Tuesday, January 27, 2004

So, do you still think outsourcing has nothing to do with poor job creation in the US, during the current "recovery"? Well, listen to Craig Barrett, CEO of Intel:

Intel has its headquarters in Silicon Valley. A Mercury News interviewer asked Mr. Barrett what the Valley will look like in three years. Mr. Barrett said the prospects for job growth were not good. "Companies can still form in Silicon Valley and be competitive around the world," he said. "It's just that they are not going to create jobs in Silicon Valley."

He was then asked, "Aren't we talking about an entire generation of lowered expectations in the United States for what an individual entering the job market will be facing?"

"It's tough to come to another conclusion than that," said Mr. Barrett. "If you see this increased competition for jobs, the immediate response to competition is lower prices and that's lower wage rates."

Once again, the point here is not that trade, per se, is bad; it's that we, as a society, are dealing with it very badly. Though there are other puzzling things in the mix. By most accounts I've read or heard, for instance, while programmers in Bangalore get paid a whole lot less in raw dollars, their lifestyles are more comparable than you'd think to what Americans enjoy -- they have cable TV, DVDs, cars, and the usual toys. So, if you expect the dollar to slide towards purchasing power parity, then that may take care of the wage differential, in the long run -- at the price of serious dislocation elsewhere, of course, as in the poorer prospects for say, science fiction writers overseas selling into the US market:

I was deeply unamused to notice the US dollar continuing its slide... you can now buy 1.8025 dollars with a single pound sterling.... [T]he dollar was at 1.50 to the pound for almost the whole of the 1990's.... [T]he majority of my sales... are to publishers in the United States.... If the dollar loses 15% of its value against the pound between a contract being negotiated and the books written, delivered and paid for, then the author loses 15% of his or her pay packet....

[I]f you're a British SF/fantasy writer, then almost by default (if you want to earn a living) you're a one-person export industry aimed at the North American market. Which is why headlines like this one (No end in sight to dollar's descent) do not fill me with joy and goodwill towards all Federal Reserve bankers.

To which Brad DeLong replies:

Within the decade, I predict, Charlie will find it possible to (with only small transactions costs) to take huge honking short derivative positions against the dollar, positions backed and collateralized by claims on his future royalty earnings. Then he will view declines in the dollar with equanimity rather than terror, as the losses on his expected royalty earnings are offset and neutralized by the gains on his derivative portfolio.

Brad might enjoy that prospect -- that's why he's an economist. Charlie, as he makes clear in the comments on this entry, is not. And it says something about the blind spots of academic economists that they think that constructing and evaluating massively leveraged derivative portfolios is the kind of thing that other people will, at some point, be good at, or even want to do. The transaction cost that Brad doesn't figure in, for Charlie, is Charlie's own time, which would be considerable no matter how cheap the formal brokerage arrangements turn out to be. Which means he's not a homo economicus, the oft-modeled species never seen in nature which will spend enormous amounts of time integrating all sorts of information into complex models of future price movements in return for trivial gains in some ill-defined utility function...


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