Cato, Trade and Outsourcing

From CounterPunch, an essay on outsourcing mythology by Reagan administration economist Paul Craig Roberts:

Few economists have bothered to think about the issue of offshoring, preferring to dismiss concerns about it as manifestations of the old protectionist fallacy. They learned in graduate school that free trade is always mutually beneficial and ceased to think when they passed their exams. This is especially true of "free market economists" who believe that economic freedom, which they identify with the freedom of capital, is always good. Thus, most economists mistakenly believe that offshoring is protected under the authority of free trade doctrine.

However, free trade doctrine is based on the assumption that domestic capital seeks its comparative advantage in its home economy, specializing where its comparative advantage is best and, thereby, increasing the general welfare in the home economy. David Ricardo, who explicated the case for free trade, rules out an economy's capital seeking absolute advantage abroad instead of comparative advantage at home.

Jobs offshoring is not only a problem for displaced US manufacturing employees--displacement that Princeton economist and former Federal Reserve vice chairman Alan Blinder says will also impact 30 to 40 million high-end US service sector jobs as well-- but also a problem for economic theory.

Economic theory assumes that capitalists pursuing their individual interests are led to benefit the general welfare of their society by an indivisible hand. But offshoring, or the pursuit of absolute advantage, breaks the connection between the profit motive and the general welfare. The beneficiaries of offshoring are the corporations' shareholders and top executives and the foreign country, the GDP of which rises when its labor is substituted for the corporations' home labor. Every time a corporation offshores its production, it converts domestic GDP into imports. The home economy loses GDP to the foreign country which gains it.

Recently, Ralph Gomory, co-author with William Baumol, of Global Trade and Conflicting National Interests, the most important work in trade theory in 200 years, pointed out that traditional trade theory has broken down because companies are no longer bound to the interests of their home countries. Offshoring has de-coupled the link between a company's motivation for profit and a nation's desire to improve the wealth of its citizens. "Most economists," Gomory observed, "have not acknowledged this fundamental change and its implications for economic theory."

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I wrote this recently: "They've outsourced everything that's not nailed down, allowing our manufacturing infrastructure, which creates real stuff as opposed to the abstract ideas generally referred to as "finance," to languish, which has also dealt the US consumer market a deadly blow, as class stratification proceeds to make America look like a lop-sided hourglass, with a small bubble of wealth at the top, a big bubble of poverty at the bottom, and almost nothing in the middle class range."

It's always a bit daunting to take on economic orthodoxy, especially with something as slippery as the issue of outsourcing, or "offshoring" as Roberts calls it. Intelligent and well informed individuals with whom I have spoken about my fears are usually quick to poo-poo my point of view. As far as I can tell, the response to my fear of a "free trade" global structure breakdown leaving us without the ability to manufacture or import important things, and therefore in a really shitty situation, is usually along the lines of "that'll never happen." While I'd like to have some specifics on why that'll never happen, I'll admit that dire predictions of worldwide economic disaster are not the best way to approach conversation with people who strongly believe in our economic system.

More troubling to me, however, are the vague responses I've gotten about how outsourcing is destroying the American consumer. "No, no, free trade helps the American consumer by getting him cheaper products; it also increases economic activity, which creates more jobs." Well, I'll grant the cheaper products and more jobs. However, when I follow up with something along the lines of "the new jobs are shitty, and cheap products mean nothing if you can't buy them," the responses are so vague that I don't even remember them. Something along the lines of "It'll work out."

Well, it's not working out, and I see nothing on the horizon indicating the reverse. I really do think Roberts is right when he attributes such a puzzling defense of free trade to economic orthodoxy: people just haven't thought this through. It is undeniable that outsourcing good jobs to other countries, in the long run, is a losing proposition for the vast majority of Americans. But deny they do, offering their vague and optimistic support for "free trade," looking weirdly at anybody who dissents.

I predict that, as the economic situation here in the US continues to deteriorate, there will be a revolution within the field of economics. New hot-shit blood will rise up and point out the obvious, winning awards, advancing their careers. Alas, things are most likely going to get really, really, really bad before this happens.

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