Jobs, Taxes & Benefits

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Mankiw’s Mistake: Why Economists Don’t Often Run for Office

2004 is most certainly an election year. A fact that President Bush’s chief economic advisor, N. Gregory Mankiw, failed to remember while delivering the 2004 Economic Report of the President to Congress.

Mankiw commented that the migration of U.S. jobs to lower-cost countries like México, India and China - a trend known as offshore outsourcing - is "a good thing." Democrats immediately jumped on the statement, claiming it as proof that the Bush administration has abandoned U.S. workers.

Mankiw was criticized by Republicans as well, including House Speaker J. Dennis Hastert (Illinois) and Representatives Walter B. Jones (North Carolina) and Donald Manzullo (Illinois). Jones and Manzullo have called for Mankiw’s resignation and suggested that he attend a hearing where victims of offshore outsourcing testify to their experiences.

Mankiw has since admitted that his statement was poorly worded. He then repackaged his remarks, explaining that an open global market is key to economic prosperity in the U.S.

In effect, Mankiw has not changed his mind about offshore outsourcing. Rather, he has learned a lesson about politics: you simply can’t say that replacing U.S. workers with cheaper ones overseas is “a good thing," even if, in the long run, for the national economy as a whole, it is.

Is outsourcing good for the economy?

Although it is unpopular to say, there is evidence that outsourcing is advantageous to the overall U.S. economy. Outsourcing allows companies to lower their costs and stay competitive (and they must stay competitive to stay in business and employ workers).

Some economists argue that outsourcing encourages efficiency and innovation, eventually leading to better jobs for U.S. workers.

Further, when companies are able to lower the costs of production, prices go down, and who doesn’t love those low-low prices at Wal-Mart? Offshore outsourcing makes it possible for you to buy a widget for .99 cents.

But if too many jobs go overseas, who will be able to buy the widgets? The overseas workers? The end result of offshore outsourcing may be a shift in wealth from the United States to developing nations. It certainly removes jobs that had been done by less skilled workers in particular locations.

Redistribution of wealth

Americans fear the redistribution of wealth (that is, redistributed from the U.S. to developing nations) that may result from globalization. But U.S. foreign policy has encouraged such a shift. By pushing developing nations like Russia and China to educate their workers , we have helped to create the competition.

What seems to be particularly disturbing to economists and workers is the relocation of white-collar jobs like software developers. It is equally devastating for a factory worker to lose her job, but the exportation of high-salary work was not anticipated by the economic theories that support free trade. Economists could not have predicted the technical innovations (like the Internet) that allow call centers in India and China to do the tech-support once performed in the United States.

There is little reason for a company to pay a software developer $80,000 in the United States when it can outsource an equally qualified Indian worker for $20,000. And this is where government may or may not intervene. Democratic presidential candidates are in favor of legislation that would make it harder for companies to outsource by taxing those that manufacture abroad for sale in the United States.. The Bush administration claims that such laws will decrease trade, hurting the overall economy.

Just how many jobs are going overseas?

In 2002, Forrester Research predicted that 3.3 million service jobs will move overseas by 2015, with 500,000 of them in computer software and services. While these figures are certainly cause for concern, they must be placed in context to be accurately read.

The New York Times reports that there are over 130 million workers in the labor force, and millions of jobs are created and destroyed each month. Within this frame, the figure of 3.3 million jobs lost over the next eleven years is less severe than it first appears. Further, The Times reports that the number of software developers in the United States increased last year to 2.35 million, a number four times greater than the developers in India and almost seven times greater than those in China.

What are the effects?

There is little agreement over the effects of outsourcing on the U.S. economy. Some economists, like Mankiw, believe it to be a natural element of free trade that will eventually lead to greater prosperity for all. Others are nervous about the outsourcing of high-paying jobs and feel that this phenomenon may be evidence that free trade theory is askew.

Although economists debate it, politicians don’t really have the option to say that outsourcing may be positive in the long run. There are just too many voters who have experienced the painful and immediate experience of losing a job to a worker overseas. And that is why Mankiw’s statement was seen as inappropriate; there is weight to the short-term consequences of globalization; the suffering of workers and families don’t always fit into long term theory.

To read more about economic theories of globalization, click here. To further explore the Jobs, Taxes, and Benefits Life Issue, click here. You can also discuss this issue with other WomenMatter readers in one of our online forums, and when you’re ready, contact your representatives and let them know what you think.

Article Posted on: 3/2/2004

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