The Indian Economy Blog

May 9, 2007

Alan Blinder on Off-shoring

Filed under: Business,Outsourcing — Atanu Dey @ 8:39 am

Alan Blinder claims that “Free Trade’s Great, but Offshoring Rattles Me” in a Washintonpost.com article. He has dug up an old 2004 US election issue. He begins with

I’m a free trader down to my toes. Always have been. Yet lately, I’m being treated as a heretic by many of my fellow economists. Why? Because I have stuck my neck out and predicted that the offshoring of service jobs from rich countries such as the United States to poor countries such as India may pose major problems for tens of millions of American workers over the coming decades. In fact, I think offshoring may be the biggest political issue in economics for a generation.

It’s a strange article considering that he does know his economics. Surely he knows that trade is good. International trade is also good, subject to some very well-understood conditions. He understands Adam Smith and David Ricardo well enough to write econ textbooks and is a professor at Princeton.

I think it is easy to see that with the rapid fall in the cost of transporting bits, many non-tradeables have become tradeables. All services that are potentially digitizable have become tradeable. When trade is opened up among two economies, both economies do gain from increased specialization but every sector in both the economies don’t gain. The sector which is import-competing loses and the sector which is exporting wins. Nothing unheard of and unexplained about that. Sure, to protect the interests of those who hurt, you could use trade protection. But that is more costly than to compensate the workers of the import-competing sector.

Blinder agrees that trade protection is not the answer.

Trade protection won’t work. You can’t block electrons from crossing national borders. Because U.S. labor cannot compete on price, we must reemphasize the things that have kept us on top of the economic food chain for so long: technology, innovation, entrepreneurship, adaptability and the like. That means more science and engineering, more spending on R&D, keeping our capital markets big and vibrant, and not letting ourselves get locked into “sunset” industries.

Blinder is wrong about blocking electrons: it is quite possible to block them from crossing national boundaries. It is technically possible and is often done for political reasons. But I agree that the US needs to do more than just try to outlaw offshoring. All in all, a fairy disappointing article. Blinder was just having a bad economics day perhaps.

18 Comments »

  1. Blinder is being blind-sided I agree. He wrote something similar a few weeks earlier too, which generated much discussion on my post, which refers to Basab’s post on the issue.

    http://laviequotidienne.wordpress.com/2007/04/02/offshoring-backlash-an-un-level-playing-field/

    Comment by Shefaly — May 9, 2007 @ 1:24 pm

  2. Good article by alan blinder though. US competitiveness
    depends on technology, innovation, entrepreneurship,
    adaptability and the like. So offshoring services in all
    these areas could leave US in no man’s land because all
    economist believes in service led US economy. Within few
    years US will have competitveness in no areas. That could
    be dangerous for US. High time US act on this subject.

    Comment by Satish — May 9, 2007 @ 1:27 pm

  3. Wonder how these people can advance such arguments without evidence. Or is he just really bad at writing articles with a cohesive argument? All in all, speaks very badly of the Princeton economics department.

    Comment by Abhishek Nair — May 9, 2007 @ 8:40 pm

  4. Interesting blog. Though you say “Blinder is wrong about blocking electrons” he too agrees that this cannot happen. What he really is doing is fueling the debate among the thought-leaders in America. The impact on Indians and Indian-Americans is going to be interesting to watch.

    Comment by Mohan — May 9, 2007 @ 9:41 pm

  5. His article was balanced and he felt the need to say more than “Stuff happens” to people losing low-end tech and service jobs. With media more powerful than in the ’70′s and educated unemployment on the rise in US (just my guess, no stats), you can expect more outcry than during the demise of manufacturing in the US.

    Apart from lack of commentary, implicit in your blog post is the assumption that something better will certainly come along in the US. Which fields are new jobs going to be in? Blinder suggests builders, mechanics who can’t be physically offshored. Any other guesses?

    Comment by Pramod Biligiri — May 9, 2007 @ 11:31 pm

  6. My reaction:
    1. I did not see any data to substantiate what Alan claimed.
    2. His focus on international trade being not the best option for US should focus on how to make US more competitive by investing in R&D, better immigration policies etc.
    US has already lost its edge in manufacturing and now per Alan its Services is going too..I wonder whats next…..

    Comment by Aseem Juneja — May 10, 2007 @ 12:32 am

  7. Its election time. Hence anyone and everyone with a voice is trying to nail the cat that stole the cream.

    Also the other day, there was this article raising storm about IBM planning to sack almost 150,000 jobs in the US and move them to India/China.

    http://www.pbs.org/cringely/pulpit/2007/pulpit_20070504_002027.html

    the fun has begun

    Comment by Full2njoy — May 10, 2007 @ 5:28 am

  8. blinder is right on the money..yet, i hear the same garbage about tradable sevices..
    the point is not if someone can block electrons as someone so naively pointed out..it is a matter of tax/tariff policies that govern all “market economies” (free market is a myth!)
    say if you are a 10% outsourcer to bengaluru, then you pay “outsourcing tax” and thus nullifying the advantage for the outsourcer (after all he is party to the social expenses incurred by the US govt, expenses beyond the realm of market economy like increased welfare expenses on folks affected by the outsourcing etc )…
    just as indian govt has given multiple tax sops to “coding cum call center factories” or say a tax bonanza like seepz etc..

    Comment by andiron — May 10, 2007 @ 7:37 pm

  9. accepting inevitabilty of outsourcing is akin to dreams of no national boundaries…same arguments can be made about anachronistic immigration laws that it interferes w/ free flow of labor and that would be case in a free market..
    and yet pajamewallas in dilli gripe about bangladeshis of poorer background who filled up the vacuum there..

    Comment by andiron — May 10, 2007 @ 7:46 pm

  10. Outsourcing is a by product of Economics and Profits. Specially in a country where everything is governed by lobbyists – HOW can you ban off shoring which is making so much money for the influential.

    Comment by Sonia — May 10, 2007 @ 10:10 pm

  11. i am not a economics major…….but what will happen if the dollar falls wrt indian rupee or chinese yuan……..dont you think that will level the playing field??

    right now with this free trade only the rich (also share holders) are raking the profits but common man is losing his job……outsourcing of manufacturing was ignored because service jobs grew and absorbed all the jobs lost………..but with US economy shrinking and offshoring increasing……..its going to become a political subject since now the common man is going to feel the pinch.

    and i guess the answer is simple……USA will simply let its currency keep falling….leaving with no choice but for india/china/japan to make correction to their currency.

    Comment by TECHY2468 — May 11, 2007 @ 1:25 am

  12. In my post on this subject a few weeks back I had predicted that that in an election year, the media (Lou Dobbs comes to mind) would eat this up. But surprisingly, the response has been muted in mainstream media compared to amongst economists. My post is here

    http://6ampacific.com/2007/03/31/offshore-backlash-redux/

    Greg Mankiw and Brad DeLong have both responded to Blinder’s pov. The comments on their posts are pretty instructive.

    Comment by Basab — May 11, 2007 @ 6:06 am

  13. A basic premise of social science is that one draws conclusion based on facts and data, rather than anecdotes and hype. Unfortunately, on the offshoring issue, Blinder has let media hype cloud his normal sober analysis.

    Here are a few facts that should help put the entire offshoring issue in perspective, and hopefully ease some of Mr Blinder’s fears.

    Fact #1: The labor force in the US (as of April 2007) is 152.6 million of which 145.8mm are fully employed [http://data.bls.gov/cgi-bin/surveymost]

    Fact #2: The total labor force in India’s white-collar services export industry is approximately 1.6 million — this includes IT services, call centers, BPO, KPO, whatever you choose to call it (www.nasscom.org)

    Since about 70% of these exports go to the Americas by dollar value, a reasonable guess is that 70% of the aforementioned 1.6 million are focusing on American clients ie, 1.1 million Indians are working for American clients. (If anyone has the exact numbers, please let me know)

    In other words, even after a decade of torrid 40%+ growth, the number of service workers in the country that’s the chosen destination for over 80% of the offshore services workers is less than 1% of the American labor force. Hardly a cause for concern, one might think.

    I\’ve long averred that the entire outsourcing/ offshoring issue was much ado about nothing. Sure, we\’ll have an occasional spike here and there, courtesy Lou Dobbs and the 2008 elections, but it will be minimal.

    And IF there is anything more than a ripple, it\’ll only serve to accelerate the process [grin].

    Comment by Prashant — May 11, 2007 @ 7:40 am

  14. prashant i agree with you that right now offshored jobs are minute in comparison to the existing labor market in usa, and i can see that due to the high number of jobs being advertised even though by some guess…its estimated that atleast 30% of IT work has been offshored by big companies(fedex, ups, ge etc..)

    but what if us economy were to shrink??….unemployment were to rise to 8-10% in IT sector (or any offshored sector)…..this time around there is not dot.com.bust to blame…..the blame is going to be on Offshoring of job…..

    and of course…..it may never happen…..if dollar was to depreciate another 30% wrt to indian rupee or chinese yuan (dollar has already depreciated by that amount in the last 4-5 years wrt to other currencies like EURO, AUD, GBP etc..)

    Comment by TECHY2468 — May 12, 2007 @ 12:58 am

  15. TECHY2468 — not sure if I understood your comment fully. However, just to pick one phrase

    but what if us economy were to shrink??….unemployment were to rise to 8-10% in IT sector (or any offshored sector)…..this time around there is not dot.com.bust to blame…..the blame is going to be on Offshoring of job…..

    My response: why do you think the US economy is going to shrink and that unemployment is going to rise to 10% in the IT sector?

    Even if so, why will the spotlight fall on offshoring? Given this, this has minimal bearing on today\’s decisions — be they policy or business.

    Comment by Prashant — May 12, 2007 @ 5:18 am

  16. The one from Greg …

    http://gregmankiw.blogspot.com/2006/05/outsourcing-redux.html

    Comment by Supreeth — May 12, 2007 @ 9:53 pm

  17. prashant- why do you think the US economy is going to shrink and that unemployment is going to rise to 10% in the IT sector?

    Even if so, why will the spotlight fall on offshoring? Given this, this has minimal bearing on today\?s decisions ? be they policy or business.

    My response- look at gdp data.US growth at 1.1%. Greenspan speaks of
    recession. IT spending is a discretionary spending. JOB losses will
    occur in this sector if economy goes into a recession.

    Spotlight will be on offshoring because americans don’t want to
    work on producing shoes, clothes and toys. They want to be in high tech jobs. so surely complains will arise in IT jobs that is
    offshored

    Comment by satish — May 13, 2007 @ 4:46 pm

  18. I believe this article is strong on emotional content. Allan tries his best to strike the emotional chord with the affected American workers. But this shift is inevitable. The Globalization has created a level playing field where people are competing at a pace and scale which is unmatched in the history of mankind.
    The tools, say software, that the worker in US has, are the same as that of the worker in India. The collaborative tools have facilitated the work flow across the borders as Allan puts it rightly. Yes the danger to the low skilled worker of US is quite real. The big debate over the H1B visas is just a testimony to this fact. US does need to work pretty hard to remain at the top of economic food chain because the food chain is changing and it is changing fast.

    But I believe the advice that Allan gives the US applies to India as well. If India is to remain as “the IT power” then it too needs to continuously innovate and move up the value chain. But the change has to be fast. It would not be a surprise that this force of globalization creates another entry of “new” workers into the world economy. There are other countries that stand outside the world economy and which can and will integrate into the world.
    The challenge that India faces is not only from the world more developed than us but the challenge will be (rather is) equally fierce from the world that is catching up-the world that is China and India of yester years.
    India does need to set its house in order. The parasites in the Indian tiger have to be weeded out. The corruption, lack of education, infrastructure bottle necks is just a few of them.
    Yes what India had done is commendable but what lies ahead of India is a far greater challenge that we have to brace ourselves for !

    Comment by Gaurav Hazrati — May 16, 2007 @ 3:11 pm

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