Tuesday, January 27, 2004

Getting our asses whooped by India and China, failed economic modernization

Here at Dan Drezner's website, Dan argues that outsourcing fears are overblown. In it he quotes somebody who argues that the "jobless" recovery is just a "cyclical" (temporary) adjustment instead of a permanent loss by quoting somebody (yes, it's confusing- I know) that says:

Some point to the jobless recovery as evidence of offshoring's impact, but the lack of jobs is just as likely the result of booming productivity and the economy's (until recently) anemic pace. "I think people are confusing the business cycle with long-term trends," says Daniel Griswold, an economist at the Cato Institute. "People are looking for someone to blame. They say, 'Aha, it's because our jobs are moving to India.' If you look at the late 1990s, though, all these globalizing phenomena were going on." In other words, it wasn't that offshoring practices changed; it was that the economy slowed.

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Here is the body of my rebuttal on his comments section:


First of all, I'm amazed that Dan here wants to treat the issue as if all the authoratative comment is pro-trade, that the job losses are cyclical rather than structural, and that criticisms of "free-trade" are all protectionist or pandered for partisan advantage.

Here is a link to a book arguing that the losses are structural and not cyclical. Here is Peter Drucker's book, arguing that the knowledge economy is here and he's also argued that America is already being outcompeted by India and China. Here is Tony Blair, acknowledging what anyone who works at a research university knows: there are literally several dozen scientific researchers from China for every single new American graduate student.

Also India has highly protective domestic corporation laws, that put strong limits on foreign investment. In addition, China has massive intellectual rights problems. Even if one were to buy the argument that outsourcing jobs to China doesn't eliminate US jobs, it's still a terrible policy because the Chinese get to effectively steal US trade secrets to produce brand name imitations or knockoffs of their own. This "patent piracy" is rampant in China as any US exec who does business there can tell you.

"Free-trade" market liberalism without an equal playing field in foreign capital investment and intellectual property rights protection is a suicide pact!

The primary hypothesis being bandied about is that manufacturing and now hitech services outsourcing to India and China is "okay" or even "good" because US brand name merchandising forces repatriation to corporations here in the US leading these corporations to spend money, and then through "trickle-down" economics this eventually leads to the creation of compensatory jobs.

This proposal is dependent upon several assumptions 1) That the US will remain the knowledge-capitol of the world 2) That US brand-name merchandising allows repatriation of profits (and therefore the lob losses are cyclical and not structural) and 3) that intellectual property rights and foreign capital investment rules are an "even" playing field so that the other nations can't steal US R&D and then set up shop with protected companies that the US companies can't get at.

Well as it turns out, every single one of these assumptions is either wrong or soon about to be proved wrong.

Okay, wake up people. It's not just about a few jobs going and new ones replacing them. It's about the US being displaced completely as the commercial and innovative center of world capitalism by being sheer outcompeted by India and China. Now unless you happen to have a "magical" belief that no matter what the US will remain "on top" and that profits will disproportionately always flow to the US mainland, and that capitalistic market competition doesn't apply to countries the same as it does to companies, then the only logical conclusion is that this country is in serious trouble.

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Read more about it at Oldman's posting "Are we exporting America?" and "Economic decline of America".

UPDATE: Ignatius of the WaPo and the WaPo Editorial weigh in on the dollar problem and the "jobless economy" respectively. Read the WaPo Editorial for a counter-argument but my opinion is still that this "cyclical shift" argument ignores the dangers of simply being outcompeted rather than just being outsourced.

Ignatius has some nice comments including:
Discussing the falling dollar at a panel of the World Economic Forum here, a former U.S. senator said the greenback's decline was just a blip. The abiding fact was that for more than a century, in good times and bad, the world's investors have been in love with the American economy. And that ardor continues today.

Yes, responded a Chinese economist, but "love affairs always end."

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