Thursday, April 13, 2006

Blinder on Outsourcing

The current issue of Foreign Affairs has an article on offshore outsourcing by Alan Blinder (Princeton econ prof, textbook author, former Fed vice chair, former adviser to Bill Clinton, and former undergrad thesis adviser to Greg Mankiw). Here is how it begins:

Offshoring: The Next Industrial Revolution?

In February 2004, when N. Gregory Mankiw, a Harvard professor then serving as chairman of the White House Council of Economic Advisers, caused a national uproar with a "textbook" statement about trade, economists rushed to his defense. Mankiw was commenting on the phenomenon that has been clumsily dubbed "offshoring" (or "offshore outsourcing") -- the migration of jobs, but not the people who perform them, from rich countries to poor ones. Offshoring, Mankiw said, is only "the latest manifestation of the gains from trade that economists have talked about at least since Adam Smith. ... More things are tradable than were tradable in the past, and that's a good thing." Although Democratic and Republican politicians alike excoriated Mankiw for his callous attitude toward American jobs, economists lined up to support his claim that offshoring is simply international business as usual.

Their economics were basically sound: the well-known principle of comparative advantage implies that trade in new kinds of products will bring overall improvements in productivity and well-being. But Mankiw and his defenders underestimated both the importance of offshoring and its disruptive effect on wealthy countries. Sometimes a quantitative change is so large that it brings about qualitative changes, as offshoring likely will. We have so far barely seen the tip of the offshoring iceberg, the eventual dimensions of which may be staggering.

To be sure, the furor over Mankiw's remark was grotesquely out of proportion to the current importance of offshoring, which is still largely a prospective phenomenon. Although there are no reliable national data, fragmentary studies indicate that well under a million service-sector jobs in the United States have been lost to offshoring to date. (A million seems impressive, but in the gigantic and rapidly churning U.S. labor market, a million jobs is less than two weeks' worth of normal gross job losses.) However, constant improvements in technology and global communications virtually guarantee that the future will bring much more offshoring of "impersonal services" -- that is, services that can be delivered electronically over long distances with little or no degradation in quality.

That said, we should not view the coming wave of offshoring as an impending catastrophe. Nor should we try to stop it. The normal gains from trade mean that the world as a whole cannot lose from increases in productivity, and the United States and other industrial countries have not only weathered but also benefited from comparable changes in the past. But in order to do so again, the governments and societies of the developed world must face up to the massive, complex, and multifaceted challenges that offshoring will bring. National data systems, trade policies, educational systems, social welfare programs, and politics all must adapt to new realities. Unfortunately, none of this is happening now.