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Outsourcing Take this job and ship it

THE hive mind behind the Modeled Behavior twitter feed has been trying to goad economic types into defending outsourcing, now the subject of intense political debate thanks to Mitt Romney's career at Bain Capital. The direct provocation of MB's ire is, I think, a series of posts from Paul Krugman. In one, he writes:

[R]ecently the Washington Post added a further piece of information: Bain invested in companies that specialized in helping other companies get rid of employees, either in the United States or overall, by outsourcing work to outside suppliers and offshoring work to other countries.

The Romney camp went ballistic, accusing the Post of confusing outsourcing and offshoring, but this is a pretty pathetic defense. For one thing, there weren’t any actual errors in the article. For another, it’s simply not true, as the Romney people would have you believe, that domestic outsourcing is entirely innocuous. On the contrary, it’s often a way to replace well-paid employees who receive decent health and retirement benefits with low-wage, low-benefit employees at subcontracting firms. That is, it’s still about redistribution from middle-class Americans to a small minority at the top.

And later he adds:

And this means that Bain’s activities are part of the really big story about America these past three decades, which isn’t about jobs moving overseas, but about the rewriting of the social contract, with income shifted away from ordinary workers and toward the Masters of the Universe.

Those of us who learned our economics in the 1990s remember well when Mr Krugman instead wrote things like this:

[M]oral outrage is common among the opponents of globalization--of the transfer of technology and capital from high-wage to low-wage countries and the resulting growth of labor-intensive Third World exports. These critics take it as a given that anyone with a good word for this process is naive or corrupt and, in either case, a de facto agent of global capital in its oppression of workers here and abroad.

But matters are not that simple, and the moral lines are not that clear. In fact, let me make a counter-accusation: The lofty moral tone of the opponents of globalization is possible only because they have chosen not to think their position through. While fat-cat capitalists might benefit from globalization, the biggest beneficiaries are, yes, Third World workers.

Now, it's possible to read Mr Krugman in a charitable way here. One could argue, as he once did, that globalisation was largely a story about how improved transportation and communication technologies allowed billions of very poor workers to join the global economy and greatly improve their living standards and global welfare in the process. One could say that, economically speaking, this was a good thing for rich economies. But one could add that one side effect of globalisation was a weakening of important countervailing political institutions in rich countries, which removed a check on the concentrated political power of owners of capital. And one could then say that owners of capital have used that political power to systematically chip away at instruments of redistribution. Globalisation represents a Kaldor-Hicks efficiency improvement, in other words, but it takes the machinery of the welfare state to make it Pareto improving. Rather than make sure that such machinery is protected, one could argue, the owners of capital who've gained from globalisation have simply allowed it to rust and decay. Indeed, you could even go so far as to say that by allowing such redistributive engines to fall apart, owners of capital have contributed to growing erosion in support for globalisation. Reckless outsourcers are actually the enemies of liberalisation!

Maybe. But if that's what Mr Krugman means, he should make the case forthrightly. As it is, the posts cited above read like a straightforward argument that outsourcing and offshoring are bad for labour, full stop. And that's wrong. If a job can be done more cheaply, then changing production methods to do the job more cheaply frees up resources that can then be used for other things. Unless there is a macroeconomic policy failure, those resources will be used for other things, ensuring that unemployment doesn't rise. Workers should earn their marginal productivity, and if we're not happy with those wages, we should support redistributive taxation, or identify productivity-enhancing public investments in education or infrastructure. We should not heedlessly create worker cartels that fight with firms over the right to capture rents.

Now I can't say for sure, but I suspect that Mr Krugman might respond to that argument by saying that it's hopelessly naive. I think he might own up to being radicalised by policy over the past decade or so and say that he's discovered that economic policymaking, as practiced in America, is much different than what textbooks suggest ought to occur. Political economy and bargaining power are everything, he might argue, and the inefficiencies associated with a class-conscious, organised labour force are a price worth paying for a check on the class-conscious wealthy who are all too willing to use the political system to protect their interests and gobble up rents. Just look at the enormous wealth and waste in finance, he would probably shout, and the appalling, intimate connections between Wall Street and Washington.

And honestly, I have some sympathy for that perspective. But here's where I differ from that imagined Paul Krugman. First, I think the process of globalisation, which has moved billions of people out of dire poverty, is worth defending loudly and proudly, even if it came along with a costly side order of dysfunctional American politics and policymaking. We have a moral responsibility to be very clear about what aspects of globalisation we think should change and why, because the cost of encouraging a broader backlash against the process of liberalisation, with all the great good it generates, is simply too high.

And second, it seems to me that an effort to restore the bargaining power of labour by having a showdown over outsourcing or by trying to reinvigorate the labour movement is destined for failure. The rise in worker bargaining power that occurred in the first half of the last century was a product of social movements, but those movements were enabled by the production technologies of the time, and it is the dissolution of those production technologies that has been most responsible for the weakening of labour's position. As Mr Krugman understands very well (his work on the topic helped earn him a Nobel Prize) the transportation technologies of the industrial revolution dictated in favour of large, industrial agglomerations. Geographic concentration enabled worker solidarity, and the benefits of the agglomeration meant that employers couldn't credibly threaten to move elsewhere. But the days of the large, urban industrial agglomeration are gone.

If labour is to capture more of the producer surplus—or have more of a say in Washington, for that matter—it will be as a result of a social evolution that matches the production technologies of today. That's a much, much harder process to think about and talk about than a call for the return of the glory days of labour. It's certainly not the sort of thing that lends itself to deployment in the binary dialogue of a presidential campaign. The truth is that Bain didn't really do anything wrong by outsourcing. It could have not done it, but that would primarily have created a profit opportunity for someone else. It may say something about Mitt Romney that he was the man who opted to take the profits. But the nature and distribution of economic activity is about the interaction between technology and institutions, and not about whether an individual capitalist tries to be fair or not. It's not Mitt Romney's fault that the median worker hasn't gotten a real pay increase in over 30 years. And Mr Romney's Bain experience might cost him the election, but that's not going to bring real pay increases back, either.

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