[Paleopsych] NYT: (Samuelson) An Elder Challenges Outsourcing' s Orthodoxy

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An Elder Challenges Outsourcing's Orthodoxy
New York Times, 4.9.9
By STEVE LOHR

At 89, Paul A. Samuelson, the Nobel Prize-winning economist
and professor emeritus at the Massachusetts Institute of
Technology, still seems to have plenty of intellectual edge
and the ability to antagonize and amuse.

His 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.

These heavyweights, among others, are perpetrators of what
Mr. Samuelson terms "the popular polemical untruth."

Popular among economists, that is. That untruth, Mr.
Samuelson asserts in an article for the Journal of Economic
Perspectives, is the assumption that the laws of economics
dictate that the American economy will benefit in the long
run from all forms of international trade, including the
outsourcing abroad of call-center and software programming
jobs.

Sure, Mr. Samuelson writes, the mainstream economists
acknowledge that some people will gain and others will
suffer in the short term, but they quickly add that "the
gains of the American winners are big enough to more than
compensate for the losers."

That assumption, so widely shared by economists, is "only
an innuendo," Mr. Samuelson writes. "For it is dead wrong
about necessary surplus of winnings over losings."

Trade, in other words, may not always work to the advantage
of the American economy, according to Mr. Samuelson.

In an interview last week, Mr. Samuelson said he wrote the
article to "set the record straight" because "the
mainstream defenses of globalization were much too simple a
statement of the problem." Mr. Samuelson, who calls himself
a "centrist Democrat," said his analysis did not come with
a recipe of policy steps, and he emphasized that it was not
meant as a justification for protectionist measures.

Up to now, he said, the gains to America have outweighed
the losses from trade, but that outcome is not necessarily
guaranteed in the future.

In his article, Mr. Samuelson begins by noting the unease
many Americans feel about their jobs and wages these days,
especially as the economies of China and India emerge on
the strength of their low wages, increasingly skilled
workers and rising technological prowess. "This is a hot
issue now, and in the coming decade, it will not go away,"
he writes.

The essay is Mr. Samuelson's effort to contribute economic
nuance to the policy debate over outsourcing and trade. The
Journal of Economic Perspectives, a quarterly published by
the American Economic Association, has a modest circulation
of 21,000 but it is influential in the field.

Indeed, Mr. Bhagwati and two colleagues, Arvind Panagariya,
an economics professor at Columbia, and T. N. Srinivasan, a
professor of economics at Yale University, have already
submitted an article to the journal that is partly a
response to Mr. Samuelson. Theirs is titled "The Muddles
Over Outsourcing."

The Samuelson critique carries added weight given the
stature of the author. "He invented so many of the economic
models that everyone uses," noted Timothy Taylor, managing
editor of the Journal of Economic Perspectives.

For generations of undergraduates, starting in 1948, the
study of economics has meant a Samuelson textbook, now in
its 18th edition, with William Nordhaus, a Yale economist,
as a co-author since the 12th edition. Because he has
taught at M.I.T. for six decades, the elite ranks of the
economics profession are filled with Mr. Samuelson's former
students, including Mr. Bhagwati and Mr. Mankiw.

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 global spread of lower-cost computing and Internet
communications breaks down the old geographic boundaries
between labor markets, he noted, and could accelerate the
pressure on wages across large swaths of the service
economy. "If you don't believe that changes the average
wages in America, then you believe in the tooth fairy," Mr.
Samuelson said.

His article, Mr. Samuelson added, is not a refutation of
David Ricardo's 1817 theory of comparative advantage, the
Magna Carta of international economics that says free trade
allows economies to benefit from the efficiencies of global
specialization. Mr. Samuelson said he was merely
"interpreting fully and correctly Ricardoian comparative
advantage theory." That interpretation, he insists,
includes some "important qualifications" to the arguments
of globalization's cheerleaders.

Those qualifications are not new to Mr. Samuelson. He noted
that in a different context, he touched on similar matters
as far back as 1972 in a lecture he delivered shortly after
he won his Nobel Prize, titled "International Trade for a
Rich Country."

For his part, Mr. Bhagwati does not dispute the model that
Mr. Samuelson presents in his article. "Paul is a great
economist and a terrific theorist," he said. "And in
markets like information technology services, where America
has a big advantage, it is true that if skills build up
abroad, that narrows our competitive advantage and our
exports will be hit."

But Mr. Bhagwati, the author of "In Defense of
Globalization" (Oxford University Press, 2004), says he
doubts whether the Samuelson model applies broadly to the
economy. "Paul and I disagree only on the realistic aspects
of this," he said.

The magnified concern, Mr. Bhagwati said, is that China
will take away most of American manufacturing and India
will take away the high-technology services business.
Looking at the small number of jobs actually sent abroad,
and based on his own knowledge of developing nations, he
concludes that outsourcing worries are greatly exaggerated.


As an example, Mr. Bhagwati pointed to the often-repeated
estimates that, because of the Internet, as many as 300
million well-educated workers, mostly from India and China,
could now enter the global work force and compete with
Americans for skilled jobs.

In their paper, Mr. Bhagwati and his co-authors write that
such an assessment of the education systems of India and
China "almost borders on the ludicrous." In an interview,
Mr. Bhagwati said, "You have a lot of people, but that
doesn't mean they are qualified. That sort of thinking is
really generalizing based on the kind of Indian and Chinese
people who manage to make it to Silicon Valley."

The Samuelson model, Mr. Bhagwati said, yields net economic
losses only when foreign nations are closing the innovation
gap with the United States.

"But we can change the terms of trade by moving up the
technology ladder," he said. "The U.S. is a reasonably
flexible, dynamic, innovative society. That's why I'm
optimistic."

The policy implications, he added, include increased
investment in science, research and education. And Mr.
Samuelson and Mr. Bhagwati agree that the way to buffer the
adjustment for the workers who lose in the global
competition is with wage insurance programs.

"You need more temporary protection for the losers," Mr.
Samuelson said. "My belief is that every good cause is
worth some inefficiency."

http://www.nytimes.com/2004/09/09/business/worldbusiness/09outsource.html