Why worry about trade

Brad DeLong has got me confused in his recent blog posting – Grasping Reality with Both Hands: Brad DeLong’s Semi-Daily Journal: Potential Reasons for Worrying About Outsourcing/Offshoring

You see, trade balances. What we buy equals what we sell, in value. What we buy and what we sell can be goods, services, or property, but it balances. If we have a comparative advantage in nothing–and export nothing–then we necessarily have a comparative disadvantage in nothing–and import nothing. Trade is thus an opportunity for us to move workers out of occupations where we are least and into occupations where we are most productive.
This doesn’t mean we shouldn’t worry about trade. But it does mean that the right reasons to worry about trade are relatively specific and relatively small in number.
I see four reasons:
* First, we can worry about trade because we can worry about what trade does to our income distribution: perhaps we would be happier with our income distribution and assess ourselves as having a higher level of social welfare if we made some of the things we import at home and didn’t make some of the things we export–even though each of our imports and exports makes narrow profit-and-loss getting-and-spending sense.
* Second, we can worry about trade because we worry about what trade does to external benefits from productive activity that boost growth: perhaps we would grow faster and become richer if we made some of the things we import at home and didn’t make some of the things we export–because making some things produces increased worker skills and technological knowledge through unpriced, un-accounted for channels.
* Third, we can worry about trade to the extent that it amplifies the ability of our dysfunctional government to dysfunction: the ability to borrow from abroad to cover deficits may diminish the pressure on feckless politicians and their supporters to deal responsibly with fiscal policy.
* Fourth, we can agree that increased trade is good for the nation, yet believe that government has to play an active and aggressive role in providing social insurance and a measure of compensation to those ground exceedingly fine by the mills of globalization–and the rise of
It is not clear which of these reasons is behind Alan Blinder’s current worries on outsourcing and offshoring. My worries about outsourcing are mostly (4). I worry somewhat about (2). But (1) and (3) are, I think, not on the agenda. Global outsourcing seems to me at least as likely to improve as to worsen the distribution of income. And the marginal amount of governmental fecklessness produced by access to global capital markets seems to me to be small.

What I don’t understand are the three statements in the beginning:
1) “You see, trade balances. What we buy equals what we sell, in value. What we buy and what we sell can be goods, services, or property, but it balances.”
Yes, trade balances – and right now we are selling property to pay for goods and services. That is the age-old formula for bankruptcy (or what Buffet calls the sharecropper economy).
2) “If we have a comparative advantage in nothing–and export nothing–then we necessarily have a comparative disadvantage in nothing–and import nothing.”
Yes, when you have a comparative advantage in nothing you eventually stop importing – and we all know how pleasant an autarkic economy is
3) “Trade is thus an opportunity for us to move workers out of occupations where we are least and into occupations where we are most productive.”
How does it follow that if we have a comparative advantage in nothing, we can move workers into more productive occupations?
Theoretically, it is impossible to have a comparative advantage in nothing – because other countries will put all their resources into those areas (wine or cloth) where they have the comparative advantage, there by opening up some areas for us. Practically, however, countries follow absolute advantage – I’m better than you in both wine and cloth, so I’m going to make both and not bother with your imports.
What Blinder said yesterday was that the occupations we should be moving people into are in the non-traded sectors. Note that Blinder’s work has been to show that there are fewer and fewer of this.
That is what worries me.

Valuing the workforce – not

How many times have we heard the phrase: “our employees are our most valuable assets?” Guess they don’t really mean it. Bottom line is that workers are a cog in the machine — as evidenced by Circuit City’s announcement: Circuit City Cuts 3,400 ‘Overpaid’ Workers:

Circuit City fired 3,400 employees in stores across the country yesterday, saying they were making too much money and would be replaced by new hires willing to work for less.
The company said the dismissals had nothing to do with performance but were part of a larger effort to improve the bottom line. The firings represent about 9 percent of the company’s in-store workforce of 40,000.
“Retail is very competitive and store operations just have to contain their costs,” said Jim Babb, a Circuit City spokesman. “We deeply regret the negative impact that was had on these folks. It was no fault of theirs.”

Steven Pearlstein summed it up nicely Attempts to Trim the Fat Merely Cut at the Meat:

But if retail is as competitive as Babb says, you’d think a merchant might want to keep its best salespeople — you know, the ones who know the most and have records of selling the most. That would be particularly true at stores where customers have lots of questions that need answering — for example, those at a chain that sells major home appliances, flat-screen TVs and digital cameras.

Let me pull a Jim Cramer here — SELL NOW. They obviously don’t have clue and are grasping at straws.
Opps — too late. Wall Street has already told us what it thinks. Circuit City dropped over 4% yesterday.

Needed — a new trade policy – part 2

Yesterday, Alan Blinder, Jeff Faux and Fred Bergsten debated globalization on the Diane Rehm’s show. I use the term “debate” loosely because, as is usual in these situations, they talked past each other.
1) Faux never acknowledged that trade agreements can have a positive effect. Yes Jeff, I agree that the situation is bad. As I’ve said before, the only good news on the trade deficit is that we are digging the hole at a slower rate. But not negotiating trade opening agreements with places like Korea will keep us in the same situation of still digging the hole. We don’t need to completely stop negotiating agreements; we need to negotiate better agreements.
2) Bergsten never acknowledged that re-training is a best a half-hearted solution (if you are not creating jobs) and that wage insurance only works in limited circumstances. The unemployed worker who called in is never going to get back to $28 an hour — he is not going to get back to where he was in a few years by taking a lower wage job and working his way back up as he learns the general and firm-specific skills. His wage insurance will be a partial subsidy for a few years and when he loses it, he will be worse off. Yes, Fred, trade has positive benefits but you have to be competitive to gain those benefits. And in this new economy of task-based competition, education and skill level alone aren’t nearly enough.
3) Blinder went out of his way to re-assert his free trade ideology. But, his solution was the most protectionists of all — retrain people to go into naturally protected jobs, i.e. in the non-trade sectors of personal services. Yes, Alan, but what happens as there are more and more losers who need to be placed in those fewer and fewer naturally protected jobs? And as our economy retreats into those naturally protected non-trade jobs, how do we earn the income we need to pay for our imports. A natural autarkic economy (which is what you end up with) is not much better than a politically imposed one.
And the discussion completely focused on the wrong thing — job loss rather than wage competition. Fred completely ignored wage competition and pointed to the low unemployment rate as a measure of success. Alan mentioned it in the beginning as the real point to his analysis of offshoring — and never brought it up again. Jeff simply asserted that trade increased inequality, but never explained how.
So — the wise men are all blindly groping around the elephant.

Needed — a new trade policy

Yesterday, there were a number of trade activities and articles. Lou Dobbs (and others) testified on Capitol Hill at the House Foreign Affairs Committee on Trade, Foreign Policy and the American Worker (something I had an indirect role in bringing about – but that is another story). The Wall Street Journal ran a front page story on how Alan Blinder (and others) are re-evaluating the free trade policy (Pain From Free Trade Spurs Second Thoughts). And Steven Pearlstein’s column in the Washington Post (An Opportunity On Trade) outlined a potential Grand Bargain of joining a more effective worker retraining and adjustment policy with continued open markets.
Pearlstein is right when he starts by saying “We’re at a crucial moment in U.S. trade policy.” But neither his Grand Bargain nor the House hearings get at the core of situation.
Economic competition and trade is shifting from industries to tasks (as the organization of work continues to evolve). That is the point Alan Blinder and other raise (see Blinder’s paper in Foreign Affairs- Offshoring: The Next Industrial Revolution?, the Grossman/Rossi-Hansberg paper at last summer’s Fed Jackson Hole symposiumThe Rise of Offshoring: It’s Not Wine for Cloth Anymore, and Baldwin – Globalisation: the great unbundling(s).
As that shift continues, a trade policy that tries to shift workers from one industry to another is bound to fail unless it deals with the fundamental competition between workers on the task level. And that competition is due to that fact that, as Pearlstein states, “even the best-paid workers in many of the best-behaved countries earn a fraction of the wages of American workers.” Yet our entire trade policy is based on moving resources and workers from rising industries and out of declining industries (as evidenced by market winners and losers).
My frustration with the system is unless we deal with the task competition, all the retraining in the world won’t help — because our re-adjustment policy thinks it is shifting workers to new industries (supposedly where there is competitive advantage here so the jobs remain here) while it is actually re-training people into tasks were there may or may not be a US competitive. We will end up repeating the experience of the late 1990’s of re-training folks for jobs in the computer industry exactly at the time when those tasks were beginning to come under intense wage competition.
As a result, taxing the winners to pay the losers (the standard solution to the downside of globalization) becomes an ever deepening hole – as there are no industries to shift the losers into, only tasks that continue to be subject to continued wage competition or are in non-traded sectors. And there in lies the second problem. As task competition increases, are the only jobs left for Americans only in non-traded sectors? If so, how do we then earn the income need to pay for our imports?
As Paul Craig Roberts has pointed out in Manufacturing & Technology News :

All advocates of offshored production for U.S. markets fail to explain how the United States can balance its trade and current account deficits when its work force is being redirected into domestic nontradable services. The United States has made it thus far, because the U.S. dollar inherited the reserve currency role after WW II. Although less inclined than previously, foreigners are still willing to accept U.S. dollars for real goods and services. This willingness is threatened by large and persistent U.S. trade and budget deficits.
(Tuesday, March 13, 2007 Volume 14, No. 5 – subscription required)

Obviously, I don’t have an answer for how we get out of this box. My real problem is that we don’t even seem to acknowledge that we are in the box. Labor and environmental standards (while I support) don’t touch the issue. Neither does “new industries” – if most of those new industries consist mostly of tasks which are subject to global wage competition.
My hope is that the Grand Bargain isn’t a splitting of hairs — but a chance to re-evaluation our situation. I know the chances of that happening are slim – but I remain an optimist.

Valuing the workforce – highly

One of the most problematic valuations of an intangible involves the workforce. How can a financial metric capture the skills and knowledge, especially of a highly technical workforce. Partly for that reason, accounting rules explicitly forbid placing a value on an acquired workforce as part of a merger or acquisition — while explicitly requiring the valuation of other acquired intangible assets.
Valuation experts say they can come up with a number for the workforce – based either on the replacement costs (what it would cost to hire the same set of skills). That, of course, does not take into account the organizational and interpersonal aspects of a team of workers.
Another way is to look at the market valuation. How much is the equities market willing to pay. That approach has its own difficulties — as the DealBook blog of the New York Times points out (Blackstones Million Workers)

Are Blackstone Group’s employees really worth an average of $50 million apiece? That value, based on reports that the private equity firm could be worth $40 billion in an initial public offering, “could well be the highest bounty ever placed on the heads of office workers,” Breakingviews writes.

The Breakingviews article compares that level to the $10 million or so value placed on AOL and Google at the height of the dot.com bubble and the current $5 million per worker valuation of Moody’s, which has a more sustainable business.
As is the case with other equities-based measures of intangibles, it is hard to separate the value from the froth.

Open source patent process – part 2

Earlier this month, I posted an item about a new Patent Office pilot project to use an open source method for patent information. On Monday I was at a presentation by Beth Noveck from New York Law School who is running the project, called Peer to Patent. The presentation provided additional clarification on the scope of the pilot.
Unlike how some have described it, it is not a Wiki but a much more controlled information gathering and sharing process based on many models – including Nature magazine’s open peer review process. Nor is it the open ended post-grant review process that some fear. It is designed specifically to gather and evaluation information on prior-art. It will not deal with issues of the scope of the claims within the patent or about patentability — although those may be added later.
Essentially, the system is designed so that participants may suggest cases of relevant prior-art, including a detailed description of the relevancy. Participant will then vote to rank the top ten cases, to be forwarded to the patent examiner. One of the evaluation criteria will be if the examiners feel the information is useful.
This pilot will be confined to software patents. Already GE, HP, IBM, Microsoft and Red Hat have signed up to have some portion of their future patent applications go through the process. As an incentive for companies to participate in the project (i.e. waive the requirement for no public comment), PTO will expedite those applications.
The pilot is not a substitute for the proposed patent reform legislation. In fact, for the open review system to work to its highest potential, several changes to current law that are in that legislation will be needed. First is universal publication of patent applications. Right now, the applicant can ask that the application not be made public. Obviously, that would prevent open source review.
Second, a change in the regulation is needed to allow comment. Right now, an outside party may submit prior art to the PTO in the patent examination process – but may not comment on the application or that prior art. Thus, there can be no description of why the prior art is relevant. The applicant can waive this requirement to allow public comment. This is how the pilot program gets around the regulation. Thus, the pilot project is completely voluntary. But for the system to work to its fullest potential, public comments needs to be allowed in all cases.
Third, the fear of being found guilty of willful infringement needs to be reduced. Scientists and company experts might be hesitant to participate, for fear that reviewing applications would be used later as evidence that they had knowledge of some invention beforehand willfully infringed on the patent.
All three of these were in the proposed patent reform legislation from last year.
Noveck would also like a change in the scientific grants process – to have scientists who review grant application also review the patent applications based on that research. My own bet is that the process will attract grad students like flies to honey. It will provide an excellent platform for bright young students to get the early recognition as an expert in their field needed to launch successful career.
IBM is already encouraging its employees to participate. The IBM representative at the presentation said that willful infringement does not apply to reviewing applications – only knowledge of a granted patent. IBM’s participation should reduce that fear of willful infringement.
One thing to watch as the pilot unfolds is its effect on valuations. This could be a big incentive to participate in the program: to get a stronger patent. Those who participate can legitimately claim they have a strong patent with greater certainty and less chance to be challenged later on. As a result of greater certainty, the valuation should be higher. That, in turn, will be a spur to the growing movement to monetize intellectual property.

What’s in a number

What is in a number? Lots of hidden value if that number is 212. According to a story in the Christian Science Monitor (Backstory: In area codes, 212 is the only-est number), phone numbers with the Manhattan area code are selling a prices starting at $250 and ranging as high as $9000 to someone in Los Angeles. The reason:

“If you had to assign a number to the center of the universe in the American mind, that number might as well be 212,” says Robert Thompson, a professor of media at Syracuse University in New York. “It’s probably one of the most intensely imagined square miles in the nation, and to a degree, in the world.”

I think I will stick with my 202 area code. Maybe I should even stock up. You know — 202, Washington DC, capitol of the free world, same starting number as the White House and the Congress . . .
Then again, it may not have the same panache. As the Monitor points out:

The geographic diversity of [number reseller Sal] Pugliese’s clientele only seems to validate what New Yorkers have always said: Civilization has a center, and they live in it. But instead of bodily moving to the concrete jungle – an old-fashioned notion in a cyberenabled world – this new generation of aspiring New Yorkers simply obtains the city’s area code. With three simple digits, they tap into the glamour of “Sex and the City,” Wall Street, Broadway, and P Diddy. They’ve made it.

Such is the power of intangibles.