Wednesday, March 28, 2007

My Father is Darth Vader

I love Alan Blinder, both as a person and as an economist. I took courses from him as an undergraduate at Princeton, wrote my undergraduate thesis under his supervision, coauthored one of my first published articles with him, and have been friends with him for more than a quarter of a century. I am therefore surprised to see him lured by the dark side of the force. You can read about it in today's Wall Street Journal:

Pain From Free Trade Spurs Second Thoughts
Mr. Blinder's Shift Spotlights Warnings Of Deeper Downside

By David Wessel and Bob Davis

For decades, Alan S. Blinder -- Princeton University economist, former Federal Reserve Board vice chairman and perennial adviser to Democratic presidential candidates -- argued, along with most economists, that free trade enriches the U.S. and its trading partners, despite the harm it does to some workers. "Like 99% of economists since the days of Adam Smith, I am a free trader down to my toes," he wrote back in 2001.

Politicians heeded this advice and, with occasional dissents, steadily dismantled barriers to trade. Yet today Mr. Blinder has changed his message -- helping lead a growing band of economists and policy makers who say the downsides of trade in today's economy are deeper than they once realized.

Mr. Blinder, whose trenchant writing style and phrase-making add to his influence, remains an implacable opponent of tariffs and trade barriers. But now he is saying loudly that a new industrial revolution -- communication technology that allows services to be delivered electronically from afar -- will put as many as 40 million American jobs at risk of being shipped out of the country in the next decade or two. That's more than double the total of workers employed in manufacturing today. The job insecurity those workers face today is "only the tip of a very big iceberg," Mr. Blinder says.

The critique comes as public skepticism about allowing an unfettered flow of goods, services, people and money across borders is intensifying, including some Republicans as well as many Democrats. The rethinking is helping free-trade foes, underscoring the urgency of helping those battered by globalization and clouding the outcome of a hot debate: Should government encourage forces of globalization or try to restrain them?...

[Mr. Blinder] was silent when his former Princeton student, N. Gregory Mankiw, then chairman of President Bush's Council of Economic Advisers, unleashed a political firestorm by reciting standard theory but appearing indifferent to pain caused to those whose jobs go overseas. "Does it matter from an economic standpoint whether items produced abroad come on planes and ships or over fiber optic cables?" Mr. Mankiw said at a February 2004 briefing. "Well, no, the economics is basically the same....More things are tradable the past, and that's a good thing."

Mr. Blinder says he agreed with Mr. Mankiw's point that the economics of trade are the same however imports are delivered. But he'd begun to wonder if the technology that allowed English-speaking workers in India to do the jobs of American workers at lower wages was "a good thing" for many Americans.

I believe Alan is terribly wrong-headed about this topic.

Suppose some country had high tariffs that prevented many goods and services from being imported from abroad. Then a new President eliminated the tariffs. Alan would, I believe, applaud the policy move, despite job losses for some workers in previously protected industries.

But the rise in offshoring is much the same. If changes in technology suddenly make previously nontraded goods and services tradable, that has precisely same effects as removing tariffs. In both cases, a barrier to trade has fallen. We would import more, and there would be some painful dislocations, but the nation overall would enjoy greater prosperity.

For some reason, Alan does not respond to this rise in technology-driven offshoring as he would to a rise in policy-driven trade. But economic logic suggests that if he is to embrace tariff reductions as an economic positive, he should similarly embrace technology-driven trade increases an an economic positive. But instead of recognizing this change as primarily a force for good, he offers mainly hand-wringing. In doing so, he gives, perhaps unintentially, aid and comfort to the protectionists.

Meanwhile, I am still rooting for the Jedi.