The Politics of outsourcing work: New Trends Old Arguments

Jobs producing autos and t-shirts have long been exposed to competition from abroad. Until recently, though, service-sector jobs like accountants, telephone operators, and medical technicians were considered un-tradeable.

New technologies may have put these jobs up for grabs in the global labor market. The image of customer service representatives fielding calls from U.S. customers from an office in Bangalore is familiar to anyone who regularly reads the business pages.

Services outsourcing may be new, but the arguments over it are reruns of earlier rounds in the trade wars. Workers in newly vulnerable industries and labor unions point to losses of employment, wages and bargaining power. Free trade advocates trot out traditional economic arguments that efficiency gains will raise national income.

One can be forgiven for thinking that these arguments contradict each other - trade can't be bad for workers and yet raise national income, can it?

Actually, it can. Textbook trade theory, the conventional wisdom of the discipline, predicts exactly that trade will raise national income in the United States while leaving most workers poorer. This was proved not by some obscure tenured radical, but by the godfather of modern economic theory, Paul Samuelson, the man who literally wrote the modern economics textbook

Trade advocates implicitly acknowledge this. Near the end of most pro-trade essays there is a mention of the "winners" and "losers" from trade, along with a recommendation that government temporarily help trade-displaced workers get back on their feet. This is insufficient - trade doesn't just harm workers directly displaced by imports; it also harms workers subsequently competing against each other for the remaining jobs.

These same essays often imply that economics teaches that trade creates more winners than losers. This is strategically misleading - economics teaches only that the winnings are greater than losses. A whole bunch of losers can be balanced out by one big winner. Economists agree (if not advertise) that most American workers are, on net, shut out of the winnings.

Of course, there are winners from trade. Companies that benefit from cheaper labor and inputs win, as do workers whose job is insulated from competition with foreign and domestically displaced labor. Service sector trade could radically shrink this latter group - thinning the pool of trade's beneficiaries. Whether or not this process is good "for America" depends on your perspective: is taking a dollar from a telephone operator to give Donald Trump two dollars good "for America"?

So what can be done? Free trade defenders of a liberal bent sometimes talk of a grand compromise, calling for trade's potential victims to their drop political opposition in exchange for compensation in the form of publicly provided health care, pensions, and adequate unemployment and wage insurance.

This bargain is worth considering, but only after this social insurance is actually implemented, not before. There's no reason why trade's winners should get to cash in before American workers have their living standards insured. This holds true whether we're trading automobiles and clothing or computer programs and accounting services. In the meantime, economists should focus more on workable social insurance plans and less on deriding the anxieties about trade felt by American workers and their advocates.

If trade yields gains so large as to make it an indispensable policy, surely a chunk of these gains can be used to allow the majority of the U.S. workforce to share in this promised prosperity rather then feeding it overseas via outsourcing work.

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