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David Ricardo talks to Ben Bernanke

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Ben Bernanke is the latest famous economist to rail at the Chinese for daring to continue to sell us stuff at low prices. From the WSJ [2] (HT: Drudge [3]):

“Why have officials in many emerging markets leaned against appreciation of their currencies toward levels more consistent with market fundamentals?” Mr. Bernanke asks. Mainly, he says, because they are sticking to a long-term strategy of pushing for export-led growth with cheap exchange rates.

In my book, The Choice [4], I discuss outsourcing, in particular, the use of foreign workers instead of Americans to write computer code. The first speaker in the dialogue is the ghost of David Ricardo. He is talking to Ed Johnson, the head of a company worried about foreign competition. Here is an excerpt from their discussion. It explains why I think Bernanke is wrong to worry about China hurting the US.

“Suppose one day a brand-new car appeared in the driveway of every American with the keys in the ignition and a card on the front seat guaranteeing free gasoline for life. And there’s a note in the glove compartment saying that after five years, the car will be replaced by another free one. Would you drive that car? Would it matter whether it was a gift from an American or a foreign supplier?”

“Sure it would. If it were made by a foreign supplier it would mean the end of the American auto industry. You’ve told me that it has gotten smaller over the years. But free cars from foreigners would kill it.”

“So if you were president of the United States you’d go on TV and the radio and warn the American people of the dangers of accepting the gift. You’d tell them it was a Trojan horse that would destroy the economy from within. You’d collect all those cars for a giant scrap drive in order to preserve the U.S. auto industry and American prosperity.”

Ed hesitated. I could see there was something bothering him.

“What’s wrong?” I asked.

“That does seem a little bizarre, destroying all those cars.”

“Let’s flip it around. Suppose you wake up in the morning, and there’s no new car in the driveway—just the same one that you’ve been driving. But the president makes a similar speech. A government official will be coming to get your car and drive it off a cliff where the remains would be buried. Sure you’re going to have to buy a new car, but employment in the U.S. auto industry will increase, and prosperity will follow, won’t it? Or will it? Would that policy make America richer or poorer?”

“It would make Detroit richer.”

“That’s right. The auto industry would expand. But the country as a whole would be the poorer for it. You don’t get rich destroying things. You get poorer. And the opposite is the road to prosperity. Free cars—or merely less expensive cars—make the country richer. Bad for Detroit. Good for everyone else. And the harm to Detroit would be offset not just by your happiness because you’d never have to pay for a new car again. The other effect would be what you’d do with the money you didn’t have to spend on cars. And all the extra traveling you’d be doing with that free gasoline. A whole new set of activities would spring up. Some of those activities would use the workers from those abandoned auto factories. But there’d be new opportunities for young people just entering the labor market as well.”

“I see that.”

“That’s the part of the story that was missing when people complained about foreigners providing computer services at a lower cost than Americans. It did put some Americans in some industries out of work at first. But it let companies pay a lot less for computer services. Companies that couldn’t afford computers before were now able to. Companies that already were using computers expanded their use of technology. The worriers ignored all those benefits and all the new things that became possible because Americans didn’t have to spend as much as they did before to get computer technology. And as it turned out, only the lowest-paying computer jobs became less numerous. Those were the jobs that foreigners could do at a distance much more cheaply than Americans. Between 1999 and 2004, when the worries about outsourcing were at their peak, the number of computer programmers in America fell by 25 percent. But the number of software engineers rose by 50 percent, more than making up for the lost jobs in computer programming. Overall, the number of high-paying computer jobs rose by 17 percent, and the real wages of American workers in the computer industry increased as well. Outsourcing made most workers in the high-tech sector better off as demand for those skills increased.”

“But what happens when foreigners figure out how to do those jobs at lower wages?”

“Why, there’d be nothing interesting left for Americans to do. Americans would just shrug, pick up their laundry detergent, and report to the massive laundromat where everyone would work.”

“Now, Dave, don’t—”

“Sorry, Ed. I don’t mean to get frustrated. But your worry about what will come along to take the place of computer jobs is the oldest worry in the world. And it never, ever turns out to be true. Look at all the new jobs we’ve talked about tonight that didn’t exist in 1960. In 2060, there will be a whole new bunch of jobs we can’t imagine now that will come along and replace what Americans do today. The good jobs of today are going to disappear the same way that buggy manufacturers and leech ranchers disappeared. They will disappear because we will find new and cheaper ways to get things done. That’s good.”

“What’s a leech rancher?”

“Sorry, I made it up. When doctors used leeches, there must have been people who raised them. I don’t know what they were called. Something will come along in 2060 that will make today’s medical devices look like leeches. And the creative people who come up with those new products will find the resources and time to find those new products because the world’s wealth will grow and make those discoveries possible. There’s one more thing people ignored when they worried about Indians learning how to do something once done by Americans.”

“What’s that?”

“Both sides benefit from trade. America gets wealthier using cheaper Indian computer programmers. But India benefits, too. Do we really want to use only American expertise when America can benefit from the skills of Indians? Do we really want to keep those poor Indians from using their skills in a bigger, richer market that demands their skills? Very cruel.”

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