Mankiw’s wise words

Four years have made a tremendous difference – in 2000, the world was horrified that George W Bush was elected (or was he?). In 2004, the world is worried that a protectionist John Kerry may yet be elected President. Unable to take Bush on national security and the Iraq war, the Democrats have latched on to outsourcing/offshoring as a key poll issue. By calling for protectionism and abandoning free trade they are jettisoning that one Clintonian virtue that made them electable. Here’s some of the latest action

In response to Mr Hastert’s remarks, Mr Mankiw said in a statement: “Some of my recent comments on outsourcing have been misinterpreted. It is regrettable whenever anyone leaves a job.

Some would respond to the recent challenges facing the economy by erecting trade barriers. History teaches that a retreat to economic isolationism would mean lower living standards for American workers and their families.

At the same time, we have to acknowledge that any economic change, whether arising from trade or technology, can cause painful dislocations for some workers and their families. The goal of policy should be to help workers prepare for the global economy of the future,” Mr Mankiw said. [Express India]

It is good to see that apart from populist politicians, not many thought leaders are falling for the protectionist agenda. Dan Drezner and Brad DeLong have covered the Mankiw story in some detail. I’ve noticed that the Washington Post has been a constant critic of Bush’s recklessness over the budget deficit. However it has delivered a solid defence of Mankiw’s statement.

Mr. Mankiw’s offense was to say that the normal rules of trade apply to services as well as manufacturing. Just as it makes sense to buy cell phones from Finland if they are cheap and excellent, it makes sense to buy call-center services or software programming from India if these are the best on the market. Not only is Mr. Mankiw right, but to argue otherwise is elitist and offensive. It would suggest that it’s okay for blue-collar workers to lose jobs to foreign competition but not okay for white-collar folk to face the same competitive pressure. Mr. Kerry voted in favor of the North American Free Trade Agreement, which boosted competition in manufactured products. How can he justify the opposite position on trade in services?

People may feel that the new “offshoring” of service jobs is different because it appears unlimited. Until now, the loss of U.S. manufacturing jobs ascribed to trade has been offset by gains in service jobs, which demand some proximity to the customer and have therefore not been tradable. Now that fiber-optic cable links the United States to cheap, educated, English-speaking labor in India and elsewhere, old assumptions about what’s tradable have to be rethought. The dislocation will create real pain for displaced workers, as Mr. Mankiw acknowledged; programs to retrain them should be expanded. But the U.S. economy will not run out of jobs as a result of some service activities being tradable. After all, technology has been eliminating back-office administrative jobs for a decade, yet unemployment sank to record lows during the 1990s. Why believe that the next phase of U.S. cost cutting will produce a different outcome? And is there nothing to be welcomed about workers in poor countries getting decent jobs? [Washington Post]

Marginal Revolution while pointing out that John Kerry’s family business has 57 factories in foreign countries puts it this way

Unless a candidate supports free trade, his party can only drive supporters to the polls with American-made cars.