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Sunday, May 07, 2006

Mankiw: Outsourcing Redux

Greg Mankiw with a sense of humor and a defense of outsourcing:

Outsourcing Redux, By Greg Mankiw: About two years ago, while I was chairman of the Council of Economic Advisers, I had my 15 minutes of fame over the topic of offshore outsourcing. (I tell the story in a recent paper with my former chief of staff Phillip Swagel.) At the time, I drafted an op-ed on the topic. The article was never submitted, but it has been sitting on my hard drive ever since, where I recently ran across it. I thought the readers of this blog--an elite group--might enjoy it.

Adam Smith on Outsourcing, by N. Gregory Mankiw, March 25, 2004 If the American Economic Association were to give an award for the Most Politically Inept Paraphrasing of Adam Smith, I would be a leading candidate. But the recent furor about outsourcing, and my injudiciously worded comments about the benefits of international trade, should not eclipse the basic lessons that economists have understood for more than two centuries.

To avoid making the same mistake twice and clinching the award, I should let Mr. Smith speak for himself. Here is what he said in his 1776 classic The Wealth of Nations: “It is maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy...What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage.”

This is the basic theory of international trade. Since Smith penned these words, economists have added rigor to the analysis (thank you, David Ricardo) and have conducted numerous empirical and historical studies of the effects of trade. The verdict is in: Smith was right. Few propositions command as much consensus among professional economists ... Smith’s insights are now standard fare in Econ 101.

Yet, whenever the economy goes through a difficult time, as it has in recent years, free trade comes under fire. Some people now fear that trade is responsible for recent weakness in U.S. labor markets. The concern is understandable, but it is simply not true. Over the past three years, job losses are more closely related to declines in domestic investment and weak exports than to import-competition. ... the main problem is not rapid growth in China and India, but slow growth in Japan and Europe.

Of course, global competition has caused employment declines in some industries. ... The Internet and advances in telecommunications have meant that more Americans are competing with workers in other nations. Even if more competition is good for consumers, it can produce very understandable anxiety among some workers and their families.

These technological changes, however, have not rendered Smith’s insights obsolete. ... McKinsey Global Institute. ... up the costs and benefits associated with outsourcing [services] and found that for every dollar the United States sends abroad, we get back about $1.12, resulting in a net gain of $0.12. Smith would not have been surprised.

Some people fear that Americans cannot compete with low-wage workers abroad, or that global competition will mean that wages will “race to the bottom.” The truth is ... our workers are among the best in the world. Our real wages are ultimately determined by our productivity, and American productivity growth has been spectacular over the past three years. ...

The President, like Smith, believes in the free enterprise system. The goal of policy should be to open up markets, not to retreat behind walls or throw rocks in our harbors. Economic growth is not zero-sum... Free and open markets can mean better jobs both for Americans and for our trading partners around the world. ...

Perhaps quoting Adam Smith is risky. Smith was British, so some people may accuse me of outsourcing economic advice. But import competition is not a threat. I have great confidence that President Bush’s policies will grow the economy and create a job for every American who wants one, including his politically tone-deaf economist.

I haven't hestitated to disagree with Greg on some issues, but as I've said many times I'm in basic agreement with this. One difference though is that I would have spent time discussing the administration's plans, if any, to help workers affected by the global transition, something that might have helped workers and taken the edge off of the difficult politics at the same time.

    Posted by on Sunday, May 7, 2006 at 12:03 PM in Economics, International Trade, Politics | Permalink  TrackBack (2)  Comments (26)

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    » Mankiw: Outsourcing Redux from EconWatch.com

    [Source: Economist's View] quoted: Not to repeat myself from the JKG piece below, but Mankiw and others who marvel that we have experienced a disconnect between productivity and real wages and fail to factor in the power relation always amaze me. Worke... [Read More]

    Tracked on Monday, May 08, 2006 at 10:01 PM

    » Mankiw on outsourcing from New Economist

    Greg Mankiw has used his weblog to publish an op-ed, Adam Smith on Outsourcing, that he wrote in March 2004 amidst the furore over some unguarded comments on the topic. About two years ago, while I was chairman of the Council of Economic Advisers, I ha... [Read More]

    Tracked on Monday, May 08, 2006 at 11:29 PM


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