A Cure Worse Than The Disease

Brad DeLong has some interesting thoughts on the subject of jobs lost due to outsourcing and why artificial barriers only make things worse for the economy as a whole.

I don’t see outsourcing as a major long-term problem quite yet for a few reasons. First, companies are betting that outsourcing is actually cheaper, which I believe is a false assumption. Over the long term the problems with relocating factories and technology centers to places like India or China will start building, especially as those governments start squeezing foreign corporations for more money. They may be getting sweetheart deals, but those deals can’t be counted to last. Doing business in countries with weak rule of law and property rights systems isn’t a good long-term strategy for any company. Second, the balance of trade still favors the US, and will continue to do so as long as the US continues its high R&D spending on the corporate level.

However, let’s assume I’m wrong (which seems to frequently happen anyway…). What can we do to prevent an exodus of high-tech jobs from the US? Mr. DeLong has some answers:

I think that the correct policy response is the one outlined by Robert Reich in his Work of Nations of a decade and a half ago: First, get our people out of industry segments where we are about to lose comparative advantage and where wages are about to take a big dive–this is the reason we Democrats like various forms of Trade Adjustment Assistance, for those who work in such industries are about to get shafted and have done nothing to deserve it (and have the ability to impose enormous costs on the rest of us through trade barriers if the political dice roll their way). Second, make sure the public investments in basic research are there to spark applied research and development to create new industries and new forms of high-tech in which our labor and our capital can be very productive (NIH, NSF, DARPA anyone?). Third, remember that the principal determinants of our prosperity and our productivity come from within: get public investment in infrastructure right, private savings and investment high, and investment in education high as well.

Educational spending on the state level is perfectly fine. However, the government doesn’t have the flexibility or the level of innovation that private industry does. Now granted, I’m for shifting money from wasteful programs and pork to real hard science projects, but the reality is that unless we want to commit to another Manhattan Project for every project the government undertakes then we’re not going to see the kind of results that we want.

What we have to do is create stronger incentives for keeping jobs in the US without resorting to trade barriers. This means lowering the costs of things like workman’s compensation rules, health care, insurance, and the other costs that go along with salaries in employment decisions. Companies in Silicon Valley are getting hammered with unnecessary and onerous regulation, a tax structure that punishes economic growth, and constant bureaucratic obstacles to business expansion – which is why Silicon Valley has been hemmoraging jobs in the last few years.

The best way of doing all this is to remove unnecessary regulation, cut taxes on business, and help keep health care costs down through systems that promote choice and accountability. For the long term we need to make our educational system work better on the primary and secondary levels, encourage research and development, and use government resources more efficiently.

Mr. DeLong points to why trade barriers are not the solution:

Remember: few would be worried about "outsourcing" if the U.S. unemployment rate were still close to four percent, rather than at the above six percent level that it is. To the extent that a structural cure is being proposed for what is really a macroeconomic problem, do not expect it to end well. And remember: a network-design job artificially kept in Sacramento when it could be done more cheaply in Singapore produces extra income for a network engineer in Sacramento, but has costs as well: in a diminished capital inflow that reduces construction and the earnings of construction workers, in higher costs for businesses installing their networks that shows up in lower salaries they pay their workers, in lower earnings and stock prices for HP. Given the all-thumbs hand the U.S. government has to try to guide industrial development through tools other than maintaining the infrastructure of a market society and the provision of basic research and other public goods, it is hard to imagine that the costs to the country as a whole will not greatly outweigh the benefits.

He’s exactly right on that account – more regulation and more trade barriers are only going to make things worse. The US is part of a world market, and it is foolish to try to ignore that or push for more economic isolationism. Even if such a strategy helped with high-tech jobs, it would decimate the service sectors and severely reduce foreign investments in US infrastructure. Such a plan would be like cutting off your ear to spite your face – it’s simply self-destructive.

Instead, we need to make the US more competitive on the world stage by doing what we do best: developing new and innovative technologies in an environment that lets businesses of all sizes expand and develop with a minimum of government interference.

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