Sunday, May 06, 2007

The Blinder Approach

OK, Alan Blinder, there’s something here I don’t understand. I get the point that things may get tough for a lot of American workers over the next 30 years. I get the point that this makes the case for providing better social insurance stronger than it used to be. I get the point that it makes the case for encouraging more research and development stronger than it used to be. I get the point that it makes the general case for facilitating more and better education and training stronger than it used to be. But here’s what I don’t get:
…we need to rethink our education system so that it turns out more people who are trained for the jobs that will remain in the United States. … many electronic service jobs will move offshore, whereas personal service jobs will not. Here are a few examples. Tax accounting is easily offshorable; onsite auditing is not. Computer programming is offshorable; computer repair is not. Architects could be endangered, but builders aren't. Were it not for stiff regulations, radiology would be offshorable; but pediatrics and geriatrics aren't. Lawyers who write contracts can do so at a distance and deliver them electronically; litigators who argue cases in court cannot.
So apparently we want to train people for onsite auditing, computer repair, building, pediatrics, geriatrics, litigation, and similar occupations. But why? Don’t we already have enough – or at least almost enough – auditors, computer repair people, builders, pediatricians, geriatricians, and litigators? Is there any reason to expect that offshoring will increase demand for those occupations? What model do you have in mind wherein foreign competition increases the demand for non-tradable services?

In my crass Mundell-Fleming conception, here’s what happens when offshoring occurs. Suppose a lot of people from India learn to do American tax accounting, computer programming, architecture, and so on, undercutting American service producers. A bunch of American accountants, programmers, architects, and such will lose their jobs. The Fed will notice the slack labor markets and cut interest rates. As a result, the dollar will depreciate, causing an increase in demand for some other American products. Which products, exactly, we don’t know, but they have to be products that are exportable – not auditing, computer repair, and building, and pediatrics. There will be excess demand for certain kinds of workers, but not, ultimately, for the categories of workers whose jobs can’t move offshore.

I grant you that we do not live in a small country with perfectly substitutable assets, so things won’t happen exactly the way I suggested. There will be a temporary demand for certain non-tradable services – specifically the ones that are interest-rate sensitive, like building. That, in fact, is already happening, or perhaps has just finished happening. But today I think one might be rather glad to have passed up the opportunity to train for a job in the construction industry. In the longer run, surely we cannot expect that foreigners will be willing to finance ever higher amounts of non-tradable services for Americans. Perhaps we can maintain a large trade deficit, but surely we can’t keep running ever larger trade deficits, to create ever greater demand for domestic non-tradable services.

So do we need to rethink our educational system? Perhaps, but as to how, exactly, I have no idea. I don’t understand why we would want to restructure it to turn out more people trained for non-tradable service jobs.

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21 Comments:

Blogger Biomed Tim said...

Good post. You made me want to review the IS/LM model...until I realized what Dr. Blinder truly meant:

He wants me to be a barber!

But then I think Dr. Blinder might be underestimating technology; I'll be safe as a barber so long as they don't invent a haircutting robot.

In reality, we already have robots that can perform surgeries. (not on their own) It wouldn't be hard to imagine that one of those robots can be remotely-controlled (from off-site) in the near future. Who's to say that surgeries won't be tradable? Will anything remain "on-site," and safe from global competition? Perhaps not.

Tue May 08, 04:29:00 AM EDT  
Anonymous Don Quijote said...

In my crass Joe-Average American conception, here’s what happens when offshoring occurs. Suppose a lot of people from India learn to do American tax accounting, computer programming, architecture, and so on, undercutting American service producers. A bunch of American accountants, programmers, architects, and such will lose their jobs. They will also lose their health-benefits and their pensions, and will be unable to get new jobs at the same wage rate. After this happens to them a couple of times they will lose their house due to their inability to pay their mortgage. Having lost all of their assets and being in hock up to their eyeballs, being unable to declare bankruptcy and get out from under their debt, they will move into the underground economy.

Tue May 08, 07:13:00 AM EDT  
Anonymous Anonymous said...

Massage therapists can still work (but it's a real tough job!) and university teaching can to some extent be exported.

Tue May 08, 08:49:00 AM EDT  
Blogger happyjuggler0 said...

What model do you have in mind wherein foreign competition increases the demand for non-tradable services?

Nice catch.

By the way, trade works both ways, and I can see how architects in the US might "take" the jobs in poor countries thanks to the internet and actually prevent an indigenous labor force from growing much.

I think the programmers losing their jobs is a red herring, at least to a huge extent. Wages are crawling up a tiny bit in the US while wages are soaring in India's IT industry. Put the two together and they don't neatly support the "US IT workers are doomed" thesis. Indeed a hypothesis that better fits the facts is that the worst is over since wages in India for IT workers are rising and causing the gap to narrow, thus decreasing the benefits of offshoring, and hence its accompanying risk to US IT workers. Across the former communist countries in Europe the wage gap is negligible for IT workers as they have already been bid up to a huge extent. Demand for IT workers overall need not be static.

As poorer countries eventually get strong intellectual property rights and enforcement, US exports will rise in such industries as pharma, software and entertainment. This by the way won't raise domestic (i.e. US) prices in those export industries the way Dani Rodrik fears since essentially the entire costs are essentially in R&D and unit expansion costs are negligible and easily ramped up.

Teach your children to work in IT, not to avoid it for computer repair work for pc's that get thrown out when they are obsolete in a few years anyway, noting for those who haven't been in the market in a while that PC prices are dirt cheap and getting cheaper.

Skilled manufacturing may be an issue, but that is only because unions have extracted rents far in excess of competitive wages and this is what pushes companies to offshore and forgo their valuable plant and trained employees that are expensive to replace. GM and Ford may send work to Mexico, but Caterpillar, Toyota, Honda, Nissan etc. aren't shutting down US capacity. The difference? Wages in line with replacement costs.

Unskilled (in relative terms anyway) manufacturing like textiles are a lost cause.

If Blinder wants to help US workers he can figure out how to accelerate intellectual property rights in China, India and elsewhere. He can also figure out how to make Michigan and Ohio right-to-work states for their own good before it is too late. They have lots of empty factories while others are building new factories in Texas and Mississippi, and lots of already trained employees while others are being trained elsewhere. What horrible waste thanks to union laws.

Tue May 08, 12:24:00 PM EDT  
Anonymous Lord said...

surely we cannot expect that foreigners will be willing to finance ever higher amounts of non-tradable services for Americans

Maybe not until the end of history, but we can expect that for the next several decades. After China and India will come more emerging markets around the globe. The time for tradeables will come, but not soon enough to begin educating masses for them. Nontradeables will dominate for a long time to come.

Tue May 08, 01:27:00 PM EDT  
Blogger knzn said...

Lord, in order for our nontradable sector to expand (relative to GDP) we need not only to keep up the current (incredibly high, by any former standard) rate of financing but to increase it (relative to GDP) over time. Maybe we can go a little beyond where we are now, but it just doesn’t seem plausible to me that we can keep increasing our rate of financing higher and higher, piling up bigger and bigger increments (relative to GDP) to our national indebtedness each year. It will become quite clear to China (and India and Brazil and so on) that it’s not in their interest to keep lending. They’ll try to buy Euros and Yen and Sterling and Swiss Francs instead, and eventually, long before several decades are up, they’ll let their currencies appreciate and recognize that they need to use fiscal policy as well as export policy to stimulate their economies.

Tue May 08, 02:30:00 PM EDT  
Anonymous Anonymous said...

Don't hold your breath.

Wed May 09, 02:44:00 PM EDT  
Blogger save_the_rustbelt said...

"...so things won’t happen exactly the way I suggested...."

That is an understatement. Huge!

Mon May 21, 08:31:00 PM EDT  
Anonymous Anonymous said...

Education change comes into play when the children of the laid off choose their occupations. They have access to the experience of their mothers, fathers, friends and relatives. This is what happened in the IT business. Now Bill Gates and crew are compaining that they need more H1Bs to fill the gap that they created. In our area it is happening in the health care professions where slots in nursing programs were cut years ago and now we are reverse offshoring nurses and other health care occupations.
As I see it there is a problem of how we replace mass employment occupations with high skills occupations. Not everyone can run a hedge fund.

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