open, the USA would lose both those pieces of its economy, because lower costs win. Then our standard of living would fall, while the Indians could increasingly buy Porsches and plasma TVs.

But that fear, Ricardo would say, is misplaced.

Why? India's schools churn out loads of programmers, but the country has little venture capital and other infrastructure to help drive innovation. So even though India can do both for less than we can, inside India, the cost of doing programming is relatively little while the cost of starting companies is relatively high. India is "most best" — to use the language of economists and many 3-year-olds — at programming.

In the USA, we pay programmers very well. We also have a well-oiled, technology-creating innovation machine. Inside our country, it has become relatively expensive to our society to do programming; and relatively cheap to innovate in technology. Our "most best" is innovation.

Now here's where it gets funky: Ricardo would say that the USA should innovate in technology and stop programming, and India should do the programming and stop innovating. If we each concentrate on our "most best" and then trade, more of both get produced for less — the very essence of increased productivity.

Of course, the "most bests" change over time, and that changes the equation. The genius of U.S. capitalism is that it continues to create "most bests" that are of higher value than everybody else's "most bests." Next up will be industries like biotech and nanotech.

Anyway, if productivity goes up, people have more of everything. Standards of living rise in both countries. "This is absolutely not a zero-sum game," says Stanford University economist Paul Romer.

Real life gets a lot more complicated than that, but in general the theory has been proved over hundreds of years. In the 1980s, the USA lost tens of thousands of auto and steel jobs to Japan, but because of comparative advantage, we gained those jobs and more in fields that were new "most bests," like high-tech and financial services. And though some people back then predicted we were going to become Japan's servants, and congressmen symbolically bashed a Toshiba boom box on the Capitol lawn, in the end the standard of living in Japan and the USA rocketed.

Ricardo's point shows up on a more practical level, too. If a computer company outsources programming and saves 30% in costs, some of that savings results in lower computer prices — a good thing for consumers. At the same time, the company keeps some of the savings, giving it higher profits.

That means it can hire more people. It can also invest in new products, which might result in the company doing even better, and hiring more — some, perhaps, in other countries, but some in the USA. And if profits go up, the stock price probably goes up, making millions of stockholders wealthier.

"A free movement of labor allows us to become more efficient, produce better products at lower costs, grow more profitable, pay more taxes to the government which, in turn, looks after the people who have been displaced," says Oracle (ORCL) CEO Larry Ellison.

At the same time, U.S. workers benefit when the standard of living rises in India or China or anywhere in the world. "Those people are all going to buy cars, cell phones, PCs, espresso machines, mutual funds, iPods, Nikes, Polo cologne and on and on," Andreessen says. Many of those products will be made by U.S. companies.

"We can benefit if they become more like us," Romer says.

One last note: The more this goes on, the less likely the United States will have enemies. If India's economy is booming because U.S. companies outsource there, India pretty quickly becomes our friend. Same with China and elsewhere. We'd have a lot easier time with North Korea's Kim Jong Il if a few American telemarketers could move their call centers to Pyongyang.

Not every tech executive buys all this. Intel (INTC) Chairman Andy Grove argues that the USA is in danger of losing key technology capabilities and needs to mount a counterattack. That doesn't mean he wants to close off trade. Basically, Grove is saying we need to once again become "most best" at software programming, and keep those jobs here.

A lot of people and politicians don't buy Ricardo-ism, at all. How can firing a well-paid, intelligent, contributing member of society in Chicago, then giving the position to a low-wage young hotshot in Mumbai, turn into a net gain?

Or just try telling programmers who see their whole departments vacuumed out and replaced overseas that it's all for the best. "This is a disaster for American workers and for our country," says Alva Perry in Clearwater, Fla., who says her husband's job as a programmer is at risk.

Competing economic theories argue that much has changed — like cheap broadband Internet connections that make a computer in India seem like it's next door — and Ricardo's theories no longer apply.

Ricardo isn't an easy man to believe in. But so far — 180 years after his death — he still seems right.

anhailla

Adam Smith and Karl Marx (just to make it simple) had opposing ideas long before 2 world wars.

I was speaking to the basic idea that free markets alone cannot and do not govern and equalize societies...that even Adam Smith believed in some government intervention.

My whole point is that the tenants of socialism and capitalism will have to succeed together, to keep the middle class the relative ruling class.

Ideas that America was based on...
we are in the beginning of a grand experiment, don't you think we are wise to realize this?

__________________
...either I go, or that wallpaper does.

Oscar Wilde