An End to Comparative Advantage

This column is a follow up to the Brookings Institute debate I posted previously, or rather that debate was a follow up to this article. Written by Democratic Senator from New York, Charles Schumer and Reagan administration asst. sec. of the Treasury, Paul Craig Roberts, the article presents a challenge to the idea that comparative advantage is driving global trade, and as a consequence a challenge to the entire Ricardoan theory of the benefits of free trade. I have been tremendously impressed with Schumer, both in the article and in the discussion. He provides a perfect example of a national political figure driving forward a critical public debate on a serious and mature level. Unfortunately I'm not sure his efforts have drawn much attention.

One place where Schumer's column has drawn notice is the Von Mises Institute, which has written a rebuttal. Now, I'm not an economics professor, as the author George Reisman is, but it looks like a fairly weak rebuttal to me. The response is that sure US wages will drop rapidly, but the shift of work to places with cheaper labor will drive value, and the cost of goods will fall faster than income, making Americans wealthier in terms of "riches". Comparative advantage? Bah, who needs it. Additionally he makes a rather specious argument that all of the capital being spent overseas to outsource ends up being reinvested in the US which will necessarily mean that US wages will not fall. I think there are a number of significant counters to this view.

First, is that his last point on wages is fairly silly. What goods and services will this money be purchasing to bring it back to the US? By his own argument, pretty much all of the work that will be left here will be services provided to Americans, which obviously doesn't hold much value to customers overseas. The other option, which is actually what mostly happens now, is that it returns to invest in the US, typically in government bonds. It is a huge leap to assume that this patter will continue as the US economy bleeds productive capacity and the dollar drops like a rock.

So wages will drop. The next item to consider is that not everything will be outsourced. The vast bulk of health care work necessarily must be done locally. These costs wouldn't fall, and in fact are currently spiralling upwards. Many other services would also not benefit from outsourcing (plumbers, auto mechanics, lawyers, etc). While workers who saw their wages drop precipitously may or may not see even more precipitous drops in the costs of some of their expenses (has the price of Nikes dropped since they moved to sweatshop labor?), they would likely find the cost of these static expenses to be crippling. I'm sure Reisman would posit some major shifts in the distribution of the labor force would magically resolve this problem, but that leads me to my next point.

Reisman suffers from the perenial sickness of economists, the inability to see past pretty numbers in a spreadsheet to the human implications beneath them. He could use a good strong shot of Keynsian reality. Massive movements of jobs out of the country and massive movement of workers from their current profession into some sort of fallback position doesn't happen by the turning of a dial on a switchboard. Even relatively small structural changes can send shockwaves of instability through an economic system. And what he suggests is by no means a small structural change. This massive churn of displaced workers comes with a tremendous human cost as our country has a severely inadequate support network for handling and retraining these out of work laborers. Additionally the dire damage to economic sectors being moved overseas cannot help put place serious drag on areas of the economy not directly affected. The economy is a tightly woven network of interdepencies underlaid from top to bottom by mass psychology. Uncertainty and turmoil breed weakness. The formulas say things will work out ok in the end, and eventually they probably would. But in the meantime there will be a lot of pain and suffering, and that is precisely what Schumer is rightly worried about.