Mankiw speaks the truth on trade, and everyone goes postal

N. Gregory Mankiw, chairman of the White House Council of Economic Advisers, testified before Congress yesterday to present the Economic Report of the President. Here’s what he said about outsourcing:

New types of trade deliver new benefits to consumers and firms in open economies. Growing international demand for goods such as movies, pharmaceuticals, and recordings offers new opportunities for U.S. exporters. A burgeoning trade in services provides an important outlet for U.S. expertise in sectors such as banking, engineering, and higher education. The ability to buy less expensive goods and services from new producers has made household budgets go further, while the ability of firms to distribute their production around the world has cut costs and thus prices to consumers. The benefits from new forms of trade, such as in services, are no different from the benefits from traditional trade in goods. Outsourcing of professional services is a prominent example of a new type of trade. The gains from trade that take place over the Internet or telephone lines are no different than the gains from trade in physical goods transported by ship or plane. When a good or service is produced at lower cost in another country, it makes sense to import it rather than to produce it domestically. This allows the United States to devote its resources to more productive purposes. Although openness to trade provides substantial benefits to nations as a whole, foreign competition can require adjustment on the part of some individuals, businesses, and industries. To help workers adversely affected by trade develop the skills needed for new jobs, the Administration has worked hard to build upon and develop programs to assist workers and communities that are negatively affected by trade.

Later on, he told reporters, “Outsourcing is just a new way of doing international trade. More things are tradable than were tradable in the past and that’s a good thing.” As I’ve argued ad nauseum, Mankiw’s correct on the economics. Alas, on the politics, it looks like he’s stepped on a land mine. Here’s the Washington Post lead:

Democrats from Capitol Hill to the presidential campaign trail lit into President Bush’s chief economist yesterday for his laudatory statements on the movement of U.S. jobs abroad, seizing on the comments to paint Bush as out of touch with struggling workers. “They’ve delivered a double blow to America’s workers, 3 million jobs destroyed on their watch, and now they want to export more of our jobs overseas,” said John F. Kerry, the Massachusetts senator and front-runner for the Democratic presidential nomination. “What in the world are they thinking?”

Kerry’s statement is a shame — until now, he had been the most adult Democratic candidate when it came to foreign economic policy save Lieberman [Given the rest of the field, he could say this and still be the most adult candidate on this issue!–ed. Plus, he needed to get out in front on the issue.]. What’s more worrisome is that Republicans are making similar noises:

Rep. Donald Manzullo (R-Ill.) called for the resignation of N. Gregory Mankiw, the chairman of the White House Council of Economic Advisers and a prominent Harvard University economist. Manzullo said industrial state Republicans are furious. “I know the president cannot believe what this man has said,” Manzullo said. “He ought to walk away, and return to his ivy-covered office at Harvard.”

More from the New York Times:

Democrats in Congress and on the campaign trail, citing remarks by a top White House economic adviser, accused President Bush on Tuesday of encouraging companies to export jobs overseas…. Asked about the role of farming out production and services to low-wage countries like China and Mexico, Mr. Mankiw acknowledged that the practice was on the rise but said it would ultimately benefit the United States. “I think outsourcing is a growing phenomenon, but it’s something that we should realize is probably a plus for the economy in the long run,” Mr. Mankiw told reporters on Monday. “We’re very used to goods being produced abroad and being shipped here on ships or planes,” Mr. Mankiw continued. “What we are not used to is services being produced abroad and being sent here over the Internet or telephone wires. But does it matter from an economic standpoint whether values of items produced abroad come on planes and ships or over fiber-optic cables? Well, no, the economics is basically the same.” Many if not most economists contend that the expansion of free trade, in goods as well as services, ultimately benefits all countries that participate…. “If this is the administration’s position, I think they owe an apology to every worker in America,” said Senator Tom Daschle of South Dakota, the Senate Democratic leader. “There is absolutely no justification for arguing that we could support jobs going overseas, especially under these circumstances.”

Actually, the Senator owes an apology to every consumer in America, but I’m not going to hold my breath in wait. An interesting question is whether economists who are also Democrats — and generally support free trade — will defend Mankiw on this point. UPDATE: Drezner gets results from Brad DeLong!! The Wall Street Journal gets results from other Democratic-leaning economists — Janet Yellen and Laura D’Andrea Tyson. FINAL UPDATE: Virginia Postrel chips in with this point:

More important than the election-year political bias is the subtle but extremely important difference between supporting “shift of jobs overseas” and supporting trade and specialization–the processes on which economic growth depends. Expanding the international division of labor doesn’t shift “jobs” overseas. It shifts “some jobs” overseas, while creating new ones at home. The transition can be extremely painful for the workers affected, but the process itself is valuable. That’s why government policies should address the specific problems of specific people, not attack the process as a whole.

Yep.