Political Economy, Outsourcing and the American standard of living

Republican television journalist Lou Dobbs inveighs against offshore outsourcing in a new book. In a recent campaign speech, John Kerry attacked corporations again for sending jobs overseas. Daniel Drezner (pro outsourcing/free trade) writes about Paul A. Samuelson's new article which argues outsourcing will eventually lower America's standard of living.

So, in the end, I'm not convinced that Samuelson's dissent changes the substantive issues of debate. But as a political scientist, it is impossible to deny the extent to which Samuelson's article will alter the rhetorical balance of power in this policy debate. Samuelson will succeed in reigniting debate on this topic, as well as provide aid and comfort to those who wish oppose the practice of offshore outsourcing.

The New York Times article Drezner focuses on says

[Samuelson's] dissent from the mainstream economic consensus about outsourcing and globalization will appear later this month in a distinguished journal, cloaked in clever phrases and theoretical equations, but clearly aimed at the orthodoxy within his profession: Alan Greenspan, chairman of the Federal Reserve; N. Gregory Mankiw, chairman of the White House Council of Economic Advisers; and Jagdish N. Bhagwati, a leading international economist and professor at Columbia University.

Bhagwati and two other economists have respdonded. Arnold Kling summarizes the draft version of their response as follows

The authors point out that some of the concern is not about trade per se but about the accumulation of capital and know-how in China and India. They suggest that this could harm the U.S. if it reduces trade by eliminating the division of labor. That is, suppose that the U.S. stays stagnant, but China and India learn how to do everything that we know how to do. Then they will no longer export cheap goods to us, and we will lose. This, they claim, is what Samuelson's theoretical paper describes. If so, then it does not really describe outsourcing.

However, the Times piece notes

According to Mr. Samuelson, a low-wage nation that is rapidly improving its technology, like India or China, has the potential to change the terms of trade with America in fields like call-center services or computer programming in ways that reduce per-capita income in the United States. "The new labor-market-clearing real wage has been lowered by this version of dynamic fair free trade," Mr. Samuelson writes.

But doesn't purchasing cheaper call-center or programming services from abroad reduce input costs for various industries, delivering a net benefit to the economy? Not necessarily, Mr. Samuelson replied. To put things in simplified terms, he explained in the interview, "being able to purchase groceries 20 percent cheaper at Wal-Mart does not necessarily make up for the wage losses."

The problematic concept is "net benefit." Wages and commodity prices are only part of the equation. Profits is the missing variable. If American wages lower and prices lower too (because of cheap foreign labor), but not as much, the difference goes to profits and capital. Some of this will go towards new investments, but some goes into the pockets of wealthy investors. To sum up, the wealthy pocket the difference when competition causes wages to fall, but prices don't fall to match the loss of purchasing power of wage earners. As Drezner should know, this is as much a matter of politics, class war to be specific, as of economics.

The rational solution wouldn't be protectionism, but rather staid social democratic reforms, you know, the kinds of things the IMF asks governments to cut in exchange for loans. But would it be "inefficient" for these reforms to improve wage earners' standard of living in tandem with rising productivity without messing with protectionism and international trade? What occurred during the period of 1946-1973 would suggest it wouldn't be. Foreign workers will gain from international trade, even if their governments are much more oppressive than ours, and not only is this fair and just, it will benefit American workers in the long run in numerous, synergistic ways if international solidarity can be maintained.