Software, Growth and the Future of the U.S. Economy
Report of the National Academies (excerpted)
Congressional staffers like himself, Mr. Socas stated, had been hearing every day from people who were losing their jobs and who could not afford the luxury of retraining themselves, as they were working two jobs or caring for small children or a sick parent. Such people reported seeing U.S. companies send offshore training and capital, resources that “used to stand behind U.S. workers”; as a result, workers abroad were being armed with all the skills that formerly had allowed U.S. workers to command the world’s highest wages. “U.S. workers were paid more not out of the kindness of the heart of companies,” he declared, “but because they produced more” — an ability now being transferred to their counterparts in other countries.
The “relentless race for profits” might be forcing U.S. companies into this, Mr. Socas conceded. But he recalled the phrase “what’s good for General Motors is good for the country,” which he interpreted as a “bold — and at the time arrogant but valid — statement” of GM’s intention to invest capital and technology in the community of Detroit and its workers “to help them be the best that they could.” In return, the U.S. government gave General Motors tax benefits for R&D and other advantages, such as the benefits of a strong public education system, and as a consequence both General Motors and the United States prospered. The substance of the complaint that the American workers had been bringing to Capitol Hill was: “It seems like this whole deal has been broken.” Since they understand how the world works, being familiar with similar stories from agriculture and manufacturing, they were not so much objecting to the loss of a specific job as to what they saw as evidence that “the game has changed.”
FREE TRADE AND PROTECTIONISM IN U.S. HISTORY
Such economists as Gregory Mankiw, chairman of the President’s Council of Economic Advisers, had reached the conclusion that this change was a good thing, Mr. Socas said. Americans have been raised to believe that free trade is good for the economy in that it will cure displacement and many other ills. But because the country had endorsed free-trade policies over the previous half-century, an important fact was being left out of account: that its history is in fact one of protectionism, that McKinley ran on a protectionist platform, that the Civil War was fought over protection and tariffs.
Free trade is a wonderful policy nevertheless. Offshoring, however, is not free trade, and the current landscape was very different from the one that David Ricardo envisioned when he put forward his Theory of Comparative Advantage. In a nutshell, this theory states that each country should use its internal cost ratios and direct its productive resources to what it does most efficiently. This does not mean that a country needs to produce something at the lowest cost around the world; simply, a country must do something well and direct its resources thereto. The consequence will be that, through trade, world output will increase and, with it, the economic pie.
SEEKING COMPARATIVE ADVANTAGE OR ABSOLUTE ADVANTAGE?
But there is an assumption in Ricardo that, Mr. Socas claimed, nobody ever talks about: that the factors of production remain immobile. If instead they can leave a country, then they will not go from South Carolina to California but from South Carolina to Guangzhou Province or from South Carolina to Bangalore. They will no longer give the United States comparative advantage but will chase what Ricardo called “absolute advantage.” In his famous example of wine and wool trading between Portugal and England, Ricardo lays this out very clearly. But Ricardo notes that the “factors of production” would never leave England, for no English capitalist would ever invest so substantially in another country out of loyalty to his mother country and out of fear for the security of his investments overseas.
Expressing skepticism that anyone in attendance believed this economic patriotism still applies today, Mr. Socas declared: “It certainly didn’t apply in my life when I was in the world of investment banking, it certainly doesn’t seem to be applying with those who talk about corporate strategies today.” Even though that fundamental assumption was no longer valid, advocates of free trade continued to fall back on Ricardo to defend their position. This raised two questions: Was offshoring something old, meaning the latest chapter in the history of free trade, or something brand new, the first manifestation of a globally integrated economy? And, if the latter were true, were the nation’s policies — reflected in everything from the way the Bureau of Labor Statistics collected data to the way corporate accounting was handled — pinned to a vision of trade oriented toward a national system, when in fact companies were oriented towards a global economy? He called the latter “the central political question of our time.”
Suggested Citation: Panel V — Participants’ Roundtable — Where Do We Go from Here? Policy Issues?.” National Research Council. 2006. Software, Growth, and the Future of the U.S Economy: Report of a Symposium. Washington, DC: The National Academies Press. doi: 10.17226/11587.
