February 22, 2004

Legitimate Reasons to Hate Outsourcing

The Angry Economist thinks that reactions to George Mankiw's endorsement of outsourcing are a litmus test of economic literacy. I think he's mostly right but is missing a significant point. Not everything is economics and a large portion of the discomfort with outsourcing derives from noneconomic sources.

A society is not all dollars and cents but is also based on social relationships that have value outside an economic system. The adjustments that must be borne in a dynamic economy create social costs and there is nothing wrong with being unhappy about the situation. The solution is in easing transitioning costs to new jobs and creating social support networks so that flexibility is enhanced. You can have a heart and assist transitions into new fields without being economically illiterate.

Another point that is appropriate is that outsourcing related job losses are not entirely related to comparative advantage but to an artificial economic intervention on the part of other countries to absorb surplus labor by importing jobs and exporting wealth to the US.

Now Adam Smith was right to say that if your neighbor is chopping off his nose to spite his face, it ultimately makes no sense to do the same. But the political interventions of others to lower their currencies and artificially maintain trade surpluses with the US result in more adjustments than would otherwise be the case in a normal free market international system.

These are unfriendly acts and while not a legitimate cause of war, should not pass by without notice and without reaction by our foreign policy establishment. The key is to keep the reaction outside the economic sphere so we do not chop off our own noses out of spite.

Posted by TMLutas at February 22, 2004 02:26 PM