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Offshoring of American Jobs: What Response from U.S. Economic Policy? (Alvin Hansen Symposium on Public Policy at Harvard University)

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This slim volume, featuring Jagdish Bhagwati and Alan Blinder, includes two essays by the scholars just mentioned along with several short comments by other scholars. Blinder's essay is the centerpiece of the volume; the highlight of Blinder's essay is that he predicts that 30 to 40 million American jobs are potentially offshore-able, where offshoring means hiring a person in a foreign nation to do the equivalent work that an American worker could do. Blinder is not concerned about factory and manufacturing jobs being offshored, since this has already happened; rather, Blinder notes that there is cause for concern because certain service jobs have potential to be offshored. Indeed, service jobs such as computer programming and call centers have already seen some offshoring, mostly to India. Why India? Because English is a common language in the country, meaning Indian workers are proficient enough to handle impersonal service jobs, and, of course, wages are lower there than in the United States. The United States (and other wealthy English speaking nations) are in a peculiar position here in comparison to other wealthy nations because other countries such as Norway, Sweden, and Germany do not have a worldwide pool of Norwegian, Swedish, and German speakers to tap into.

What's more thought provoking is that impersonal service jobs often require college education, which means a significant amount of college educated Americans might be seeing their occupations offshored in the near future: the fields of computer science, accounting, radiology, etc., are all occupations that can be done abroad at or near the same quality. Personal service jobs, such as nursing, hair cutting, lawn mowing, lawyering and doctoring are safe from offshoring, but only if the aspects of each job remain personal. For example, the legal profession has recently seen jobs in the document review field move to India, where practitioners know English and are familiar with the common law system. Medical tourism also poses problems for the American medical profession. All of this is to say that not only are low-skilled manufacturing jobs in danger of exodus, but many high-skilled, education-requiring jobs have potential to be easily offshored. This is a political problem in the making, Blinder notes, because highly educated workers are less likely to sit idly by and watch their occupations be sent abroad. Protectionism is a evil spectre within the economics profession (all the authors in this volume bend over backwards to show that they do not support protectionism), but can carry much appeal to the highly educated and low skilled alike, most of which have never heard of comparative advantage.

What, then, is to be done? Blinder proposes that, if his forecast is correct, the United States must strengthen trade adjustment assistance (TAA) (and the social safety net in general), which would help soften the fall for workers whose jobs have been offshored; must prepare workers of the future with adequate education, meaning education focused on preparing kids for the personal service sector; must remain a central innovator in fields of technology and medicine, and whatever else will be highly valued in the future. Blinder writes that "sometimes a quantitative change is so large that it brings about qualitative changes". Indeed, the potential offshoring of 30 to 40 million American jobs, many of which require 4+ years of higher education, would be a large addition to the many other economic and political problems facing the United States today. A weaker dollar could hurt Americans' standard of living, but it would help to even out the disparity in regards to prices and wages, meaning American exports would be more affordable to the rest of the world and wages paid to Americans would no longer be a premium burden to employers. The economic development of India, while apparently hurting certain aspects of the American domestic economy, will undoubtedly help others; on top of this, wages in India will increase, thus making the appeal to offshore jobs less appealing.

A coda. In his response to Bhagwati's essay (Bhagwati's essay, by the way, adds very little to the volume and is written in High Emeritus to boot) Blinder writes that, "to the vast majority of humankind, earning a decent living is overwhelmingly more important than being able to pick up bargains at Wal-Mart. Our job as economists is to convince the body politic that, once you add up all these Wal-Mart savings, and factor in the new jobs that trade create, the nation is indeed better off. Unfortunately, we have largely failed in this task for over two hundred years." This quote sums up the crass utilitarianism of contemporary economic science, which is why society mistrusts economics. We ought to do better. On an unrelated note, Professor Irwin's comment on Blinder's essay is the best response in the volume. Irwin does not claim that offshoring is not a real phenomenon, nor does he stray from the subject like Bhagwati. Irwin quotes Alfred Marshall by saying nature makes no leap: Irwin agrees with Blinder that offshoring is real and imminent, but believes it will happen slowly enough that the collateral damage will not be great.

I agree with Blinder for the most part, and think that offshoring of high-skill-requiring occupations has the potential to be politically more problematic than the decline of American manufacturing (i.e. the loss of manufacturing jobs). If Blinder's 30 to 40 million jobs estimate is correct (I suspect the estimate is a little on the high side), then a significant chunk of the labor force will be extremely irate. They will not just be out of work or underemployed, they will have little prospect of lateral occupation changes. This is because in today's economy/society, credentials matter, and if you don't hold a BS in engineering, your computer science degree will be of no help breaking into the engineering profession. This highlights the fact that higher education is no longer a panacea or a ticket to the upper middle class (let alone the middle class). Many lawyers who were once getting by doing document review---the lowest rung of the legal profession, lower than ambulance chasing---have seen their wages slashed, and many blame India. All the while the American Bar Association endorsed offshoring these menial "doc review" jobs to India. If professional organizations such as the AMA, ABA, and whoever holds the pot for the radiology profession ever take a significant stand against offshoring, then American capitalism will be placed in a bind. The gravy train is long gone.

Alan Blinder is a professor of Economics and Public Affairs at Princeton, and also served on President Clinton's Council of Economic Advisers and as Vice-Chairman of the Federal Reserve. Jagdish Bhagwati is a professor of Economics at Columbia. "Offshoring of American Jobs" includes their papers presented at a 2007 Alvin Hansen Symposium on Public Policy at Harvard University. The most interesting material in the book, by far, comes from Professor Blinder.

The relevant supply of labor to the integrated world economy has doubled in recent years - advances in information and communications technology, the entry of giants like China and India into the mainstream world economy, and rising levels of Asian education have made an ever wider range of jobs subject to international competition. This will bring major change in America's industrial structure, in what Americans do to earn their living, in wages, job security, and turnover.

The key distinction in whether a job is likely to be offshored or not will be in whether a particular service is delivered in person (haircuts, brain surgery) or not (computer programing) - not whether it is education intensive. Thus, a college degree may no longer be a panacea. Blinder recommends more vocational training; emphasizing students trying to outperform memory chips on rote learning is not going to succeed. Blinder also believes it is quite likely that offshoring will depress the real wages of many U.S. workers who do not lose their jobs. The transition will last for 2 - 3 decades and bring gross potential job losses in the range of 30- 40 million. Unemployment will rise.

What will these displaced service workers do? Blinder has no specific answers, though points out that our economy has already gone through a similar 'revolution' when the share of Americans earning their living on farms fell from 84% to 2%.

Blinder's regression analysis shows that offshorable jobs have already suffered an estimated 13% wage penalty as of 2004, a result surprising to him and other economics professionals. Unfortunately, he also contends that while the U.S. may be harmed overall (lower wage levels, depreciated dollar, higher unemployment), that this offshoring cannot be stopped and is in favor of Free Trade.

This offshoring will strike the U.S. harder than other nations - eg. Germany and France, because the foreign supply of English speakers is so much larger.

Blinder sees our future as lying in new industries, presumably higher technology. However, China's reputation for intellectual acquisition (by theft or any other means - eg. Windows 7 pirated editions were selling in China prior to the U.S. release date), rising education levels, enormous surplus labor supply, and the fact that Asians in general score about 10 points above Caucasians on IQ tests does not bode well for that suggestion.

The 'gains-in-trade' theorem from Adam Smith posits that overall the U.S. will benefit from this new revolution; however, Blinder offers no further documentation or support, and himself believes the U.S. standard of living will decline. If market prices do not reflect social costs, then Adam Smith's 'Invisible Hand' will point in the wrong direction - government and businesses may make incorrect decisions. On the other hand, some Free Trade defenders continue to argue that free trade does not depress wages - but these analyses occurred when we were buying a lot less from overseas than now (and contravene basic economic principles).

Bottom Line: Alan Blinder's thoughts on offshoring are well-thought out, scary, and merit intense high-level government consideration and action.

Jagdish Bhagwati turns out to be the king of "ad hominem:" I am very clever, have studied under the finest teachers of economics, have taught most of you (in the audience). During the past 20 years, I have anticipated all the points you raise, and have refuted them convincingly.
Don't fixate on India and China. Remember the rise of S. Korea, Taiwan, Singapore, and Hong Kong. Blinder may turn out to be right...for all the wrong reasons. I'm 73, and won't care. Offshoring is an inevitable and creative part of creative destruction.

Alan Blinder's "ad rem:" Offshoring will be a Big Deal for English-speaking economies,in number and types of jobs affected. Indians, Philippinos, and Chinese do not speak French or German, so France and Germany will see a lesser impact.
Aim yourself towards constant innovation and at jobs that cannot be off-shored. I'd advise my children to prepare for careers that a computer cannot do better, and that a well-educated Indian cannot do well.

My own comment: No knock-out punches om either side. I vote for economic advice from another Indian economic gasbag (not at Columbia University) who will give advice at much less cost.