← Autodidact Archive · Original Dissent · edward gibbon
Thread ID: 14960 | Posts: 5 | Started: 2004-09-11
2004-09-11 14:46 | User Profile
This article in Thursday September 9, 2004 was to me the most important article I have seen in a long, long time. Samuelson, the very first Nobel laureate in Economics, recanted many of his and his professions long cherished beliefs. [url]http://www.nytimes.com/2004/09/09/business/worldbusiness/09outsource.html?pagewanted=1[/url]
[QUOTE]September 9, 2004 [B][CENTER][SIZE=4]An Elder Challenges Outsourcing's Orthodoxy[/SIZE][/CENTER][/B]
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 "[COLOR=Red][I]the popular polemical untruth[/I][/COLOR]."
Popular among economists, that is. [COLOR=Red][I]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[/I][/COLOR].
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. "[COLOR=Red]For it is dead wrong about necessary surplus of winnings over losings[/COLOR]."
[I][COLOR=Red]Trade, in other words, may not always work to the advantage of the American economy, according to Mr. Samuelson[/COLOR]. [/I]
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. [I]"[COLOR=Red]This is a hot issue now, and in the coming decade, it will not go away[/COLOR]," [/I] 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, [I]"[COLOR=Red]being able to purchase groceries 20 percent cheaper at Wal-Mart does not necessarily make up for the wage losses[/COLOR]."[/I]
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.[I] [COLOR=Red]"If you don't believe that changes the average wages in America, then you believe in the tooth fairy," [/COLOR][/I] 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."[/QUOTE]I find it extremely difficult to overemphasize the influence Samuelson has had on present day America. Perhaps he even more than Friedman has charted the doctrine for the American economy. Buchanan and friends now have an important ally.
2004-09-11 15:45 | User Profile
He's poking around the edges of admitting that there really is such a thing as "social capital" and that free trade only works when social capital is safeguarded, as Ricardo had it by assuming the immovability of labor and capital, and the exclusively EXCLUSIVELY of goods.
Free trade was thus an extension of the discovery of the assembly line - per worker productivity goes up in direct proportion to specialization. Just as the factory system allowed for vastly greater efficiencies through increased specialization at the micro level, free trade allows higher levels of specialization at the macro level with greater efficiencies are achieved.
But all of that falls apart when both labor and capital are moveable.
[URL=http://www.able2know.com/forums/about20476.html]Paul Craig Roberts [/URL] did a great job of summing this up recently:
[QUOTE]The case for free trade is based on the British economist David Ricardo's principle of "comparative advantage" ââ¬â the idea that each nation should specialize in what it does best and trade with others for other needs. If each country focused on its comparative advantage, productivity would be highest and every nation would share part of a bigger global economic pie.
However, when Ricardo said that free trade would produce shared gains for all nations, he assumed that the resources used to produce goods ââ¬â what he called the "factors of production" ââ¬â would not be easily moved over international borders. Comparative advantage is undermined if the factors of production can relocate to wherever they are most productive: in today's case, to a relatively few countries with abundant cheap labor. In this situation, there are no longer shared gains ââ¬â some countries win and others lose.
When Ricardo proposed his theory in the early 1800's, major factors of production ââ¬â soil, climate, geography and even most workers ââ¬â could not be moved to other countries. But today's vital factors of production ââ¬â capital, technology and ideas ââ¬â can be moved around the world at the push of a button. They are as easy to export as cars.
This is a very different world than Ricardo envisioned. When American companies replace domestic employees with lower-cost foreign workers in order to sell more cheaply in home markets, it seems hard to argue that this is the way free trade is supposed to work. To call this a "jobless recovery" is inaccurate: lots of new jobs are being created, just not here in the United States. [/QUOTE]
Note that our "corporate libertarians" - who are themselves largely Jewish theoreticians with Marxist connections - fudge this basic argument. The smoke they're blowing is designed to cover up the fact that corporations are NOT about increased efficiencies, they are all about EXTERNALIZING social costs.
2004-09-11 15:53 | User Profile
More from Paul Craig Roberts on free trade.
[QUOTE]February 13, 2002
Trading our living standards for what?
A belief in free trade is part of being an economist, and a belief in America's competitiveness is part of the economist's commitment to the global economy.
Economists note that no other country has the depth and breadth of our capital markets, political stability, rule of law protecting contracts and property rights, strong currency, and accumulation of scientific and technological knowledge that makes the United States the high-tech leader.
All of this stability and leadership causes foreigners to send their money here for safe haven and secure investments. The inflow of money keeps the dollar strong, which encourages imports from abroad and a trade deficit year after year after year.
These arguments are reassuring and make sense. Still, it comes as something of a shock to discover that the United States, the world's high-tech leader, has the export profile of a 19th century Third World colony.
Twenty years ago, when I was a U.S. Treasury official, the U.S. trade deficit came mainly from oil imports. Today, our trade deficit is driven by imports of energy, consumer goods and manufactured goods.
A table prepared by MBG Information Services in Washington, D.C., from U.S. Deptartment of Commerce data shows the U.S. trade balance for 85 separate industrial and commodity classifications. The only high-tech goods of which the United States is a net exporter are airplanes and airplane parts, military technology and specialized machine tools. In 2000, the United States was a net importer even of spacecraft.
What does the high-tech U.S. economy export? Are you ready for this? Hides and skins, metal ores and scrap, pulp and waste paper, tobacco and cigarettes, rice, cotton, coal, meat, wheat, gold, animal feeds, soybeans and corn.
We can't even make our own clothes. Clothing is the third largest contributor to our trade deficit, after vehicles and crude oil.
Even our agricultural exports are declining, as the "green revolution" takes hold abroad and U.S. farming shuts down.
The case for free trade rests on comparative advantage. Each country is supposed to specialize in what it does best. Where does the United States have a comparative advantage? Apparently, our comparative advantage lies in a political system that doesn't mind if foreigners buy up our assets.
Very little of the foreign money flowing into the United States is for the purpose of building Toyota and BMW plants. Eighty percent to 85 percent of direct investment by foreigners in the U.S. economy goes into mergers and acquisitions. In 2000, 97 percent of direct investment by foreigners went for the purchase of existing U.S. assets.
We are not only losing industrial jobs, we are losing ownership of our companies.
This is bad news for Americans training for engineering and high-tech occupations. The jobs are moving out. Recently, Motorola announced the company was moving more of its manufacturing and research and development jobs to China. The jobs that remain in the United States are being filled with engineers imported from India at half the salary.
As capital and technology are now completely mobile, the only comparative advantage lies in labor costs. Companies are chasing the lowest labor costs. For a while, the move was to Mexico, but before Mexico could get on its feet, the move shifted to China.
Propagandists call the move to China "free trade" and "globalization." But the Chinese don't see it that way. They say, "You can't sell here unless you produce here." That's blackmail, not free trade.
Few companies are making money in China, but the hype is that, with 1.5 billion consumers, China is the market of the future. If it doesn't work out that way, equity shares will suffer another pricked bubble.
The United States is on its way to becoming a country whose corporations are foreign-owned and foreign-based. The United States will decline as a consumer market, as there will be no high-productivity jobs to support consumer demand.
The United States is importing a new population that will help it on its way to Third World-ism. Every year, millions of poor and uneducated immigrants, both legal and illegal, pour into the United States from alien lands that have never been part of the rational scientific culture of the West. Today, 20 percent of the U.S. population is foreign-born or children of foreign born.
This massive influx drives up the demand for income-support programs, while driving down the taxable wages in retail- and service-sector jobs, where Americans are forced to seek employment as higher-paying automotive, electronic, textile and manufacturing jobs leave the country.
The United States is still a superpower, but it is a country with very little, if any, control over its future and its destiny, a country whose time is running out.
Contact Paul Craig Roberts[/QUOTE]
é2002 Creators Syndicate, Inc.
2004-09-12 17:36 | User Profile
[QUOTE=Walter Yannis]More from Paul Craig Roberts on free trade.[QUOTE]Still, it comes as something of a shock to discover that the United States, the world's high-tech leader, has the export profile of a 19th century Third World colony.
Twenty years ago, when I was a U.S. Treasury official, the U.S. trade deficit came mainly from oil imports. Today, our trade deficit is driven by imports of energy, consumer goods and manufactured goods. [/QUOTE] [/QUOTE] I intend to post more, but demolishing the myth of free trade should be uppermost for nationalists. It can only work with countries having a shared cultural background. If we expect the Chinese to have any gratitude in a few years, we are in for a huge blow to our adolescent egos.
2004-09-14 11:08 | User Profile
Jagdish N. Bhagwati has counter attacked in the Wall Street Journal of yesterday. He doesn't mention Samuelson by name, this obstensibly being an attack on Kerry, but I believe that it is in response to the article posted below by Edward.