Book Review: Job prospects

In this peculiar little book, six prominent economists—the two listed authors plus four distinguished commentators, all writing separately—take stock of the possibility that expanding international trade in services, particularly service imports to the United States, will disrupt the U.S. labor market. They debate the potential scope of such trade, how fast it might grow, and who will gain and lose from it. To a lesser extent, they argue about what Americans, individually and collectively, ought to do about it.

One might think that these challenging topics would easily be enough to fill 144 pages, and indeed they certainly could have. But some of the authors also see fit to exchange insults, pursue diversions, and engage in speculation. The volume thus provides an interesting window into the internal workings of the discipline of economics as well as a few insights into its main subjects.

The centerpiece of the book is an essay by Princeton University’s Alan Blinder entitled “Offshoring: Big Deal or Business as Usual?” Blinder argues that “the confluence of rapid improvements in information and communications technology coupled with the entry of giants like China and India into the global economy is creating a situation that, while not theoretically novel, may be historically unprecedented.” Just as it has become possible for phone calls, medical images, insurance claims, and many other sorts of information to be conveyed thousands of miles at ever-lower costs, a huge new labor force has become available to respond to, analyze, process, and otherwise work with this information. Many occupations that were previously protected from lower-wage international competition, Blinder therefore claims, are now becoming vulnerable to it. He likens the process to “a new industrial revolution.”

Blinder estimates that about a quarter of all U.S. workers currently work in occupations that are potentially “offshorable.” His method for making this estimate is primitive, and his colleagues give the method a well-justified pounding. Yet his estimate of tens of millions of jobs is consistent with more sophisticated approaches, such as that of Lori Kletzer of the University of California, Santa Cruz, who provides a brief introduction to her work in one of the commentaries in this volume. The two largest occupations on Kletzer’s list, accountants and bookkeepers, employ almost 3 million Americans. Of course, not all of the jobs on the list will be taken by foreigners if the driving forces of offshoring are allowed to play out without government intervention. Employment in some occupations open to international competition will grow, because of the creativity and productivity of U.S. workers. Other occupations may be sustained in this country by lowering compensation toward overseas levels.

The authors agree on this much. They disagree about the pace of offshoring and its impact. Blinder argues that this transformation will happen more rapidly than workers will be able to adjust to it; so fast, in fact, that we should expect offshoring to be “one of the biggest political issues in economics over the next generation.” He points out that it’s harder to change occupations than to change jobs and suggests that this more difficult kind of adjustment will become increasingly common in the future. In contrast, commentator Robert Lawrence of Harvard University labels Blinder “Chicken Little.” “[C]hange will come slowly,” Lawrence assures the reader, a view echoed by his fellow commentator, Douglas Irwin of Dartmouth University.

Lawrence claims that his position is supported by “an overwhelming amount of empirical evidence,” but that is an exaggeration. International trade in services is in its infancy. Measurement of it is poor. Nevertheless, early data indicate that trade in services is not yet a serious problem. Kletzer (with J. Bradford Jensen) and others who are not represented in the book, such as Runjuan Liu and Daniel Trefler, have shown in recent papers that the effects on U.S. workers through the first half of the decade of the 2000s have been modest, even trivial. Moreover, their best estimates suggest that these effects have been positive, rather than negative, for domestic earnings and employment.

Whether an economist is willing to project these preliminary results into the future with confidence turns in large part on how he or she interprets the impact of the expansion of international trade in goods (as opposed to services) during the past several decades. Falling transportation costs, economic liberalization, and business-model innovation have driven a labor market adjustment in the U.S. manufacturing sector of roughly equal magnitude to that anticipated for the service sector, producing the much larger body of evidence to which Lawrence refers. How bad was it? “Nothing calamitous has happened,” Blinder concedes, reviewing the numbers.

But calamity is a subjective experience. What seems not so calamitous in the leafy precincts of Cambridge or Princeton may seem quite calamitous in Detroit or Cleveland. To be fair, Blinder goes on to say “I don’t think we … handled [the manufacturing adjustment] very well.” Kletzer takes a stronger position, labeling the costs “considerable.” Harvard’s Richard Freeman, another contributor to this volume, cites public opinion data that reveals Americans’ deep fear of offshoring. In a 2004 poll, 30% of workers reported that someone they knew had lost a job due to offshoring.

It is surprising, then, that this widespread concern has not coalesced into a serious political movement. The appearance of such a movement would be calamitous from the point of view of Jagdish Bhagwati of Columbia University, whose slight contribution is for some reason given the first slot in the volume, a sort of prebuttal to Blinder’s essay. Bhagwati is not especially interested in engaging the substantive arguments of his colleagues; his main concern is to head off the perception that anything less than unanimity on free trade reigns among economists. As Blinder says, “The thought police are on patrol.” And the volume shows how effective they are: None of the authors proposes any constraints on trade, no matter how big he or she believes the threat posed by offshoring to be.

What they do propose are policies that they would probably support under any circumstances. Freeman, who is furthest to the left, wants stronger unions, a more robust welfare state, and income redistribution. Irwin, manning the other end of the spectrum, is skeptical that government can make much of a difference. Lawrence and Kletzer can comfortably sign on to Blinder’s centrist proposals for a stronger safety net and for supporting creativity, innovation, and entrepreneurship, even though they disagree about the pace and impact of services offshoring. As Irwin says, “After getting us all excited about offshoring, [Blinder] offers us plain-vanilla remedies.”

Blinder’s only spicy offering is for U.S. educators to do more to prepare kids for jobs that he believes will be immune from foreign competition in services. “Nurses, carpenters, and plumbers,” he suggests, are the kinds of jobs that will always have to be done in physical proximity to the customer, no matter how much technology improves.

This proposal, like Blinder’s data and analysis, is eviscerated by his colleagues, both left and right. The difficulties include predicting which jobs fall in this category, how well they might pay, and whether they might be subject to another of the modes of international competition in services, namely the physical migration of people to jobs and of jobs to people, such as in medical tourism.

The reader who shares Blinder’s intuitions about the scope and pace of the challenge, then, is left without much hope for addressing it. It is a testament to the power of the economic orthodoxy that the notion of a national strategy for competitiveness is never mentioned in the book.

Global governance to manage the tensions of economic globalization receives no attention either. U.S. economic hegemony is long gone. Yet whether the 21st century brings multipolar rivalry or new forms of cooperation, the U.S. government and its dominant intellectual paradigm seem woefully unprepared.

Much of this book was written in 2007. The financial crisis and “great recession” of the intervening years have cast some of the issues in a new light. U.S. politics have proven even more resistant to protectionist impulses than Bhagwati and company might have expected. Even in a period of high unemployment, not to mention rising uncertainty about social protections such as health insurance and pensions, no major-party candidate for president in 2008 advocated significant trade or immigration restrictions. Nor did a Ross Perot or Pat Buchanan give voice to nativist discontent through a third-party campaign, perhaps because this global crisis was so obviously made in America.

The prompt monetary and fiscal policy response to the crisis also deserves some credit for this outcome. In the 1930s, the length and depth of the depression did lasting damage to the idea and the reality of a liberal global economy. This time around, at least so far, the long-term forces that are propelling the expansion of international trade remain undisturbed. If anything, therefore, the issues highlighted in this volume, both explicitly and implicitly, are more important now than when they were written.

The symposium on which this book is based commemorates Alvin Hansen, a Harvard economist who helped bring Keynesianism to the United States in the 1930s and 1940s and is thus indirectly responsible for the relatively successful response to the current crisis. Hansen is also famous as a failed prophet, predicting that the country would fall back into depression at the end of World War II. Only Irwin among this volume’s authors invokes Hansen, and he suggests that Blinder, too, will prove to be a failed prophet. Perhaps so; the evidence points that way right now. But the evidence is limited and the underlying forces undeniably strong. This reader would feel a lot more comfortable if, along with prophecy and timeless verities on the virtues of free trade, economists offered fresh ways of thinking about the evolving global economy and how to govern it.