Archive for March, 2004

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March 22, 2004

The “Outsourcing1” Issue: Good or Bad for Workers? � D2 Digest

Effect on employment

In the short term, negative. When a company outsources, domestic workers lose their jobs. This may be “frictional” unemployment, but it’s nasty if it happens to you. And in a recession “frictional” unemployment lasts longer, because employers take their sweet time to reinvest the money they save by outsourcing. It’s not good enough to pretend that short-run costs don’t exist.

In the long term, negligible. The domestic level of employment is a result of monetary policy, not trade policy. All previous scares about trade destroying jobs have proved to be bollocks, so these will too.

Effect on wages

There are two effects at work here:

If outsourcing improves the division of labour and increases national income (if the money saved by capitalists is reinvested at a profit), then it should be good for wages in the long term, as wages tend to rise in line with national income.

In the short term, outsourcing decreases the bargaining power of domestic workers, which is bad for wages. Particularly in an economic environment in which the labour market is slack and seemingly getting slacker.

More efficient technologies tend to increase wages. Union-busting decreases wages. Outsourcing has elements of both, so it is hard to say which effect will prevail. My guess is that in the long run, labour has always got its share of the returns to productivity improvements and so it will this time. But the short run (see above) could last a long while.

DD sez: It seems to me that, in principle, and in the long run, outsourcing is a form of trade and should be supported for all the reasons that trade should be supported. However, I certainly don’t propose to make that argument in front of a gang of recently-outsourced workers and nor should anyone else. There are real social costs to any technological revolution which should not be ignored. In general, society doesn’t internalise these costs to the companies in order to provide an implicit subsidy to innovation, but I am unsure that this subsidy is merited in this case. I haven’t tackled questions of international equity here; they are obviously important.

1In reality, “offshoring”. The jobs in question are not always being moved out of a company, and it is possible to outsource jobs without also offshoring them. But give up, this linguistic battle has been lost and “outsourcing” was a pretty nasty neologism anyway, so it’s not ground worth fighting over.

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March 22, 2004

Reaction to the Spanish Elections from Scott McClellan, David Brooks, and others – D2 Digest

You walked into the party
Like you were walking onto a yacht
Your hat strategically dipped below one eye
Your scarf it was apricot
You had one eye in the mirror
As you watched yourself gavotte
And all the girls dreamed that they’d be your partner
They’d be your partner, and

You’re so vain
You probably think this song is about you
You’re so vain
I’ll bet you think this song is about you
Don’t you? Don’t you?

You had me several years ago
When I was still quite naive
Well, you said that we made such a pretty pair
And that you would never leave
But you gave away the things you loved
And one of them was me
I had some dreams they were clouds in my coffee
Clouds in my coffee, and

You’re so vain
You probably think this song is about you
You’re so vain
I’ll bet you think this song is about you
Don’t you? Don’t you?

Well, I hear you went up to Saratoga
And your horse naturally won
Then you flew your Lear jet up to Nova Scotia
To see the total eclipse of the sun
Well, you’re where you should be all the time
And when you’re not, you’re with
Some underworld spy or the wife of a close friend
Wife of a close friend, and

You’re so vain
You probably think this song is about you
You’re so vain
I’ll bet you think this song is about you
Don’t you? Don’t you? Don’t you?
(Repeat until fade)

DD sez: Well really.

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March 10, 2004

“Grounds for Complaint”, by Brink Lindsey, published in the UK by the Adam Smith Institute – D2Digest

Fair trade coffee is a “politically motivated” niche, while “the fast-growing specialty coffee industry is developing and serving vibrant consumer demand”. Figure out the difference between these two products for yourselves.

Despite the fact that Fairtrade occupies only 1% of the US coffee market (it did in 2001, anyway; see below), its very existence will distort production forever.

Antiglobalisation activists are demonising the coffee producers and retailers, and this accounts for the recent decline in coffee drinking in the USA.

Works cited:

Oxfam (Sept 2002) &lt— most recent
Seattle Times (Nov 2001)
Federal Reserve Boston (Q2 2002)
Hillside Agricultural (2001-2002)
Proctor & Gamble (2002 annual report)
Coffee Assoc. of Canada (2002)
World Bank Agriculture Technology Note (June 2002) (relevant detail cited to an earlier 2001 report. More up to date numbers here
Economic Development & Cultural Change (Jan 1996)
House Committee on International Relations (July 2002)
World Bank Comodity Market Reform (2001)
Bohman & Jarvis, 1999
The Economist (Sept 2001)
World Bank PREM Note (Jan 1999)

ICO Coffee prices, change since September 2002:

Colombian Mild Arabica: +30.4%
Other Mild Arabica: +37.1%
Brazilian Natural Arabica: +51.8%
Robusta: +18.6%
Composite: +27.4%

I haven�t noticed the “coffee crisis” is the year before last�s story because I�m using a chart of coffee prices in which the scale is dominated by the 1994 and 1998 spikes to $2/pound, and didn�t use a log scale. Look out next week for my working paper on why “Dot Com Stocks Are Go! Go!”, citing only sources from 1999.

DD sez: But really, does anyone believe that paying farmers more is bad for farmers? Or that coffee producers are hanging on in a dead industry simply out of the hope of getting their hands on some of that sweeeeet Fairtrade moolah? Of course not. Lindsey is just engaging in pretty mindless epater les gauchistes. This is a real clunker from the author of “Against the Dead Hand”, which was apparently a pretty good book.

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March 10, 2004

The Penrose Report into the collapse of Equitable Life – D2 Digest

The important finding is that Equitable went bust because, fundamentally, it had always distributed more in bonuses than was prudent. This was actually always a selling point for Equitable�s sales force; that they paid policyholders more and held less �surplus� capital. Helas. Life assurance is actually a very simple business (nothing beyond high school maths) What makes it complicated is trying to do it with too little capital, as you have to decide two imponderables:

a) what is an acceptable risk of ruin
b) what risk of ruin you are actually running

Estimating the first is merely intractable; estimating the second is a metaphysical impossibility, unless you are prepared to extend frequentist statistics into the realm of human actions. US life assurers don�t run these risks; they are generally fully funded, which is why US actuaries have two years� less training than UK � we demand higher returns from our life assurance and so we occasionally get these blow-ups. Lesson learned for investors; don�t invest your money with people who boast about their low solvency margin. Lesson not learned for economists; �acceptable risks�, are defined as those risks acceptable to people who have not lost money.

The genuine culpability, though, was the regulators and company a) assuming without advice that Equitable would win its case in the House of Lords and b) remaining open to new business after it had lost. Taking new investors� money to pay off old and hoping that investment returns improve, is exactly what Charles Ponzi did.

DD sez: It isn�t the government�s fault that Equitable collapsed. The people who invested post 1998 should get compensated the full amount by the FSA; for the rest, it�s a hell of a shame but if caveat emptor is to mean anything it has to mean this. This will presumably dent confidence in long term savings for private pension provision, but that�s all to the good; it can�t be a good idea for people to have �confidence� in a fundamentally unstable product