The gains from job losses

In 1991, many Indians were terrified that globalisation would cost us millions of jobs. Today, American politicians are terrified that millions of their jobs will be outsourced to India .

What a compliment to our global success! And what a come-uppance for supposed intellectuals who predicted in 1991 that opening up our economy would mean massive unemployment and a lost economic decade.

Amusingly, American politicians are using the same language and metaphors as Indian ones used to. Back in 1991, globalisers like me were castigated by leftist politicians and intellectuals as Mir Jaffars, betraying India to foreigners.

Now John Kerry, leading Democratic candidate in the US primaries, has castigated American outsourcers as Benedict Arnolds (the man who betrayed US forces to the British during the US war of independence). Both accusations represent economic illiteracy, but that has never cramped the style of politicians.

Many states in the US are enacting or considering legislation to curb outsourcing. In this populist heat, a breath of cool sense has come from Gregory Mankiw, Chairman of President Bush’s Council of Economic Advisors.

Mankiw says that outsourcing is good for America ‘s long-run health, and outsourcing service jobs is as logical as outsourcing manufacturing to China . For this, he has been reviled by politicians of all stripes.

Mankiw says, rightly, that US workers need to keep shifting from traditional occupations to new ones thrown up by technical and economic progress. What will those new jobs be?

“I don’t know what those jobs are, any more than people 50 years ago knew that the future of the US was going to be high-tech, biotech, and other jobs that are routine today but were unimaginable a generation ago.”

In India too, the jobs that have come up in computer software and call centres could not have been predicted ten years ago.

Our liberalised economy policy freed entrepreneurs to innovate and come up with new ideas on their own. They created the services revolution that has made India a global power.

Job losses are traumatic in the short run for those losing them. Yet the entire history of human progress is one of lost jobs. If jobs were never lost, we would still be in the stone age.

When electricity was invented, it displaced millions employed in making candles and related components. When the automobile was invented, it displaced millions employed in raising and training horses, making horse-carts and upholstery, iron horseshoes and saddles. Would we be better off preserving those old jobs and banning electricity and autos?

Living standards rise when workers are constantly shifted out of jobs that are less productive and competitive into jobs that are more so.

In the short run this causes much pain, and governments need to create safety nets and retraining to facilitate the shift in employment. But to declare the churning of jobs as undesirable, let alone treason, is myopic and false.

Some say it is one thing for jobs to be lost to new technology, and quite another to be lost to foreign competitors. Not true.

Benefits arise from specialising in competitive lines and outsourcing uncompetitive ones, regardless of whether your competitor is local or foreign. In 1999, the US lost 33 million jobs but created 35 million new ones. That massive churning explains why the US is the most dynamic economy in the world.

Nobody knows how many of the 33 million jobs were lost to technical change, and how many to outsourcing. It does not matter. What matters is that Americans stopped providing goods and services where they were uncompetitive, imported these at lower prices, and moved on to more competitive jobs.

Some of the losers may never regain their original income levels. But job churning ensures that wages and living standards will be much higher for their children than in a stagnant economy where no jobs are lost.

The US lost 2.9 million jobs in the 2001 recession, and job recovery has been slow. So, in an election year, political rhetoric on outsourcing is understandable.

But even if some protectionist barriers come up, they will barely dent outsourcing: the gains are too huge to be ignored.

American companies that do not outsource will be bankrupted by global rivals that do, and bankrupt companies do not employ people.

Mckinsey has calculated that for every dollar of work outsourced, the US gains $1.12-$1.14. The US needs us, even if displaced US workers do not.

The head of the US Democratic Party has lambasted Mankiw, and suggested that he be outsourced to India . A fascinating idea!

The entire work of the US Council of Economic Advisors could be contracted to Indian economists, who could give equally good advice to George Bush at a much lower price. Try me, for starters..

What do you think?