Ed note: This isn't the only Nobel winning economist out there questioning outsourcing. Columbia U. economist Joseph Stiglitz is too (link to article).

From Ian Fletcher at aea.org:

A Dissenter on Outsourcing States His Case

By ECT News Business Desk
09/07/04 8:44 AM PT

Mainstream economists acknowledge that some people will gain and others will suffer in the short term, but they quickly add that "the gains of the American winners are big enough to more than compensate for the losers." That assumption is "only an innuendo," Samuelson writes. Trade, in other words, does not always work to all parties' advantage. (read more)

At 89, Paul Samuelson, the Nobel laureate in economics and professor emeritus at the Massachusetts Institute of Technology , still seems to have plenty of intellectual edge and ample ability to antagonize and amuse.

His dissent from the mainstream economic consensus about outsourcing and globalization will appear this month in a distinguished professional journal, cloaked in clever phrases and theoretical equations, but clearly aimed at the orthodoxy: Alan Greenspan, chairman of the Federal Reserve; N.Gregory Mankiw, chairman of the White House Council of Economic Advisers; and Jagdish Bhagwati, a leading international economist and professor at Columbia University.

These heavyweights, among others, are perpetrators of what Samuelson terms "the popular polemical untruth."

The Costs of Trade

That untruth, Samuelson asserts in the article for the Journal of Economic Perspectives, is the assumption that the laws of economics dictate that the U.S. economy will benefit in the long run from all forms of trade, including the outsourcing of call-center and software programming jobs abroad.

Sure, Samuelson writes, the mainstream economists acknowledge that some people will gain and others will suffer in the short term, but they quickly add that "the gains of the American winners are big enough to more than compensate for the losers." That assumption, so widely shared by economists, is "only an innuendo," Samuelson writes. "For it is dead wrong about necessary surplus of winnings over losings."

Trade, in other words, does not always work to all parties' advantage, according to Samuelson.

Simplistic Views of Globalization

In an interview last week, Samuelson said he had written the article to "set the record straight" because "the mainstream defenses of globalization were much too simple a statement of the problem."

Samuelson emphasized that his article was not meant as a justification for protectionist measures. Up to now, he said, the gains to America have outweighed the losses from trade, but that outcome is not necessarily guaranteed in the future.

In his article, Samuelson begins by noting the unease many Americans feel about their jobs and wages these days, especially as the economies of China and India emerge on the strength of their low wage rates, increasingly skilled workers and rising technological prowess.

The essay is Samuelson's effort to contribute economic nuance to the policy debate over outsourcing and trade. The Journal of Economic Perspectives, a quarterly published by the American Economic Association, has a modest circulation of 21,000 but it is influential in the economics profession. Indeed, Bhagwati and two other economics professors, Arvind Panagariya of Columbia and T.N. Srinivasan of Yale, have already submitted an article to the journal, "The Muddles Over Outsourcing," that is partly a response to Samuelson.

The Samuelson critique carries added weight given the stature of the author. "He invented so many of the economic models that everyone uses," noted Timothy Taylor, managing editor of the Journal of Economic Perspectives.

Exporting Jobs Lowers U.S. Wages

According to Samuelson, a low-wage country that is rapidly improving its technology, like India or China, has the potential to change the terms of trade with America in fields like call-center services or computer programming in ways that reduce U.S. per capita income. "Being able to purchase groceries 20 percent cheaper at Wal- Mart does not necessarily make up for the wage losses," he said in the interview.

The global spread of lower-cost computing and Internet communications, he noted, could accelerate the pressure on wages across large swaths of the service economy.
"If you don't believe that changes the average wages in America, then you believe in the tooth fairy," Samuelson said.

For his part, Bhagwati does not dispute the model that Samuelson presents in his journal article.

Outsourcing Worries Overblown?

"Paul is great economist and a terrific theorist," he observed. "And in markets like information technology services, where America has a big advantage, it is true that if skills build up abroad that narrows our competitive advantage and our exports will be hit."

But Bhagwati doubts whether the Samuelson model applies broadly to the economy. "Paul and I disagree only on the realistic aspects of this," he said.

The magnified concern, Bhagwati said, is that China takes away most of American manufacturing and India most of high-technology services business. Looking at the small number of jobs actually sent abroad, and based on his own knowledge of developing nations, he concludes that outsourcing worries are greatly exaggerated.