Thursday, April 19, 2007

Free trade: True test for the faithful

Like all "isms," capitalism requires a certain leap of faith. You just have to accept the notion that everyone working in his own self-interest will somehow create a more vibrant economy. The leap of faith is particularly large when it comes to free trade. It is hard to see on the face of it how letting the Chinese build our furniture or encouraging Indians to write some of our software will make America a wealthier country in the end.

But that is just the outcome we can expect if we let the market work. That, at least, is the view put forth in a recent report by the McKinsey Global Institute, a think tank associated with the well-known consulting firm. The McKinsey people focused on the outsourcing of service jobs, everything from answering telephones to more sophisticated computer work, to countries such as India and the Philippines. Forrester Research in Cambridge has estimated that by the year 2015, roughly 3.3 million American service jobs will have moved overseas.

McKinsey starts with the obvious: that Americans whose jobs disappear will suffer and that they will need substantial help -- far more than we currently provide -- to make an adjustment to new careers. The pain of free trade is always easy to see. The gains are tougher to identify, but no less real, according to McKinsey. The initial gains will come in the form of cost savings to companies that hire Indian programmers for a fraction of what they would pay American programmers. A portion of those savings will show up as higher profits that can be reinvested; the rest will flow to consumers in the form of lower prices. Farther down the road, the increased prosperity of the economies in India or China will generate extra sales for American exporters. Finally, the displaced American workers will find new jobs. "Far from being bad for the US, `offshoring' creates additional value for the US economy that did not exist before," according to the McKinsey report.

History would seem to be on McKinsey's side. Other jobs, even whole industries, have gone overseas in the past. The production of televisions is one example. Yet over time the American economy expands and new jobs are created. In a recent essay, David Henderson, a researcher with the Hoover Institution, another think tank, put the matter simply. "The history of economic growth is the history of people making more with less and shifting into new jobs that were unheard of in the previous generation," wrote Henderson. Think about it. Could you ever have imagined that anyone would earn a living as a personal trainer?

The job losses also need to be put in perspective. In the 1990s the US economy created more than 30 million jobs. If Forrester is right and roughly 3 million jobs migrate in the next decade, the shift, while painful, should be manageable.

But what if the past isn't a reliable guide to the future? What if this time is different? What if the jobs on the lower end of the ladder disappear and there isn't a new rung for us to climb up to? Or what if there is a higher rung, but relatively few of us have the rarified skills necessary to reach it? Nicholas Perna, a Connecticut economist, considers himself a true believer in free trade, but in the next breath he admits, "This time I have my fingers crossed." Until now, said Perna, America has always retained a comparative advantage in enough industries to compensate for the loss of others. But as the Chinese and Indians become better skilled and educated, will enough industries be left in which the US enjoys a bona fide edge?

In the 1990s, the American economy thrived on openess -- to people, ideas, and investment. "The openness of the US economy and its inherent flexibility are recognized widely as two of its greatest strengths," wrote McKinsey. The economy remains open, but now some of the traffic is flowing in the other direction. I don't think the outsourcing of white-collar jobs will shatter our faith in capitalism, but at a minimum, it will put that faith to the test.

Charles Stein is a Globe columnist. He can be reached at