Samuelson on outsourcing

From: Rakesh Bhandari (bhandari@BERKELEY.EDU)
Date: Wed Sep 08 2004 - 19:40:41 EDT

A dissenter on outsourcing states his case
The International Herald Tribune
September 7, 2004
By Steve Lohr (The New York Times)

At 89, Paul Samuelson, the Nobel laureate in economics and professor
emeritus at the Massachusetts Institute of Technology, still seems to
have plenty of intellectual edge and ample ability to antagonize and

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

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

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

Sure, 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,"
Samuelson writes. "For it is dead wrong about necessary surplus of
winnings over losings."

Trade, in other words, does not always work to all parties' advantage,
according to Samuelson.

In an interview last week, Samuelson said he had written the article to
"set the record straight" because "the mainstream defenses of
globalization were much too simple a statement of the problem."

Samuelson emphasized that his article 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, 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 wage rates,
increasingly skilled workers and rising technological prowess.

The essay is 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 economics profession.

Indeed, Bhagwati and two other economics professors, Arvind Panagariya
of Columbia and T.N. Srinivasan of Yale, have already submitted an
article to the journal, "The Muddles Over Outsourcing," that is partly
a response to Samuelson.

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

According to Samuelson, a low-wage country 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 U.S. per capita income. "Being
able to purchase groceries 20 percent cheaper at Wal-Mart does not
necessarily make up for the wage losses," he said in the interview.

The global spread of lower-cost computing and Internet communications,
he noted, 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," Samuelson said.

For his part, Bhagwati does not dispute the model that Samuelson
presents in his journal article.

"Paul is great economist and a terrific theorist," he observed. "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 Bhagwati 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, Bhagwati said, is that China takes away most of
American manufacturing and India most of 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.

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