Think Globally, Act Locally

By Jyoti Thottam

Near the middle of a three-hour round table on globalization that touched on innovation in medieval China, the impact of Sept. 11 on graduate engineering programs and India's market for software, New York University professor WILLIAM BAUMOL offered a much needed reality check: "The fundamental issue that we're losing in this discussion is, Is outsourcing bad for America? Is globalization good or bad for America?" Baumol, along with his fellow panelists on TIME's Board of Economists--RON HIRA of the Rochester Institute of Technology, CATHERINE MANN of the Institute for International Economics and MATTHEW SLAUGHTER of the Tuck School of Business at Dartmouth--proceeded to delve into that hotly contested question. Under prodding from TIME's JYOTI THOTTAM, the panel wrestled with issues of policy, politics and economic philosophy, sometimes clashing sharply. But in the end they agreed on a sobering call to action. The future of U.S. competitiveness in a globalized economy, they argued, depends on helping American workers through a period of historic transition.

TIME: Outsourcing has really dominated the economic press this year. What issues in the debate have been ignored?

CATHERINE MANN: The gains from globalization are very large and very real. Of course, the adjustment costs associated with getting these gains are coming from firms closing, from workers having to get new jobs. Historically, these adjustment costs have tended to be discounted. We can no longer afford to ignore them. We must address them explicitly. Rising wage disparities tell us something about where policies should be directed.

WILLIAM BAUMOL: There is a very clear possibility that the common man and woman's view is right: that [economic] catch-up in China may lead to a lower level and rate of growth of GDP per capita in the U.S. I am not advocating tariffs. We are so much richer than China that it may be desirable for us to make a modest sacrifice to raise their standards of living. But better still is for us to take measures that will be advantageous both to China and to us. It is obscene for us to ignore the effects [of outsourcing] on those who are hurt by it. Surely we are rich enough as a nation not to leave the ones with obsolete skills, those who are hurt by technological change and globalization, to their fate.

RON HIRA: Let me give you my take on outsourcing. First, how much of it is going on? Really, no one knows. Companies are very reluctant to reveal how many jobs they've eliminated here in favor of moving work offshore. The government is not collecting the data, and I see this as a major failure. We do know that it's not insignificant, and it's accelerating.

MANN: We can't on one hand say we don't know how big outsourcing is but on the other say it's accelerating and therefore we ought to worry about it.

MATTHEW SLAUGHTER: There is something lost in the discussion about trying to identify the number of jobs lost to outsourcing. Counting jobs in these snapshots misses the point. Globalization for the U.S. economy continues to create very large gains, but those gains don't accrue to every single worker. There's too much focus [on] policy solutions for those directly impacted. Given the fluidity in the labor market, these pressures are really spread economywide.

MANN: The question is, What policies do we have to have in place to address people who lose their jobs and won't ever get another one in the same industry?

TIME: Will historians look back at this moment and say this is the end of American economic leadership?

MANN: The United States, for a very long time, thought it could get by by being pretty good at everything it does. An athlete with great talent who doesn't train is ultimately going to be caught by somebody who has less talent but better training. We don't get to make the globalization choice. We do get to make the choice about whether or not we change.

SLAUGHTER: I think we're at a really important point. An important political decision needs to be made about how much we're going to allow this globalization of industries and labor forces to continue. We've got the capacity now to globalize production in a much wider range of economic activities. When I go to my dentist's office, I look at the wall behind the receptionist, and it's all these paper files. That's all going to change. Maybe some of that will get digitized, maybe some will go to India or China or God knows where. It's like manufacturing back in the 1980s.

TIME: What does it mean when, say, R. and D. can be done all over the world and innovations are so rapidly shared?

SLAUGHTER: Innovation in services, like leisure and hospitality and education, is not the classic idea of guys in labs with test tubes. To have that kind of innovation, you need educated, experienced, motivated workers. So, are we cranking out these kinds of workers in the U.S.? Income inequality across skills--the earnings of a college graduate relative to a high school graduate--is widening. The really highly skilled group, they've had pretty good real wage growth in the last three or four years. It's everyone else that's had virtually no real wage growth.

HIRA: We have to shift our idea of innovation from company-centric views to workers. We need to think about innovation in terms of a healthy science and engineering labor market in the U.S. How do we get there?

SLAUGHTER: One thing that's been completely lost is that the labor force is going to grow much more slowly. That's largely determined by the population. So the overall growth of the U.S. labor force in the next 20 years is going to be half of what it was in the previous 20. When you think about where in the U.S. economy we're going to get these kinds of highly skilled workers, suddenly you need to be talking about immigration. Yet in the post-9/11 world, U.S. immigration policy has gotten more restrictive than open.

TIME: So why should we care if smart kids can't get into this country to go into graduate programs?

SLAUGHTER: Because these are the smart kids that drive innovation. But with the rising global engagement of China and India, these students could have better options back in their home countries.

MANN: Multinationals are already going abroad for new ideas about how to get the mouse. Why are they going there?

BAUMOL: As far as innovations quickly crossing borders, that's essential for us all, because that's the way of eliminating obselescence quickly. But I worry about government support of basic research, reduction in private spending on R and D.

HIRA: I don't see R. and D. as a silver bullet. We increase R.-and-D. spending 10% or 15%, it's not going to create lots of new jobs. If it does create innovations, it's not clear that the spillover benefits of making those products will be done by U.S. labor.

TIME: Is there a sense of urgency that these issues really have to be dealt with?

HIRA: So many people have been arguing that this is all very good for us, it's really taken away any sense of urgency. We don't have good practical solutions.

MANN: I disagree with you. Labor economists know a lot about how to promote skills evolution in the face of change. We know a lot about re-employment. So there is a sense of understanding among the policy community. There is not that sense of urgency or desire to spend any money in the political community.

BAUMOL: My worry is that there's the wrong sense of urgency, one that will make for pressures for impediments to trade instead of dealing with the problems of the sort that you were discussing.

HIRA: The economics profession seems to be very, very concerned about protectionism. I think that's clouded some of their arguments, understating the problems that are created from globalization. Unless companies start to face competition and problems from this, there's no sense of urgency from their point of view.

SLAUGHTER: Much of the discussion is breathlessly waiting for next month's unemployment report and seeing how many manufacturing jobs there are in Ohio and Florida. That is nowhere near sufficient to grapple with the sort of issues we've talked about. The median person in the U.S. labor force today has a high school diploma and about one year of post-high school education. That person is going to have a job, but how productive and how highly compensated is that job going to be? Maybe we could have tax cuts for less skilled Americans.

MANN: Or an income tax credit.

SLAUGHTER: I would also love to hear more discussion about immigration.

TIME: Immigration is a thorny topic. Businesses may want to hire skilled immigrants, but some people argue that they take jobs away from Americans. Is there a way to connect immigration policy to competitiveness?

SLAUGHTER: One could start with the issue of How many H1-B visas are we going to issue? You want to ameliorate the pressures in the labor market, but you should also try to soften the impact, at least initially, of more workers arriving in the system who will compete with workers in the U.S.

HIRA: I think Professor Slaughter doesn't understand fully how the H1-B is being utilized. Many of the Indian IT firms--their whole business model is about bringing in inexpensive foreign labor so they can underbid their U.S. rivals. This discussion is an important one, but it's all about how a U.S. firm will benefit from globalization. There's no guarantee these firms will actually hire U.S. workers to serve those markets. There's a fundamental shift in the bargaining power between workers and firms.

BAUMOL: Trade policy is not the way to deal with unemployment. But you are right, the bargaining power of U.S. workers and the U.S. worker's wage is very heavily affected by globalization. Paul Samuelson has just written on the subject. He said if you believe this doesn't affect American wages, you also believe in the tooth fairy.

MANN: There are two sets of issues with respect to labor- market adjustment. One has to do with people who have lost their job in an area where there's no replacement. That has to be addressed through wage insurance, through unemployment insurance, through the portability of health care and pensions. So if you lose your job, you don't lose everything else with it. But there is a different problem: firms do not have an incentive to, say, take people who are programmers and train them to be systems-integration network engineers. We ought to have some kind of human-capital-investment tax credit, which would subsidize, for example, cross training an IT person in another sector, like health care. It improves the match between the workers' skills and the skills that are being demanded. The nation as a whole gets a spillover benefit if all firms engage in this kind of training. The other component of this would be subsidizing the first rung on the career ladder--through internships, apprenticeships--in professions where that first rung is now being done in some other country.

HIRA: I'm all for the idea of human-capital credit. But you're supposing there's all this opportunity and some kind of skills mismatch. There aren't good data coming out of firms saying there's a lot of job openings in the U.S., and we're looking for people, we just can't find them.

MANN: The icon of the American work force is Horatio Alger. It's all about the individual. I'm all for the individual, but I think the individual could use a few climbing ropes too. That is why the outsourcing debate is misplaced. It is about long-term competitiveness of the U.S. economy, through the channel of its human resources. We're nothing without the people