Daniel W. Drezner

Do I have blinders about Blinder?

Do I have blinders about Blinder?

Over the weekend, Alan Blinder once again vented his concerns about the future of offshoring, this time in the Washington Post:

[T]wo powerful, historical forces are driving these changes, and both are virtually certain to grow stronger over time. The first is technology, especially information and communications technology, which has been improving at an astonishing pace in recent decades. As the technology advances, the quality of now-familiar modes of communication (such as telephones, videoconferencing and the Internet) will improve, and entirely new forms of communication may be invented. One clear implication of the upward march of technology is that a widening array of services will become deliverable electronically from afar. And it’s not just low-skill services such as key punching, transcription and telemarketing. It’s also high-skill services such as radiology, architecture and engineering — maybe even college teaching. The second driver is the entry of about 1.5 billion “new” workers into the world economy. These folks aren’t new to the world, of course. But they live in places such as China, India and the former Soviet bloc — countries that used to stand outside the world economy. For those who say, “Sure, but most of them are low-skilled workers,” I have two answers. First, even a small percentage of 1.5 billion people is a lot of folks. And second, India and China will certainly educate hundreds of millions more in the coming decades. So there will be a lot of willing and able people available to do the jobs that technology will move offshore. Looking at these two historic forces from the perspective of the world as a whole, one can only get a warm feeling. Improvements in technology will raise living standards, just as they have since the dawn of the Industrial Revolution. And the availability of millions of new electronically deliverable service jobs in, say, India and China will help alleviate poverty on a mass scale. Offshoring will also reduce costs and boost productivity in the United States. So repeat after me: Globalization is good for the world. Which is where economists usually stop. And where my alleged apostasy starts. For these same forces don’t look so benign from the viewpoint of an American computer programmer or accountant. They’ve done what they were told to do: They went to college and prepared for well-paid careers with bountiful employment opportunities. But now their bosses are eyeing legions of well-qualified, English-speaking programmers and accountants in India, for example, who will happily work for a fraction of what Americans earn. Such prospective competition puts a damper on wage increases. And if the jobs do move offshore, displaced American workers may lose not only their jobs but also their pensions and health insurance. These people can be forgiven if they have doubts about the virtues of globalization. We economists assure folks that things will be all right in the end. Both Americans and Indians will be better off. I think that’s right. The basic principles of free trade that Adam Smith and David Ricardo taught us two centuries ago remain valid today: Just like people, nations benefit by specializing in the tasks they do best and trading with other nations for the rest. There’s nothing new here theoretically. But I would argue that there’s something new about the coming transition to service offshoring. Those two powerful forces mentioned earlier — technological advancement and the rise of China and India — suggest that this particular transition will be large, lengthy and painful.

I’ve read Blinder’s longer paper on this topic, and I must confess — again — that I don’t see how he’s coming to this “large, lengthy and painful” conclusion. As Greg Mankiw points out:

Alan says the transition to the new equilibrium will be “large, lengthy and painful.” When he spoke at Harvard last week, he said the transition would take about 30 years. But the very length of the transition will make it less painful. Over the course of a generation, workers can gradually retire from shrinking industries, and new workers can be trained for the growing industries that take their place. Of course, some individuals will experience painful transitions, but that is always the case in a dynamic market economy. I don’t expect future transitions to be macroeconomically different than past transitions. Even if imports as a percentage of GDP continue to rise as Alan predicts, I would nonetheless expect the average rate of unemployment for the U.S. economy to be about the same over the next thirty years as it has been over the past thirty. After the Blinder-Bhagwati debate last week, there was a dinner at the Harvard Faculty Club at which Ben Friedman asked Alan a good question: Now that Alan has had this epiphany about offshoring, does he favor economic policies any different than he favored a decade ago? Alan thought about the question for a moment and then said no. I found that answer reassuring. My fear is that many politicians reading Alan’s work on offshore outsourcing will not come to the same conclusion.

This brings us to a point that Dani Rodrik raised earlier in the week about what happens when economists start debating public policy:

Finally, let me note the irony in how a discussion on free trade among economists quickly ends up being a debate on its politics?that is, a debate on whether this or that trade policy which on economic grounds is actually desirable can also be politically feasible. We are way beyond our area of expertise. Your hand-waving is as good as mine. Scratch any strongly-held view about free trade, and you will find (typically) unexamined political assumptions underneath. Even if we do not end up agreeing, the value of the present exchange is that it is getting us to reveal what those assumptions are.

If you eliminate the word “free” from both paragraphs, then I agree 100 percent with Rodrik. By economist standards, Alan Blinder is remarkably sophisticated about the ways in which politics and economics intersect. What puzzles me, therefore, is why he is making Cassandra-like noises about a phenomenon that does not justify such warnings if it takes place over several decades (and there’s decent evidence that this is the case). As a political scientist, I have two hypotheses:

1) Blinder believes that the political effects of increased offshoring will be substantial enough to make the current tide of protectionist sentiment seem like a baby wave. To prevent a stronger backlash, he feels it necessary to warn people with Very Scary Numbers to prompt action. 2) Blinder believes that the United States should more closely resemble the Scandanavian countries in being both economically open and more socially democratic. Since a direct political campaign for a European-style social welfare state will not fly in the U.S., he feels it necessary to use Very Scary Numbers about trade as a backdoor tactic.

My concern is that however well-intentioned Blinder’s tactics might be, he’s overlooking another possible outcome of his self-proclaimed apostasy, which is that it empowers economic populists with the mantle of intellectual respectability. Saying that upwards of 40 million jobs will be threatened by offshoring sounds scary, even if the data as of yet doesn’t show those jobs have actually been offshored. As some other economists have observed, entrenched interests will always exploit these kind of economic fears to implement policies that serve their own interests. Furthermore, some political scientists have pointed out that these protectionist policies will also be far from transparent. Maybe Blinder is speaking truth to power and I am simply adopting too static a view of trade policy. But I can’t shake the feeling that Blinder has adopted the Jeffrey Sachs theory of political change. UPDATE: Robin Toner has an excellent front-pager in the New York Times today that gets at how these political questions are playing out among House Democrats. Some of them clearly share the Blinder view of what to do. What disturbs me, however, are passages like this:

Since the Democrats took control of the committee in January, the 75-year-old Mr. [Sander] Levin has met with restless Democratic freshmen who helped their party regain the majority by promising to ?do something? about the job losses caused by a globalized economy ? and who now want to deliver…. Mr. Levin and his fellow Democrats face a political backlash on trade and globalization as intense as it has been in years, a point underscored by the freshman class of 2006. Across the industrial heartland and the Northeast, those freshman campaigned on a scathing critique of American trade policies. How could Americans compete against workers in developing countries, they asked, while maintaining decent wages, health benefits and pensions? ?It?s an issue near and dear to our hearts, and one we feel we need to deliver change on,? said Representative Betty Sutton, a Democrat from northeast Ohio.

Whenever a politician presents a demand or proffers a promise to “do something” about trade, I get hives.