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Wednesday, March 22, 2006


Arthur Eckart

"Offshore outsourcing" is disruptive to societies. In the U.S., it has caused millions of job losses. However, in the U.S., it has also increased productivity, made firms financially stronger, created better jobs, and raised aggregrate living standards. Offshore outsourcing was particularly disruptive, in the early 2000s, because U.S. job losses were taking place faster than new skills could be acquired for new jobs (consequently, the U.S. had a "jobless recovery," although some stated it was a "recoverless recovery"). Job losses take place quickly. However, needed new skills, e.g. computer engineers, microbiologist, biochemists, etc. take many years to acquire. The U.S. government subsidizes college educations. Consequently, when workers lose their jobs, they can learn new skills. So, U.S. workers don't have to work in "unnecessary jobs," and can choose more interesting work that contributes more to society.


Once, I shared Blinder’s optimistic vision of globalization. Let me suggest two things that should be considered:

1) Enormous dislocations in the system are becoming dangerous: Our debt and trade balance, for example. Now, I would agree, in principle, that given enough time matters may well right themselves. In fact, they will, whether we like it or not. The questions are:

a) What time scales are we talking about?

b) Will those dislocations grow so huge that only a crash will bring them back into balance?

2) Growth is not infinite, resources are not infinite. Populations cannot grow towards infinity, nor can consumption. We will face within the next 20 years two very large problems:

a. Global warming and environmental despoilment.

b. Depletion of energy supplies.

Both of these issues will be implacable obstacles to continued growth as we now understand it.

Blinder asks for solutions. Let me propose one that directly addresses some of these issues and may act as a break on the perilous economic dislocations while at the same time addressing some of the issues raised in #2.

The WTO should begin to make both tax and environmental arbitrage increasingly more difficult. China, for example, offers very low tax rates for FDI firms, much to the chagrin of indigenous firms. In fact, in some cases there will be no taxes for 10 years or more. China, like many developing nations, puts little restrictions on environmental abuses.

I would suggest also that entrance and continued participation in WTO be conditioned on strong labor regulations and the ability of labor to organize within a developing country.

I could very easily develop a case for slowing down each kind of arbitrage. Arguments could be made that this “slowing” will the help not only developing nations grow properly and maturely but that also that this “slowing” will start to address the dangerous economic imbalances as well as the larger issues of global warming and energy.

Too often, globalization is presented as a Hobson’s choice: Free trade or protectionism. I think there is a middle ground, avoiding the pitfalls of each.

Arthur Eckart

Stormy, I agree, many developing countries are not taking into account the social costs of externalities. Consequently, many developing countries are expanding too quickly. China, for example, is producing and exporting too many goods too cheaply, which, for example, induces U.S. consumption resulting in higher U.S. debt and lower U.S. saving, although U.S. living standards rise. Eventually, U.S. consumption will slow and China will fall into recession, while the U.S. has stagflation. The U.S. is playing a Cournot Duopoly with China to achieve the greatest gains, since it has no control over China's domestic policies. When poor economic policies affect only the home country, that should be a domestic issue. However, if an externality created by one country affects other countries, then that country should pay the social costs. It's hard to quantify global warming, many countries contribute to it, and it's uncertain what should be done, except slow growth.

Arthur Eckart

Also, I may add, globalization, e.g. free trade, open markets, and unrestricted capital flows, is inevitable. Nonetheless, there are many reasons for protectionist policies. The U.S. recently imposed an "optimal tariff" to protect the U.S. steel industry against predatory pricing (or dumping). Japan continues to grow rice, although land is expensive, and won't shift more rice production overseas for national security reasons. There are laws against market power, e.g. monopolies and monopsonies, which can lower output and raise prices, etc.

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