C. Peter McColough Roundtable Series on International Economics: Fear of Offshoring

Council on Foreign Relations
New York, NY

ANDREW CROCKETT:  Well, good morning everybody.  My name is Andrew Crockett from JP Morgan Chase.  I’d like to welcome everybody on this cold and frosty morning.

Before I introduce our speaker, Alan Blinder, I should make one or two housekeeping announcements.  Firstly, to remind, as usual, everybody to turn off their cell phones or noisemaking devices.  Secondly, to let you know that this is part of the Peter McColough series of talks in international economics.  Thirdly, we will finish, as is the custom at the council, promptly at 9:00.  And I will — after these introductory announcements, I will put a few questions to Alan on the subject of his paper, and then we will open his floor to discussion.  This session is on the record.  And I think those are probably all of the housekeeping announcements I need to make.

It’s a great pleasure to be here with Alan.  I think most of you know of him and of his record.  He’s been a distinguished academic.  He served in the Clinton administration both as a member of the Council of Economic Advisors and as vice chairman of the Federal Reserve.  He’s advised both the Gore and Kerry campaigns.  I’m not sure those were —

ALAN BLINDER:  Well, if you want to lose — (laughter).

CROCKETT:  — your distinguished background.

He’s had an interest in a wide range of public policy issues that come at the intersection of economics and politics.  And that, I think, must be what has sparked his interest in the subject of offshoring as something that is of growing interest and importance.  And you can’t open newspapers these days without frequently finding references to companies — many companies, I think, represented in this room have offshored a number of their activities.

And my first question to Alan is, many people think of offshoring as being a process in which relatively low-skill jobs are transferred to countries with low wages.  And in this, it seems like an extension of the model we know conventionally from international trade.  Is that right, or there differences in the case of offshoring?

BLINDER:  It’s half right.  I mean, it’s for lower wages.  You bring it offshore accepting the attendant additional expenses of doing that for lower wages — maybe for better quality, but I think largely for lower wages.  But not necessary low wages, and then particularly not necessarily low wages in the country of origin.

A simple example is what we think of a low-end job; a call center center operator is a very low-end, low-wage job in America.  In India, it’s not such a bad job at all.  But there are also, incipiently, a number of jobs that are not low-end — I shouldn’t say incipiently — actually, but there’s going to be a lot more as we go forward, a lot of what we think of as high-end jobs are potentially or actually offshorable.  Security analysts and radiologists are two examples where it’s happening already, although on a small scale, but there’s a lot more potential for things like that.

So to me — one of the interesting things when you think about what can be offshored and what can’t, the distinction doesn’t map at all well to high skill versus low skill.  It maps to what can be delivered electronically with very little diminution of quality — maybe there’s some, but relatively little — and what can’t.  And that just doesn’t correlate very well with high skill/low skill.

CROCKETT:  How much — how significant is this phenomenon going to become?  I mean, you’ve talked about anything that can be delivered electronically.  We’ve become aware that a huge range of things can be just delivered electronically.  You mentioned radiology and so on.  Do you have some quantitative feel as to how — what proportion of the economy is now being affected and what proportion could be affected in the future?

BLINDER:  Yeah, the first — see, it’s always easier to forecast the present than the future.  As best we know — and there are no reliable national statistics like from the BLS or something on this — but as best we know from a number of fragmentary studies, it’s quite small today.  There’s a huge fuss about it, but in fact, it’s quite small today.

A million jobs in the service sector would be an overestimate.  I don’t know if it’s a half a million, 400,000, 600,000.  It’s certainly under a million out of a workforce of 140 million.  So it’s, you know, in that sense, chicken feed now.  But if you look — as I did in the paper — look over American job categories.  Just look at the list — and when I say American, that’s just the data I looked at; it wouldn’t be very different if you looked at British or French or German — and ask, which of these things could conceivably be delivered offshore?

Just as we look at manufacturing — we think of — let me make an analogy.  We think of the manufacturing sector as being tradeable.  That doesn’t mean everything is produced offshore.  We do do manufacturing in the United States.  But the whole sector is potentially tradeable or has to compete with foreign competition.  Running over these things, I estimated that — so manufacturing jobs are about 14 million, ballpark, in the United States.  I estimated that — two to three times that much.  So 28 (million) to 42 million jobs are potentially offshorable.  That does not mean they’ll all be sent offshore, of course, just as manufacturing hasn’t gone to zero.  But it’s a number like that.  The point is, once you go into — in a serious way into the service sector, you’re dealing with vastly more people than in the manufacturing sector.

CROCKETT:  Traditionally, as you — as industries become — move around the globe and production shifts from one country to another, unemployment, as we know, doesn’t rise because other things happen.  How easy is it going to be for the U.S. to — and the other industrial countries — to adjust to this movement offshore of the numbers that you’re talking about?  And will we expect other industries to take their place such that unemployment stays relatively low?

BLINDER:  Yeah, I’ll start taking that question from the back end.  Yes, other industries and other types of jobs within the industries will take their place over time.

Then moving to the front part of your question, I think it’s going to be a very difficult transition.  I make the analogy in the paper to the two massive — this one’s not quite that large, but it’s large — two massive transitions that we’ve made in our history — and this is not just the history of the United States; it’s more or less the same in Europe — which is the movement off the farm and into the factory, massive number of people.  Now that did not lead to massive unemployment.  There were new sorts of jobs.  But a fun fact that I looked up — I didn’t know this; I looked it up and it’s in the paper — the number of farm workers in the United States is approximately the same now as it was in 1810.  The number, not the share.  It was the majority in 1810.  So that was a really massive shift.  This one won’t be that large.

The second industrial revolution that we’re living through now is the shift from manufacturing to services.  I mean, again, tens and tens of millions of jobs had to move from manufacturing into a variety of services.  This adjust — so these are very big adjustments.  They require lots of things to happen.  It’s not as simple as you just move from company A to company B.  I mean, the first industrial revolution changed in the education system, where people lived, transport, and so on and so forth.

So this is not going to be fast and it’s not going to be easy.  And relating it back to the question you started with, it will not be solved with simply by upskilling the workforce because you can upskill people to be radiologists and computer programmers and so on and the jobs will go to India or wherever.  So we have to upskill the — we have to not only upskill the workforce, as we always do to stay ahead of the comparative advantage train, but also train our young people for the kinds of jobs — and these are jobs that can’t be easily delivered electronically — that will be available when they’re not so young anymore, when they’re out into the labor market.  That’s not obvious what that is.  If you say, well, what are the six things we have to do to our educational system to do that?  I don’t know.  And that’s one of the reasons I think this is not going to be an easy transition.

CROCKETT:  Can I just push you a little bit on that, Alan, because probably to say we don’t know is not sufficient.  We’ll have to advise our children on things to do.

BLINDER:  Yeah.

CROCKETT:  And indirectly or directly, we advise our governments on things that they should do.  What should governments be doing and what should individuals be doing?

BLINDER:  Well, the principle is easy to enunciate.  Turning it into practice — not to dodge your question — is not something I’m prepared to do.  I think we need to think about it deeply.  Education specialists need to think about it deeply.  The kinds of jobs we want to train them for are the jobs that either require or are vastly better when delivered face to face, personally.

So for example, if you just take within the legal profession, some lawyers sort of just write routine contracts.  That could go anywhere in the world.  Some lawyers are negotiators, think of divorce lawyers and probably trust lawyers — though who knows, that might go — but where it requires face to face contact.  Similarly, in the medical profession, I think almost all the jobs are not offshorable.  Radiologists and maybe a few other things are exceptions.

I wonder about my own profession, in fact.  College — let me draw the contrast.  Kindergarten teaching is never going to be offshored.  (Laughter.)  College professors, that’s a whole different thing.  We know that some of it is delivered electronically now, and we know that it’s marching upward in relative price inexorably.  And it’s gradually going to get more and more expensive.  I always consoled myself that I teach at Princeton because the last three universities to cave are going to be Harvard, Princeton and Yale.  But you can see almost an inevitability of moving some of that electronically.

So you know, in the first instance, it may be coming from South Dakota, just like Citigroup’s call center came from South Dakota.  In the second instance, it may be coming from India.  So that’s the principle.

Turning that into practice, you know, what would I tell the Princeton regional schools — my local school district — to do with the kids?  You know, I don’t know.

The one thing that you can think is that rote, routinizable skills are not going to be the things that lead to good jobs in the new electronic age, even if they’re high skills; I mean, the computer programmer, the routine computer programmer is an example of that.

I’m sorry, it’s not a very good answer, but —

CROCKETT:  Is it conceivable that the process of development, which is already proceeding quite rapidly in a country like India, will be accelerated by this?  And those of us that have offshore centers know that the costs of running those, while still well below those in Europe and the United States, is going up.  Is it conceivable that if we cast ourselves 10, 20 years forward, the solution to this problem — at least as far as the political sensitivity is concerned — will come in an equalization of wages across skills across the world?

BLINDER:  Yes, although I think your time frame is probably much too aggressive there when you say 10, 20 years.  We were just talking at the table; Japan, from its post-World War II low pulled through — they haven’t reached equality with the United States, but you know, near equality in 35 years, and that was really fast.  I can’t imagine that India and China do it that fast.  So over a longer time frame, I think the answer will be yes.

Now to what extent that ameliorates the political angst I’m not sure.  I don’t think many Americans would take it as good news to say, well, you know, 40 years from now you’ll have the same standard of living as India.  I don’t think that message delivered to the American public would be treated — well, then you say, well, it’s mostly from India coming up, not from us going down.  But some of it is going to be, for some of us, going down in the intense competition from foreign jobs.  So yes, it’ll become a less politically sensitive subject when Indian wages are 85 percent of American wages, but I think that takes a long time.

CROCKETT:  You touched on the politics.  Maybe we could move on to that.  Where are the particular political sensitivities, and how should — I presume we all agree that the reaction should not be simple protectionism, but what are the responses that can be utilized to get the advantages of this without some of the disadvantages?

BLINDER:  You know, the cupboard there is not bare, but it’s not generously stocked.  I think we need to do — I mentioned the education system.  There are serious educational reforms that we don’t — and I in particular don’t — yet understand, but that need to be done, just as there were for the other two industrial revolutions.  Then I think we have to do a vastly better job than we’ve done in the past.

And unfortunately, the past is a long time and we haven’t done very well at what I’ll in the first instance trade adjustment assistance, but you might just call it adjustment assistance.  So that’s the whole job retraining, unemployment benefits, portability of pensions, health insurance, probably what’s called wage insurance, which has been proposed already, which is a partial replacement of the diminution in your wage when you lose one job and take another job.

But you know, I have to say, as you look at this, this looks like old wine in new bottles.  I mean, these are not — these are, first of all, not new ideas.  And secondly, they’re not programs that have been wildly successful up to now.  My hope is that as it becomes relevant, the problems become relevant to a larger and larger and better and better educated and more and more vocal share of the population, which has not been the case up to now, the government will put more and better resources behind these programs and make them better.  But that’s more a hope than a forecast.

CROCKETT:  If I could turn for a moment to the countries that are providing the offshoring services, we all think mainly and firstly of India.  Could I ask you to say a little bit more on why it is India that seems to be at the forefront of this?  Will it spread, and what will it do for these countries and their development efforts?

BLINDER:  Yeah, I think it will spread.  It will help their development efforts.  And I think the reason — I mean, there’s never one reason, but a main reason why it’s centered in India — that is, service offshoring; manufacturing offshoring in doing much better in China, probably, than in India — is English.

In the service sector, speaking English — especially speaking good English — is a huge comparative advantage.  And that, I think for a very, very, very long time, is going to be, say, an advantage of India over China.  China has some other advantages over India, but in this sector, India has a large number of English-speaking people.  It’s producing more and more every year and will continue to produce more and more every year.  They also have these great technical institutes that can produce computer programmers and people like that.

My friend Jagdish Bhagwati wrote to — Jagdish isn’t here, is he?  No, I don’t see him — in minimizing this, saying, well, for the next decade or two, the numbers of Indians and Chinese that speak good English won’t be more than 300 million.  (Laughter.)  Now I look at that, 300 million!  You know, we have a 140 million jobs in America.  So I mean, I think he’s right about that.  So 300 million is a minority of the combined populations of China and India, a small minority, and that’s a lot of people.  So you know, I think more than anything else it’s English.

And you know, I should have also aired the obvious, which is, you know, at some point the Indian government back in the ‘90s, actually, decided to become sensible when it comes to economic policy, instead of saying we should run the whole country like Gandhi would have wanted to run it.  You know, they sort of let capitalism flourish.  Without that, you wouldn’t be having this.

CROCKETT:  I’m going to ask Alan one more question and then open the floor for comments or questions from those who are here.  And this last question concerns the broader macroeconomic consequences of this, about which we haven’t talked a great deal.

Does it have implications for, for example, the ability to hold down inflation, sustain price stability?  Does it have implications for global rates of productivity growth?  Does it have implications for the way in which the balance of payments adjustment process works?

BLINDER:  Yes, starting with the obvious, global productivity growth.  This is standard gains from trade from, you know, comparative advantage theory, which will lead to global productivity gains.  And we all know how those gains are split between the two countries depends on a whole variety of factors.  But there will be gains from trade from both countries — both parties to the trade.

On inflation, I think the answer is yes, but I don’t believe it’s as much as people typically think.  I mean, it is not the case, as many Americans think, that every manufactured good we have in America is made in China.  It’s just not true.  It will never be true that every service that we consume in America — (chuckles) — is coming from India.  I think for a very long time, if not forever — who knows about forever, but for a very long time the huge, huge majority of the things that Americans buy will be made in America, goods or services.  And conversely, the huge, huge majority of the things we make will be for the American, you know, market.

As people in this room know, but as people in the large world don’t know, you know, ballpark seven-eighths — seven-eighths of the economy domestic, so to speak.  You know, seven-eighths of what we buy is made at home and conversely.  They’re not equal, of course, imports and exports — (chuckles) — as well all know.  So you get the downward pressure on prices on the eighth, so to speak, that comes from abroad, plus some competitive pressures on the remaining seven-eighths, which has to compete with the foreign stuff.  But you know, I continue to think that American inflation is now, and will be for a very long time, much more determined by the balance of supply and demand inside the home market.  So I wouldn’t exaggerate that.

So you’re asking about productivity inflation was the third thing —

CROCKETT:  Balance of payments adjustment.

BLINDER:  Oh, the balance of payments adjustment.  No, I don’t think it changes that.  I mean, it changes the nature of the balance of payments.  I mean, we’re running now a — you could view this, I guess, as a forecast that our surplus in services is in great peril of turning into a deficit in services.  And then you ask yourself, let’s see, a deficit in services, a deficit in goods?  Hmm.  (Chuckles.)  So what’s the answer to this?  It is sort of the depreciation of the dollar as a counterweight to both of those.

CROCKETT:  Thanks very much.

I think the time’s come now to go around.  Please, when I recognize you, would you wait for the microphone to come to you, stand, and for the benefit of the rest identify yourself?

Jeff.

QUESTIONER:  Jeff Shafer.

Alan, you described this, and I would probably think the same way, as primarily an adjustment problem that could go well, it could go badly.  And then at one point you said, well, some incomes will go down.  You weren’t clear whether this process would generate average lower levels of income in the U.S. and otherwise.  But the real key question is, whatever the answer to that is, would U.S. incomes be higher or lower if we shut out these services with protectionism?

BLINDER:  Lower, I think.  I mean, there are net gains from trade, and whole name of the game is how are these gains going to be distributed?

As you know, economists theorized for three generations about distributing.  You allow the gains from trade, and then you redistribute from the winners to the losers.  In fact, we don’t do that at all, or you know, it’s a nickel and a dime.  And so that means there are a significant number of net losers, but the society as a whole cannot be a net loser unless we really foul up.

And you know, the — you implicitly gave the answer for the last part of the question.  Part of really fouling up would be to put Lou Dobbs in charge.  (Laughter.)  If you do what Lou Dobbs wants us to do, that would be one way we might actually reduce national income.  But I don’t believe we’re going to do that.

CROCKETT:  At this table here.

QUESTIONER:  John Beatty (sp) from UBS.

The proponents of offshoring typically cast their arguments in terms of the economic benefits.  Of course, it’s little consolation to someone who is an employee to give him economic statistics, but that’s another story.  Let us assume, for example, that, you know, India and China have moved on from call centers, upscaled to radiology, and eventually they are masters of developing new technology.

Now the question I wonder is, how much more can we see in the economic argument?  Are we still — even if we can point to the fact that from an economic perspective it’s cheaper to produce nuclear technology in China or India, are we still going to sing the same song?

BLINDER:  Well, nuclear is a special case because of the potential military use of nuclear, so that involves foreign policy and national security issues that go way beyond comparative advantage.  If it was not such an issue and it was straight economics, I would say yes, exactly the same principles.  It doesn’t matter whether it’s nuclear energy or toys.  I mean, the economic theory is exactly the same.  But the national security and foreign policy aspects couldn’t be more different, and that means the political reaction couldn’t be more different.

So I think for the same reason that we would never, even if the comparative advantage shifted completely away from the United States — that is, away from Boeing — we would never allow our aircraft industry to dwindle to zero.  Our television set industry is zero, as you know.  We don’t make any television sets and haven’t for a long time in the United States.  But we’re never going to allow that to happen to aircraft for military reasons, and we never would allow it to happen for nuclear energy, for, you know, military/foreign policy reasons.

CROCKETT:  Over there.

QUESTIONER:  John Watts, FAPW.

A lot of recent studies have shown that income concentration and wealth and ownership of liquid assets concentration has accelerated in the United States in the last few years.  Given your comment that outsourcing affects across the board, but there would be some specialization, do you think increasing service outsourcing will make income concentration greater?

BLINDER:  No, I don’t.  I’m glad you asked that question.  It’s one of the points I make near the end of the paper, that, just to put a preface to your question, the big story in the distribution of income in the United States and in some other countries, Anglo countries, has been a disequalization caused by what — principally caused by what economists call skill-biased technical change, which means that the world is shifting in favor of high-skilled people and they are doing well, and low-skilled are doing poorly.

One point of this essay is that as you look forward to the offshoring revolution, there is no particular reason to think that that is the case; that there are very high-skilled occupations that are imperiled, and the way that’s going to show itself is fewer job opportunities and lower relative wages, and there are also low-skilled that are in peril.  And conversely, there are high-skilled and low-skilled that are immune to the offshore competition.

So I think that one of the bright aspects in this — of this phenomenon may be — may be — that this now 25-year trend towards more and more inequality might be dissipating by this — might be dissipated by this.  I guess the right way to put it is, I see no reason whatsoever to think it will be exacerbated by this.  It seems to me close to distributionally neutral.

CROCKETT:  At the back.

QUESTIONER:  David Weiss (sp), SNP.

What bothers me is really the trade deficit issue, that we are now running a trade deficit, 6 percent of GDP, we’re looking at more and more — you’re talking about more and more jobs leaving the country.

BLINDER:  Yeah.

QUESTIONER:  What are we going to produce over here that we can sell overseas besides Treasury bills?  (Laughter.)

BLINDER:  I’ve been emphasizing the services that are offshored out of the United States to somewhere else.  There will be some other services that are offshored from elsewhere to the United States.  For example, right now we have a substantial trade surplus in financial services, which is probably most of the people — what most of the people in this room do.  My guess is it’ll be a long, long, long time before that turns negative, turns the other way.  So that ought to remain a comparative advantage of the United States for a long time.

High-skill specialized manufacturing, as you know better than I, over the last few decades, while the old-fashioned low-skill mills sort of moved elsewhere, we’ve done okay in specialty steel, fancy stuff.  That’s another class of answers.

But the main answer to your question, David, has to be, and you know this is the right answer, is who knows?  If we were sitting here in Thomas Jefferson’s time and I said to Jefferson, who was pretty smart, or better yet I said to Hamilton, who was probably even smarter, in 1960, only 8 percent of Americans will earn their living on farms, and what will the rest do?  I don’t know what they would have said, but they wouldn’t have had a clue.

And so I fall back on the same excuse.  I don’t know.  The exchange rate will have to adjust.  You know, this is the thrust of your question, to accrue whatever it is that we have a comparative advantage in producing and shipping to what we have a comparative disadvantage in, and therefore take on the imports.

CROCKETT:  At the table in front.

QUESTIONER:  Margaret — (off mike) —

CROCKETT:  Here’s your mike, Morgan.

QUESTIONER:  Margaret Taylor (sp) with JP Morgan.

And I’ve been involved, as Alan knows, for the last couple of years in developing a securities analysis unit in India.  And we went there for low cost, but now, as we’re there for a couple of years, it’s been very successful, and I think we keep finding new things for people to do which really aren’t based on low cost, but based on the extraordinary quality that they offer us.

So as that unit grows, the question that I always get from the folks that run it there is, when does this become — how many people will there have to be in India, how much outsourcing will there have to be, before this becomes a major political issue, particularly in the next election?

BLINDER:  I think we’re getting very close to that point, if not there already.  You may remember when the economic report of the president in February 2004 came out.  There was a paragraph or two on offshoring and then a press conference in which my friend Greg Mankiw, who was then the chairman of the council, made an unfortunate remark about how this was good for America, like full stop.  The right way to do this politically is first you bleed and cry to the people that are disadvantaged, but then at the end you say but it’s good for the whole country.  Had he done it that way, I don’t think you would have had so much angst.  But he was then excoriated by his own party, and by the Democrats; it was bipartisan piling on.  John Kerry tried and maybe succeeded — you know, on net he lost the election, but you lose it on many things — to make an election issue out of that.  And it seems to me as clear as anything can be that this difficult transition, which is the right way to think about it, will be a bigger political issue in 2008 than it was in 2004 and bigger in 2012 than it was in 2008.  What I’m trying to get my party — I’m a Democrat, as you can tell from the introduction — you know anyway — (laughter) — to try to think creatively about what sorts of remedies — by which I really mean palliatives — make sense and can be proposed in order to give greater security.  This is about security for the American workforce. 

I really think — I may be wrong about this, but I really think that this issue will be THE major issue in political economy for the next 20, 30 years — not the budget deficit, not the trade deficit, not inequality, not any of these things.  And the reason I say that — it comes back to the numbers that I was saying before.  When tradable goods are limited to manufacturing, you’ve got this many people.  When they get to the service sector, you’ve got this many people.  And you’ve got — in that set you’ve got a lot more vocal people that are used to talking to politicians and know how to do it in the way that factory workers don’t.  So I think it’s just going to grow and grow, and I wouldn’t be a bit surprised if already by the ‘08 presidential it’s a huge issue. 

CROCKETT:  Back there. 

QUESTIONER:  Professor, Craig Rowe (sp), Craig Rowe (sp) Capital.  

BLINDER:  Hi.

QUESTIONER:  Hi.  Following on David’s question and your response, sort of the brother of the offshoring of trade and services is the offshoring of capital flows.  The electronic age has allowed for substantially larger, substantially faster capital flows.  What is your feeling about that — and new products as well — in two areas specifically:  one, we’ve arbitraged or in the process of arbitraging wages; we’ve also been arbitraging interest rates around the world.  Certainly interest rates in Japan, because of these financial flows, have affected the shape of the yield curve.  And secondly, as the current account deficit rises in the next few years to 7.5 percent, the huge amounts of flows that are supporting this — what is your opinion of that?        

BLINDER:  Well, first of all, I mean, if you think about the movement of financial capital around the world, this is the quintessential example of what can be delivered down the wire with no loss of quality.  If I’m interacting with JP Morgan, it doesn’t much matter if I do this transaction in person with Andrew or I get on the phone and I wind up with somebody in India. It really doesn’t affect me one way or another.  So it’s basically already happened.  And there’ll be more of it.  But it’s already very large scale there.  The arbitraging of interest rates has gone a long way.  It still has some way to go.  There’s still some home-country bias actually, but it’s less than it was, and you can just see it continually moving in that direction. 

And the last part of your question went to the trade deficit.  Or let me put it differently:  went to the — I like to say it went to the capital accounts surplus, because that’s really what it’s about.  I think in the modern world which is the dog and which is the tail have flopped, and the capital accounts surplus is now the dog. 

My answer to you is qualitative not quantitative.  I don’t know.  I think it’s already gone on longer and grown larger than I would have thought possible if you asked me this four years ago.  And part of the reason is the you can’t beat something with nothing principle.  That is, if investments around the world are going to pull out — relatively speaking:  I don’t mean pull out; I mean stop putting so much money every year into U.S. assets.  They have to put it somewhere else.  So as Japan starts looking better that becomes a more viable destination for capital.  It hasn’t been in the last 10 to 15 years.  If Europe would start looking better, Europe would be a very viable destination.  And then, of course, over longer periods of time, you’re talking about India, China and other truly emerging parts of the world. 

As wealth-holders around the world start getting the idea that piling ever more U.S. dollar assets into their portfolios starts to look like not such a good idea, then we’re going to start feeling the discipline of the world’s capital markets.  It looked like that was happening in the years ‘02 to ‘04.  And the dollar fell a lot, and then it reversed.  But it will come back.  And the dollar is itchin’ for a ditchin’, as they say.  (Laughter.)   

CROCKETT:  In front, Ernie.

QUESTIONER:  Thank you.  Ernie Stern from the Rohatyn Group. 

Alan, I wondered whether — when we talk about outsourcing as kind of a limited and specific activity, a number of the questions have gone around a much broader framework for this discussion.  And I thought actually the answer to the question by the JP Morgan people in Mumbai — how much more are these people going to come here — I thought the question was going to be when is headquarters going to move to Mumbai?  (Laughter.)  The outsourcing, as you say, started with technology.  Language made a big difference for India, but I think in my experience lots of countries are by now engaged in outsourcing, particularly on the technology side, where English is not the native language.  It has, as a major base, the technology education, which India started to invest in 30 years ago.  But I think the technical side, along with the outlet it found, is a major driver in these economies itself.  It has led to major improvements in productivity, in corporate governance, in their external investments.  Some latest figures from the IFC suggest that multinationals from emerging markets now represent some 15 percent of FDI, and in all kinds of activities. 

And it seems to me underlying all this outsourcing — it’s part of a much broader transformation of those economies which have internalized the technological revolution — not completely, in parts; you’ve got a long way to go to be sure.  But it also is a driver for the unusually high growth rates, not just in China where, you know, the statistics always are a little fishy or non-comprehensible, but India, which used to run along at three, three-and-a-half percent rate of growth, is supposed to grow at 8 percent this year.  Manmohan Singh went on the record saying it’s going to be 10 percent next year, which would be an extraordinary internal revolution.  And those changes in domestic economies — driven by the same thing as the outsourcing is driven by, as I see it — is going to make for a major transformation of the world economy and the relative sharing of global GDP, which I think, in time, is going to be seen to be as threatening to Americans as the simple outsourcing question of how many jobs go from here to there next year.  Would you kind of put this in the broader context as you see it?

BLINDER:  I largely agree with what you said, except right at the end.  I think when it comes to politics, the three most salient issues are jobs, jobs, jobs.  Everything else is tertiary after jobs — politically, not economically.  Economists would start with wages actually.  They say, “The jobs will take care of themselves; we start with wages.”  But that’s not the way the political world thinks of it.  But everything else you said I agree with.  I mean, the reason that China has become the big threat, if I may — let’s just say competitor — in manufacturing and the reason that India has become the big competitor in business services is they put in place the infrastructure necessary to do it.  That includes trained people, communications.  Now a lot of this the private sector had to do, especially in India, because the public sector was not actually doing it.  But some of it had come out of the public sector.  And you know, put in open — well, I shouldn’t say “open” because they’re not fully open.  Let’s just say real markets moved towards capitalism.  This formula is available elsewhere, so it’s not going to stay only in China and India.  And as you well know, as everyone in this room well knows, it’s not foreordained that America stays ahead — so far ahead of the rest of the world as it’s been for the last hundred years or so. 

So significant catch-up has already happened in Japan, Singapore, Hong Kong, Korea — South Korea, that is — and a variety of other places — should be expected.  Now politically, you know, I think Americans have been used to being at the top of the heap for a very long time.  And the notion — I think I mentioned this before — the notion that the rest of the world is — or large swaths of the rest of the world is catching up to us at a rapid rate is going to be a source of political angst.  I mean, one thing we know about people, as opposed to homo-economicus, is that people care about their relative standing.  There’s a huge literature about this in economics.  Like if everybody’s standard of living goes up 30 percent, people don’t report that they’re happier, but if mine goes up 30 percent and yours doesn’t, I’m much happier.  (Laughter.)  Well, this is going to play out on the global scale.  Americans are not going to like the idea — and they’re going to complain to their government, do something about this — as the income gap between India and China on the one hand, and us on the other hand, closes.  And it will close.  And one result of this — and again, especially the job loss that goes with it — and I mean here the gross job loss.  It’s not going to be a consolation to the people that lose their jobs to say, “Well, some other guy gained a job; it doesn’t matter” — it’s the gross lost jobs — is going to be constant, unremitting strain on the liberal trading regime, constant clamorings from various sources to stop this process in one way or another.  And it’s going to be a big fight.  It’s going to be a big fight. 

CROCKETT:  At the back.

QUESTIONER:  Professor, my name is James Tunkey.

I’d like to pick up on your comment about security.  The Kerry-Edwards campaign gave a hint that one way to improve security would be to adjust the corporate tax rates.  Looking forward, what do you see within the U.S. corporate taxes — places that are worthy of adjustment to improve security?  Thank you. 

BLINDER:  I don’t think you do it mainly in the corporate tax system.  Let me just — a word — the Kerry proposal was to equalize the tax treatment of activities offshore and onshore by ending — let’s just say ending the deferral.  You can argue for or against that.  I argued for it.  I think it would probably be a marginal improvement in the tax code.  When you get into the details, you’re trading off one distortion against another distortion, so you can make an argument on the other side.  I think on balance it was probably a good idea.  But this was going to be a very small contribution to, quote, “solving” this problem.  You know, in a political campaign, you want to exaggerate — you know, we’ve got all the greatest ideas and the other guys are terrible.  So that’s the way you run a political campaign.  In fact, it wasn’t that big a deal, although, I thought, a net benefit.

I don’t think the corporate tax system is at all the way to attack this problem.  I think if you ask a narrow question, what could we do with the corporate tax system to make this better, I think it’s trivial to nothing.  I think the individual tax transfer system — it’s not so much through the income tax; think of it as a unified whole — the tax transfer system can do something, can do a lot more than it’s doing now in principle.  I mentioned, for example, wage insurance.  Whether there will be — anyone will be able to muster the political force to get that done in the United States of America — okay, this is not Sweden here — is another question entirely.  I mean, it’s one of the interesting and, to me, frustrating parts of American political economy for a long time, that it’s very hard to get the broad populace much interested in policies that promote greater equality.  This is what we’re talking about, right?  There’s going to be more winners than losers, and you’re going to compensate some of the losers by taxing, say, the winners.  This is not a very popular strategy in the United States — much more so in Europe but much less so here. 

So the question in my mind — it’s just a question that I’m not — I’m tempted to give it a negative answer, actually, which is not a good answer — is as this phenomenon broadens and deepens, will it change our politics enough so that thickening the social safety net becomes politically popular?  It’s not now. 

CROCKETT:  Here and then this table’s the last one.  Here, here.

QUESTIONER:  Thank you.  Professor Blinder, my name is — (name inaudible) — from Dresdner Bank.

I have a two-part question.  We’ve always looked at economic development moving from farm to factory to service sector.  Beyond service sector, what is the next benchmark?  That’s one thing.

Secondly, you indicated ultimately these changes — (word inaudible) — theirselves on the exchange rate front.  Would you say it will take another probably 20 years, 30 years before the dollar finds a lower level from where it is today?  Thank you.

BLINDER:  It’s not so much moving outside the service sector, but I see it as moving within the service sector in the direction of these information — broadly conceived, information services, the kinds of things that I mentioned at the outset that can be delivered down a wire more or less as well as they can be delivered face to face.  So some services have that property, some don’t.  So where I see the big shift is from — take one basket which has in it manufacturing and what I call in the paper impersonal services, and another basket, personal services.  So the expansion of trade is largely coming in the impersonal services in the future, and the concentration in the rich countries in terms of domestic jobs has to move in the direction of the personal services.

Now the dollar question, I’d really like to break that into two parts.  One really comes back to the question Craig asked before; that is, here we are sitting in the year 2005 with a mammoth and rapidly growing capital accounts surplus.  How long can that go on before the dollar has to fall?  My answer by now is who in the world knows?  It’s already gone on longer than I think.  But I often put it this way:  I have no confidence in my ability to say where the dollar is going to go over the next four weeks or four months, but over four years, I’m pretty sure it’s down.  Four years is a relevant time frame in politics, for example.  I’m pretty sure it’s down substantially.  But that’s problem one, the one that we have now, which is partly self-inflicted through the budget deficit and the fact that Americans stubbornly refuse to save anything.  It’s not — this has nothing to — well, not nothing — this has little to nothing to do with competition from China and India.  This is basically homegrown problem. 

The longer-run problem that I was talking about in answer to David’s question and a few others is as you think of equilibrating the balance of trade — that doesn’t mean a zero trade deficit but a sustainable trade deficit — in the future where a lot of these things that we now do at home are going to migrate abroad, that has to be done by some combination of cleverness — that is, finding other things here which are new and innovative and especially personal to do — and a decline in the dollar.  You know, I mean, trade theory teaches us that if the productivity is a lot more rapid elsewhere in the world — now there’s a lot of the world where that’s not true vis-a-vis the United States — a lot of the world, like Europe, for example.  But vis-a-vis China and India, the two giant emerging countries, it’s dramatically true; their productivity growth is hugely higher than ours.  The real exchange rate is going to move adversely — well, I say adversely; it depends if you’re a mercantilist or not.  Let’s just say the real exchange rate, the dollar goes down, and the Indian and Chinese and a few other currencies go up.  That’s a long-term secular force.

CROCKETT:  There.

QUESTIONER:  Hi.  Glen Lewy, Hudson Ventures.

It seems to me that there are some winners, or some constituencies that are winning here that maybe don’t quite understand yet that they’re winning.  For example, the housing bubble:  It may be that part of that stemmed from the additional disposable income that came to the U.S. from offshoring, and yet you don’t see the construction industries, the home construction industries coming out and saying yeah, this is good, we need to support more offshoring because it benefits us.  Over time, will some of those winners more clearly identify their own positive stake in this and serve as a counterweight to the political pressures the other way?

BLINDER:  It’s a great question.  I’m not very optimistic about that.  I think that with some pockets in which it’s dramatically untrue — like the financial services industry, which is a winner from globalization and understands it’s a winner and understands the basic principles of comparative advantage — because after all, everybody in financial services has taken Economics 101.  I think it’s true.  (Laughter.)  In the land as a whole — just take construction workers as an example — these basic principles are not understood; this is abstract gobbledygook to them and there’s no connection made between globalization and income gains.  And by the way, they’re not completely wacky on this because — this, again, won’t surprise you — if you actually tried to decompose the income gains over the last decade into what’s due to trade and what’s due to non-trade, you won’t get that much from trade.  So it’s not like they’re missing the lion’s share of the story; it’s only a minor part of the story. 

But I’m pretty pessimistic for the following reason:  David Ricardo taught us the basic story here in the early part of the — very early part of the 19th century.  And Adam Smith had most of the idea anyway 35 years before that.  So here we are 230 years after Adam Smith, and how many people understand comparative advantage?  Well, it’s a pretty small number.  And we economists have vast experience in trying to persuade people of this case, and we fail and fail and fail.  I mean, when I come to the lecture on comparative advantage at Princeton in Economics 101, I start the lecture by saying you’re about now — you’re all about to cross a line, which you’ll never cross back in the other direction, between the minority of the world that understands comparative advantage and therefore believes in trade, and the majority of the world that doesn’t and therefore doesn’t.  And I think that’s largely true, and I think it’s always going to be a minority.  (Laughs.)  I don’t see that we get to a majority on that. 

So I’m not — while your point about there being winners is 100 percent correct — couldn’t be more correct — I’m not at all convinced that we get to the point where the winners become a powerful political force.

CROCKETT:  Alan, I’m going to ask the last question in order that we finish at 9:00.  You talked about the rest of the world catching up.  And we’ve actually talked almost exclusively about India and China and a little bit about the rest of Asia.  Three regions that I don’t believe have even been mentioned in the discussion are Africa, Latin America, the Middle East — large, politically important parts of the world that don’t — have not yet, I think it’s fair to say, benefited from this.  Is there a way in which we can see these regions of the world participate in catching up and adding, both politically and economically, to stability?  And you’ve got two minutes to answer that.  (Laughter.)

BLINDER:  I could answer one way:  Yes — the way you phrased the question.  But will it actually happen in finite time?  I’m not convinced that the answer is yes.  I mean, the Middle East is just wracked by political issues, by religious inhibitions, and a whole variety of things that just prevent them — most of these countries, with some pockets of exception — from joining the modern world.  And if you don’t join the modern world, you can’t benefit from these things, from what globalization can bring. 

Africa is, of course, a big place; it’s a mixed bag.  And of course, some of it’s the Middle East also.  It varies greatly.  And some of these African countries want to get into the club and are trying to get into the club, some don’t.  So the recipe for those African countries that want to do it and can succeed is the same recipe that India’s doing; that is, you know, adopt market reforms, provide some infrastructure, educate your people and speak English.  So you’ve got some of these African countries where there’s a lot of good English speakers, and they’re going to have the kind of comparative advantage that India — they COULD have the kind of comparative advantage that India has.  They don’t have it now, but it’s at least possible; but it’s a big hill to climb. 

We finally come to our neighborhood, Latin America.  I don’t know what to say about Latin America.  Again, it’s a diverse group.  If it all looked like Chile, you probably wouldn’t have asked the question.  You know, this is the question that’s been on my mind for a long time:  Why can’t the rest of Latin America look like Chile?  But it doesn’t.  And we all know that a hundred years ago Argentina had a higher standard of living than the United States, and look where they are now.  So you know, there I think it’s largely politics that have prevented the kinds of institutions that lead to high growth.  But could these nations move in this direction?  Yeah, absolutely they could.  Will they?  You know, I wouldn’t bet on Venezuela.  (Laughter.)

CROCKETT:  Please join me in thanking Alan for a fascinating talk.  (Applause.)       

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