Presentation to Hawaii Society of Investment Professionals, Honolulu, HI, April 29, 2004Globalization ; Free trade

Robert T. Parry

English

Research Papers in Economics

 
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Presentation to the Hawaii Society of Investment Professionals 
Banker=s Club, Honolulu, HI 
By Robert T. Parry, President and CEO of the Federal Reserve Bank of San Francisco 
For delivery Thursday, April 29, 2004, 7:30 PM Hawaii Standard Time, 10:30 PM Pacific and 
1:30 AM Friday, April 30 Eastern 
____________________________________________________________________________ 
 
 
  Globalization: Threat or Opportunity for the U.S. Economy? 
 
 
I.  Good evening, and thank you for having me here tonight. 
 
A.  As a monetary policymaker, my main concern is the health of the U.S. economy. 
 
1.  Although the economy turned in a pretty sluggish performance for a long 
while after the 2001 recession,  
 
a.  it has shown some real strength over the last few quarters in terms 
of  
 
(1)  output growth 
(2)  and productivity. 
 
B.  But along the way, the jobs market performance has been surprisingly 
disappointing─at least, until the last few months. 
 
1.  This certainly has been a concern─not only for those who have been 
looking for work,  
 
a.  but also for us at the Fed  
 
b.  and for other policymakers around the country. 
 
C.  In the discussions about this so-called Ajobless recovery,@ a lot of attention has 
focused on trade issues. 
 
1.  The terms you hear are Aglobalization,@ Aoutsourcing, Aoffshoring,@ and the 
like. 
 
2.  The concern, of course, is that a free-trade environment is  
 
a.  letting good jobs drain from the U.S. economy  
  
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b.  and wind up in China, India, and other countries where workers 
command much lower salaries. 
 
3.  And, in the extreme, some would like to see restraints on trade to protect 
those jobs and halt the globalization trend. 
 
D.   Now, the question of whether globalization is a threat or an opportunity for the 
U.S. economy is a big one, with serious ramifications.   
 
1.  In my remarks tonight, I won=t be able to cover all the issues. 
 
a.  But I would like to say a few words to add a little balance to the 
discussion. 
 
2.  Before I turn to that question, I=d like to address a few background 
questions.  
 
a.  First, why are most economists in favor of free trade? 
 
b.  Second, what exactly are Aoutsourcing@ and Aoffshoring@? 
 
3.  Then I=ll lay out some of the threats and opportunities I see for 
globalization=s impact on the U.S. economy.  
 
4.  Finally, I=ll say a few words about focusing policy on protecting people, 
not on protecting jobs. 
 
II.  So, why are most economists in favor of free trade?  
 
A.  Basically, the argument is that everyone benefits when countries specialize in the 
type of production at which they=re relatively most efficient. 
 
B.  Let me illustrate with an analogy that=s very close to home─the family. 
 
1.  No family tries to make everything that it eats, wears, and enjoys. 
 
2.  If it=s cheaper to buy something or have someone else do something, that=s 
what a family does. 
 
3.  That allows individual family members to concentrate on becoming good 
at their jobs in order to pay for what they buy. 
 
C.  A nation isn=t any different.  
  
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1.  If it costs less to make certain products abroad than it does in the U.S., 
 
a.  then it's difficult to argue that  U.S. consumers and  U.S. 
companies should pay more for those products from U.S. 
producers. 
 
b.  Instead, it makes sense to purchase those products more cheaply 
from abroad, 
 
(1)  whether they=re hard goods, like VCRs, 
 
(2)  or services, like call centers. 
 
2.  That lets us devote our resources to producing and exporting those goods 
where we have a relative advantage. 
 
a.  The result is a twofold benefitC 
 
(1)  ─greater efficiency  
 
(2)  ─and lower costs for U.S. firms and consumers. 
 
III.  Now, what are Aoutsourcing@ and Aoffshoring@?  
 
A.   In its broadest sense, outsourcing is simply contracting out functions that had 
been done in-house. 
 
B.  And outsourcing has been going on a long time in our economy. 
 
1.  When a car manufacturer in Michigan chooses to buy brake pads from an 
intermediate supplier in Ohio rather than produce them in-house, that=s 
outsourcing. 
 
2.  When a company replaces its cleaning and cafeteria workers with an 
outside contractor who provides the same services more cheaply, that=s 
outsourcing.  
 
3.  When a company contracts out its payroll, accounting, and software 
operations, that=s outsourcing. 
 
4.  And outsourcing clearly can result in job losses if the outside supplier is 
more efficient and uses fewer workers.  
 
C.  Now, what about offshoring?  
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1.  Offshoring has been referred to as the global cousin of outsourcing.   
 
a.  Instead of turning to domestic providers, firms may decide to 
purchase a good or service from overseas providers. 
 
b.  And the reason is the same─lower costs. 
 
2.  We=ve been familiar with the offshoring of a lot of manufacturing for 
many years. 
 
a.  For example, firms in Mexico are important suppliers of seat 
covers and wiper blades for Detroit automakers. 
 
3.  What appears to be new about offshoring these days is that it=s affecting 
workers in the service sector who never expected to see foreign 
competition for their jobs─ 
 
a.  ─data managers, computer programmers, medical transcriptionists, 
and the like. 
 
D.  Now, it would be good to get a handle on just how much offshoring is going on.   
 
1.  But that=s easier said than done. 
 
a.  We don=t have official statistics,  
 
b.  and there are a lot of unsettled measurement issues.  
 
2.  But let me refer to a couple of estimates that have gotten some press 
recently and that seem to be pretty similar. 
 
a.  One is from Goldman-Sachs, and the other is from Forrester 
Research, a consulting firm. 
 
b.  These estimates indicate that the number of jobs lost to foreign 
workers between 2000 and 2003 was one hundred to one hundred 
and seventy thousand. 
 
3.  Those numbers sound high. 
 
a.  But they don=t sound high when you put them in the context of all 
the job turnover that occurs every year in the U.S. 
  
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(1)  Each year, some fifteen million jobs are lost for all kinds of 
reasons─ voluntary  employment changes, layoffs, firings, 
and so on.  
 
(2)  And in a growing economy, every year even more jobs are 
created. 
 
IV.  Now let me turn to my main question: Is globalization a threat or an opportunity for the 
U.S. economy?   To answer this, I want to focus on three important issues that I think are 
sometimes neglected in the discussion. 
 
A.  First, it=s important to remember that globalization means that economic activity 
flows in both directions.   
 
1.  So, although we may lose jobs to foreign workers, we also may gain jobs 
and boost economic activity. 
 
2.  For example, the data suggest that, in terms of office work, the U.S. 
insources far more than it outsources.  
 
a.  That is, just as U.S. firms use the services of foreigners, foreign 
firms make even greater use of the services of U.S. residents.  
 
(1)  Here I=m referring specifically to the category of business, 
professional, and technical services. 
 
(2)  This includes computer programming, telecommunications, 
legal services, banking, engineering, management 
consulting,  and other private services. 
 
(3)  It also encompasses U.S. outsourcing of call centers and 
data entry to developing nations, among other things. 
 
b.  In 2003, we bought about seventy-seven billion dollars= worth of 
those services from foreigners. 
 
c.  But the value of the services we sold to foreigners was far higher, 
over one hundred and thirty billion dollars. 
 
3.  Here=s another set of interesting numbers.  
 
a.  Between 1991 and 2001, U.S.-based multinationals created close 
to three million jobs overseas. 
  
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b.  But they also created five and a half million jobs inside the U.S. 
─an increase of about thirty percent in payrolls. 
 
c.  That=s a significantly faster rate of job growth than purely domestic 
companies generated. 
 
d.  So, this is an instance that shows you can=t assume that a job 
created overseas necessarily means one isn=t created here. 
 
(1)  For example, expanding an overseas network frequently 
means you have to hire more workers in the U.S., too─ 
 
(a)  ─people in management, logistics, research and 
development, and international IT. 
 
4.  Here=s a final set of numbers. 
 
a.  According to the Commerce Department, even as the U.S. Aloses@ 
jobs when our companies send operations offshore, we also Again@ 
jobs as foreign corporations invest here.  
 
(1)  Specifically, foreign firms employed almost six and a half 
million workers in the U.S. in 2001─up from about five 
million in 1991. 
 
(a)  These workers included highly paid Honda and 
Mercedes-Benz workers in the auto industry. 
 
(b)  And in 2006, Toyota is going to employ two 
thousand people building cars in San Antonio. 
 
b.  And there are plenty of similar examples. 
 
(1)  Samsung is investing $500 million to expand its 
semiconductor plant in Texas. 
 
(2)  And Novartis is moving its R&D operation from 
Switzerland to Massachusetts. 
 
B.  Another key point to recognize in the globalization debate is that open trade 
creates opportunities in the U.S by helping foreign economies become stronger. 
 
1.  As foreign incomes grow, the demand for U.S. exports expands as well. 
  
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2.  And that provides even more opportunities for high-paying jobs in this 
country. 
 
C.  Finally, globalization can help increase productivity growth in the U.S..  
 
1.  Let me illustrate with a brief look at how offshoring has affected the 
spread of IT in the U.S. and, therefore, our economic growth. 
 
a.  According to Catherine Mann at the Institute for International 
Economics, globalized production of IT hardwareCthat is, the 
offshoring of computer-related manufacturing, such as Dell 
computer factories in China─reduced the prices of computer and 
telecommunications equipment by ten to thirty percent. 
 
b.  These price declines boosted the spread of IT throughout the U.S. 
economy and raised both productivity and growth. 
 
2.  Offshoring offers the potential to lower the prices of IT software and 
services prices as well.  
 
a.  This will promote the further spread of ITCand of new business 
processes that take advantage of cheap IT. 
 
b.  It also will create jobs for U.S. workers to design and implement 
IT packages for a range of industries and companies.  
 
3.  Although some jobs are at risk,  
 
a.  the same trends that make offshoring possible are creating new 
opportunitiesCand new jobsC throughout the U.S. economy.  
 
b.  For example, a McKinsey Global Institute study finds that  
 
(1)  for every dollar of activity outsourced to India,  
 
(2)  the U.S. receives between $1.12 and $1.14 in economic 
benefits.  
 
V.  Now, I=ve mentioned productivity several times so far, and I want to take a few minutes 
to focus on this subject, because I think it deserves to play a significant role in the 
discussion about the so-called jobless recovery. 
 
A.  Over the past two years, U.S. productivity in the nonfarm business sector has 
grown at a 4.8 percent annual rate.   
  
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1.  In the short term, this increased productivity has let businesses satisfy the 
demand for their output without having to hire new workers on net.   
 
2.  So, it appears that this extraordinary surge of increased efficiency in our 
economy explains much more about the jobless recovery than offshoring, 
outsourcing, or globalization does. 
 
B.  Although, clearly, productivity creates pain for workers who are displaced, most 
economists agree that higher productivity is a good thing for the economy. 
 
1.  Why?  Because, in the long run, higher productivity is the only way to 
create higher standards of living across the economy. 
 
C.  The ongoing ability of the American worker to produce more goods and services 
per hour has been the key to the U.S. economy's surprising success throughout its 
history.  
 
1.  Clearly, in the manufacturing and agricultural sectors, more output can 
now be produced with fewer workers.   
 
2.  The same trend has occurred in services.   
 
a.  The U.S. used to have lots of elevator operators, telephone 
operators, bank tellers, and gas station attendants.  
 
b.  But now technological advances have taken over many of these 
jobs. 
 
c.  Likewise, the Internet has taken over many routine tasks from  
travel agents, stock brokers, and accountants.  
 
d.  And, with high speed data links, a lot of office work can be done 
more cheaply abroad.  
 
D.  What happens to the displaced workers? 
 
1.  They move into other sectors of the economy, as new jobs emerge. 
 
a.  For example, by one estimate, about a quarter of today=s labor 
force is in jobs that didn=t even exist in 1967. 
 
E.  This emergence of new jobs and workers= ability to move into them are the 
hallmarks of a flexible economy─ 
  
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1.  that is, an economy in which labor and capital resources move freely 
among firms and industries. 
 
2.  And such flexibility is a significant strength of the U.S. economy.  
 
a.  We operate in competitive markets,  
 
b.  and competition, whether from domestic or foreign competitors,  
induces change.  
 
3.  To adapt to that change, and to ease the burden of adjusting to it, flexible 
labor and capital markets are critically important. 
 
VI.  Now let me wrap up with a few words on what policy can do to help U.S. workers. 
 
A.  In terms of the overall economy,  
 
1.  appropriate monetary and fiscal policies can ensure that aggregate demand 
 
a.  keeps the economy on a sound footing   
 
b.  which helps generate jobs to replace those that have been lost. 
 
B.  But words about aggregate demand can seem like cold comfort to the individual 
workers whose offices and plants are closing because their jobs are going 
overseas. 
 
1.  And concern for these workers, of course, is why there=s interest in trying 
to restrict trade by imposing tariffs, quotas, or other barriers. 
 
a.  Indeed, such measures may actually succeed in slowing job losses 
in affected industries temporarily. 
 
C.  But, as I hope I=ve illustrated, in the end, they impose significant costs on the rest 
of the economy─ 
 
1.  ─costs that are much higher than any benefits.   
 
D.  That=s why, as I said at the outset, I think it=s far more appropriate to have policies 
that focus on protecting the people at risk, not the jobs. 
 
1.  Such policies ought to aim to do two things during difficult transitions: 
 
a.  help workers get through the hard times,   
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b.  and help workers become more flexible so they can adapt when 
they do face these kinds of changes. 
 
2.  In fact, there already are policies like this in place─ 
 
a.  unemployment insurance, for example. 
 
3.  And there are even policies specifically for manufacturing workers who 
have lost jobs to foreign competition. 
 
a.  These trade-adjustment assistance programs offer  
 
(1)  both financial support for a time  
 
(2)  and the opportunity for training, so that workers can retool 
their skills and find new jobs. 
 
4.  So, in order to help the service workers who have lost their jobs because 
of outsourcing, it might be appropriate to extend these programs to them. 
 
5.  Now, I know there=s some debate about how effective the programs are,  
 
a.  but the concepts they=re built on are, to my mind, right on target─ 
 
(1)  providing a safety net for workers 
 
(2)  and providing them with the training and tools to qualify 
for the jobs being created in the U.S. 
 
b.  In fact, such programs could be appropriate  
 
(1)  not only for workers who have lost jobs to outsourcing, 
 
(2)  but also to workers who have lost jobs in the wake of the 
technology-driven productivity surge. 
 
E.  In the long-run, of course, the solution is simple to state, but difficultCand 
costly─to implement.  
 
1.  And that solution is improving the performance of the U.S. education 
system. 
 
a.  Education is the bedrock of our current edge in technology and  
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productivity. 
 
b.  It=s the key to producing workers with the flexibility to learn new 
skills as market conditions evolve. 
 
c.  And it=s the hope and promise we must provide for future 
generations of Americans. 
 
# # # 

Globalization: threat or opportunity for the U.S. economy?

http://www.frbsf.org/news/speeches/2004/040429.pdf

Globalization: threat or opportunity for the U.S. economy?

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