Removing the Blinders on International Trade

David Wessel and Bob Davis of the Wall Street Journal give an update on Alan Blinder's views on globalization and his estimate that trade will put tens of millions of jobs at risk [Update: free link to article plus related data on jobs at risk and offshoring]:

Pain From Free Trade Spurs Second Thoughts, by David Wessel and Bob Davis, WSJ: For decades, Alan S. Blinder ... 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. ...

Yet today Mr. Blinder has changed his message... Mr. Blinder ... 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 ... in the next decade or two. .... The job insecurity those workers face today is "only the tip of a very big iceberg," Mr. Blinder says.

The critique comes as .... skepticism about allowing an unfettered flow of goods, services, people and money across borders is intensifying... Some critics are going public with reservations they've long harbored quietly. Nobel laureate Paul Samuelson ... damns "economists' over-simple complacencies about globalization" and says rich-country workers aren't always winners from trade. He made that point in a 2004 essay that stunned colleagues...

Mr. Blinder's answer is not protectionism, a word he utters with ... contempt... Rather, Mr. Blinder still believes ... [n]ations prosper by focusing on things they do best -- their "comparative advantage" -- and trading with other nations with different strengths. He accepts the economic logic that U.S. trade with large low-wage countries like India and China will make all of them richer -- eventually. He acknowledges that trade can create jobs in the U.S. ... But he says the harm done when some lose jobs and others get them will be far more painful and disruptive than trade advocates acknowledge. ...

His critique puts Mr. Blinder in a minority among economists, most of whom emphasize the enormous gains from trade. "He's dead wrong," says Columbia University economist Jagdish Bhagwati... Mr. Bhagwati says that in highly skilled fields such as medicine, law and accounting, "If we do a real balance sheet, I have no doubt we're creating far more jobs than we're losing."

Mr. Blinder says that misses his point. The original Industrial Revolution, the move from farm to factory, unquestionably boosted living standards, but triggered an enormous change in "how and where people lived, how they educated their children, the organization of businesses, the form and practices of governments." He says today's trickle of jobs overseas, where they are tethered to the U.S. by fiber-optic cables, is the beginning of a change of similar dimensions, and American society needs similarly far-reaching changes to cope. "I'm trying to convince a bunch of economists who are deeply skeptical and hard to convince," he says. ...

When he talked about trade in the past, Mr. Blinder emphasized its great benefits. ... As a Clinton aide, he helped sell the North American Free Trade Agreement... He 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 ... 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 than...in 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...

Mr. Blinder began to muse about this in public. ... At the urging of former Clinton Treasury Secretary Robert Rubin, Mr. Blinder wrote an essay, "Offshoring: The Next Industrial Revolution?" published last year in Foreign Policy. ...

In that paper, he made a "guesstimate" that between 42 million and 56 million jobs were "potentially offshorable." Since then he has been refining those estimates, by painstakingly ranking 817 occupations ... to identify how likely each is to go overseas. From that, he derives his latest estimate that between 30 million and 40 million jobs are vulnerable. 

He says the most important divide is not, as commonly argued, between jobs that require a lot of education and those that don't. It's not simply that skilled jobs stay in the US and lesser-skilled jobs go to India or China. The important distinction is between services that must be done in the U.S. and those that can -- or will someday -- be delivered electronically with little degradation in quality. The more personal work of divorce lawyers isn't likely to go overseas, for instance, while some of the work of tax lawyers could be. Civil engineers, who have to be on site, could be in great demand in the U.S.; computer engineers might not be. ...

Mr. Blinder says there's an urgent need to retool America's education system so it trains young people for jobs likely to remain in the U.S. Just telling them to go to college to compete in the global economy is insufficient. ... It isn't how many years one spends in school that will matter, he says, it's choosing to learn the skills for jobs that cannot easily be delivered electronically from afar.

Similarly, he says any changes to the tax code should encourage employers to create jobs that are harder to perform overseas. ... Mr. Blinder says the focus should be on jobs with person-to-person contact, regardless of pay and skill levels -- from child day-care providers to physicians.

Mostly he wants to shock politicians, policy makers and other economists into realizing how big a change is coming and what new sectors it will reach. "This is something factory workers have understood for a generation," he says. "It's now coming down on the heads of highly educated, politically vocal people, and they're not going to take it."

Here's the Foreign Affairs article by Alan Blinder, "Offshoring: The Next Industrial Revolution?," (draft version in case link is blocked), and a summary of some of its contents is in "What Jobs are Safe from Offshoring?." Also, "The New Globalization" looks at the work of Blinder, Grossman, and others.

Comments

[reason]

I think he is wrong about what we need to do about it. We need international financial reform that puts as much pressure on surplus as deficit countries. We need to recognise the importance of economic security and stability, to recognise that costs of adjustment are real costs (and a GNP measure that destinguishes between costs and final benefits), and we need systems of lifetime learning. The current system is like going outside in a hurricane.

[reason]

And of course disequilibrium economics instead of faith in comparitive statics (my favourite theme).

[Zong Qua]

The US should set up an accounting of imports and exports from/to each country, and then require a net zero balance on an annual basis. If trade with a particular country is out of balance, then apply tarriffs to make it balance on a country by country basis. The trade deficit goes away and American Jobs are protected. The market can decide the prices and quantities of goods to be traded. To date, economists are just stupid to think that American workers will benefit from the current policies. The top 20% of US workers have benefited but the bottom 80% have been made to sacrafice. Blinder is correct. Things will get worse for the bottom 80% unless policy changes are implemented. Example, if China or Japan want to sell more goods in the US without tarriffs, buy more Airplanes, Medicines or Software to balance the account. Or, Like Toyota, they could start to manufacture here.

[mayo]

Blindar leads the Blind
Who is blinder to the unintended consequences of free trade, Thomas Friedman, The World Is Bumpy, who informed us that an engineer or medical diagnostician displaced at fifty would learn a new career. Or Mr. Blindar, who now encourages us to spend more education money on face-time occupations? Both seem to me to be avoiding the fact that trade bills they supported had the consequence of lowering wages.

[evagrius]

Can someone point out what "comparable advantage" the U.S. has?

[real person from the real world]

Zong, you make a very good point. I also must say, that for once someone (Wessel & Davis) is getting sensible on Globalization.

I work for a foreign entrepreneur, who is building his empire on my back, barely pays me, and provides no benefits, but he's not the devil incarnate. He's merely doing what the British did in India, to some extent, in the 1700s & 1800s, trying to make his fortune in another country with what he feels, is his competitive advantage.

He sure has different values, but is creative. Is overly sensitive about some things, and gives new meaning to the words "agile" maketing and productivity. But I have heard Americans rant about the quality of the work of foreigners and that their upper level schools aren't as good as the US. These scared idiots / or arogant jackasses (take your pick) have blinders on to the fact that these visa guys are very intelligent, and learn from their mistakes, and are willing to make the sacrifices we Americans have become too complacent about, and forgotten. They are also a big business for American Education, Inc.

This is another aspect to globalizaion as well. Education, Inc. needs to be less of a business, and start giving US citizens a fair leg up in the jobs race. I have moderate college debt and even at a low rate it now is at, I can barely live on what I am paid let alone, pay this off... and there are plenty of people with a HUGE debt. Meanwhile the US gov't and schools, generously provide for the foreign student population, at the same time we are losing jobs to people vetted thru entry level jobs in corporations back in their home countries, where rates and salaries are low, and gov't subsidize health and schooling as well.

Personally, as the blog about homes being a problem with regards to employment recently displayed in these pages, no one got the story right that I recall. It isn't that homes prevent people from finding employment, it's that the global employment is uprooting everyone. Also, that if that is to become the reality, it is mainly for the young and healthy. Most people, even foreigners, want to settle down at one point. For those who can float from job to job, we need to offer the best education to facilitate their rise into management. For those at home, we need to offer education in jobs that will stay here on our home turf, for the long term.

It is much harder to chase a job to a foreign country for someone who loses out to globalization, and has to "retrain." A company can import plane loads of programmers from India or China, but where do I, as an American, displaced by this, go for a job to buy my groceries here, or pay my mortgage to the local US bank? Where are consumers? How can you consume if you have no decent paying job? How do we maintain a balance of trade or on the flows of money and goods, if we don't have a population that can afford to buy somewhere other than Walmart?

[spencer]

I wonder how much of the problem is not trade in and of itself. Rather it is the long run trade imbalance.
If trade were approximately in balance it would be easy to argue that the benefits outweigh the cost. but since we are running a massive imbalance it is much easier to conclude that the cost outweigh the benefits.

Supposedly the loss of jobs to foreigners to produce the goods we use to produce domestically is offset by the inflow of foreign capital to finance new investments that creates the new jobs that the trade deficit destroys.
But if the capital inflow is just financing deficit spending or consumption -- largely through the govt deficit -- rather then new investments or just offsetting the drop in domestic savings we may not be creating the new jobs to offset those displaced through trade.

But the problem is not trade it is the structural deficits. I'm not sure about this, but this sure looks like a good description of the current environment.

[save_the_rustbelt]

Proctor and Gamble's accounting department is not in Cincinnati, but in Costa Rica. So much for a bachelors degree job.

There will be more Sherrod Brown's in Congress - I hope.

[ken melvin]

He's seen the light - half of it that is. The other half - that more than half the work force has become redundant hasn't dawned on him yet.

[reason]

Spenser gets it. At last some one gets it!

Zong Qua - why bilateral? Is that sensible? Think of a three country model where each country produces a single good where the main market is ONE of the other two.

[paine]

where's laff??

can't wait to read his full eye roll on this

every one here knows where i stand

but

notice how few msm pundits push the over strong dollar scam
as a big part of the jelly roll here

prolly because
it would provide a legal way
to head us back towards balance

of course

once the system settled down
wages would still end up down here
if we allowed fully open trade
and even with no immigration
even if balanced by a reduced dollar

[save_the_rustbelt]

1 of 7 homes in Cleveland is in foreclosure - and not because any bubble popped.

We have never recovered from NAFTA, let alone the pounding we are taking from the Chinese.

Shopping at Wal-Mart does NOT make up for losing your job.

Like duh.

[calmo]

The Chinese. Rusty, you mean Intel's announcement of a new $2.5B plant in China? Or GM's, Ford's, Chrysler's... profitable branch sector...in China?
paine is on this as usual, but the rest of us are a tad slow abandoning these o so yesterday nationalities.
We B so patriotic...like rooting for The Panthers* in the NCAA tournament while the promoters quietly take the advertising revenue.
* I make this up people. My knowledge of basketball goes as far as being able to distinguish a basketball from a volleyball, but no further.

[ken melvin]

. "It's now coming down on the heads of highly educated, politically vocal people, and they're not going to take it."

I'll be roadside here, waiting for these folks to come along.

[reason]

paine...
you are correct, but the insecurity would be much less, and there could be a political solution to the relatively lower wages (net redistribution - don't blush now).

[save_the_rustbelt]

Circuit City to fire 3,400 store workers, hire lower-paid replacements
Wednesday, March 28, 2007 10:40 AM

RICHMOND, Va. (AP) -- Circuit City Stores Inc. said today it plans to cut costs by laying off about 3,400 store workers and hiring lower-paid employees to replace them, and by trimming about 130 corporate jobs.

Its shares rose 3 percent in morning trading.

Circuit City, the nation's No. 2 consumer electronics retailer behind Best Buy Co. Inc., the store workers being laid off were earning "well above the market-based salary range for their role." They will be replaced with employees who will be paid at the current market range, the company said in a news release.

"We are taking a number of aggressive actions to improve our cost and expense structure, which will better position us for improved and sustainable returns in today's marketplace," Philip J. Schoonover, Circuit City's chief executive, said in a statement.

[save_the_rustbelt]

calmo:

Put your money on the glorious Ohio State Buckeyes!

Go Bucks!

[jm]

The theory of comparative advantage assumes that exchange rates properly value the economic inputs and outputs. In the era when the theory was developed, the kind of exchange rate manipulation that goes on today could not have taken place -- accounts were settled in gold, and no sovereign would have been willing to lend to a foreign nation in a vendor-financing fraud anything like the quantity of gold equivalent to Chinese and Japanese holdings of dollar securities. In those days, "reserves" meant gold in your own vaults, not IOUs for gold shipped back to foreigners*.

When Asian exporters are paid in dollars (almost always the case), they must exchange those dollars for their native currency to pay their employees and their local suppliers, and for other currencies to pay foreign suppliers. If governments were not standing ready to subsidize exports by buying up those dollars with freshly printed native currency, the exporters would need to find other private parties willing to buy the dollars, and that would force the exchange rates to reflect the true relative buying power of the currencies. It's exactly to avoid that, and give a semi-hidden subsidy to the exporters, that the governments intervene. (Why we don't see more high dudgeon from "free-trade" advocates about this interference in the markets, qualitatively no different from tariff protectionism, would be puzzling if we did not know that most of the "free-trade" advocates salaries are ultimately paid by agencies who profit from this.)

Though Asian government buying of dollars to manipulate exchange rates impoverishes their citizens, they don't care, because the power elites benefit. Imagine how comfortable the managers of GM and Ford and the politicians of the Midwest states would be if they could take the Midwest out of the union and peg the Midwest dollar at twenty cents.

*This is not an argument for return to a gold standard. As Bernanke so correctly observed in one of his books, nowadays there is nothing to prevent a nation from abandoning a gold standard when it becomes inconvenient, and in the Great Depression it was those who cut and ran first who recovered most quickly.

[kthomas]

China is a dictatorship and does not produce enough food to feed her people (and still they build on farmland). India does not have enough water to keep expanding at the rate it's going, and still has a caste system...a dispicable system that will be her undoing. Add to that there will be increased demand petrol (a limited resource), that will drive up operating costs on everyone.

US workers have no chance to compete with wages in India, China, etc.....but no matter. Eventually, there will be losers on a scale that no Economist can honestly predict.

Does anyone remember when Offshoring started, one of the excuses was "it will allow companies to devote more money into R&D, etc."...another lie. That's been offshored.

Maybe if American universities started offshoring their academic services (e.g. importing professors from India and laying off the over-paid tenured), maybe the intellectual cowards running those universties might seeeven more light.

[baileyman]

Can someone explain how we can prevent most of the gains from trade in this scheme from going to capital owners and winner take all talents? This seems to show up in the top 0.1% of the income distribution.

[Callahan]

Could it be that lower wages in this country are the goal? If fewer of us can afford vehicles, then we use less oil. If wages rise too much outside of the US, then those folks will be able to purchase more food, maybe even cars, and hey guess what, there is only so much oil, and only so much food.

The lower 80%, ... does any one in congress or on K street really give a damn?

[calmo]

kt notesIndia does not have enough water to keep expanding at the rate it's going, and still has a caste system...a dispicable system that will be her undoing. and I wonder whether those 12M illegal aliens might be our "undoing".
Also, didn't the US become net importers of food recently?
Last thing:US workers have no chance to compete with wages in India, China, etc.....but no matter.is true for most workers but if you examine the trade numbers and look at "services" under Exports, you find some pretty startling numbers.

[kthomas]

Hi calmo.

Illegal aliens? Last I recall, we were told that NAFTA and CAFTA, etc. was to have increased the standard of living in Mexico and the rest of Central America, and thus reduce migration. Hooray for free-trade.

And it may be that US imports more food then it exports, that's irrelavent...the point is that we have enough land and water to sustain our people.

Calmo, please tell, what would startle me about the numbers? (not being rude)

[Callahan]

In Michigan we call NAFTA and CAFTA the great American SHAFTA.

But again, we do not want those foreigners to get too wealthy, only so much oil, and only so much food.

[save_the_rustbelt]

"...Can someone explain how we can prevent most of the gains from trade in this scheme from going to capital owners and winner take all talents? This seems to show up in the top 0.1% of the income distribution...."

That will likely only happen when there is a tight labor market, and outsourcing and illegal immigration will prevent the labor market from tightening, except for certain fields.

So, tell your children to be plumbers or nurses, hard to do those jobs from Bangalore, or to get a license if you are illegal.

[Callahan]

But in the tight labor market of the future who will be able to afford a plumber or a nurse?

Get land I say, and grow yer own crops.

[dissent]

Now we get an establishment pundit economist with a critique of globalization!

It's just in time for the next recession, induced by globalization compressed wages and the capitulation of the debt ridden American consumer.

The globalization pundits and architects have aided and abetted the corporatocracy as they've stripmined the American economy of jobs that have decent wages and decent benefits.

Now that the damage has been done, now that the horse is out of the barn, now we have a critique. Methinks it's too late.

[johnchx]

evagrius asks: Can someone point out what "comparable advantage" the U.S. has?

Sure: here's how to find out. First, pick any two tradeable commodities, more or less at random. Next, find their domestic prices in the U.S. and calculate the ratio between them. Now, find the domestic prices in some other country -- France, let's say -- and compute the French ratio.

If the ratios in France and the U.S. are identical, then neither country has a comparative advantage, vis-a-vis the other, with respect to these two comodities. But that's actually rather unlikely. Much more likely is that the ratios are different (even just a little), and that difference creates a trading opportunity: the U.S. has a comparative advantage in one commodity and France has a (precisely symmetrical) comparative advantage in the other.

That's all there is to comparative advantage: the observation that differences in domestic price ratios constitute mutually beneficial trading opportunities.

But this is an idea with interesting implications. For example, notice that price ratios are unit-free values: they do not depend upon the currencies in which they are calculated. Which means that exchange rates don't affect comparative advantage at all. This is an implication that is frequently missed.

Comparative advantage isn't a theory about the balance of trade at all. In fact, I'd suggest that it's a mistake to think about the trade balance as having anything to do with "trade". The trade balance is about credit: it's a measure of borrowing and lending between countries.

The suggestion that we impose balanced trade by fiat is the advice of Polonius: neither a borrower nor a lender be. But it turns out that there are very good reasons both to lend and to borrow. An atavistic fear of credit per se seems a poor basis for policy.

The real concern about the trade deficit is not that foreign lenders are unduly generous ("evil Chinese officials cut my mortgage rate!") but that we are being imprudent borrowers (tax cuts for the fabulously well-to-do, McMansions, et al).

[Callahan]

Too late, me thinks it too, unless ... we replace the current congressional and senatorial monkeys with real leaders, ... but even then that leadership would have to be extraordinary.

[nodakdude]

1. That article suggests that Blinder is arguing that we should train people primarily to work in the nontradable sectors, or in "tradable" sectors that are tied to the land such as agriculture, extraction industries, and tourism. This may make employment more predictable for more people but it would also leave us with the economic profile of a 3rd world country. I can't imagine that he actually believes that.

2. Poor countries catching up put a lot of rich-country jobs at risk...but if you think about what a world where the current poor countries have more or less caught up to the rich countries would be like, the Americas will always have an advantage because we have a relatively small population, and we are at work while the vast majority of the world's people are off work or asleep.

[Poor Boy]

The problem with "free trade" is that we, the individual economic units, have to act on insufficient data in order to insulate ourselves from the effects of transitioning job markets. Especially in an economy that will transition from manufacturing to more intellectual endeavors (we assume), an economic actor needs at least four, and as many as eight years lead time to choose a field of work. If that actor chooses incorrectly (and most will) then they are not only lost to the opportunity that has been "off shored", but also they've lost the time and monetary investment in trying to find its replacement.

The effect of this inefficiency will be an increasing concentration on wealth to those who are lucky enough to guess right at what opportunities will exist in four to eight years, become trained in those areas, and then to capitalize on that training. This is fundamentally different than three or four generations of a family working at the same plant, after 150 years of working on the same farm. "Planning" for the future under free trade is an illusion at best.

If success cannot be planned for, then failure must be. Thus, under a system of free trade it is the totalitarian political systems which will succeed, because they have the social safety nets, and political control, needed to keep labor in inventory until such a time that its needed, without causing the major political turmoil that will lead politically freer nations to abandon free trade.

Of course, as the people of a nation become wealthier, their hunger for freedom increases. As they become more free, and less accepting of rationing, the ability of the government to manage free trade is reduced and the next, more oppressive, regime will step in to take over as the most successful economic machine.

Free trade = oppressed people.

[johnchx]

dissent observes: Now we get an establishment pundit economist with a critique of globalization!

That's the way the WSJ seems to be spinning it, but Blinder's actual article doesn't seem to fit the "critique of globalization" mold very well. What Blinder is really saying is:
To repeat, none of this is to suggest that there will be massive unemployment; rather, there will be a massive transition. An effective safety net would ease the pain and, by so doing, speed up the adjustment.

Which is more or less what liberal economists have been saying all along.

We don't know what the future economy will look like. (We've never known.) Therefore, flexibility is the one sure bet. Make it possible for people to respond to change as it happens without facing immediate personal ruin.

[Bruce Wilder]

"Mr. Blinder still believes ... [n]ations prosper by focusing on things they do best -- their "comparative advantage" -- and trading with other nations with different strengths."

"Mr. Blinder says the focus should be on jobs with person-to-person contact, regardless of pay and skill levels -- from child day-care providers to physicians."

I hope my juxtaposition of these two statements serves to highlight that Mr. Blinder's view makes very little sense.

Focusing resources on jobs in sectors immune to trade is perfectly idiotic, in fact, and self-destructive.

What a waiter, nurse, barber, teacher or physician is paid, is entirely dependent on productivity in tradeable sectors.

The trick to trade is being able to pay for what you buy with stuff you make or do.

The U.S. position in trade is increasingly perilous, because the U.S. is dependent for its high income on sectors, some of which are subject to rapid expropriation. Our reliance on financial services and intellectual property, while we "invest" in exurban housing, SUVs and the War in Iraq, has put on the top of a cliff, with the very real risk of being pushed off.

[Poor Boy]

Just another thought that I forgot to add. From most people's point of view it isn't the unemployment rate that is important, but the pay rate. For a vast majority of workers, the question isn't just "do I have a job?", but it's, "am I being paid well for my time?".

When pro-free traders talk about free trade and its affects, they talk a lot about transitioning job markets without talking at all about transitioning rates of pay (which is really all most people care about anyway). They also never talk about the investment that it takes for workers to transition (and more importantly, where that money comes from), nor do they talk about the very high likelihood that displaced workers will attempt to transition to fields that are also being sent to other countries (computer programmers, engineers...).

[Meh]

Bruce Wilder hits the target with the problem of focusing on non-tradeable goods.

I'd also like to draw attention to the fact that we are undergoing a transition from a manufacturing economy to "something else." It's clear that manufacturing productivity has (in terms of labour) reached the point where you can supply solid goods to the entire world using the manufacturing capacity of a couple of large countries.

More worryingly, new sectors are not generally labour intensive at all. Biotech, IT all have a lower peak employment profile than, say, the auto industry had.

It's certainly going to be a bumpy ride while we work out what to do about endemic mass unemployment. No doubt the first approach will be a return to the Gilded Age. We can all be servants of the rich!

In the meantime, I'd also like to pick a bone with this:

""He's dead wrong," says Columbia University economist Jagdish Bhagwati... Mr. Bhagwati says that in highly skilled fields such as medicine, law and accounting, "If we do a real balance sheet, I have no doubt we're creating far more jobs than we're losing.""

This is fascinating, because he's making a statement of faith. The first question is... why on earth don't we have some figures on this? If this is going to be the main contention in favour of globalisation then it needs documenting.

Secondly, I'm not so sure the picture is quite so simple. All those fields have seen an increasing divide between the top end and ranks of young graduates who do a lot of the grunt work. (Or in medicine between doctors and nurses/healthcare assistants.) It's not at all clear that the rise in employment in those professions is an expansion of "knowledge economy" or just "people who do face/keyboard time."

If a new healthcare assistant job pays the same as the low-end job at a closed factory, then it's not really a net gain. Once you factor in that the factory had many more of those jobs than the healthcare industry and the balance looks mighty odd.

Someone needs to call Baghwati out on this, to get some figures on the table.

[save_the_rustbelt]

"...But in the tight labor market of the future who will be able to afford a plumber or a nurse?...."

I don't remember who, but in the past couple of months one of the econ bloggers wrote something to the effect that since the rich need brick masons and plumbers and nurses and etc. most of us should get in a position to serve the needs of the rich and super rich.

Nice, huh.

If I think of who wrote that I will let you know.

[Poor Boy]

That is nice Save_the_Rustbelt. It reminds me a lot of the Republican talk show hosts who say things very similar; I'm thinking of Shawn Hannity who I once heard say the rich shouldn't pay taxes, because it prevents them from buying more Yachts, and Yacht builders, and mechanics, and bait manufacturers and on down the line all suffer.

When did every economic issue start revolving around how to make sure that the rich are well served?

[Callahan]

Save the rustbelt, but will there be enough of the rich to sustain a world of plumbers and nurses? I don't think so. Now they are getting richer whilst we are getting poorer. But this can't go on forever as I believe they (the rich) will eventually depend on having enough of us to afford to buy things that they (the rich) sell either directly or indirectly.

Whether I'm wrong or right, we are in for a wild ride.

[Lafayette]

Binder: "Civil engineers, who have to be on site, could be in great demand in the U.S.; computer engineers might not be. ..."

Unfortunately misguided claptrap from (yet) another economist who fails to understand technology.

Technology is not as fungible as one might think. Binder focuses on IT because India is so talented in the industry. What India does is provide building-block computer programs to those who want to use them "as is".

For the moment, Indians are not going to meet with a client towards understanding their business needs and proposing the right solution, then implement it and hold the client's hands till the solution works to the customer's satisfaction. And, when the customer has a question, do you think s/he is going to call India at two o'clock in the morning? Will Indian sales engineers drop in to meet with the customer for "jam sessions" to solve problems with business processes?

More over, the IT products coming out of the US engineering laboratories today require legions of computer specialists to develop, even if the "little black box" is made in China. Wherever there is an element of value-added service, that service will be obviously performed locally - and that means anywhere from 70 to 80% of IT today.

Do we see ChIndia developing hi-tech computers? No. Hi-tech networks? Who are the major purveyors of Internet software today? For the moment, they are all in the US. The US has demonstrated repeatedly sufficient ingenuity for developing new products. It is true, nonetheless, that most IT product manufacturing will probably leave the US in the next quarter century.

When Google builds its server farms, do they look for cool places in the Himalayas to run their computers? No, they go to Washington State or even North Carolina. At most, hi-tech companies create some engineering labs in India to take advantage of the local talent – but I seriously doubt it will be getting any innovative world-beating products from those sources.

Microsoft will outsource much of the wrote programming, but the innovation, the real added-value to products, will remain American/European for some time to come - IF American business maintains sufficient R&D levels. Big little "if".

There are other sectors on Binders list that will remain "at home" as well. I simply don't see any major company trusting computers in India with its back-office applications, which are often highly confidential and therefore performed in house. I certainly would not put any engineering development work on a foreign computer for fear of having it purloined.

Let's not get carried away by the "paradigm shift" that has taken place in "traditional" industry sectors that, due to brawn-work as a primary factor cost, was dislocated.

If America wanted to strike a blow against the dislocation of hi-tech jobs, it should close down the training of foreign students in key technologies. But, to do so, would put a serious constraint on US-based skilled hi-tech manpower, because way more than half of the students are foreign born.

These are the ones who inevitably leave the US and start-up businesses in their home countries to take advantage of lower cost - but also lower-skilled - local employees.

The West will have to compete with brain-work from the East for some time to come. But, given history, I submit that this is one "comparative advantage" that the West has in spades.

[Scott Ferguson]

"kthomas,
You are the only one here who has mentioned the problems facing our biggest potential rivals. "

Sorry Lafayette! I started composing my screed before you posted your comment.

[dale]

I think there is a fundamental contradiction working out here as these trade regimes shape our social world. If the workings of comparative advantage on the world scale are really creating greater wealth and efficienies, while at the same time destroying security and creating greater inequality- then a more radical decommodification of labor (people) and a much more radical redistribution of wealth will be required.

If, that is, we want to live in a decent global society.
"Free" trade is creating the necessity for socialism or a radical social democracy.

[kthomas]

calmo will no doubt claim I am channeling Marx, but I can very well see Marx smiling at dale's last comment.

[Martin]

Mark,

With your indulgence I'd like to post a few links, because this is a subject to which I have devoted a great deal of time and effort.

What is 'globalisation'? Is it The End of Economics just like the collapse of Soviet Communism was supposed to be The End of History?

Or is it, as the bears like Stephen Roach suggest, nothing more than a global labour arbitrage?

When global labour's share of world GDP has reduced from 56% to 53% over the last five years, with global capital's share increasing from 10% to 16%, a very strong case can be made that it is such an arbitrage; and more to the point it's a policy, not a process, for which no voter has ever been asked to cast a mandate.

It has four elements, all intended to work towards arbitraging First and Third World labour costs to a vanishing point:

1. Offshoring removes the high value, high wage labour to low value, low wage centres;
2. Mass immigration expands the Western labour pool to the point where labour supply far outstrips demand and wages remain static or start to fall;
3. The migrants send remittances home, thus increasing their countries' of origins GDPs' without the necessity of those countries undertaking meaningful economic reform; and
4. We get to send foreign aid from our new and improved low wages. Lots and lots of aid.

In the UK, the Department for International Development now has a budget three times that of the Foreign Office (or as you guys would call it, the State Department) -

http://martinkelly.blogspot.com/2006/05/policy-not-process.html

If this is not a policy, why do some economists refer to the IMF and G8 as being globalisation's 'stewards'?-

http://www.moneyweek.com/file/26264/the-dangers-of-economic-complacency.html

If it were a process, it would occur naturally - it would have no need of stewards.

The worst example of global labour arbitrage that I have yet come across has been right here in Scotland. It concerns...well, read the link...

http://martinkelly.blogspot.com/2006/11/scampi-panky_16.html

Classical free trade, if applied properly, would also have the result of arbitraging incomes to the point of equality - but that equality would be much more likely to be at 20 bucks an hour and rising than at a static dollar a day.

Which is the precisely the point to which the Western World, oil shocks and stagflation permitting, might just be heading.

[Bruce Wilder]

L: "Indians are not going to meet with a client towards understanding their business needs and proposing the right solution, then implement it and hold the client's hands till the solution works to the customer's satisfaction"

One area where India has been very successful is website development, and in website development, they are able to all that L says they won't. With a much lower cost of labor time, they are able to tweak websites endlessly and elaborately. And, yes, they do answer the phone at 2 am.

[johnchx]

Martin notes: When global labour's share of world GDP has reduced from 56% to 53% over the last five years, with global capital's share increasing from 10% to 16%...

Do you have a link or citation for these figures? They don't look quite right to me...in particular I wonder where the 31% of global income that isn't going to either labor or capital is going.

I'm not saying that they're necessarily wrong, but knowing the context they come from might help me to understand what they really mean.

[piglet]

"Nobel laureate Paul Samuelson ... damns "economists' over-simple complacencies about globalization" and says rich-country workers aren't always winners from trade."

Neither are poor country workers. Those economists still haven't come to their senses. They continue preaching their ideological free-trade gospel in the face of overwhelming evidence that it isn't working. Well, at least not as promised. They are in pure denial.

[Poor Boy]

Oddly, someone claimed that there is free trade among the States in the U. S., and hence we have a vibrant and strong economy. This person is unaware of the Interstate Commerce Clause, and all the regulation that the Federal Government does in regards to trade among the states. In many ways, my own company would be better off as a foreign company doing business in various states that a Missouri Company doing business in California.

[Lafayette]

dale: "If the workings of comparative advantage on the world scale are really creating greater wealth and efficienies, while at the same time destroying security and creating greater inequality"

Economic paradigms have been changing for centuries. What is transpiring is nothing new and simply another challenge that humanity must contend with.

The only constant in life is change.

[Lord]

Wherever there is an element of value-added service, that service will be obviously performed locally

This does not contradict Blinder. The reason for doing this locally is in the face time required, not because of any other comparative advantage. IT that does not involve meeting with C3 executives, interfacing with sales and marketing, and serving the customer, doesn't have much a future. No need for a company trust outsourcers with the work, they can simply open an office there, and all the backoffice and trust issues vanish, or at least become equivalent to same here. IT won't likely vanish here, only dwindle over time.

[Lafayette]

piglet: "They continue preaching their ideological free-trade gospel in the face of overwhelming evidence that it isn't working"

Open your eyes a bit further than your nose.

Look at world economic activity since the end of WW2. The world you see could not have been built without global trade and the riches that it returned, particularly, to the US.

Without it, Americans would still be driving a '55 Chevy.

[dale]

Lafayette,
Yes economic paradigms have been changing for centuries. But there has only been a very short moment of broad based prosperity in the entire hisory of mankind. Instead of que sera sera, I think a heightened state of alertness and an intentional push to maintain and strengthen the elements of a decent society are the better response.

[Lafayette]

Lord: "This does not contradict Blinder. "

It is not intended to contradict Binder.

Binder makes the foolish assumption that because, given the transition from Industrial Age (brawn-work) to the Information Age (brain-work), that most or a worrying "great many" jobs will dislocate to the Far East.

Yes, brawn-work jobs will do exactly that, they will go to cheaper-cost countries. But, brain-work jobs will not only be maintained, but increase. Information workers employ their intellectual capacities and not their bodies.

All the more reason to change educational systems to adapt to the new requirements and instill, perhaps, more discipline such that students graduate with competence in stead of foolish notions like "be all ya wannabe".

The career choices will not likely be as great as they were in the past. Work will be mostly sedentary, so obesity will be a growing menace. It is entirely possible that living standards will stagnate, as a large part of the growth pie goes to where renewal growth is taking place after decades of neglect.

Already a massive shift of financial resources (West to East) has taken place and that will continue unabated. The US needs to think hard about how it is going to get its "new act" together.

The moribund plutocrats presently marking time till they are put out to pasture have wasted 8 years by doing nothing but senselessly wasting years and resources.

It's a propitious moment in time for someone who can articulate credibly an inventive vision of the future that could rejuvenate American spirits. Heaven knows America needs one and it aint gonna be easy.

Another John Kennedy would do just fine ...

[dissent]

Microsoft will outsource much of the rote programming, but the innovation, the real added-value to products, will remain American/European for some time to come - IF American business maintains sufficient R&D levels. Big little "if".

I think you're off by a mile. American IT companies are rushing for the exits, building big labs in India and downsizing their American workforces. (Just recently HP announced excellent corporate results and downsizing.) American students see the writing on the wall and have abandoned computer science as a major in droves - enrollment is down 50-70%, even in schools like MIT. Simply put, you have to be a dummy to go into computer science nowadays, and dummys won't cut it, when it comes to maintaining 'America's R&D lead'.

This is simply short term thinking, all about greed. It has been buttressed by free market and globalization ideologues, the economic orthodoxy. The corporate sector finds it profitable (right now) to exhange national loyalty for the sake of a cheap and exploitable workforce overseas. That is the real meaning of the partnership between "American" MNC's and the Chinese dictatorship.

In the long run, this may very well be an unprofitable bet. The world is a dangerous place. How good would profit margins look if these formerly American MNC's had to raise and fund their own militias?

[Lafayette]

dale: "But there has only been a very short moment of broad based prosperity in the entire hisory of mankind."

You forget the Pax Romana. Egypt also knew peace and prosperity for quite a while.

It isn't Mission Impossible. We simply must change the manner in which the economy generates its wealth. And, frankly, this current clique of short-term obsessed MBAs running business haven't the foggiest notion. (It is no wondrous management aptitude to milk a cash-cow sector to death and walk away with a big grin holding a bundle of money as the entire industry dislocates to points east.)

There was never a case study quite like this one in the past to learn from in Business School.

When the West transited from the Agricultural Age to the Industrial Age, major dislocations occurred as populations moved from the country villages to towns to forget old work habits and adopt new ones. Humanity survived, because we have intelligence and perseverance.

We'll survive this one as well - if we make the effort.

[paine]

jim

"The theory of comparative advantage assumes that exchange rates properly value
the economic inputs and outputs.
In the era when the theory was developed,
the kind of exchange rate manipulation that goes on today could not have taken place "

nice exposition

"Imagine how comfortable the managers of GM and Ford and the politicians of the Midwest states would be if they could take the Midwest out of the union and peg the Midwest dollar at twenty cents."

great thought provoker

i'd just add in the tech transfer
that comes when your shore
is the trans nats off shore

that might even trickle down to the real consumption
of the local wagery

[paine]

dissent

"The globalization pundits and architects have aided and abetted the corporatocracy as they've stripmined the American economy of jobs that have decent wages and decent benefits"

stripmined indeed

great curl to your comment

[piglet]

Lafayette: (sigh, roll eyes)

says...

johnckx
"exchange rates don't affect comparative advantage at all"

you've left out the step often left out in eco 101
that barter ratios are expressed in prices which ----can -----
reabsolute advantage an undervalued currency

see the gold talk in jims comment to
see why ricardo by passing this step was almost okay

you evoke credit very good

but you don't link it to its potential effect on the exchange rate adjustment that closes trade gaps
in a gold system

the answer is not go back to gold
but go forward to keynes world credit money

[paine]

laff
u disappoint me
only one clap trap

i wish i shared your sanguine sense of the unique rents
or name your fee type services
our western brains can earn in the global market place

i don't

and even if the labs and studios of the world
are located in the usa

why hunch more and more uniqur talent will be
in shored from chindia and other places
ask larry summers

[paine]

dale
you are calling for the end of capitalism

"a more radical decommodification of labor (people) "

[dale]

actually, L, I doubt that even at the height of ancient empire's past glorys that their prosperity was broad based and widely shared. Slave based- authoritarian- agricultural societies survived by stripping all but the barest necessities from the agricultural producers- the surplus going to the elites. When I talk about real broad based prosperity- I'm thinking of the post WW2 leveling.

I agree we can get through this. But not by complacency. Class based political intervention in our economic systems to intentionally correct pathologies and force elites to give up most of the gains of globalization- social solidarity- are my prescriptions.

[paine]

martin grasps the problem
then makes horse out of wishes

"Classical free trade, if applied properly,
would also have the result of arbitraging incomes to the point of equality - but that equality would be much more likely to be at 20 bucks an hour and rising than at a static dollar a day"

unless "applied properly "
here means sublated into a worldwide
planned trade and credit flow system

nope

[paine]

laff

"Economic paradigms have been changing for centuries. What is transpiring is nothing new and simply another challenge that humanity must contend with.

The only constant in life is change"

let them eat cake

[dale]

Paine,
Maybe not the end of capitalism. It is seemingly the goose that lays the golden egg. But we do need to find ways to both use its productivity and creativity and also at the same time recognize the inherent worth and dignity of each and every person. How to make capitalism more and more class neutral? Any thoughts? Or is that an oxymoron? And what alternatives are there?

[paine]

laff admit you are not french
any more then that hideousorange salad creme we
find in cafeterias is french

[paine]

dale ..dear virtual comrade
t'is indeed an "oxymoron"

[dale]

one comrade's oxymoron is the other's possibility.

[RP]

Lafayette: Do we see ChIndia developing hi-tech computers? No. Hi-tech networks? Who are the major purveyors of Internet software today? For the moment, they are all in the US.

You appear to be operating under the delusion that the major hi-tech companies are not major multinational enterprises with global work forces. And then you base your
argument on a false premise. Ignorance truly is bliss, apparently.

[DRR]

Wow, this discussion is much more intelligent than I thought it would be, mostly due to the yeomans work of Lafayette and Johnchx. I'll only add that upon reading the actual article, there's a lot less there than the hyperventilations of the reactionaries here would lead you to believe. He's basically saying (as he has been for 3 years now) that global economic integration & increased technological sophistication will affect far more jobs than some previously thought. But he's not predicting some mass binge of unemployment (he's correct) and his prescriptions for dealing with it, as public policy goes, are along the lines of aiding adjustment. Very unlike the "OMG! global trade, finance, immigration volatitility! SCARY!! Close the borders! 800% tariffs quickly before we run out of food!!!" crowd.

says...

drr

"this discussion is much more intelligent
than I thought it would be
mostly due to the yeomans work
of Lafayette and Johnchx"

yeoman???

the cross bow went out with robin hood

[real person from the real world]

I see this from POOR BOY:
an economic actor needs at least four, and as many as eight years lead time to choose a field of work. If that actor chooses incorrectly (and most will) then they are not only lost to the opportunity that has been "off shored", but also they've lost the time and monetary investment in trying to find its replacement.

The effect of this inefficiency will be an increasing concentration on wealth to those who are lucky enough to guess right at what opportunities will exist in four to eight years, become trained in those areas, and then to capitalize on that training. This is fundamentally different than three or four generations of a family working at the same plant, after 150 years of working on the same farm. "Planning" for the future under free trade is an illusion at best.

Too true, but who and what army is going to stop US companies from hiring cheap overseas labor? Meanwhile, I do not see too many US car mechanics cutting their fees. Plumbers are still ripping the citizenry off, as are salesmen and lawn services, IRS agents, and anyone in any other occupation that requires face-to-face work. Besides, grocery stores buy out of season foods from overseas. You going to stop buying winter tomatoes and fruits?

Right now, India is running out of midlevel and executive IT talent. Where do you think they are going to get it? It doesn't take a lot to figure out the various scenarios, and pick the best, most flexible option. Green cards, originally from India will return to India, and some Americans, brave and healthy enough to go over seas will go too. Those like me, older workers unable to pick up and move, are screwed, and that is that. Ranting doesn't help. In the 1800s and early 1900s people who came here had it tough, and we are in for it again, unless possibly we get rid of the Republicans AND the Dems that get in, are sensible, not ideologues or spineless shift-with-the-wind hot air types.

[Martin]

JohnCHX,

My fingers are Googled to the knuckle.

That figure came, from memory, from a Morgan Stanley despatch prior to the website reorganisation last year that tanked all of its old links.

My apologies, but the best I can do for sourcing even an approximate figure is a link from another blog which quoted a figure along similar lines and which also has a tanked MS link -

http://neweconomist.blogs.com/new_economist/2006/02/labour_the_batt.html -

"In the US, for example, inflation-adjusted worker compensation in the private sector -- which includes wages, salaries, and benefits and is, by far, the biggest piece of overall personal income in the US -- has risen only 12% in the 49-month time span of the current expansion. By our calculations, this falls about $365 billion short (in real terms) of the 20% increase that occurred, on average, over comparable intervals of the past four expansions. Nor is the US an outlier. According to our estimates, the combined compensation shares of the US, Europe, and Japan fell to 54.4% of gross national income in late 2005 -- a record low since the inception of this series in 1991 (see accompanying chart). Labor’s share of industrial world output is under unprecedented pressure."

Paine,

"unless "applied properly "
here means sublated into a worldwide
planned trade and credit flow system"

No, not at all - precisely the opposite.

It is only by us all getting OUT of all of the EU/NAFTA/WTO/OAS/World Bank/IMF structures and leaving trade policy to individual nations that true 'free trade' can commence.

If the UK wants to trade with Malawi on individual terms, what business is it of the Poles to whom the EU has bound us?

Similarly why should developing nations be forced to open their borders to heavily subsidised European/American/Chinese goods (if the dollar an hour pay rate that wee Chinese lassies receive to get mercury on their skin isn't a subsidy, I don't know what is) when what they need is access? That isn't any definition of free trade that I understand, but you'll get all kinds, and any number, of economists trying to establish how many private equity houses (I prefer using their old, politically incorrect description 'corporate raiders') can dance on the head of a market in order justify just how we all benefit from their activities; and such activities.

Why do the IMF/World Bank wallahs insist on developing nations adopting economic policies such as neoliberal privatisation which their economies are palpably too fragile to sustain? Don't they get that political stability flows from economic stability, that once people see a chance to improve their lot they kind of lose the urge to fight with each other? And that instead of making demands on how they should do things they should just get the hell out of their faces and let them adopt models which best suit them?

[Lafayette]

Martin: “Why do the IMF/World Bank wallahs insist on developing nations adopting economic policies such as neoliberal privatisation which their economies are palpably too fragile to sustain?”

Because the economies in question are rampant with market distortions, brought about in many countries by either monopolies or oligopolies run by a clique of individuals. Or, simply politicians that try to please the masses with extravagance beyond the country's means.

The above comment indicates, to me, that you are imposing a set of western values in a context where such values have no meaning. So, if the IMF/World Bank do not introduce countervailing methods (accurate financial accounting, low-tariff barriers, exchange rate deregulation, market deregulation, etc.), who is going to? You?

Remember, when the IMF/World Bank have to get involved, it is because a country does not have the means autonomously to get itself out of the mess it is in. It lends countries the financial means to go forward, but exacts procedural changes in order to assure that its investment doesn’t go down a plughole. Which is all to often the case.

Go to a bank. Get a loan. Squander it. See if the bank will loan you more, given that you have amply shown that you have no self-discipline. Well, economies work in the same manner. Politicians squander the resources available, then go crying to the IMF for a bail out.

And, sometimes, they go this route several times. In time, it gets a bit boring ...

[Martin]

Lafayette,

Good question, and the points that you make about wealth squandering/extravaganceare well taken.

I don't think that values can be 'imposed' as you say - they have to be allowed to develop generically. One way of doing that might, and I think only might, be would for the World Bank/IMF bwanas to actively withdraw from nations' affairs.

At the moment, what precise good, for want of a better word, do they serve? Either wittingly or unwittingly they seem to be in the business of pain avoidance - 'things will be better if we throw $100bn/$200bn/$300bn down assorted black holes'.

One has to wonder whether they are actually in the business of making themselves feel better (at our common expense) without any necessity that they produce tangible results.

Perhaps only withdrawing financial aid would provide a sufficient potent incentive for aid recipient governments to grow up and get responsible. Heck, lafayette, althouygh I know we're all dead in the end by the same token being born's the most traumatic thing that can ever happen to anyone - why should we expect that the birth of stable economies should be pain free?

As for accurate financial accounting, well...Enron?

I do not believe, I cannot believe, that there is no nation which does not possess 'the means autonomously to get itself out of the mess it is in'. If that is the case then the entites we are discussing are not nations.

Perhaps a radical solution like redrawing the map would be in order.

[Lafayette]

Martin: "As for accurate financial accounting, well...Enron?"

I was writing about IMF/World Bank clients. Are you assuming that the US is a third-world under-developed nation.

Come to think of it ... don't answer that question ... ;^)

"Perhaps a radical solution like redrawing the map would be in order."

Yes, well, when you get around to that ... do let us know. I will want to take cover.

The IMF/WB do undertake some financial investments that prove to be worthwhile. They are no world-beating projects, but an hydraulic damn here and countryside electrification there does amount to a great deal for a small nation without resources to undertake these projects itself.

What I decry is the "banker's salaries", these functionaries are getting simply to preach the good word of capitalism. Not even NGOs pay as much ...

[johnchx]

someone (Paine?) said: you've left out the step often left out in eco 101
that barter ratios are expressed in prices which ----can -----
reabsolute advantage an undervalued currency

You're missing the point: the theory of comparative advantage has nothing to say about trade surpluses and deficits, very much in the same way that Newton's theory of gravitation says nothing about the geological age of the Grand Canyon. It's not about that.

We may, or may not, be interested in the causes of trade imbalances. But comparative advantage never explains them, because comparative advantage is always symmetrical.

If we're looking for an explanation for trade imbalances, we have to look elsewhere. Comparative advantage is no help, and Ricardo didn't mean it to be.

see the gold talk in jims comment to
see why ricardo by passing this step was almost okay

I think that it is a serious historical misunderstanding to believe that settling the balance of payments in gold made trade deficits less important in Ricardo's day. Indeed, gold settlement made trade imbalances disastrous.

Compulsory gold settlement imposes a de facto "credit limit" on each country, more or less at random. That is, the size of the credit limit has nothing to do with the ability of the country to repay its debts in the long term -- i.e. with the long term productive potential of the country. Instead, it depends upon the quantity of shiny metal that country happens to have under lock-and-key at any particular moment.

In Ricardo's day, nations went crazy to protect their reserves of "specie." So I don't think "Why is trade imbalanced?" was somehow a less important question in Ricardo's day than it is now. Quite the contrary.

Nevertheless, the theory of comparative advantage isn't about that. Why not? Because in a very real sense, that thing we call the "trade deficit" isn't trade at all. That is, it isn't the exchange of goods and services for other goods and services (you know, "trade"). It's purchases on credit. Period. And to understand that, we need to look at theories of savings and investment -- why savings in one country sometimes turns up as investment (or consumption) in another.

Now, exchange rates. I think that it's a mistake to try to think about exchange rates in isolation from internationl credit flows. They are, basically, the same thing.

China furnishes the clearest example. We talk about China's exchange rate policy, but what China actually does to maintain the cheap yuan is lend capital to the U.S. This isn't a "side effect" or "consequence" of the exchange rate policy -- it is the exchange rate policy.

In general, the dollar is worth what the dollar is worth, on the international market, because investors are willing to hold -- and, so far, buy more -- dollar-denominated assets. (Which is subject to the usual chicken-and-egg issue: investors hold those assets because they believe that the dollar will go on being worth more or less what it's worth now.)

Bottom line: comparative advantage has nothing to say about America's trade deficit...because that's not "trade," it's international borrowing. And we are able to borrow favorably -- low interest rates and a strong dollar -- because a mix of private and public (e.g. PBoC, BoJ) investors choose to lend to us.

My personal concern remains whether we are making good -- or foolish -- use of all this cheap credit.

There is, by the way, a notion out there that balanced trade would somehow be less "disruptive" than un-balanced trade. There is no support for this notion, either in theory or in practice. Your job -- even your industry -- can be vaporized by foreign competitors just as easily in a balanced (or surplus) country as in one running a deficit. And no, there is no guarantee at all that balanced trade means an equal number of jobs "gained" in export industries than "lost" in import-competing industries. So the problems that most of us are worried about -- basically the disruptions to the lives of workers who get caught up in a changing competitive environment -- are wholly independent of whether we happen to be running a trade surplus or deficit.

[cm]

Lafayette: I agree with the general point that (quality and efficient) R&D/tech is not as fungible and distributable as it is made out to be. But then the occupations that you cited of people who work with the clients on-site are precisely in the "face to face" category of services. So effectively you too are recommending "soil bound" service jobs, like Blinder.

says...

jonchx
"We may, or may not, be interested in the causes of trade imbalances. But comparative advantage never explains them, because comparative advantage is always symmetrical"

couldn't agree more
if your "point"
was comparative advantage ricardo one factor model
ie the real deal
is a barter proposition
any one citing it
in the real world today
is making confusion
and relying on "logical results"
based on it
or even favor trade theory
that are not applicable

i guess we were ships passing in the night

[Martin]

Lafayette,

You reply that,

"Yes, well, when you get around to that ... do let us know. I will want to take cover."

For sure, I don't think it would be as dramatic as that. Let me explain what I mean.

Development is surely like all economics, how to determine the efficient allocation of all resources - mineral, financial, mortal and temporal. There are some political structures in which this cannot now be done.

For example Nigeria seems to be polarised between the Muslim north and the Christian south and the Christian south seems to be polarising along tribal lines.

Zimbabwe has been appallingly polarised by Mugabe's tribal massacre of the Matabele, and as for Rwanda...

Are these greater entities the most useful vehicles for enabling their inhabitants to improve their standards of living?

I don't think so.

It might be the case that development is possible if populations were able to conduct their economic lives on cultural lines. If Zimbabwe's not working why not suggest that the real estate be partitioned, preferably on tribal lines, and effectively start again?

The example of the Grameen Bank tells us that properly managed microfinance works by demanding social collateral. If you don't pay your Grameen loan, Mohammed Yunus tells your neighbours. It would seem to me that if peer pressure amongst neighbours is a good way of keeping the loan book in the black then peer pressure amongst kin would be equally effective - particularly when your $25.00 loan is from the tribal bank, and it's your kin's money you're not repaying.

Inevitably there would be squabbles over resources - but I don't think these would be as widespread or violent as might be feared.

[Lafayette]

cm: "So effectively you too are recommending "soil bound" service jobs, like Blinder."

Perhaps, but Blinder made a forecast of such jobs being dislocated that I think is far to drastic and, if he did think of soil-bound jobs, I doubt he took it into account for IT.

I suspect most economists do not understand the manner in which IT implicates itself intimately into the business processes of a company - thereby binding the company to local software services. However, if economists' sole direct experience in the matter is calling a hot-line somewhere when they've got a problem with Windows, then I don't blame them for the error. That hot-line support is likely in India.

Blinder was probably thinking of his next hair cut when considering soil-bound work. He wont be going to Shanghai to get one, will he.

[jm]

johnchx,

I think you misinterpreted the comment (by Paine?), "... see the gold talk in jims comment to see why ricardo by passing this step was almost okay ..."

I think he meant that Ricardo had no need to consider the case of a nation maintaining a huge trade surplus by vendor financing fraud exactly because, as you next wrote, "... gold settlement made trade imbalances disastrous." (Which I assume you understood was my point, too.)

[paine]

"Compulsory gold settlement imposes a de facto "credit limit" on each country"
i agree totally

and a credit line based on gold
as you say
is clearly unrelated
to optimal global investment opportunity

again boats miss

i think we agree
the gold system was an automatic rebalancer
more or less
a bit too elastic at times cause the tether to gold
was thru credit and crisis occured regularly

my up to date lemma

chronic imbalance
do to undervalued currency was impossible
when gold prices de facto were universal

again we agree completely here jonck...i think

"that thing we call the "trade deficit" isn't trade at all. That is, it isn't the exchange of goods and services for other goods and services (you know, "trade")"
ie
it isn't barter or tied to a universal
intrinsically valuable
commodity money system (gold)

"Now, exchange rates. I think that it's a mistake to try to think about exchange rates in isolation from internationl credit flows. They are, basically, the same thing."

if not the same thing

one might say

exchange rate markets
are a product of credit markets
and credit markets
(to complete the curcuit)
are fueled by sovereign credit money

"what China actually does to maintain the cheap yuan is lend capital to the U.S. This isn't a "side effect" or "consequence" of the exchange rate policy -- it is the exchange rate policy"

quite right
but vis a vis trade
only indirectly

example
dooal corp buys chinese products
pays in dollars
chinese firm
exchanges dollars for yuan

china buys uncle 's bonds
but to complete the loop
and avoid yuan price inflation
ie de facto equivalent of a re val
the chinese cb
sterilizes the yuan issued
to the dollar recipient trader
by soaking up an equivaent amount of yuan
in curculation
by issuing notes

"In general, the dollar is worth what the dollar is worth, on the international market, because investors are willing to hold -- and, so far, buy more -- dollar-denominated assets"

however central bankers are not playing this game
for direct portfolio profit max

this is where you must start the quest for answers
to the forex fiddle
how do the answers to these two questions blend

a) why would an undervalued currency be optimal
to the central bank behind that currency

"the disruptions to the lives of workers who get caught up in a changing competitive environment -- are wholly independent of whether we happen to be running a trade surplus or deficit"

hey maybe here we do disagree

the size the speed and the kinds
of jobs both created and destroyed
the winners and losers can...can ...can
be profoundly diffrent
with fair exchange rates

and as a first approximation
rapidly re balancing trade

and
b) why would the central bank
behind the over valed currency
see that status as equally optimal

--------

meta comment

perhaps we're both assuming the other
is less
enlightened then we both are ...
my gut finds sub text
in things it don't got the warrant for
all too often

i'm too quick to find
error not merit

from now on assume
i'll assume u and i
might be in agreement
u are usually thoughtful
and
usually with a good point to make

at least on
....on international trade and credit flows

[Poor Boy]

real person from the real world:

To say that some are just "screwed" is totally insufficient. At a basic level, I pay taxes and play by societies rules only because being a part of the large "co-op" provides me opportunity and a level of security that I couldn't achieve by myself. If society fails to provide opportunity for me, and in fact encourages the dismantling of the opportunity that does exist -- the cheapening of my very birthright -- then society is not holding up its end of the social contract.

The governments job (any government) is not to pick winners and losers, but provide a safe space by which the greatest number of that governments citizens can achieve the greatest level of comfort, safety and success. Our government is currently working to provide for the comfort and safety of Indians and Chinese at the expense of Californians and New Yorkers. Doesn't make a lick of sense.

[Poor Boy]

Is there going to be a place that we can watch the debate at Harvard, that anyone knows of (online or on television)?

[paine]

poor boy

"Our government is currently working to provide for the comfort and safety of Indians and Chinese at the expense of Californians and New Yorkers"

true enough but why ???

why persist in this

unless some group of "Californians and New Yorkers'
also benefit

and i don't me walmart shoppers here

the enemy is within

NOT IN CHINA

the fed and treasury are run
to the specs
of the MNC's
and
the MNC's are operated
for and by
"our fellow ameeeerikans"

got a portfolio ???
is its delta value bigger then your pay check ????

maybe you be one of "THEM"

[dale]

"But he's not predicting some mass binge of unemployment (he's correct) and his prescriptions for dealing with it, as public policy goes, are along the lines of aiding adjustment."

Whatever is happening in unemployment related to our trade regimes and other economic developments- it seems fair to say that there are jobs being created- thus our seemingly low unemployment rates. But those jobs are also less rewarding $$-wise and benefit wise and seem to be such that more and more folks who do not absolutely have to work are opting out of the work force- thus the lower rates of labor force participation. But that trend seems limited- only so many will have such resources and with lower paying jobs fewer will be able to afford to opt out in the future.

And in terms of prescriptions for the ills of our trade regimes- for "adjustments" (what an odd term or euphamism for protecting the well being of human beings)are what this has always been about. If proponents of our current trade regimes had Always Also been proponents of "adjustments", universal health care, guarranteed incomes, retirements, education, family protection- what is in practice the decommodification of labor (people) and if our trade regimes had only been approved with such adjustments as an integral part of a unified program then much of the controversy surrounding economic globalization would have been avoided.

But then I suspect most of the advocates of our current economic globalization regimes would not have signed on. I don't think what is now finally becoming more and more obvious- the vulnerability of the US worker-citizen-human being is an accident or unforeseen development in this process. But now they do have to find a way to channel and defuse the rage and unease felt by more and more people. They could have dealt with the ire of the manufacturing workers. But I think the ire of the IT workers and other professional types is both embarrassing and somehow more dangerous.

[Lord]

But, brain-work jobs will not only be maintained, but increase.

I expect they will, but not here, or if here, only temporarily. Brain-work is far more readily automatable than brawn. That is what the intellectually overpreening always close their eyes to. They honestly believe they can't be replaced until they are. The pool of educated english speakers in the third world is not limitless, but it is far less expensive and far more productive to educate them than it is to produce them here. As long the work can be done over the wire, there is no incentive for it to be done here over the long term, a great disincentive in fact. This changes the value equation. Value is no longer in what one knows, it is in emotional intelligence, communicative ability, idea creation, and persuasion. That is a far different skill set than IT promotes or conveys as its value added.

[paine]

dale

most models assume full re employment
and just look at the falling wage share
in the mature economy
when two very unevenly developed economies
collide on the market place

take away that assumption
ie macro policy that maintians chock full employment
then you better figure
the adjustment means
a bunch of older jobsters
are headed
for an early trip to the scrap heep
or
work as a security guard at the mall

[calmo]

My Lord has me thinking again (merci) and this time about brainful activities (this could be one) [this should be one] and how that distribution mirrors the income/wealth distribution without actually corresponding to it.
Roughly, there is a need for Fullbrights and Smartest Pants but not Pretty Smarts or Competents. Technology is at that point where Alexander the Pretty Good, might as well try his luck with the shovel.
Not to say that robotics is that far behind and never going to steal his shovel, but that vast majority of workers who are technically trained and certifiably "competent" means that their job has a limited future.
But this sounds like the marketers have won:Value is no longer in what one knows, it is in emotional intelligence, communicative ability, idea creation, and persuasion. but I am still mulling it over. What is this thing called emotional intelligence /(Love)?

[paine]

dale
"I don't think what is now finally becoming more and more obvious- the vulnerability of the US worker-citizen-human being is an accident or unforeseen development in this process."

very important point

the domestic job mangle was
not only fore seeable
collateral damage
along the way to higher profits
for our MNC's
but it had a joint product...
lower surviver wage rates then otherwise

a win win

lose lose

looked at two class wise

"But now they do have to find a way to channel and defuse the rage and unease felt by more and more people... "
right on !!!!

"....I think the ire of the IT workers and other professional types
is both embarrassing and somehow more dangerous"

i agree
the american dream is about the merit class of self made professionals
the crushing of that
is too cruel to leave unattended to

unless you can get away with it by

juggling and tap dancing
till most of the heavy lifting
in helping them
is" ooohps .... too late
you're already cooked....sorry"

[paine]

calmo
"Roughly, there is a need for Fullbrights and Smartest Pants but not Pretty Smarts or Competents. Technology is at that point where Alexander the Pretty Good, might as well try his luck with the shovel"
direct bulls eye hit

larry summers wants the worlds leading labs and studios and hospitals and universities here in amerika

the super star rent rewarded types

but they will likely be more and more
made over seas and move here
once their super start merit is observable

[paine]

sorry my larry summers point
is of the form
calmo's cheaper built chinia brain workers
will swamp us out of the price range for hire

and it gets worse
cause even the super stars
will come here from there

its larry s
getting revenge on the harvard faculty

[paine]

lord
"emotional intelligence, communicative ability, idea creation, and persuasion"

ya ...i agree

con men always rise to the top

[Lord]

Yes they do, how astute. It is no surprise one of the most successful fields is acting. Emotional intelligence is the ability to connect with others, communicate, empathize, lead, persuade, sell. (I am somewhat surprised that given how many wealthy people there are, they have not yet adopted the most conspicuous of consumption, an army of personal staff to flaunt, a coterie of personal clients. I would guess it has to do with their less affluent background.)

[cm]

calmo, paine: How about this -- "emotional intelligence" == knowing when to kiss butt and when to kick butt.

[Lafayette]

Lord: "Emotional intelligence is the ability to connect with others, communicate, empathize, lead, persuade, sell."

Er, you mean "manipulate", don't you.

[real person from the real world]

Hey guys, no one of you may read this, but I work in IT, and unless you are the CIO, a lot of these IT jobs are not that brainy. Locking some poor visa slave into a cubical to code a stub or module, and paying him $20 an hour, while his multi layers of employers take cuts of the $90/hr the company is paying for him ain't good use of smarts is it? What about call centers? Now they intend to implement the lean business rules of Toyota to that! on top of everything. Ever call into someone, and have them answer (using an American name and lying about location) -- have them answer NOT the question you asked, but a SIMILAR question? This underpaid brow beaten people are answering questions using a decision tree on a computer screen, or some sort of rule of thumb based AI program, because the employer doesn't want brains, since he would have to pay more. IT is a lot of SHIT jobs that require knowing where to click. There are a FEW top people that know and get the bucks, and more and more, they are GREEN CARDS. Read what is written in the sand.

[Lafayette]

rprw: "IT is a lot of SHIT jobs that require knowing where to click."

Never had "shit" job, have you.

I've had several and I've not had much choice. It pays for the roof over one's head.

You work in hi-tech. If you can punch the Enter button, you must be paid OK and if you know C+++ I'm sure it's not bad. If you can handle a SAP installation - goodness, you must walk on water with that competence.

The industry has not known a major disaster since inception - just a small bubble-burst in 2000. Unlike that of buggy whip producers ....

Just what is it that you want? To complain? (OK, I'll punch your TS-card. ; ^ )

[cm]

real person: Don't worry, we read ...

"unless you are the CIO, a lot of these IT jobs are not that brainy"

That is mostly a matter of whether the organization cares for and enables people to use their brain. Even in scenarios like that you describe, I would think that most workers are not the morons that you make them out, or that they appear, to be, but more likely hamstrung by an organization defining their role and their degrees of freedom to be whatever it is. This notwithstanding of course there is a selection/adjustment process by which those unhappy with affairs and who have a better alternative! leave, or otherwise limit their engagement to what they can live with.

"because the employer doesn't want brains, since he would have to pay more"

Again, it's often not a question of money, but one of how one looks at and treats people, and understanding of how the organization actually works and what exactly it is supposed to do and how. Pay depends on supply/demand. Enabling your people to use more brain does not necessarily mean you have to pay more, as there will still be the same number of alternative jobs out there. (But OTOH when there is broader recognition that your people are not morons, more of them may be considered for better jobs.)

Your argument is based on the assumption that (upper) management knows very well what it is doing. That is not necessarily so, and by appearances quite often.

[real person from the real world]

Guys, sometimes management DOES know. IT tools are invasive and pervasive. You can run reports to see how many phone calls, phone calls to where, how many emails, keep track and view emails, see what URLs were looked at, among other things. You guys all love the numbers and figures, don't you? if you are selling call center services, you have to keep your costs down to keep your profits up. An engineer costs money, so you get an idea of how he approaches a problem, use it as a template for a decision tree or AI program, and find the cheapest (dumb only because they don't have the skills and $$$$$ to be something better) people you can, and sit them in front of a computer. THIS IS FACT.

In another case you may have an older person with college degrees that an immigrant employer who is very selective and has an eye for value targets as someone exploitable for low pay and high skill work as he builds his enterprise.

There are a whole slew of ancillary IT business related tasks involving sales, outsourcing related services, recruitment staffing, and low octane small business db and administrative IT that are pretty poorly paid.