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October 8, 2009

Economist's View - 5 new articles

"25% of US Jobs are Offshorable"

Alan Blinder says that the amount of offshoring that the US is likely to experience in the future can "be handled by the market system – with some help from government." This seems to back off a bit from his earlier estimates of the consequences:

On the measurability of offshorability, Alan S. Blinder, Vox EU: Although overshadowed by the financial crisis and the world recession right now, the debate over offshoring – that is, outsourcing work to foreign (often poorer) countries – seems poised to stage a comeback as a public policy concern in the not-too-distant future. Indeed, with so much protectionist talk and some protectionist action in the air, fear of offshoring may force its way back onto the policy agendas of the US and other rich countries sooner than we think.
It seems axiomatic that both the economically appropriate and the politically feasible policy responses to offshoring should differ depending on whether the share of the workforce holding offshorable jobs is, say, 2%, 25%, or 75%. In the 2% case, we should probably ignore offshoring as a detail of little consequence. In the 75% case, we should perhaps be seeking radical solutions to the manifold problems caused by massive job dislocations. But if a number nearer to 25% is more plausible, as argued here, the situation probably calls for certain marginal (and some not so marginal) policy adjustments – but certainly not panic. Thus it seems important to obtain a rough empirical handle on this number, slippery though the concept of offshorability may be.1
Several attempts have been made to estimate this fraction in recent years. Unfortunately, they ... present a distressingly wide range – from 11% to 38%. Can we do better?
Estimating offshorability using individual surveys
In a recent paper, Alan Krueger and I employed standard survey methods to assess the offshorability of each job in a random sample of US workers (Blinder and Krueger 2009). Moving to the individual, rather than the occupational, level is important because substantial heterogeneity exists within many occupation groups (Blinder 2009a). (For example, some accounting services are offshorable, while others are not.) In addition to improving accuracy, the other major purpose of our research was to see if we could develop a technique that could be used in standard labour force surveys, such as the Current Population Survey (CPS) in the US. We think we did.
Using a specially-designed telephone survey, which Princeton University's Survey Research Center put in the field in June and July 2008, we experimented with three different ways to measure offshorability. In the first, professional coders used the answers to standard CPS questions to rate the offshorability of each person's job. In the second, respondents essentially classified their own jobs by answering a single question about the need for face-to-face contact and/or physical presence on the job. (Both attributes indicate an inability to move the work offshore.) In the third, we used the answers to a series of questions on face-to-face contact, the ability to deliver one's work from a remote location, etc. to create our own index of the offshorability of each job.
Strikingly, and surprisingly, all three measures agreed on the overall macro number – roughly speaking, 25% of US jobs are offshorable. At the micro level, the three measures agreed on the classification (offshorable or not) of a specific person's job in 70% to 80% of all cases. In studying the detailed responses, we concluded – not surprisingly – that professional coders provided the most accurate assessments of offshorability. That is encouraging news because it implies that the Census Bureau in the US and similar agencies in other countries could easily start producing data on offshorability on a routine basis – probably without changing their survey instruments much, if at all.
In terms of major substantive results, we found that more educated workers appear to hold somewhat more offshorable jobs and that offshorability does not have many statistically significant effects on either wages or the probability of layoff. Perhaps most counter-intuitively, we found that routine work, in the sense defined by Autor et al. (2003), is no more offshorable than work that is not routine.
Policy implications
What might our estimate that roughly 25% of US jobs are, in principle, offshorable imply for public policy?
1. First, saying that 25% of all current US jobs are probably offshorable is not the same as predicting that all these jobs will, in fact, move offshore.
For example, even today, after decades of offshoring of manufacturing jobs, nearly 10% of American workers still work in the manufacturing sector. Virtually all of their jobs are offshorable in principle, but they have not actually gone offshore. So the requisite labour force adjustment will almost certainly be less than 25 percentage points. It will also take place gradually, over decades, as did the relative shrinkage of manufacturing employment between 1960 and today.
2. Second, the 25% estimate is roughly the same as the number of jobs – then almost exclusively in manufacturing – that were probably offshorable in the heyday of US manufacturing (around 1960).
The relative shrinkage of the manufacturing sector in the US (and elsewhere) from about 30-35% of total employment then to under 10% now was somewhat painful, especially in places where manufacturing was concentrated; it fostered some protectionist sentiment and some protectionist measures, and it induced a variety of other ill-considered policy responses. But, broadly speaking, the adjustment did not precipitate any major economic or social convulsions. This experience suggests that a similar-sized labour force adjustment can, once again, be handled by the market system – with some help from government.
3. Third, most of the policy responses that would best prepare the workforces of the rich countries for the coming wave of offshoring are conventional and not very controversial.
I refer to policies like more job retraining, bolstering the social safety net where it needs bolstering (mostly in the US rather than in Western Europe), and improving trade adjustment assistance and extending it to services. The unconventional – and therefore more controversial – policy responses may need to come in the primary and secondary educational system.
Primary and secondary schools, though well-designed to turn out factory workers for the industrial age, has not adapted very well to the information age and to the likelihood of large-scale offshoring in the service sector. I address how it might do so in Blinder (2009b). In a nutshell, I argue there that our schools will have to put more emphasis on communication skills, interpersonal contact, and creative thinking – and far less on rote memorization.
1 I define "offshorability" as the ability to perform one's work duties from abroad with little loss of quality. 2 For details on the three measures, see Blinder and Krueger (2009), pp. 13-22.
Autor, David H., Frank Levy, and Richard J. Murnane (2003), "The Skill Content of Recent Technological Change." Quarterly Journal of Economics, 118 (4, November): 1279–1333.
Bardhan, Ashok D., and Cynthia Kroll (2003), "The New Wave of Outsourcing." Fisher Center for Real Estate & Urban Economics Working Paper 1103, University of California, Berkeley, Fall.
Blinder, Alan S. (2009a), "How Many US Jobs Might Be Offshorable." World Economics, 10 (2, April-June): 41–78
Blinder, Alan S. (2009b), "Education for the Third Industrial Revolution," forthcoming in J. Hannaway and D. Goldhaber (eds.), Creating a New Teaching Profession, Urban Institute.
Blinder, Alan S. and Alan B. Krueger (2009). "Alternative Measures of Offshorability: A Survey Approach," NBER Working Paper 15287, August.
Jensen, J. Bradford, and Lori G. Kletzer (2006), "Tradable Services: Understanding the Scope and Impact of Services Offshoring." In Brookings Trade Forum 2005: Offshoring White-Collar Work, ed. Lael Brainard, and Susan M. Collins, 75–134. Washington, D.C.: Brookings Institution Press.
McKinsey Global Institute (2005), The Emerging Global Labour Market, June.
van Welsum, Desirée, and Graham Vickery (2005), "Potential Offshoring of ICT-intensive Using Occupations." DSTI Information Economy Working Paper 91, Organization for Economic Cooperation and Development (OECD), May.

"So Much Happening in Washington and So Little To Show for It"

Robert Reich is not pleased with the proposals from congress for health care reform, financial regulation, environmental legislation, and job creation, all of which come up far short of what is needed, and he says lobbyists are to blame:

So Much Happening in Washington and So Little To Show for It, So Far, by Robert Reich: The Senate Finance Committee is set to vote Tuesday on a healthcare bill that just got a seal of approval from the Congressional Budget Office and is very likely to garner the vote of Republican Senator Olympia Snowe -- a twofer that gives the bill preeminence over four other healthcare bills that have emerged from House and Senate committees... Unlike those bills, though, the Senate Finance bill won't it have a public insurance option to compete with private insurers. Nor does it allow Medicare to use its bargaining power to negotiate lower drug prices, or adequately subsidize millions of middle-class families who will be required to buy health insurance that will be hard for them to afford. In short, it's a great deal for private insurers and Big Pharma but not such a great deal for middle-class Americans. Meanwhile, the House Banking Committee is quietly circulating a draft set of reforms of financial markets... Barney Frank, who heads the Committee, is a thoughtful progressive. But the draft has gaping loopholes that will let most financial firms escape -- such as one that exempts corporations that deal in financial derivatives from any requirements for capital, business conduct, record-keeping, and reporting if they use derivatives for the purpose of "risk management," which is the very thing they all claim they're doing. Neither the draft bill, nor the Committee, nor anyone on the Hill having anything to do with financial regulation, is ... resurrecting the Glass-Steagall Act that once separated commercial from investment banking, and applying antitrust laws to the remaining five biggest Wall Street banks so none is "too big to fail." At the same time, environmental legislation is now slinking its way through Congress..., but the bills are, frankly, far short of what's needed. ... And what's happening on the job's front? Nothing except a blip of interest in tax credits to small businesses that create new jobs. That's not a bad move (I suggested it myself), but it's rather like bailing out the ocean with a teacup. If that's all there is, we're headed toward two years of double-digit unemployment. No one on the Hill or in the Administration is yet willing to say openly and clearly that the stimulus plan must be larger, and continued through 2010 and 2011. My friends in the Administration and on the Hill repeatedly tell me "don't make the perfect the enemy of the better," or words to that effect. Politics is the art of the possible, blah blah blah. True. But in each of these areas -- healthcare, financial regulation, environment, and jobs -- the "better" is really not that much better. Forget perfect; anything that offered real reform would suffice for now. But in every case, what should be the centerpieces of reform are being left out. Why? Congress is overwhelmed with corporate and Wall Street lobbyists (far too many of whom are former Democratic office holders). The White House is trying best it can to push ... in the right direction but there's too much going on, too many arenas where private interests are framing the debate and stifling major reform, and too many friends of friends and relations of relations who are making tons of money working for the other side. The public doesn't know what's going on because the national media would rather report on the sexual escapades of famous people... And progressives -- that is, progressive organizations in our nation's capital -- have been remarkably and consistently outgunned, outmaneuvered, or just plain ineffectual. This is largely due to the fact that they're sitting in Washington rather than organizing and mobilizing the rest of the country. And I haven't even brought up Afghanistan.

"'It's Not the Great Depression — It's Worse'"

Paul Krugman notes the collapse in world trade:

Paul Krugman: In Trade, 'It's Not the Great Depression — It's Worse', Real Time Economics: ...Paul Krugman .... offered a few comments about ... world trade. And the picture he painted was not a pretty one.
"When it comes to international trade, actually it's not the Great Depression, it's worse," he said, presenting charts showing the decline in global trade activity falling much more steeply in the current downturn than during the Depression.
"The scale of the collapse of world trade has been so large that it has produced a degree of international linkage that surpasses what even the pessimists imagined," he said. "World trade acted as a transmission mechanism," spreading economic distress "even to those countries that had relatively healthy financial systems," such as Germany.
"We really are one world economy in a way that has never been true before," he said.
Despite the collapse in trade, Krugman downplayed concerns about protectionism. ...

Felix Salmon adds that:

[Krugman] also had a good line about economic forecasters, who have us returning to full employment in about five years just because all forecasts tend to bake in a return to "normal" in five years. Krugman's more pessimistic than that, however: "We almost certainly have a long, long haul before we're fully recovered," he said. A good part of the reason for that is what has happened to international trade — it "has fallen through the floor in a way that it literally never has before, including in the Great Depression". And building it back up is going to be very hard indeed.

This goes back to something I should have emphasized in Robert Solow's comments yesterday. Using Y = C + I + G + NX as a reference point, if growth in C falls, as we expect, if G cannot grow much more and if NX cannot take up the slack, also as we expect, then can I grow fast enough to make up the difference? Solow believes:

We have to expect consumer spending to be weak..., not just for six months, but for the next few years. It will not be as strong a driving force as it has been the past several years. Something has to take its place. Government spending can't, since government will have a hard time financing the inevitable deficits and is not in a position to aggressively increase its deficit spending.
We need business investment to support the economy. We have every reason to want to divert our resources toward secure and renewable sources of energy, new materials and environmental improvement. ... I also think it's the job of the federal government to shift incentives, from incentives to consume more to incentives to invest more. Obama ran on this kind of platform, and if he can put some money behind that fundamentally correct view, he might generate something. It's going to take more than that to replace 5 percent of GDP, but that would be a neat place to start.

There must be a way to bring the Republicans on board with plans to increase business investment? Will a focus on "secure and renewable sources of energy, new materials and environmental improvement" spoil whatever cooperation might have existed among Republicans for measures to enhance business investment? In any case, we need to do our best to maintain G, and another round of stimulus measures would help, while we give I the time (and the incentives) it needs to grow robustly.

"A Better Way to Health Reform"???

Martin Feldstein says he can solve the health care problem for a mere $220 billion:

A Better Way to Health Reform, by Martin Feldstein, Commentary, Washington Post: The American health-care system suffers from three serious problems: Health-care costs are rising much faster than our incomes. More than 15 percent of the population has neither private nor public insurance. And the high cost of health care can lead to personal bankruptcy, even for families that do have health insurance.
These faults persist despite annual federal government spending of more than $700 billion for Medicare and Medicaid as well as a federal tax subsidy of more than $220 billion for the purchase of employer-provided private health insurance.
There's got to be a better way. And it should not involve the higher government spending and increased regulation that characterize the proposals being discussed in Congress. ...
A good system should not try to pay all health-care bills. That would lead to excessive demand, wasteful use of expensive technology and, inevitably, rationing in which health-care decisions are taken away from patients and their physicians. ...
Here's a better alternative. Let's scrap the $220 billion annual health insurance tax subsidy, which is often used to buy the wrong kind of insurance, and use those budget dollars to provide insurance that protects American families from health costs that exceed 15 percent of their income.
Specifically, the government would give each individual or family a voucher that would permit taxpayers to buy a policy from a private insurer that would pay all allowable health costs in excess of 15 percent of the family's income. A typical American family with income of $50,000 would be eligible for a voucher worth about $3,500, the actuarial cost of a policy that would pay all of that family's health bills in excess of $7,500 a year.
The family could give this $3,500 voucher to any insurance company or health maintenance organization, including the provider of the individual's current employer-based insurance plan. Some families would choose the simple option of paying out of pocket for the care up to that 15 percent threshold. Others would want to reduce the maximum potential out-of-pocket cost to less than 15 percent of income and would pay a premium to the insurance company to expand their coverage. Some families might want to use the voucher to pay for membership in a health maintenance organization. Each option would provide a discipline on demand that would help to limit the rise in health-care costs.
My calculations, based on the government's Medical Expenditure Panel Survey, indicate that the budget cost of providing these insurance vouchers could be more than fully financed by ending the exclusion of employer health insurance payments from income and payroll taxes. ... And unlike the proposals before Congress, this approach could leave Medicare and Medicaid as they are today.
Lower-income families would receive the most valuable vouchers because a higher fraction of their health spending would be above 15 percent of their income. The substitution of the voucher for employer-paid insurance would be reflected in higher wages for all.
Two related problems remain. First, how would families find the cash to pay for large medical and hospital bills that fall under the 15 percent limit? ... Second, how would doctors and hospitals be confident that patients with the new high deductibles will pay their bills?
The simplest solution would be for the government to issue a health-care credit card to every family along with the insurance voucher. The credit card would allow the family to charge any medical expenses below the deductible limit, or 15 percent of adjusted gross income. (With its information on card holders, the government is in a good position to be repaid or garnish wages if necessary.) ...
The combination of the 15 percent of income cap on out-of-pocket health spending and the credit card would solve the three basic problems of America's health-care system. ... All of this would happen without involving the government in the delivery or rationing of health care. It would not increase the national debt or require a rise in tax rates. Now isn't that a better way?

A benefit of making sure that the government is not involved in health care is that it ensures that Medicare and Medicaid remain "as they are today"? So a benefit of getting rid of government involvement is that it preserves government involvement?

On the credit card proposal, what happens to a family with high medical costs after two or three years when the credit card balance is, say, $15,000? Do they get cut off? Does medical care end until they pay their newly acquired credit card debt, or can they keep running up the balance? How costly is it to garnish wages or send collectors after people who don't use this credit wisely (meaning, in some cases, giving up needed care)? That solves the bankruptcy problem? How do we stop people from using this as a fungible source of credit for other purchases?

There's lots more, but you can probably guess that this is not a proposal I'd favor. E.g. it does little to make routine health care affordable to households who are already having trouble making ends meet. If a household cannot afford routine care, if even, say, spending the first few hundred dollars means giving up essentials, having costs above 15% of their income covered won't help with that problem. High deductible, catastrophic coverage, which is essentially what this is, is not the best way to provide for our health care needs.

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