Can We Export Lou Dobbs?

One of the horrors of staying in hotels a good bit is that you don’t always get to see your news channel of choice, mine being FNC. Right now I’m suffering through another installment of Lou Dobbs’s “Exporting America” and just listened to some asshat Congressman say that the current wave of outsourcing is the worst economic crisis since the Great Depression; with unemployment at 5.8%, a level that could lead to wage growth, but never mind. Dobbs’s obsession with outsourcing and border issues could be called xenophobia, though I’m not quite prepared to go that far.

I’ve said repeatedly that outsourcing looks like the normal rules of trade and economics are being applied to a new area, service jobs, and we will benefit in the long run even if there is some short-term pain. We have a dynamic labor market and it will adjust accordingly. As long as the economy grows there will be jobs and the current “jobless recovery” has little to do with outsourcing and more to do with the lack of business investment over the past three years. Business investment picked up in the third quarter of 2003 and the economy is growing at a solid pace. Jobs will follow.

Lynne Kiesling has a nice summary, in econo-speak, of why outsourcing isn’t the monster it’s portrayed to be:

I tend to be simple-minded about it and say that outsourcing will continue until the wage in each country equals the value of marginal product of that country’s workers. Put another way, the high productivity of US workers will place a finite upper bound on the outsourcing of tech jobs.

Sometimes things are as simple as they appear and I suspect she has nailed it in those two sentences. From there it would seem that a growing economy will, in time, provide tech jobs, as in other fields.

She also points to an article by Tyler Cowen on the same issue. It’s a good read. He has a newer post on the issue as well that links to this article:

“The system works so amazingly well that it’s a wonder anyone doubts it, and yet, of course, people do,” says Marc Andreessen, chairman of tech services company Opsware (OPSW), and one of the few who will forthrightly say that the outsourcing trend should be cheered.

That belief is based on a widely accepted theory — the theory of comparative advantage — that goes back to David Ricardo, a brilliant 19th-century economist who seems not to be related to Ricky.

Though, as Ricky Ricardo might say, let me do some ‘splainin.

Let’s say the USA is really good at two different things, software programming and creating innovative technology. And let’s say India is also good at both. Because Indians don’t get paid nearly as much as Americans, India can do each job at a far lower cost compared with the USA.

A big fear is that if trade is free and open, the USA would lose both those pieces of its economy, because lower costs win. Then our standard of living would fall, while the Indians could increasingly buy Porsches and plasma TVs.

But that fear, Ricardo would say, is misplaced.

Why? India’s schools churn out loads of programmers, but the country has little venture capital and other infrastructure to help drive innovation. So even though India can do both for less than we can, inside India, the cost of doing programming is relatively little while the cost of starting companies is relatively high. India is “most best” — to use the language of economists and many 3-year-olds — at programming.

In the USA, we pay programmers very well. We also have a well-oiled, technology-creating innovation machine. Inside our country, it has become relatively expensive to our society to do programming; and relatively cheap to innovate in technology. Our “most best” is innovation.

It’s amazing what you can learn from long-dead economists. It seems Ricardian economics is alive and well, even in the service sector. I wish Lou Dobbs would leave the fear-mongering to the Paul Craig Roberts’s, Jude Wanniski’s and Pat Buchanan’s of the world.

Read the rest of the excerpted article for more detail.

See also here, here, here, here, here, here, here, here and here.

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