Should we worry about offshoring? What Blinder is really saying

Along with a number of eminent economists, I was shocked to read that Alan Blinder thinks there is something fundamentally different between trade in tangible goods and offshoring. In a widely discussed article in Foreign Affairs (Economist's view collects many of the stories), Alan seems to challenge economic orthodoxy on one of the few issues dominated by one-handed economists:

Free Trade's Great, but Offshoring Rattles Me, by Alan S. Blinder, Commentary, Washington Post: I'm a free trader down to my toes. ... Yet lately, I'm being treated as a heretic by many of my fellow economists. Why? Because I have stuck my neck out and predicted that the offshoring of service jobs from rich countries ... to poor countries such as India may pose major problems for tens of millions of American workers over the coming decades. In fact, I think offshoring may be the biggest political issue in economics for a generation.

When I say this, many of my fellow free-traders react with a mixture of disbelief, pity and hostility. Blinder, have you lost your mind? (Answer: I think not.) Have you forgotten about the basic economic gains from international trade? (Answer: No.) Are you advocating some form of protectionism? (Answer: No !) Aren't you giving aid and comfort to the enemies of free trade? (Answer: No, I'm trying to save free trade from itself.)

I don't think Alan Blinder has lost his mind. However I do believe he has trouble expressing his thoughts in a clear and coherent manner.

Here's my take on Alan's objections. With trade in tangible goods, the short-run pain of adjustment is confined to a relatively small number of sectors. Now, the 'short-run' pain is not negligible: As Keynes has made clear, in the long-run we are all dead, and on top of that the long-run does not vote to change trade policy. But people who benefit from cheap Chinese goods do, and despite the general mess that is trade negotiations real advances are being made. Rich countries benefit from cheaper goods and millions in poor countries are able to not only feed their families but also look towards a brighter future.

So why is offshoring different? In pure economic terms, it's most definitely not. But with off-shoring there is now potential short-run pain for '30-40m US workers'. Yes, the majority of people will eventually benefit from offshoring, the same way they do from free trade in tangibles. But for the moment, you have a very large constituency of people rattled by the very thought of easing restrictions, sceptical of any move to liberalise in fear their job might be next.

That's what I think Alan is really worried about: farmers and steel workers can be overriden, but an electorate whose jobs are all up for grabs will express their worries about the future in the voting booth. Building a robust social safety net and getting the right incentives in place to move the workforce away from 'off-shorable' jobs is in many respects wise advice: it removes the potential for future short-term pain as the employment map in developed countries changes; and in doing so it goes a long way towards 'saving free trade from itself'.

Addendum: A more general point is in order here. Most economic advice stemming from academic papers is directed towards a benevolent, non-generational discounting dictator. There's a natural reason for this: it's the simplest case. However, if economists harbour any desire to affect policy they better start taking the political economy of reform more seriously. An economic policy that will eventually bestow everyone with mythical weatlh, improve the weather and make the national team win the World Cup is no good if it's going to lose you the next election.


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