samuelson = heretic?
Source Jim Devine
Date 04/09/10/03:42

September 9, 2004/New York TIMES.

An Elder Challenges Outsourcing's Orthodoxy


At 89, Paul A. Samuelson, the Nobel Prize-winning economist and
professor emeritus at the Massachusetts Institute of Technology, still
seems to have plenty of intellectual edge and the ability to antagonize
and amuse.

His dissent from the mainstream economic consensus about outsourcing and
globalization will appear later this month in a distinguished journal,
cloaked in clever phrases and theoretical equations, but clearly aimed
at the orthodoxy within his profession: Alan Greenspan, chairman of the
Federal Reserve; N. Gregory Mankiw, chairman of the White House Council
of Economic Advisers; and Jagdish N. Bhagwati, a leading international
economist and professor at Columbia University.

These heavyweights, among others, are perpetrators of what Mr. Samuelson
terms "the popular polemical untruth."

Popular among economists, that is. That untruth, Mr. Samuelson asserts
in an article for the Journal of Economic Perspectives, is the
assumption that the laws of economics dictate that the American economy
will benefit in the long run from all forms of international trade,
including the outsourcing abroad of call-center and software programming

Sure, Mr. Samuelson writes, the mainstream economists acknowledge that
some people will gain and others will suffer in the short term, but they
quickly add that "the gains of the American winners are big enough to
more than compensate for the losers."

That assumption, so widely shared by economists, is "only an innuendo,"
Mr. Samuelson writes. "For it is dead wrong about necessary surplus of
winnings over losings."

Trade, in other words, may not always work to the advantage of the
American economy, according to Mr. Samuelson.

In an interview last week, Mr. Samuelson said he wrote the article to
"set the record straight" because "the mainstream defenses of
globalization were much too simple a statement of the problem." Mr.
Samuelson, who calls himself a "centrist Democrat," said his analysis
did not come with a recipe of policy steps, and he emphasized that it
was not meant as a justification for protectionist measures.

Up to now, he said, the gains to America have outweighed the losses from
trade, but that outcome is not necessarily guaranteed in the future.

In his article, Mr. Samuelson begins by noting the unease many Americans
feel about their jobs and wages these days, especially as the economies
of China and India emerge on the strength of their low wages,
increasingly skilled workers and rising technological prowess. "This is
a hot issue now, and in the coming decade, it will not go away," he

The essay is Mr. Samuelson's effort to contribute economic nuance to the
policy debate over outsourcing and trade. The Journal of Economic
Perspectives, a quarterly published by the American Economic
Association, has a modest circulation of 21,000 but it is influential in
the field.

Indeed, Mr. Bhagwati and two colleagues, Arvind Panagariya, an economics
professor at Columbia, and T. N. Srinivasan, a professor of economics at
Yale University, have already submitted an article to the journal that
is partly a response to Mr. Samuelson. Theirs is titled "The Muddles
Over Outsourcing."

The Samuelson critique carries added weight given the stature of the
author. "He invented so many of the economic models that everyone uses,"
noted Timothy Taylor, managing editor of the Journal of Economic

For generations of undergraduates, starting in 1948, the study of
economics has meant a Samuelson textbook, now in its 18th edition, with
William Nordhaus, a Yale economist, as a co-author since the 12th
edition. Because he has taught at M.I.T. for six decades, the elite
ranks of the economics profession are filled with Mr. Samuelson's former
students, including Mr. Bhagwati and Mr. Mankiw.

According to Mr. Samuelson, a low-wage nation that is rapidly improving
its technology, like India or China, has the potential to change the
terms of trade with America in fields like call-center services or
computer programming in ways that reduce per-capita income in the United
States. "The new labor-market-clearing real wage has been lowered by
this version of dynamic fair free trade," Mr. Samuelson writes.

But doesn't purchasing cheaper call-center or programming services from
abroad reduce input costs for various industries, delivering a net
benefit to the economy? Not necessarily, Mr. Samuelson replied. To put
things in simplified terms, he explained in the interview, "being able
to purchase groceries 20 percent cheaper at Wal-Mart does not
necessarily make up for the wage losses."

The global spread of lower-cost computing and Internet communications
breaks down the old geographic boundaries between labor markets, he
noted, and could accelerate the pressure on wages across large swaths of
the service economy. "If you don't believe that changes the average
wages in America, then you believe in the tooth fairy," Mr. Samuelson

His article, Mr. Samuelson added, is not a refutation of David Ricardo's
1817 theory of comparative advantage, the Magna Carta of international
economics that says free trade allows economies to benefit from the
efficiencies of global specialization. Mr. Samuelson said he was merely
"interpreting fully and correctly Ricardoian [! -- JD] comparative
advantage theory." That interpretation, he insists, includes some
"important qualifications" to the arguments of globalization's

Those qualifications are not new to Mr. Samuelson. He noted that in a
different context, he touched on similar matters as far back as 1972 in
a lecture he delivered shortly after he won his Nobel Prize, titled
"International Trade for a Rich Country."

For his part, Mr. Bhagwati does not dispute the model that Mr. Samuelson
presents in his article. "Paul is a great economist and a terrific
theorist," he said. "And in markets like information technology
services, where America has a big advantage, it is true that if skills
build up abroad, that narrows our competitive advantage and our exports
will be hit."

But Mr. Bhagwati, the author of "In Defense of Globalization" (Oxford
University Press, 2004), says he doubts whether the Samuelson model
applies broadly to the economy. "Paul and I disagree only on the
realistic aspects of this," he said.

The magnified concern, Mr. Bhagwati said, is that China will take away
most of American manufacturing and India will take away the
high-technology services business. Looking at the small number of jobs
actually sent abroad, and based on his own knowledge of developing
nations, he concludes that outsourcing worries are greatly exaggerated.

As an example, Mr. Bhagwati pointed to the often-repeated estimates
that, because of the Internet, as many as 300 million well-educated
workers, mostly from India and China, could now enter the global work
force and compete with Americans for skilled jobs.

In their paper, Mr. Bhagwati and his co-authors write that such an
assessment of the education systems of India and China "almost borders
on the ludicrous." In an interview, Mr. Bhagwati said, "You have a lot
of people, but that doesn't mean they are qualified. That sort of
thinking is really generalizing based on the kind of Indian and Chinese
people who manage to make it to Silicon Valley."

The Samuelson model, Mr. Bhagwati said, yields net economic losses only
when foreign nations are closing the innovation gap with the United

"But we can change the terms of trade by moving up the technology
ladder," he said. "The U.S. is a reasonably flexible, dynamic,
innovative society. That's why I'm optimistic."

The policy implications, he added, include increased investment in
science, research and education. And Mr. Samuelson and Mr. Bhagwati
agree that the way to buffer the adjustment for the workers who lose in
the global competition is with wage insurance programs.

"You need more temporary protection for the losers," Mr. Samuelson said.
"My belief is that every good cause is worth some inefficiency."

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