On January 6, 2004, Senator Charles Schumer (D, NY) and I
scandalized the economics profession and Washington policymakers with our New
York Times article, Second
Thoughts on Free Trade. We noted that the two conditions on which
the case for free trade rests no longer exist in the present-day world and that
there was no basis for the assumption that offshoring of US jobs was beneficial
overall to Americans.
The Brookings Institution in Washington, D.C., organized a
conference, televised by C-Span, to subject our argument to peer review, and we
easily dominated the conference.
Business Week (March 22, 2004) was receptive to a
column from me explaining the adverse effects of offshoring, and Tim Aeppel at
the Wall Street Journal organized an online debate
between myself and Columbia University trade theorist Jagdish Bhagwati.
Aeppel hoped to test the validity of my points in the
crucible of debate with a leading academic proponent of offshoring. However,
Bhagwati evaded my argument and threatened to withdraw his participation if my
reference to the latest work in trade theory by Ralph Gomory and William Baumol
was included in the edited version of our debate in the Wall Street Journal
(May 10, 2004). In Global
Trade and Conflicting National Interests published in 2000 by the M.I.T. Press,
Gomory and Baumol show that the case for free trade is a special case and had
never been one of
general validity. Their criticism is more far-reaching than the one
made by me and Senator Schumer.
Professor Bhagwati�s skill in evading my argument told most
people who read the edited version of our debate that he could not answer
me. Obviously, all was not well with the establishment�s contentment with
offshoring and �globalism.�
Paul Samuelson, in many respects the dean of American
economists, wrote an article supportive of Gomory and Baumol�s work. [Where
Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists
Supporting Globalization, Journal of Economic Perspectives�Summer
But nothing happened. Economists simply closed ranks and ignored the
points that I brought to their attention as well as the latest work in trade
theory. Libertarian free trade ideologues got upset with me. Unable
to deny that the case for free trade had lost its necessary foundations,
libertarians reduced the issue to one of economic freedom and concluded that I
Since 2004 I have written a number of articles pointing out
that offshoring is really labor arbitrage and that if offshoring had the mutual
economic benefits associated with free trade, there would be US employment
growth in export and import-competitive industries. Instead, employment
in these industries has declined in the US but grown remarkably in Asia.
In the 21st century the US economy has been able to create net new jobs only
in nontradable domestic
services, such as waitresses and bartenders and health and social services.
Moreover, the growth in productivity and GDP attributed to the US economy were
inconsistent with the stagnant real incomes of Americans. Somehow
productivity and GDP were growing strongly, but it wasn�t showing up in the
incomes of Americans.
Economists have found it difficult to think about the issues
that I have raised. Economists are taught that free trade is a good thing
and that anyone who disputes it is a protectionist
in the pay of some industry scheming to raise prices that consumers have to
pay. The notion that there could be any problem with free trade is beyond the
imagination of most economists.
In addition to their unexamined commitment to free trade,
economists disbelieved my analysis because they thought it was inconsistent
with statistics indicating high US productivity and GDP growth. They
thought GDP and productivity statistics trumped my use of job data.
All of this may be about to change. Susan N. Houseman, a good but
previously obscure economist with the Upjohn Institute, has discovered a
problem in the statistical data that produces phantom US GDP. Phantom
GDP results when cost reductions achieved by US firms shifting production
offshore are miscounted as US GDP growth. Phantom productivity increases
occur when gains from moving design, research and development offshore are
counted as increases in US productivity. Obviously, production and
productivity that take place abroad are not part of our domestic economy.
Business Week�s June 18 cover story by Michael Mandel
Real Cost Of Offshoring] explains the problem identified by
Houseman. Economist Matthew J. Slaughter, a proponent of offshoring,
says: �There are potentially big implications. I worry about how
pervasive this is.� Business Week says the implications are
big. The cover story estimates that 40 percnet of the gain in US
manufacturing output since 2003 is phantom GDP.
Most likely that estimate is low. Consider, for
example, that furniture imports have doubled in the past few years (offshored
production counts as imports) while US jobs in furniture manufacture have
declined 21%. US statistics, however, show that US output and productivity rose
even as US manufacturers closed their plants and no new investment went into
My hat is off to Business Week. It requires
courage for a publication dependent on advertising from global corporations to
tell the truth about offshoring.
Craig Roberts [email him] was Assistant Secretary of the Treasury in the
Reagan Administration. He is the author of Supply-Side
Revolution : An Insider's Account of Policymaking in Washington; Alienation
and the Soviet Economy and Meltdown:
Inside the Soviet Economy, and is the
co-author with Lawrence M. Stratton of The
Tyranny of Good Intentions : How Prosecutors and Bureaucrats Are Trampling the
Constitution in the Name of Justice. Click here for Peter
Brimelow�s Forbes Magazine interview with Roberts about the recent epidemic of