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'Benedict Arnold' CEOs

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G

~ reg Mankiw, chairman-of1he Preident's Council of Economic Advisers, is getting a tiny taste of the inanities of the

:political season. Mr. Mankiw, a noted econo­mist and author of a best-selling text on macro­

economics, ventured

.to repeat what all economists and business­people know: Trade is

.g-ood.                                                               ... .­

Specifically, Mr. Mankiw dared to point out .the potential economic benefits of relocating :the production of goods or services to lower­wage countries. "Outsourcing is a growing phe­:nomenon," he said this week, "but it's some­thing that we should realize is probably a plus for the economy in the long run."

Wham! Bam! Faster than you can say Ban­galore, Senator John Kerry was all over him. The front-runner for the Democratic Presiden­tial nomination is smart enough to understand the law of comparative advantage, but chose to ignore it by declaring that "My economic policy is not to export American jobs. . . . Unlike the Bush Administration, :r  want to repeal every tax break and loophole that rewards any Bene­dict Arnold CEO or corporation for shipping American jobs overseas."

Comparative advantage means that if coun­try X does or makes something with relatively less cost than country Y, then country X should do it. Country Y is thus released to earn higher returns on something else. The magic is that both countries are better off through this ar­rangement. In the current trade debate, country­ X stands for India and country Y is the U.S. By moving some data entry, customer service and software engineering activities to India, the economies of both countries gain.

The impetus for this trade in services has come from cheaper and higher quality telecom­munications and a well-educated but cheaper labor force overseas. The combination has made it more cost effective for U.S. companies

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. to shift the production of some services abroad. Even better, the difference in time zones makes it possible for companies to work round­ the-clock, adding to the efficiencies.

The immediate, short-term impact of out­sourcing is some lost American jobs. Mr. Mankiw acknowl­edges this, observing

-                      ~.               - that an open trading

system is good but "can create painful disloca­tions for some workers." The key word here is short-term. As Mr. Mankiw went on to say, "I know there will be jobs in the future because I know this is a vibrant economy, a dynamic economy." The political problem - which Mr. Kerry is trying to exploit-is that the lost jobs are felt immediately while the jobs of the fu­ture are by definition still unknown.

By reducing costs, outsourcing gives compa­nies more money to invest. More investment means more jobs, especially jobs with higher

value added. It's also good for shareholders. This is pretty much what happened in U.S. man­ufacturing when companies started to move plants overseas. As important, lower costs means lower prices. This is a boon for consum­ers who then enjoy increased purchasing power.

Even discounting for the excesses of poli­tics, it's hard to see how all of this adds up to treason. The opposite is closer to the truth. CEOs who don't do whatever they must to stay competitive are the real traitors to their work­ers because eventually their companies will go out of business.

Mr. Kerry understands this, which is why until this campaign year he was known as a free trader. But if by some chance he is elected, we suspect he'd quickly drop all the Benedict Arnold blather and begin inviting those same CEOs to the White House. His own political prosperity would then depend on their success, outsourcing included.

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Keeping your company competitive is now treasonous.

Wall Street Journal 2/17/04

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