Fed Chair nominee Bernanke - logic flawed on Outsourcing
October 24, 2005
Fed Chair nominee Bernanke - logic flawed on Outsourcing
By Richard Kuper
The Op Ed Page
http://theopedpage.blogspot.com
In June 2004, Minneapolis Fed Research Director Art Rolnick interviewed Ben S. Bernanke, whom President George W Bush has today nominated to succeed Alan Greenspan. Of interest to US citizens seeking work in the United States is Mr. Bernanke's response to a question about outsourcing. Restated below is that section of the interview. The entire interview can be found at:
http://minneapolisfed.org/pubs/region/04-06/bernanke.cfm
OUTSOURCING CONTROVERSY AND ECONOMIC LITERACY
Rolnick: The outsourcing of jobs to India, China and elsewhere has become a huge controversy in the United States. Most economists would say such job flows are a normal and healthy phenomenon. And as you indicated in a recent speech, outsourcing abroad accounts for a very small fraction of total job loss in the United States each year—perhaps a bit more than 1 percent.
Does this controversy indicate that the economics profession has failed to educate the public about international trade in particular and economics more generally? What can be done to improve economic literacy?
Bernanke: As I argued in my recent speech, there is an overwhelming case that trade increases economic welfare. With respect to jobs, it is true that trade promotes structural change that displaces some jobs, but trade creates many opportunities for increased employment as well, including high-wage employment. While recently many people have been concerned specifically about the outsourcing of business services, few are aware that the United States runs a healthy trade surplus in services—that is, there is considerably more (and higher-value) “insourcing” to the United States than there is outsourcing from the United States abroad. Employment of Americans by foreign-owned firms, such as foreign automobile manufacturers, is a major source of domestic employment as well.
With respect to economic literacy, I have no magic bullet; responsible economists just have to keep getting the word out. Specifically with respect to trade, though, I think there is a legitimate issue arising from the fact that you can't buy insurance against losing your job to new foreign competition, so that workers who are displaced by trade bear most of the associated costs, rather than society at large. We should consider expanded support and retraining for workers displaced for any reason. I think if people were a bit less fearful of the impact of change on their own financial well-being they might be more amenable to arguments that trade is highly beneficial to the economy as a whole.
Comment:
Sadly, there is a major flaw in Mr. Bernake's arguments, and he is not alone in perpetuating this flaw. What he and others fail to recognize or acknowledge is that there is a major difference between the following:
Scenario 1: A company in country U opens a branch office or a plant in country Z and employs citizens from country Z at that branch office or plant to provide goods and services for country Z. This is NOT (offshore) outsourcing.
Scenario 2. A company in country U opens a branch office or a plant in country Z and employs citizens from country Z at that branch office or plant to provide goods and services for country U. This IS (offshore) outsourcing and the kind that replaces workers in country U to the detriment of both the workers of country U and the economy of country U.
Fed Chair nominee Bernanke - logic flawed on Outsourcing
By Richard Kuper
The Op Ed Page
http://theopedpage.blogspot.com
In June 2004, Minneapolis Fed Research Director Art Rolnick interviewed Ben S. Bernanke, whom President George W Bush has today nominated to succeed Alan Greenspan. Of interest to US citizens seeking work in the United States is Mr. Bernanke's response to a question about outsourcing. Restated below is that section of the interview. The entire interview can be found at:
http://minneapolisfed.org/pubs/region/04-06/bernanke.cfm
OUTSOURCING CONTROVERSY AND ECONOMIC LITERACY
Rolnick: The outsourcing of jobs to India, China and elsewhere has become a huge controversy in the United States. Most economists would say such job flows are a normal and healthy phenomenon. And as you indicated in a recent speech, outsourcing abroad accounts for a very small fraction of total job loss in the United States each year—perhaps a bit more than 1 percent.
Does this controversy indicate that the economics profession has failed to educate the public about international trade in particular and economics more generally? What can be done to improve economic literacy?
Bernanke: As I argued in my recent speech, there is an overwhelming case that trade increases economic welfare. With respect to jobs, it is true that trade promotes structural change that displaces some jobs, but trade creates many opportunities for increased employment as well, including high-wage employment. While recently many people have been concerned specifically about the outsourcing of business services, few are aware that the United States runs a healthy trade surplus in services—that is, there is considerably more (and higher-value) “insourcing” to the United States than there is outsourcing from the United States abroad. Employment of Americans by foreign-owned firms, such as foreign automobile manufacturers, is a major source of domestic employment as well.
With respect to economic literacy, I have no magic bullet; responsible economists just have to keep getting the word out. Specifically with respect to trade, though, I think there is a legitimate issue arising from the fact that you can't buy insurance against losing your job to new foreign competition, so that workers who are displaced by trade bear most of the associated costs, rather than society at large. We should consider expanded support and retraining for workers displaced for any reason. I think if people were a bit less fearful of the impact of change on their own financial well-being they might be more amenable to arguments that trade is highly beneficial to the economy as a whole.
Comment:
Sadly, there is a major flaw in Mr. Bernake's arguments, and he is not alone in perpetuating this flaw. What he and others fail to recognize or acknowledge is that there is a major difference between the following:
Scenario 1: A company in country U opens a branch office or a plant in country Z and employs citizens from country Z at that branch office or plant to provide goods and services for country Z. This is NOT (offshore) outsourcing.
Scenario 2. A company in country U opens a branch office or a plant in country Z and employs citizens from country Z at that branch office or plant to provide goods and services for country U. This IS (offshore) outsourcing and the kind that replaces workers in country U to the detriment of both the workers of country U and the economy of country U.
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