Friday, July 20, 2012

Outsourcing and the Campaign

I've had a little time to reflect on the Bain-outsourcing-Romney stuff. So here are a couple of observations, which I share with the Free Exchange editors at the Economist.
(1) Outsourcing is good on the net, not just for the country receiving the investment, or even some vague global sense. It is welfare-improving for the US in the aggregate.
(2) Outsourcing can be pareto-improving, meaning that not only does it increase income, wealth and efficiency on average, but it is possible to ensure that no one is worse off.
Point (1) implies that, even if you support President Obama, the criticism of outsourcing by itself is misplaced. That includes this criticism by Paul Krugman. We should be outsourcing when it is profitable to do so.
Point (2) is tougher. Basically, it qualifies the political feasibility of (1) by implying that, in order to bring everyone on board with free trade, outsourcing, etc., you need pretty extensive structural adjustment assistance programs also known as the Welfare State. Here, as the Economist correctly points out, we could learn a little something from the 1997 incarnation of Professor Krugman when he says that voters aren't nuanced enough in their understanding of trade and public policy to grasp this subtlety - or care. They know jobs are gone, and US companies are growing operations in China. They win, I lose.
The Economist article points out that Obama could come out with a more nuanced and correct argument. But really, either candidate could take up this mantle and make it part of their platform without abandoning their core values. Mr. Romney, for his part could say, "yes, I am for free markets and outsourcing, and the fact that it puts some folks out of work only highlights the need to reform existing welfare programs so they help people who really want to work." Mr. Obama, instead of spewing protectionist garbage could say, "see, people are hurt by some aspects of free markets and we need social programs like my health care law to make markets work better for everyone" (he could even throw in some of his "shared prosperity" catchphrases).
But neither candidate is doing this. Obama is pretending to be protectionist (when we all know he won't govern that way); Romney is acting like the attacks are simply unfair, which doesn't seem to help much - do we really want a crybaby for a President? Obama's strategy, sadly, is the politically effective one, and I expect to see much more of it through November.

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