Paul Samuelson on Outsourcing

I remember using Samuelson’s textbook for an Economics course during my undergrad at IIT. So, was curious to see what he had to say. The New York Times talked to the 89-year-old Nobel Prize-winning economist and professor emeritus at the Massachusetts Institute of Technology:

Mr. Samuelson asserts in an article for the Journal of Economic Perspectives [to be published soon], [that the] the assumption that the laws of economics dictate that the American economy will benefit in the long run from all forms of international trade, including the outsourcing abroad of call-center and software programming jobs [is not true.]

In an interview last week, Mr. Samuelson said he wrote the article to “set the record straight” because “the mainstream defenses of globalization were much too simple a statement of the problem.” Mr. Samuelson, who calls himself a “centrist Democrat,” said his analysis did not come with a recipe of policy steps, and he emphasized that it was not meant as a justification for protectionist measures.

Up to now, he said, the gains to America have outweighed the losses from trade, but that outcome is not necessarily guaranteed in the future.

In his article, Mr. Samuelson begins by noting the unease many Americans feel about their jobs and wages these days, especially as the economies of China and India emerge on the strength of their low wages, increasingly skilled workers and rising technological prowess. “This is a hot issue now, and in the coming decade, it will not go away,” he writes.

According to Mr. Samuelson, a low-wage nation that is rapidly improving its technology, like India or China, has the potential to change the terms of trade with America in fields like call-center services or computer programming in ways that reduce per-capita income in the United States. “The new labor-market-clearing real wage has been lowered by this version of dynamic fair free trade,” Mr. Samuelson writes.

But doesn’t purchasing cheaper call-center or programming services from abroad reduce input costs for various industries, delivering a net benefit to the economy? Not necessarily, Mr. Samuelson replied. To put things in simplified terms, he explained in the interview, “being able to purchase groceries 20 percent cheaper at Wal-Mart does not necessarily make up for the wage losses.”

The global spread of lower-cost computing and Internet communications breaks down the old geographic boundaries between labor markets, he noted, and could accelerate the pressure on wages across large swaths of the service economy. “If you don’t believe that changes the average wages in America, then you believe in the tooth fairy,” Mr. Samuelson said.

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Rajesh Jain

An Entrepreneur based in Mumbai, India.