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The Rise of Outsourcing

Tyler Cowen and John Irons The job market, the rising costs of health care and the uncertain state of retirement weigh heavily on the minds of many Americans. As a nation, can we balance all of these priorities -- and if so, what's the best way to do it? To sort out these issues, WSJ.com has recruited two prolific bloggers to debate the best course for the nation's policy makers. In this feature, our two economists -- Tyler Cowen and John Irons consider challenges facing the at the start of the new century. Today, they take on free trade and fair trade when it comes to outsourcing, and ways the economy can progress without leaving behind its own untrained workers, or those of other countries. You can add your own thoughts to our discussion board. Tyler writes: I am blogging from India, where trade and outsourcing are giving millions better lives and a greater attachment to ideals of freedom and democracy. American capital is the best ambassador we have. Exchange across borders benefits the as well. International exchange, like interregional exchange, allows us to deploy our resources and energies more effectively. Tariffs across nations are no more a good idea than are tariffs between New Jersey and Ohio. Outsourcing helps us move to higher paying and more productive jobs. For instance, Asian producers were dominating the memory-chip market by the late 1980s. Despite vociferous complaints, this hardly spelt disaster for high-tech endeavors. Cheaper chips and other components allowed American semiconductor makers to switch to higher-value microprocessors. The resulting information-technology boom has boosted American productivity growth. Cheaper software or phone-answering services will bring similar results, albeit not immediately in every case. Insourcing, as traditionally defined, accounts for more than 6.5 million jobs nationwide. Companies operate about 10 million positions abroad, but the balance of insourcing vs. outsourcing has been moving in our favor4. In the critical area of business services, the regularly runs a multibillion-dollar trade surplus. Critics expect American wages to fall toward world levels as outsourcing grows. Most likely, even extreme outsourcing will boost long-run real wages. Outsourcing resembles technical progress in its economics; in both cases, we procure something more cheaply, whether it is produced by machine or by Indians. We have had dramatic technical progress now for several hundred years. While particular groups take short-run losses, real wages have risen across the board. It is because we shed low-productivity jobs that we move to a wealthier and more-productive set of options. The core intuition of the critics6 is that "unskilled labor" will someday earn or approach the real wages of or . But American workers at many different skill levels are uniquely situated -- in terms of economic, legal and social contexts -- to be mobilized into new and growing sectors. An uneducated American worker is not close to the same as an uneducated Indian worker in this regard. Everyone has some skills, and American entrepreneurs constantly find ways to make a given set of skills count for the most, often relying on productive interactions. In other words, the value of skills is determined by a region's core general capital structure. Indian outsourcing firms, in contrast, usually build self-sufficient economic islands, many of which have to produce their own infrastructure. These ventures face strong natural limits. Let's not succumb to our temptation to demonize foreigners8. If we want to help labor, let's introduce school choice to improve education and check the tax and regulatory burden on American business. John writes: You paint an oversimplified picture of trade issues. The choice is not "trade or no trade," but rather "will trade be fair." Few would deny that trade is an increasing reality in the global marketplace. But should we allow ourselves to be taken advantage of when countries with lower environmental standards or fewer worker protections beat us in the race to the bottom? Or do we instead work with other countries to help raise the standards for everyone? The right approach is to first ensure a well-qualified, highly skilled labor force that will increase productivity, allow wages to increase and make it hard for firms to go overseas. The wrong approach is to send jobs overseas first and then clean up the mess later. Yes, outsourcing can help consumers by lowering the prices of the goods they buy, but it also affects American workers in a negative way when their jobs go overseas. We will never be able to prevent all of those jobs from leaving (nor would we want to) but we need to have a better system in place to help unemployed or struggling workers get back on their feet. There is a fundamental challenge that we need to face -- how do we ease the transition for workers who are hurt by the global economy? Education is one answer -- but I don't think "school choice" will be any comfort to the 8.1 million workers9 who are currently unemployed. Instead we need to strengthen supports10 to ease the transition from declining industries to expanding ones. On the trade side, we need to start worrying about the growing trade deficit,11 the decline of the dollar, and other issues -- such as the value of the Chinese currency. Tyler writes: You and I approach trade issues very differently. Most importantly, you take a nationalist perspective. I believe that as economists we should take a broader, cosmopolitan perspective13. Many Indians and other recipients of outsourcing investment are desperately poor by standards. It is both proper and in our long-term national interest to help develop into a free and prosperous economy. Indians do not count for less simply because they stand outside of national borders. To assert that poorer countries "take advantage of us" is to beg the question and deny the benefits of free trade, which are commonly accepted by virtually all economists. Even the leftwing Paul Krugman remains a free-trade advocate. Poor countries should not have the same environmental and labor standards that the does; they simply cannot afford them and do not have the requisite legal structures to enforce them. The best way to improve their standards is to help them grow rich, so outsourcing is part of the solution in this regard. And outsourcing no more destroys American jobs than does technical progress. If we look at current unemployment, outsourcing has not been a major source of the problem. I'm all for improving the lot of the current unemployed. This is best done by private-sector training, including for-profit education. Our rather bureaucratic government has no comparative advantage in retraining displaced labor. And do you really expect the Republicans to allocate these funds according to economic merit, rather than future electoral advantage? Cutting the government deficit15 would restore long-run economic confidence. A broader safety net is important for humane reasons, but remember that it often hinders long-run economic adjustments rather than helping them. Welfare and unemployment insurance often lower the incentive to find a new job, relocate or retrain. We should not think of the safety net as the solution to an unemployment problem; rather it is a (necessary) exacerbation of that problem. I view the trade deficit as the symptom of our low savings rate rather than an issue per se. Furthermore, it is inconsistent to complain about outsourcing and the trade deficit at the sametime16. If we ran a trade surplus we would, as an accounting identity, have to export more capital. This would mean more outsourcing. And if the Chinese wish to subsidize American purchases by keeping their currency artificially low, we should be happy to buy at discount prices. John writes: It seems to be a common tactic to paint anyone who is for some kind of fair trade to be anti-trade. Like most economists, I too believe that much good can and has come from trade across countries -- but to have a blind faith that everyone is necessarily better off is simply incorrect. While there are many people who are helped by free trade, there are also people here, as well as abroad, who are hurt by free trade. On balance, free trade is likely to be a net positive, but we need to at the same time work to ensure that as many people see the benefits as possible. I certainly do not take a "nationalistic approach" to trade -- growing the world economy, reducing global poverty, and improving the lives of all of the world's inhabitants is just as important as improving the lives of those of us who are fortunate to be born in (or immigrate to) a wealthy country like the U.S. Supporting U.S. foreign aid and multinational efforts to increase the wealth and health of other countries is essential. But let me finish on a tone of agreement: Our national savings are indeed too low, with personal savings rates approaching zero. I think this will be a growing problem for the long run, and the current massive federal budget deficits only exacerbate the problem. As for the likelihood that the Republicans will allocate funds based not on merit but on "future electoral advantage" -- I'm shocked, SHOCKED! that you would be so cynical!