The Economics and Politics of Outsourcing

12 February, 2004
by Steve Suranovic

This week, CEA chairman and Harvard economist, Gregory Mankiw was lambasted by Democrats and Republicans alike for statements he made upon release of the Annual Economic Report of the President. The reaction he received is either an example of how confused politicians are about the advantages of international trade, or is an example of how politics creates an atmosphere of misinformation that makes it virtually impossible to express the whole truth. It's probably a little of both.

Mankiw's remarks are standard fare in almost every international economics course taught at any university. He said that outsourcing of jobs to India was the equivalent of buying a manufactured product shipped into this country from overseas. He said that outsourcing is just a new way of doing international trade and that's a good thing. In response, House speaker Dennis Hastert (R, IL) released a statement saying, "(Mankiw's) theory fails a basic test of real economics. An economy suffers when jobs disappear."

If Hastert truly believes this, then maybe he should drop out of the Republican party and support Dennis Kucinich for President. (Kucinich favors US withdrawal from NAFTA and the WTO). Both ivory-tower economics AND real life experience show that trade liberalization will lead to the expansion of imports, a decline of domestic import-competing industries, and plant closures, together with all the dislocations that go with it. Yes, and the sad truth is that trade liberalization can and will cause outsourcing.

However, real economics also teaches that reallocations of resources (that's the euphemistic way to say "job losses") are necessary to force improvements in productivity and economic growth so that living standards for all can be raised in the future. Economic theory never said that free trade is painless. The whole truth includes both costs and benefits, both the good and the bad.

Unfortunately, the realities of politics are such that one cannot even suggest that job losses or outsourcing is a necessary component of a healthy economy. Any statement like this brands one insensitive, at best, or a fool, at worst. It also means that politics forces politicians to take public positions that are only partially truthful.

As a spokesperson for the administration, Mankiw enters into the realm of politics. In this realm, the whole truth cannot be spoken. Or if it is, it must be sanitized to such a degree that it becomes almost meaningless. All policies must be described as good for all people, even when they are not. Questions regarding obvious harm coming to people due to current policies or conditions, must be described as temporary or must be deflected by highlighting other policies that will soon offer relief.

Mankiw, like all economists, is accustomed to thinking about the big picture, of seeing the broad implications, both good and bad. When economists compare trade liberalization with alternative policies, they compare all of the good and bad that goes with it, to all the good and bad of the alternatives. Mankiw's role as CEA chairman is to provide this economic point of view to the administration, which is just one input to be weighed along with other political and security considerations in forming policy.

Mankiw should be allowed to express this view freely and without restraint. Of course, he will do so privately, but he should also be allowed to do so publicly. His point of view needs to be conveyed to politicians and the general public. Ignorance of the big picture is simply too widespread.

But, alas, Mankiw's full voice will not be heard in public until he returns to academics. Political realities will force him to express nothing more than sanitized half-truths in the future. Politicians and the public will continue to have an incomplete view of the international economy and will continue to monitor the statements of their opponents in search of anything that looks "too truthful". It's no wonder politicians are regarded with such suspicion.

Last Updated on 1/18/07