[DEBATE] : Wall Street Journal: Pain From Free Trade Spurs Second Thoughts

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Pain From Free Trade Spurs Second Thoughts Date: 	Wed, 28 Mar 2007 
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For decades, Alan S. Blinder -- Princeton University economist, former 
Federal Reserve Board vice chairman and perennial adviser to Democratic 
presidential candidates -- argued, along with most economists, that free 
trade enriches the U.S. and its trading partners, despite the harm it 
does to some workers. "Like 99% of economists since the days of Adam 
Smith, I am a free trader down to my toes," he wrote back in 2001.

Politicians heeded this advice and, with occasional dissents, steadily 
dismantled barriers to trade. Yet today Mr. Blinder has changed his 
message -- helping lead a growing band of economists and policy makers 
who say the downsides of trade in today's economy are deeper than they 
once realized. [Alan Blinder]

Mr. Blinder, whose trenchant writing style and phrase-making add to his 
influence, remains an implacable opponent of tariffs and trade barriers. 
But now he is saying loudly that a new industrial revolution -- 
communication technology that allows services to be delivered 
electronically from afar -- will put as many as 40 million American jobs 
at risk of being shipped out of the country in the next decade or two. 
That's more than double the total of workers employed in manufacturing 
today. The job insecurity those workers face today is "only the tip of a 
very big iceberg," Mr. Blinder says.

The critique comes as public skepticism about allowing an unfettered 
flow of goods, services, people and money across borders is 
intensifying, including some Republicans as well as many Democrats.
(See related article.1) The rethinking is helping free-trade foes, 
underscoring the urgency of helping those battered by globalization and 
clouding the outcome of a hot debate: Should government encourage forces 
of globalization or try to restrain them?

Some trade critics are bothered by the disappointing performance of 
Latin America since it slashed tariffs in the 1980s and 1990s while more 
protectionist China and Southeast Asia sped ahead. Others are struck by 
the widening gap between economic winners and losers around the globe. 
The rethinking on trade issues is the most significant since the early 
1990s when many in the U.S. worried that Japan would overtake the U.S., 
a fear that has since abated. CHARTBOOK

[go to chartbook]2 Huge changes in the global economy are challenging 
long-held beliefs about free trade. See related data on jobs at risk, 
offshoring's impact and more.3 QUESTION OF THE DAY

? What's the net effect of free trade on U.S. employment?4


Some critics are going public with reservations they've long harbored 
quietly. Nobel laureate Paul Samuelson, whose textbook taught 
generations, damns "economists' over-simple complacencies about 
globalization" and says rich-country workers aren't always winners from 
trade. He made that point in a 2004 essay that stunned colleagues. 
Lawrence Summers, a cheerleader for trade expansion as Clinton Treasury 
secretary, says people who argue globalization is inevitable and 
retraining is enough to help displaced workers offer "pretty thin gruel" 
to the anxious global middle class.

Others are finding the debate moving closer to positions they've had for 
years. Ralph Gomory, International Business Machines Corp.'s former 
chief scientist who now heads the Alfred P. Sloan Foundation, says that 
changing technology and the rise of China and India could make the U.S. 
an also-ran if it loses many of its important industries. Harvard 
economist Dani Rodrik says global trade negotiations should focus on 
erecting new barriers against globalization, not lowering them, to help 
poor nations build domestic industries and give rich nations more time 
to retrain workers.

Mr. Blinder's job-loss estimates in particular are electrifying 
Democratic candidates searching for ways to address angst about trade. 
"Alan, because of his stature, provided a degree of legitimacy to what 
many of us had come to feel anecdotally -- that the anxiety over 
outsourcing and offshoring was a far larger phenomenon than traditional 
economic analysis was showing," says Gene Sperling, an adviser to 
President Clinton and, now, to Hillary Clinton. Her rival, Barack Obama, 
spent an hour with Mr. Blinder earlier in this year. 'WE NEED TO THINK 
LONG AND HARD'

[blinder excerpts]5 Alan S. Blinder still considers himself a free 
trader but now warns loudly that the downsides of trade are deeper and 
longer-lived than most free traders say. Read excerpts of his writings6 
and speeches over the past 20 years.
* * * GOMORY AND RODRIK: SKEPTICS

For years, Ralph Gomory and Dani Rodrik were on the outs with the 
economic establishment because they argued that free traders greatly 
underestimated the costs of trade liberalization. Now their views are 
attracting greater interest. Take a look7 at their iconoclastic views on 
trade.

Mr. Blinder's answer is not protectionism, a word he utters with the 
contempt that Cold Warriors reserved for communism. Rather, Mr. Blinder 
still believes the principle British economist David Ricardo introduced 
200 years ago: Nations prosper by focusing on things they do best -- 
their "comparative advantage" -- and trading with other nations with 
different strengths. He accepts the economic logic that U.S. trade with 
large low-wage countries like India and China will make all of them 
richer -- eventually. He acknowledges that trade can create jobs in the 
U.S. and bolster productivity growth.

But he says the harm done when some lose jobs and others get them will 
be far more painful and disruptive than trade advocates acknowledge. He 
wants government to do far more for displaced workers than the few 
months of retraining it offers today. He thinks the U.S. education 
system must be revamped so it prepares workers for jobs that can't 
easily go overseas, and is contemplating changes to the tax code that 
would reward companies that produce jobs that stay in the U.S.

His critique puts Mr. Blinder in a minority among economists, most of 
whom emphasize the enormous gains from trade. "He's dead wrong," says 
Columbia University economist Jagdish Bhagwati, who will debate Mr. 
Blinder at Harvard in May over his assertions about the magnitude of job 
losses from trade. Mr. Bhagwati says that in highly skilled fields such 
as medicine, law and accounting, "If we do a real balance sheet, I have 
no doubt we're creating far more jobs than we're losing." THE OTHER SIDE

[the other side] Criticisms of Blinder's trade theories include: ? 
N.Gregory Mankiw, former chairman of the Bush Council of Economic 
Advisers, and Phillip L. Swagel, currently assistant Treasury secretary 
for economic policy, "The Politics and Economics of Offshore 
Outsourcing,"8 2005

? McKinsey Global Institute, "U.S. Offshoring: Rethinking the 
Response,"9 2005

? Jagdish Baghwati et. al, "The Muddles Over Outsourcing,"10 2004


Mr. Blinder says that misses his point. The original Industrial 
Revolution, the move from farm to factory, unquestionably boosted living 
standards, but triggered an enormous change in "how and where people 
lived, how they educated their children, the organization of businesses, 
the form and practices of governments." He says today's trickle of jobs 
overseas, where they are tethered to the U.S. by fiber-optic cables, is 
the beginning of a change of similar dimensions, and American society 
needs similarly far-reaching changes to cope. "I'm trying to convince a 
bunch of economists who are deeply skeptical and hard to convince," he 
says.

Mr. Blinder, 61 years old, a Princeton college graduate with a Ph.D. 
from Massachusetts Institute of Technology, has been on the Princeton 
faculty since 1971. He is known for his work on macroeconomics and a 
liberal bent captured by the title of a 1987 book, "Hard Heads, Soft 
Hearts: Tough-Minded Economics for a Just Society." When he talked about 
trade in the past, Mr. Blinder emphasized its great benefits. His 
undergraduate economics textbook, first published in 1979, says "the 
facts are not consistent" with the popular notion that "cheap foreign 
labor steals jobs from Americans and puts pressure on U.S. businesses to 
lower wages."

When Mr. Blinder went to Washington in 1993 to join President Clinton's 
Council of Economic Advisers, he became even more convinced of the 
benefits of free trade. He saw steel, aluminum and farming lobbyists 
fight for export subsidies or protection from imports, and then passing 
the costs to consumers. "I came out a much more radical free trader than 
I went in," he says.

As a Clinton aide, he helped sell the North American Free Trade 
Agreement with Mexico and Canada, although he says he disagreed with the 
administration pitch that it would create jobs in U.S. Economic theory 
teaches that trade changes the types of jobs in an economy, not the 
overall number. But he bowed to Mr. Clinton's political savvy. "If he 
had left the salesmanship to me, Nafta would have failed," he says.

Mr. Blinder left the White House after 18 months for the Fed in 1994, 
and immediately was mentioned as a possible successor to Alan Greenspan. 
He left in 1996 and returned to Princeton, where he still teaches 
introductory economics. Six years ago, he cashed in on his prominence by 
joining former Clinton banking regulator Eugene Ludwig in a firm that 
advises troubled banks and another that deciphers the Fed and other 
central bankers for a hefty price. [Blinder] Alan S. Blinder in 
Philadelphia

At Princeton, he began to reassess some of his views on trade. Visiting 
the yearly business gabfest in Davos, Switzerland, in January 2004, he 
heard executives talk excitedly about moving jobs overseas that not long 
ago seemed anchored in the U.S. [Table]

He was silent when his former Princeton student, N. Gregory Mankiw, then 
chairman of President Bush's Council of Economic Advisers, unleashed a 
political firestorm by reciting standard theory but appearing 
indifferent to pain caused to those whose jobs go overseas. "Does it 
matter from an economic standpoint whether items produced abroad come on 
planes and ships or over fiber optic cables?" Mr. Mankiw said at a 
February 2004 briefing. "Well, no, the economics is basically the 
same....More things are tradable than...in the past, and that's a good 
thing."

Mr. Blinder says he agreed with Mr. Mankiw's point that the economics of 
trade are the same however imports are delivered. But he'd begun to 
wonder if the technology that allowed English-speaking workers in India 
to do the jobs of American workers at lower wages was "a good thing" for 
many Americans. At a Princeton dinner, a Wall Street executive told Mr. 
Blinder how pleased her company was with the securities analysts it had 
hired in India. From New York Times' columnist Thomas Friedman's 2005 
book, "The World is Flat," he found anecdotes about competition to U.S. 
workers "in walks of life I didn't know about."

Mr. Blinder began to muse about this in public. At a Council on Foreign 
Relations forum in January 2005 he called "offshoring," or the exporting 
of U.S. jobs, "the big issue for the next generation of Americans." 
Eight months later on Capitol Hill, he warned that "tens of millions of 
additional American workers will start to experience an element of job 
insecurity that has heretofore been reserved for manufacturing workers."

At the urging of former Clinton Treasury Secretary Robert Rubin, Mr. 
Blinder wrote an essay, "Offshoring: The Next Industrial Revolution?" 
published last year in Foreign Policy. "The old assumption that if you 
cannot put it in a box, you cannot trade it is hopelessly obsolete," he 
wrote. "The cheap and easy flow of information around the globe...will 
require vast and unsettling adjustments in the way Americans and 
residents of other developed countries work, live and educate their 
children."

In that paper, he made a "guesstimate" that between 42 million and 56 
million jobs were "potentially offshorable." Since then he has been 
refining those estimates, by painstakingly ranking 817 occupations, as 
described by the Bureau of Labor Statistics, to identify how likely each 
is to go overseas. From that, he derives his latest estimate that 
between 30 million and 40 million jobs are vulnerable.

He says the most important divide is not, as commonly argued, between 
jobs that require a lot of education and those that don't. It's not 
simply that skilled jobs stay in the US and lesser-skilled jobs go to 
India or China. The important distinction is between services that must 
be done in the U.S. and those that can -- or will someday -- be 
delivered electronically with little degradation in quality. The more 
personal work of divorce lawyers isn't likely to go overseas, for 
instance, while some of the work of tax lawyers could be. Civil 
engineers, who have to be on site, could be in great demand in the U.S.; 
computer engineers might not be.

Mr. Blinder's warnings, and his numbers, are now firmly planted in the 
political debate over trade, and sometimes invoked by those whose views 
are distinctly more protectionist than Mr. Blinder. Richard Trumka, for 
instance, secretary-treasurer of the AFL-CIO, cited them in an 
indictment of "free market fundamentalism" and a call for "more balanced 
trade policies that protect the rights of workers."

Diana Farrell, head of the McKinsey Global Institute, a 
pro-globalization think-tank arm of the consulting firm that has done 
its own analysis of vulnerable jobs, calls Mr. Blinder "an alarmist" and 
frets about the impact he is having on politicians, particularly the 
Democrats who see resistance to free trade as a political winner. She 
insists many jobs that could go overseas won't actually go.

Ms. Farrell says Mr. Blinder's work doesn't take into account the 
realities of business which make exporting of some jobs impractical or 
which create offsetting gains elsewhere in the U.S. economy. He counters 
he is looking further into the future than McKinsey -- 10 or
20 years instead of five -- and expects more technological change than 
the consultants do "even without the Buck Rogers stuff."

Mr. Blinder says there's an urgent need to retool America's education 
system so it trains young people for jobs likely to remain in the U.S. 
Just telling them to go to college to compete in the global economy is 
insufficient. A college diploma, he warns, "may lose its exalted 'silver 
bullet' status." It isn't how many years one spends in school that will 
matter, he says, it's choosing to learn the skills for jobs that cannot 
easily be delivered electronically from afar.

Similarly, he says any changes to the tax code should encourage 
employers to create jobs that are harder to perform overseas. While Mr. 
Gomory, the former IBM chief scientist, suggests tax breaks for 
companies that create "high value-added jobs," Mr. Blinder says the 
focus should be on jobs with person-to-person contact, regardless of pay 
and skill levels -- from child day-care providers to physicians.

Mostly he wants to shock politicians, policy makers and other economists 
into realizing how big a change is coming and what new sectors it will 
reach. "This is something factory workers have understood for a 
generation," he says. "It's now coming down on the heads of highly 
educated, politically vocal people, and they're not going to take it."

Write to David Wessel at david.wessel at wsj.com11 and Bob Davis at 
bob.davis at wsj.com12 URL for this article: 
http://online.wsj.com/article/SB117500805386350446.html

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