Decline of the U.S. Middle Class?

His article, Mr. Samuelson added, is not a refutation of David Ricardo's 1817 theory of comparative advantage, the Magna Carta of international economics that says free trade allows economies to benefit from the efficiencies of global specialization. Mr. Samuelson said he was merely "interpreting fully and correctly Ricardoian comparative advantage theory." That interpretation, he insists, includes some "important qualifications" to the arguments of globalization's cheerleaders.

Those qualifications are not new to Mr. Samuelson. He noted that in a different context, he touched on similar matters as far back as 1972 in a lecture he delivered shortly after he won his Nobel Prize, titled "International Trade for a Rich Country."

For his part, Mr. Bhagwati does not dispute the model that Mr. Samuelson presents in his article. "Paul is a great economist and a terrific theorist," he said. "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 Mr. Bhagwati, the author of "In Defense of Globalization" (Oxford University Press, 2004), says he 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, Mr. Bhagwati said, is that China will take away most of American manufacturing and India will take away the 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.

As an example, Mr. Bhagwati pointed to the often-repeated estimates that, because of the Internet, as many as 300 million well-educated workers, mostly from India and China, could now enter the global work force and compete with Americans for skilled jobs.

In their paper, Mr. Bhagwati and his co-authors write that such an assessment of the education systems of India and China "almost borders on the ludicrous." In an interview, Mr. Bhagwati said, "You have a lot of people, but that doesn't mean they are qualified. That sort of thinking is really generalizing based on the kind of Indian and Chinese people who manage to make it to Silicon Valley."

The Samuelson model, Mr. Bhagwati said, yields net economic losses only when foreign nations are closing the innovation gap with the United States.

"But we can change the terms of trade by moving up the technology ladder," he said. "The U.S. is a reasonably flexible, dynamic, innovative society. That's why I'm optimistic."

The policy implications, he added, include increased investment in science, research and education. And Mr. Samuelson and Mr. Bhagwati agree that the way to buffer the adjustment for the workers who lose in the global competition is with wage insurance programs.

"You need more temporary protection for the losers," Mr. Samuelson said. "My belief is that every good cause is worth some inefficiency."

The global spread of lower-cost computing and Internet communications breaks down the old geographic boundaries between labor markets, he noted, and 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," Mr. Samuelson said.

This is basically the way I see it. I don't see a solution to this issue either. *I'm just glad that I'm out of the workforce, because it doesn't look pretty from here!


This is what I was trying to explain to Ted last year before he left the forum. He was thinking that the U.S. will always come out on top. True enough for the last 100 years or so, but eternity is forever !

[ESRBob]

"You need more temporary protection for the losers," Mr. Samuelson said. "My belief is that every good cause is worth some inefficiency."

I'm always a little nostalgic for inefficiency -- probably my reason for heading into ER. THe grinding pressure to be more efficient, work longer etc etc. is a gerbil wheel. So I am partial to Samuelson's efforts to find some sort of theoretical defense for keeping things from moving too fast in one direction or another. Founding fathers did the same thing for the political system with checks and balances and built-in gridlock. Inefficiency, if you will.

I think India and China will be eating our lunch for as long as we are on the planet. Sure not everyone there is hyper-educated, but plenty are, and the growth trends are astounding. China's growth in highways, for instance is growing leaps and bounds and will match ours (miles of expressway) withing a few years.

Considered from a macro-level, all economic activity in the US faces a liability/tort-tax, a healthcare tax , a pensions tax, and a public-sector-out-of-control tax which China and India don't (as yet) share in anywhere near the same degree, so there are built-in efficiencies to producing and innovating overseas.

Capital needs to go where it can work hardest, at least the capital that does will bring home more bacon. As an investor, I am happier to be 'efficient'. (Probably somewhat hypocritical of me). So I decided a long time ago that there is no point in trying to 'beat them' so I join them instead. I have lots of our assets in emerging markets-- our portfolio's overall debt and equity exposure in emerging markets is almost 10%, and lots more in small international (but not emerging markets-headquartered) companies (another 10%).

I agree with Cut-Throat that the US middle class is in a vice -- innovation and US ingenuity aren't going to buck the tide to the same degree it has in the last 100 years. If I were still working, I would get myself to a third world country on an expat assignment, learn chinese or do something else to turn myself into an international executive with emerging markets exposure. For investors its as easy as making an asset allocation commitment to these places, but US workers have choices too.

Staying home (and investing solely domestically) and worrying about how bad things are getting is probably not going to be a winning strategy.

ESRBob

[cute fuzzy bunny]

Yep, a lot of studies say that you can get it done cheaper abroad.

The reality is that the productivity and efficiency in many, if not most, job categories is far lower in other countries than it is here. In very specific categories (for example, software development) you do get near parity in dollars per hour per 'solution'. In things like call centers though, you dont get the productivity, nor do you get a reasonable satisfaction level.

But in many areas, outsourcing 'partners' are improving.

Protectionism isnt the answer though, not even for a short time. I've never seen a case of protectionism end up well, or really improve any part of the situation other than making the pain last a little longer and in aggregate worse.

I think the good news is that nothings stable in these situations. Sure a lot of people in a lot of countries will work for very little to do a job. The minute they start doing the job as well as someone getting paid 2x for it in another country, they'll want 2x the pay. And then they'll buy stuff.

That might take 10-20 years to cycle though.

One thing I do know is that counting on the other guy to suck or fail is not a good competitive marketing strategy...