An Exchange of Views on Off-Shoring, and Globalization and Income Distribution II

To John:  To continue this conversation..

Musing on the term “offshoring” makes me wonder if this is the same thing as “globalization”. Both could have the same effect for individual small towns but not for the country as a whole.  In my view “offshoring” really only reflects a local portion of the aggregated economic effects and “globalization” would count the total economic flows, both into and out of the country.  Every analysis I’ve seen suggests the globalization has produced a greater overall economic benefit (per capita GDP) rather than less.  The “social cost” is actually a surplus.

Reply  Did you notice in today's post that the Brits are starting to make some decent wine.  What are we going to do?  I'm not sure we can find an example of comparative advantage as clear as Ricardo's wool and wine trade. 

I agree with you about the distinction between "off-shoring" and "globalization," but I don't quite see how social cost is a surplus, especially for the people bearing the social cost.  As for globalization, it seems clear that Ricardo's wool and wine works, but my question is: For whom?  Maldistribution of wealth in this country is a growing problem.  If the fruits of globalization are all picked by the top 1% and their attorneys in the top 5%, the overall effect on society may be negative.

Domestic economic growth is a function of domestic demand.  If the hollowing out of mid-level jobs and salaries continues (it has even started to hit the healthcare industry), demand will stagnate or even decline.  Multinational corporations will continue to be profitable to the extent they have sales in non-US markets, but perhaps not in the US.  What will come back to us will be profits to the 1% and cheap stuff to be sold at Walmart to keep the bed makers, lavatory cleaners and hamburger flippers alive.

FYI:  Here's a website on economic questions that I have just begun exploring.  You might want to check it out.

http://conversableeconomist.blogspot.com/

NOTE:  At this point the Reinhard-Rogoff study and Larry Summers criticism of it was injected into the dialog by a third party and the dialog continued:

To John:  This is one of those relatively rare cases where, for a bit of research, you can get to the bottom of the issue.  I attach the results of my investigation.  The first part is a direct rebuttal of RR.  Bottom line is that while there was an error in processing the means of GDP growth, no error occurred in the medians which was the basic parameter used for study conclusions.  So in fact the study conclusions about the deleterious impact of Debt/GDP ratio were not changed although the magnitudes of the averages were reduced.  Plot on second page gives a good graphical overview of all results

I think the Samuelson article from the Washington Post says much the same thing.  I wish all economic issues were this simple to research!  Note: Charts omitted

Reply:  Hans, interesting charts.  From the beginning I have thought that the whole R&R controversy was sort of missing the point.  It's probably correct that debt levels affect growth levels, but I'm not sure that's where the debate should be.  We had the stimulus and it had some effect but not enough.  It just wasn't big enough.  Krugman and the other Keynesians haven't suggested that we ignore debt, but rather that we increase debt in the short term in order to restart growth and deal with debt when we have the economy moving again.  (I have to admit that Krugman can go overboard at times about ignoring the significance of debt.  I think most Keynesians would more cautious).

Since it's a closely related topic, I'll give you some feedback here on Fred Bergston and globalization.  You wrote:

"This is the basis of my statement that, overall, there is no net social cost.  But you have to look at the entire economy to see this."

It is certainly correct to say that globalization (and off-shoring) have increased total GNP and are likely to continue to do so.  The problem for me is the distribution of those gains.  The share of the nation's economy constituted by wages has sunk to its lowest level since WW II, and US median household income continues to decline.  To me this is "social cost."  If I thought that the increased share that is going to millionaires and billionaires was going to be taxed at levels that would enable increased investment in education, infrastructure and basic research, I could live with it, but there are no indications that that's going to happen.  I repeat myself when I say you have to have demand if you want to have growth and that demand has to be for more than corporate jets, third homes and BMW 700s.  I'm waiting for the econometricians to give us some charts that relate distribution or maldistribution of wealth to political stability and economic growth.

To John:  I've seen no information that globalization has contributed to income inequality. It is interesting that income inequality has increased in many counties.   

 I'm always on the lookout for interesting correlations between economic factors. If you find such, let me know.

Reply:   I just googled "offshoring income distribution" and the first two articles of 563,000 are the ones below.  The first is from the San Francisco Federal Reserve Board Branch and the second is from the New School.  The Federal Reserve piece is a short summary of some regression research which identifies three probable factors for changes in income distribution: "skill-biased technological change" or SBTC, offshoring, and immigration.  It's short, and the references to the math behind it will be easier for you than for me.  I did not read through the 33 pages of the New School paper, but I will if I can stand sitting in front of the terminal long enough to do it.  Economists at the school do have a certain bias and it is certain that they will find lots of problems with offshoring.

What is clear to me is that there are no definitive answers to the question of the relationship of offshoring to income distribution, and I doubt that further research could provide a definitive answer.  Unlike science, economics rarely if ever produces a definitive answer, so perhaps your gut instinct that offshoring is not related to the change in income distribution is just as valid as mine that it is.  The one thing that neither of us can quarrel with is that the change has occurred and that the rich are getting richer and the rest of us are not -- well, maybe I've gotten a little richer in the current stock market, and I hope you have too.

http://www.frbsf.org/publications/economics/letter/2007/el2007-28.html
http://www.newschool.edu/scepa/publications/workingpapers/SCEPA%20Working%20Paper%202006-3.pdf

No doubt the third of the 563,000 articles says that offshoring has not been a factor in changes in income distribution.

To John:  Thanks for the articles on the effects of offshoring.  I did some work on the FRBSF article and have prepared a summary of that work as an attachment to this message.  Sorry but I was unable to determine the focus of the New School article.

The FRBSF article was very straightforward but, unless I’ve missed the boat (always a possibility) I think it does not say what you presumed.  It shows offshoring to be a minor factor in income inequality.

In my research travels I came upon an article by Greg Mankiw, former Harvard Economics Chair, specifically directed at off shoring as a focus of John Kerry’s 2004 election campaign.  It’s long but very interesting description of how the issue was handled in the election (he was an advisor for Bush).  Mankiw wrote my macroeconomics text book and is a neo-Keynesian.  The paper is the second attachment.  I include here parts from the conclusion:

Outsourcing will create winners and losers, and the pain of dislocation will be real

for workers and their families. Taken together, however, these conclusions suggest that

offshore outsourcing is likely to be beneficial for the United States as a whole. This

presents a challenge of how to best assist people affected by offshore outsourcing without

retreating from international engagement and thereby giving up the economic gains that

trade in services makes possible. As is the case with more familiar forms of trade, in the

long run, outsourcing is likely to be a good thing for the U.S. economy.

Reply:  I read the whole Mankiw paper, learned quite a bit and I'm sore where I sit.  I have no problem with the statement which you quote from his conclusion.  It’s accurate  but:

Outsourcing will create winners and losers, and the pain of dislocation will be real

for workers and their families. …….

I think we distinguished in our earlier dialog between firms that manufacture overseas for consumption overseas, e.g., GM, and firms that send most of what they manufacture overseas back to the US, a mixed bag economically and socially, including those dead towns in Ohio. 

Mankiw does an excellent job of stating the case for outsourcing services, especially since we apparently run a trade surplus in this area.  I'm still left with the distribution of income problem.  I guess we can take care of that by giving unemployed workers vouchers to go up to the community college and take some courses.  I hardly think we are going to get more generous than that, when over on the playing field next door the debate is how we are going to cut Social Security and Medicare benefits because we just can't afford them. Oh, and the food stamp thing has gotten out of control and needs to be cut back.

It's easy to write from the comfort of an office at Harvard or on K St. that "the pain of dislocation will be real for workers and their families" but the overall US economy will benefit.  I just learned a new word, "eusociality," coined in 1966 by Susan Batra, a biologist specializing in bees.  Edward O. Wilson picked up on it and used it in his work on ants and now is writing about eusociality in the development of human society, The Social Conquest of Earth.   I recommend it, although I learned more about ants than I really wanted to know.  Eusociality is a concept that seems to be lacking in boardrooms these days, and that does not bode well for our future.   Wilson's ideas can be suggested by this:  Selfish individuals always win against altruistic individuals.  Altruistic groups always win against selfish groups.

This country used to be a little bit altruistic.  Are we still?