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Gavin Kennedy

From good news coming out of Kenya we go to Canada and get a reality check. In much of Africa, corrupt officials and meddling government ministers (some are both) are obstacles to wealth creation, which keeps the poor, abysmally poor, and for which you do not ‘make poverty history’ by giving such people more ‘aid’ which only perpetuates poverty. In North America we have another problem, this time not from corruption, but from meddling politicians, headline chasing journalists, and gullible victims of demagoguery.

Peter Foster, in the Financial Post (The National Post) writes a brilliant article on “The new hysteria on outsourcing” (4 April) which I commend to you to read. (Peter Foster's association with the Financial Post goes back 25 years. He is the author of eight books, and winner of the National Business Book award and numerous magazine awards. He is currently working on a book on "The Conundrum of Capitalism.")

“Concern about the alleged threat of "offshore outsourcing" -- that manufacturing would increasingly move to China, and services to India -- has inevitably declined from the hysterical levels of three years ago. The issue was big news in the run-up to the 2004 U.S. presidential election. Remember Democratic candidate John Kerry indicting "Benedict Arnold CEOs" who sent "American" jobs overseas? The great media promoter of the outsourcing scare remains CNN's Lou Dobbs, who continues his nightly populist rantings, but hysteria becomes harder to stoke while the U.S. continues to have one of the lowest unemployment rates in the world.

Hillary Clinton and Barack Obama, are listening to a Dr. Blinder, a former vice-chairman of the Federal Reserve, [who] isn't so much a protectionist as an alarmist, but the fact that he is being quoted approvingly by U.S. labour leaders is surely a warning sign.

Dr. Blinder's claim is that offshore outsourcing represents part of a "Third Industrial Revolution" whose uncertain ramifications have to be addressed -- somehow -- by government. His concerns were outlined in an article last year in Foreign Affairs, where he suggested that the impact would be "staggering." The United States had to start preparing, "and fast." Just how was a little more problematic.

Dr. Blinder pointed out that Adam Smith, writing at the beginning of the First Industrial Revolution, did not see what was coming. But Smith would have been the last man to imagine that the future should be constrained by his limited imagination. His eternal insights were about human nature and institutional processes, not about what those processes would produce. Above all, Smith scorned the possibility of government "help" for markets.

Dr. Blinder -- by contrast -- belongs to that school that seems to believe that governments will somehow be rendered competent by the scale of the task facing them: "We can because we must."

He claims that the really big change in the Third Revolution (The First was about the expansion of manufacturing, the Second about the expansion of services) is that being well-educated is no protection. Well, maybe not, if you take note of a recent Wall Street Journal/ NBC News poll that found that only 35% of those with at least a four-year college degree thought "that the U.S. is benefiting from the global economy." But they'd perhaps still be advised to lean on whatever education they have rather than wait for government to lead the way.

Dr. Blinder acknowledges that a number of studies of the outsourcing issue have concluded that the job threat is low. Neverthless he engages in typical economic macromancy, fretting about "reallocating labour from one industry to another," as if such reallocation might not happen without wonkish overseers. Similarly, he writes that "rich countries such as the United States will have to reorganize the nature of work to exploit their big advantage in nontradeable services." But it is not countries that "reorganize work," except in places such as North Korea and Cuba.
Dr. Blinder seems at times to be at war with himself. He admits that: "The market system is very good at making adjustments like these, even massive ones. It has done so before and will do so again. But it takes time and can move in unpredictable ways. Furthermore, massive transformations in the nature of work tend to bring wrenching social changes in their wake."

But he leaps from this simple fact to the conclusion that government can ease transition. He suggests that a bigger and more elaborate social safety net will "ease the pain and, by so doing, speed up the adjustment."

This is simply not true. It may be unfortunate, but there is no spur to adjustment like pain. One suspects that if Dr. Blinder had been in charge of transition at the time of The First Industrial Revolution, it might never have happened.
His most valid -- and worrying -- conclusion is that those who "feel threatened" by offshore outsourcing will become "a potent political force." But they would certainly not be a force for the good.

According to a recent piece in The Wall Street Journal, "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."

Perhaps we might recall why it abated. The Japanese were once alleged to be the masters of politically "managing" trade and markets. They are just emerging from a 15-year slump.

Comment
To say I am surprised at these, apparently, new, remarks by Alan Blinder, is an understatement. When I taught undergraduate economics to an Honours class in the late 70s, I used Dr Blinder’s long essay, “Economics of Public Finance (Studies of Government Finance)” from Brookings as support reading for my public finance specialism and most students found it helpful.

The most telling sentences in what I have quoted from Peter Foster’s article are: “[Adam Smith’s] eternal insights were about human nature and institutional processes, not about what those processes would produce. Above all, Smith scorned the possibility of government "help" for markets.”

What exactly are these siren voices of despair saying; what are their policies that the want governments to pursue? For the issues they raise affect every country in the global market, which gives us quite a few governments to apply them. Once governments get into cycles of protectionist panic (and the furies that go with them) they are likely to make any recession worse than it needs to be and the destruction of wealth creation – the only antidote to poverty in every country – far deeper than they imagine. Their policies lead to self-perpetuating misery for the trivial ends of political advantage.

Smith reserved his deepest contempt for politicians of that ilk who convince gullible legislators to follow their nostrums for protection from the benefits of trade. It is interesting that job ‘losses’ from outsourcing – the so-called export of jobs – are not materialising in the waves of misery predicted.

I am minded of Rudyard Kipling’s lines:

If you can keep your head when all about you
Are losing theirs and blaming it on you”.

I am so sorry to see that Alan Blinder seems to be losing his.

[Read Peter Foster’s article in The Financial Post at: http://www.canada.com/nationalpost/financialpost/story.html?id=85eec8e8-1b87-4a61-a2ce-b3bc0286f8cc]