Shaking Up Trade Theory

Business Week ^ | 12/06/04 | Aaron Bernstein

[ninenot]

For decades economists have insisted that the U.S. wins from globalization. Now they're not so sure

But the bulk of this work is labor-intensive and lower skilled and can be done more efficiently by countries that have an abundance of less-educated workers.

in the long run a more disruptive trend may be the fast-rising tide of white-collar jobs shifting to cheap-labor countries.

"...nobody has a clue about what the numbers are," says Robert C. Feenstra, [UC-Davis]

-- competition is coming on in the products such as software. If the new competition drives down prices too much, U.S. export earnings will suffer

"comparative advantage cannot be counted on to create...net gains greater than the net losses," Samuelson asserts in his new paper.

Every 1% drop in employment due to imports or factories gone abroad shaves 0.5% off pay for remaining workers. So if job losses rise to 6% of the white-collar total, these workers' pay could be depressed by 2% to 3% through 2015, figures Katz.

Turns out that just 30% of laid-off workers earn the same or more after three years, according to a study of 22 years of BLS data

Could the offshore phenomenon even dent America's overall GDP? Standard theory suggests not, but it's now another question nagging economists.

"According to the Heck-sher-Olin model, we shouldn't be sending these [programming, legal, accounting, engineering] jobs to countries with [so few skilled workers]," But U.S. companies are doing just that because labor is cheaper and the Net makes it feasible to transport work done abroad back to the U.S.

Globalization, say most trade economists, ultimately should benefit the U.S. more than it hurts. But they can't yet show that to be true.

[ninenot]

Every 1% drop in employment due to imports or factories gone abroad shaves 0.5% off pay for remaining workers, he found in a study with Harvard colleagues Richard B. Freeman and George J. Borjas. So if job losses rise to 6% of the white-collar total, these workers' pay could be depressed by 2% to 3% through 2015, figures Katz.

[ninenot]

Excerpting this to 300 words was a challenge and to be fair, one should read the entire article.

But I think that the gist of the article is maintained.

[blackeagle]

bump

[Iris7]

An old and dear friend is a Ph.D. economist working in academia. There is simply no correlation between his beliefs about the operation of the world and reality.

[ninenot]

Well, that should place Ricardo's theories appropriately for you, too.

[maestro]

.......only a World-wide War will force the situation.....forward?

[Iris7]

Are you talking about Ricardo's example about the country with the fishing and the other with, I forget, wine or something? Wheat? He was talking about the rationality of comparative advantage.

This example is intuitively correct, as I recall.

As far as I can see no one is looking at the political ramifications of trade imbalance and "outsourcing". The very least result is the Chinese investment in oil production in Sudan, Brazil, and Venezuela.

The increased world consumption and price increase of oil lately could not have happened without Indian and Chinese greenbacks.

The Chinese dollars that got Clinton into office did not spring from the forehead of Zeus, either.

I hear lots of working class people saying the lack of "good jobs" is the fault of "the rich", because "the rich" are "greedy" and have all of the political power, and control everything. "You don't see the rich hurting, just the little guy. The rich control this country." This monstrous insanity can, and very easily may, lead to horrors here.

[Noachian]

Nevertheless, they aren't yet able to reconcile what's happening on the ground with the ideas they have so passionately defended.

This sounds like another "grand idea" that looks great on paper, but doesn't work in the real world.

[FITZ]

Under today's approach, it was apparently a big very costly mistake to spend so much taxpayer money on education for the majority of Americans and others living here. We're seeing large number of kids of immigrants drop out in middle and high school after wasting $10,000 a year of taxpayers' money --- they can't compete with the Chinese and Mexicans who have no schooling at all ---- so we're supporting a whole lot of non-working people --- half the federal budget goes just to social handout programs.

[EEDUDE]

"This sounds like another "grand idea" that looks great on paper, but doesn't work in the real world."

Bingo!

All of that happy horsesh*t was predicated upon the assumption that there would be a free flow of BOTH capital and labor in BOTH directions.

But that isn't the real world.

[atari]

Still, most economists think the new offshoring is an overall plus. For one thing, they say, employers' cost savings should more than compensate for any wage damage. And by slashing the price of software and other goods, offshoring could power a new wave of U.S. productivity gains similar to those triggered by falling computer-hardware prices in the '90s

Sure, India or China are taking high-skilled jobs in programming, but the U.S. will still outperform them in, perhaps, drug research or nanotechnology. Instead of thinking about comparative advantage in broad strokes such as high-skilled and low-skilled, they say, it makes more sense to make finer distinctions and look at areas in which countries have industry- or occupation-specific advantages

[XBob]

1 - "Turns out that just 30% of laid-off workers earn the same or more after three years, according to a study of 22 years of BLS data "

So, in otherwords, after being laid-off, and struggling for 3 years, 70% of the laid-off workers are still making less than they earned on the job from which they were laid off from.

So much for free-traitors great 'improvements' due to free trade.

[raybbr]

If blue- and white-collar employees alike are thrown into the global labor pool, a majority of workers could end up losing more than they gain in lower prices. Then the benefits of increased trade would go primarily to employers. "It's entirely possible that all workers will lose and shareholders will gain; you have to be concerned about that," says Harvard University trade economist Dani Rodrik.

Not could, will.

[LowCountryJoe]

See, this is where you show yourself to be a knee-jerking, short-term thinking reactionary. It very well could be that those 30% that do go on to do something better, will be the ones who do significantly better. Some potion of that thirty percent may even start an innovative business that will end up employing a great deal many people further down the road. If you only look at this from a one generation point of view, you really do miss the boat entirely. After all, no one claims that the creative destructive forces of capitalism do not bring about their share of pains...but the pains are necessary for growth and they put all of the pressures in the right places to affect change. I think that even you would have a difficult time in refuting this from an empirical evidence standpoint...as long as you save us from your silly bullsh-t fairytale fiction pieces and lame anecdotes.

[LowCountryJoe]

From the article you highlighted the following: a majority of workers could end up losing more than they gain in lower prices.

And your response to that was: Not could, will.

Now, after I show you what I'm about to show you, would you like for me to also direct you to the data that shows the disposable income in the United States since 1929? You may just discover that when taken in the aggregate, you and this author you quote are far, far from the reality of it all:

This table shows the percentage change in GDP, the year that it happened, and the percentage that net exports made on the composition of that year’s GDP number. Negative numbers for “%NXonGDP” signifies that the U.S. had a trade deficit for that particular year. It is interesting to note that these negative numbers actually work against the GDP calculation, so you would think that the GDP would be lower in the years that the “%NXonGDP” numbers were negative (remember this fact for the second table displayed.) Source: Department of Commerce – BEA table 1.1.2

Table 1.1.2. Contributions to Percent Change in Real Gross Domestic Product (from the BEA)

%ChGDP	Year	%NXonGDP
%Line #1	-----	Line #13
-13	1932	-0.2
-11	1946	3.82
-8.6	1930	-0.31
-6.4	1931	-0.22
-3.4	1938	0.89
-1.9	1982	-0.6
-1.3	1933	-0.11
-1.1	1945	0.68
-1	1958	-0.89
-0.9	1947	1.08
-0.7	1954	0.4
-0.5	1949	0.08
-0.5	1974	0.75
-0.2	1975	0.89
-0.2	1980	1.68
-0.2	1991	0.69
0.2	1970	0.34
0.8	2001	-0.2
1.9	1956	0.37
1.9	1990	0.43
1.9	2002	-0.7
2	1957	0.25
2.3	1961	0.06
2.5	1960	0.72
2.5	1967	-0.22
2.5	1981	-0.15
2.5	1995	0.11
2.7	1993	-0.59
3	2003	-0.43
3.1	1969	-0.04
3.2	1979	0.66
3.3	1992	-0.04
3.4	1971	-0.19
3.4	1987	0.17
3.5	1986	-0.3
3.5	1989	0.52
3.7	1996	-0.14
3.7	2000	-0.86
3.8	1952	-0.59
4	1994	-0.43
4.1	1985	-0.42
4.1	1988	0.82
4.2	1998	-1.16
4.4	1948	-2.18
4.4	1963	0.24
4.5	1983	-1.35
4.5	1997	-0.34
4.5	1999	-0.99
4.6	1953	-0.7
4.6	1977	-0.72
4.8	1968	-0.3
5.1	1937	0.46
5.3	1972	-0.21
5.3	1976	-1.08
5.6	1978	0.05
5.8	1964	0.36
5.8	1973	0.82
6.1	1962	-0.21
6.4	1965	-0.3
6.5	1966	-0.29
7.1	1955	-0.04
7.1	1959	0
7.2	1984	-1.58
7.7	1951	0.81
8.1	1939	0.07
8.1	1944	0.01
8.7	1950	-1.31
8.8	1940	0.53
8.9	1935	-0.84
10.8	1934	0.33
13	1936	0.24
16.4	1943	-1.18
17.1	1941	-0.65
18.5	1942	-1.21

This table shows the descriptive statistics that were run on the net export's affect on GDP (%NXonGDP) data – with the exception of the left most column; it was run on the GDP numbers of the data set (1930-2003). This first set (left most set) was run to give me the median point of GPD growth rates for the data set. Since there was an even number of observations and the median was identified as 3.7 and there were two observations of 3.7 and because I used 3.7 as a GDP growth rate cut off point for the two set of data on the right, then you will probably notice the observations (counts) of the middle and right most data sets are not equal to each other…it is however the number identified as the median and it’s not too far away from the mean either. As the data shows, those years that had GDP growth of 3.7 (recall that 3.7 was the median) or higher tended to be years that the U.S. ran a trade deficit. The years with less than 3.7 tended to be years where the U.S. ran a trade surplus. Food for though.

Descriptive statistics on %NXonGDP data

% C GDP	% NXonGDP	% NXonGDP
all GPD #s	w/ > 3.7 GDP	w/ < 3.7 GDP
Mean 3.547	Mean -0.377	Mean 0.261
Std Err 0.604	Std Err 0.115	Std Err 0.137
Med 3.7	Med -0.3	Med 0.095
Mode 2.5	Mode 0.82	Mode -0.2
Std Dv 5.20	Std Dv 0.71	Std Dv 0.82
Var 27.05	Var 0.50	Var 0.67
Range 31.5	Range 3	Range 4.71
Min -13	Min -2.18	Min -0.89
Max 18.5	Max 0.82	Max 3.82
Sum 262.5	Sum -14.34	Sum 9.4
Count 74	Count 38	Count 36

[raybbr]

Joe, I accept that you are a big-buisness supporter. Actually, so am I. Although not to the extent you are. I think big business is vital for this country. Unfortunately big business is run by theories and humans whose primary concern is sating their own greed. I see it where I work all the time. It wasn't always like that. There are some at the top who are benefiting from those numbers in your charts but I would say the percentage is low and getting lower every year. I mean direct benefit.

However, if I get your inference, you are saying that disposable incomes have gone up steadily based on GDP? That really doesn't translate into real wage growth. In fact, according to the BLS wages are actually down. I know, you are going to throw some stats at me that seem to contradict that but there are others on this forum who can show you the reality of that claim better than me.

What I do know is that my wife and I have to work more hours every year to pay the bills. The bills never go down. The cost of propane, gasoline, electricity, food, insurances, wood, etc. have gone up. That is the reality. And that has nothing whatever to do with GDP.

At the same time wages for she and I have stayed stagnant. Anecdotal? Yes. Reality? Yes.

You can show me historic growth in the GDP all day long but those at the top are skimming that growth off with enormous salaries and personal dividends. It means "We have to cut near the bottom in order to show growth". It's another way of saying that "We have to make double the numbers to make sure I get my cut first".

Enron's director's scams weren't the only ones out there. They just got caught.

[A. Pole]

Under today's approach, it was apparently a big very costly mistake to spend so much taxpayer money on education for the majority of Americans and others living here.

According to the free market ideology it is a costly mistake to spend money on American education since China and India can provide educated labor much cheaper.

The law of comparative advantage says that American workers should not study, should not have children (Mexicans in Mexico will do it cheaper), and SHOULD NOT LIVE (cost of living/wages are too high)!

In general, the investors do not need Americans, they can do business better without them, only thing they need from USA is the land, resources, army and police (to protect their assets).

[ninenot]

If your screen-name has anything to do with your profession, there's MORE bad news in today's Yahoo.

Seems that salaries of EE's have gone down last year.

[ninenot]

The news article did not report all the results from the survey, which may hint that the writer has a bias.

Of course, YOU could find the survey and report the balance of the results...eh?

[ninenot]

Stay focused on wages, not "incomes" in the BEA statements, and in the BLS statements, watch the "average hours worked" number.

"Income" includes a bunch of stuff beyond actual wages/salaries paid. "Average hours worked" has a great deal to do with wages paid.

And, as LCJoe pointed out, don't look at "average" when dealing with wages--watch for median, which is much closer to reality.

As to LCJoe's statistical evidence: it's very interesting. He demonstrates that GDP growth is greater when imports are higher, by and large. But one does not have to be a genius to figure that out; imports of raw materials (including oil) will rise as demand rises in the USA.

However, I would argue that Joe is placing the cart before the horse. It is not "imports" which cause greater GDP; rather, it is greater demand which cause "imports." In other words, "imports" do not create prosperity in and of themselves.

Further, if you are to make the case that "imports" are always a good thing, then you have to show what those imports ARE--i.e., where is the "value added."

I suggest that "value added" is the most significant leading indicator of a nation's prosperity. That would be the reason that we seem to have difficulty pulling out of the recession; over the last 20 years, the "value-added" content has not been "added" in the USA.