Economists Tussle Over Outsourcing, But Investment in Research Funding Seen as Answer

The New York Times has an interesting article today that discusses a forthcoming paper by Nobel Prize-winning economist Paul A. Samuelson that challenges the orthodoxy surrounding outsourcing.
In the piece, Samuelson argues against 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.”

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. “For it is dead wrong about necessary surplus of winnings over losings.”
Trade, in other words, may not always work to the advantage of the American economy, according to Mr. Samuelson.

Jagdish N. Bhagwati, a leading economist and professor at Columbia University — and former student of Samuelson — doesn’t disagree with Samuelson’s theory, only how well it applies broadly to the economy, he told the Times.

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.

Bhagwati mocks the idea 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.”

“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.

Read the whole thing here.

Economists Tussle Over Outsourcing, But Investment in Research Funding Seen as Answer