report

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Excerpt from the Testimony before the

Joint Economic Committee, U.S. Congress

"The Economic Report of the President" By N. Gregory Mankiw, Kristin J. Forbes, and Harvey S. Rosen

February 10th, 2004

New types of trade deliver new benefits to consumers and firms in open economies.

Growing international demand for goods such as movies, pharmaceuticals, and

recordings offers new opportunities for U.S. exporters. A burgeoning trade in services

provides an important outlet for U.S. expertise in sectors such as banking, engineering,

and higher education. The ability to buy less expensive goods and services from new

producers has made household budgets go further, while the ability of firms to

distribute their production around the world has cut costs and thus prices to consumers.

The benefits from new forms of trade, such as in services, are no different from the

benefits from traditional trade in goods. Outsourcing of professional services is a

prominent example of a new type of trade. The gains from trade that take place over the

Internet or telephone lines are no different than the gains from trade in physical goods

transported by ship or plane. When a good or service is produced at lower cost in

another country, it makes sense to import it rather than to produce it domestically. This

allows the United States to devote its resources to more productive purposes.

Although openness to trade provides substantial benefits to nations as a whole, foreign

competition can require adjustment on the part of some individuals, businesses, and

industries. To help workers adversely affected by trade develop the skills needed for new

jobs, the Administration has worked hard to build upon and develop programs to assist

workers and communities that are negatively affected by trade.

The Administration has also worked to strengthen and extend the global trading system.

International cooperation is essential to realizing the potential gains from trade. Trade

agreements have reduced barriers to international commerce, and contributed to the

gains from trade. A system through which countries can resolve disputes can play an

important role in realizing these gains.

From the Council of Economic Advisors

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Democrats Criticize Bush Over Job

Exports By Edmund L. Andrews

February 11th, 2004

Democrats in Congress and on the campaign trail, citing remarks by a top White House

economic adviser, accused President Bush on Tuesday of encouraging companies to

export jobs overseas.

''The Bush administration said that sending American jobs overseas is a good thing for

America and good for the economy,'' Senator John Kerry of Massachusetts, the front-

runner for the Democratic presidential nomination, said in a statement released by his

campaign.

''They've delivered a double blow to America's workers -- three million jobs destroyed on

their watch, and now they want to export more of our jobs overseas. What in the world

were they thinking?''

Mr. Kerry and other top Democrats were reacting to remarks on Monday by N. Gregory

Mankiw, chairman of the White House Council of Economic Advisers, who had been

summarizing his office's annual economic report to the president.

The new report predicted that the economy would gain as many as 2.6 million jobs this

year, which is more optimistic than most private-sector forecasts but barely enough to

offset the jobs that have been lost in the last three years.

Asked about the role of farming out production and services to low-wage countries like

China and Mexico, Mr. Mankiw acknowledged that the practice was on the rise but said

it would ultimately benefit the United States.

''I think outsourcing is a growing phenomenon, but it's something that we should realize

is probably a plus for the economy in the long run,'' Mr. Mankiw told reporters on

Monday.

''We're very used to goods being produced abroad and being shipped here on ships or

planes,'' Mr. Mankiw continued. ''What we are not used to is services being produced

abroad and being sent here over the Internet or telephone wires. But does it matter from

an economic standpoint whether values of items produced abroad come on planes and

ships or over fiber-optic cables? Well, no, the economics is basically the same.''

Many if not most economists contend that the expansion of free trade, in goods as well

as services, ultimately benefits all countries that participate.

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But anger over ''free trade'' has proved to be a potent issue for Democratic presidential

candidates, and it has eroded political support for Mr. Bush in major Midwestern

industrial states and in Southern states like South Carolina, where textile manufacturers

and furniture companies have shed tens of thousands of jobs.

Mr. Kerry voted in favor of treaties that greatly expanded international trade, including

the North American Free Trade Agreement with Canada and Mexico and a market-

opening treaty with China.

In Congress, numerous other Democrats seized on Mr. Mankiw's comments to attack

Mr. Bush.

''If this is the administration's position, I think they owe an apology to every worker in

America,'' said Senator Tom Daschle of South Dakota, the Senate Democratic leader.

''There is absolutely no justification for arguing that we could support jobs going

overseas, especially under these circumstances.''

Claire Buchan, a spokesman for Mr. Bush, did not contradict Mr. Mankiw's remarks but

said the administration was committed to ''free and fair trade.'' ''The argument that

we're exporting our good jobs is false,'' Ms. Buchan said Tuesday. ''American workers

earn the highest wages in the world. They are the most productive workers in the world

and in fact they are becoming more productive.''

Ms. Buchan said Mr. Bush remained committed to expanding free trade and opening up

more markets to American exports, but she added that ''the president's view is that we

need to work to assure a level playing field for goods and services.''

From The New York Times

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Some Democratic Economists Echo Mankiw on Outsourcing By Bob Davis

February 12th, 2004

White House chief economist Gregory Mankiw set off a political firestorm this week

when he said that outsourcing U.S. jobs helps the economy. But some prominent

Democratic economists make the same argument.

At a Monday news conference, Mr. Mankiw said that sending U.S. service jobs abroad

"is probably a plus for the economy in the long run." That is because foreign workers can

do the jobs more cheaply, reducing costs for U.S. consumers and companies.

"Outsourcing is just a new way of doing international trade," he added.

Since then, his remarks have brought sharp rebukes from lawmakers, including some

Republicans. "Incredible indifference," said Democratic presidential contender Sen.

John Edwards of North Carolina. "What planet do they live on?" Even Republican

House Speaker Dennis Hastert of Illinois said Mr. Mankiw's "theory fails a basic test of

real economics."

The White House has offered Mr. Mankiw only tepid support. Calls for his resignation

were "kind of laughable," said White House spokesman Scott McClellan, because the

economic team is "doing a great job."

Even among Democratic economists, though, Mr. Mankiw's remarks were mainstream.

"Basically I agree with Greg's thrust," said Janet Yellen, who was President Clinton's

chief economist. "In the long run, outsourcing is another form of trade that benefits the

U.S. economy by giving us cheaper ways to do things."

But Ms. Yellen added that many moderately paid U.S. workers are suffering because of

outsourcing, especially call-center workers whose jobs have been shipped to India and

elsewhere.

The controversy surrounding Mr. Mankiw's remarks spotlights the political potency of

the jobs issue this year. Since Mr. Bush has taken office, the U.S. has lost more than two

million jobs -- a statistic that has become a major point of attack for Democrats who cite

outsourcing as one cause. In recent months, the economy has sharply rebounded, but

job growth remains weak.

Mr. Mankiw, who is chairman of the White House's council of economic advisers, may

have been trying to put the outsourcing issue in perspective, and speaking more as an

economist than a politician. But to some critics he sounded cavalier -- for instance, in

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suggesting that high-paying jobs in radiology might be better done abroad than in the

U.S.

Said Laura Tyson, dean of the London Business School and another of Mr. Clinton's

former chief economists: "The traditional economic response does sound hard-hearted

and can be criticized for not taking nearly as seriously the dislocation as one should."

A chastened Mr. Mankiw said yesterday, "I wish I had been more clear at the press

conference; any loss of jobs is regrettable. If I suggested otherwise, I failed to

communicate."

Though Mr. Mankiw also trumpeted the administration's job-retraining initiatives, the

message was obscured by his outsourcing remarks.

"On efficiency grounds, he [Mr. Mankiw] is right," said former Clinton Labor Secretary

Robert Reich, meaning that the economy becomes more efficient when costs are

reduced through trade. But Mr. Reich, who advises Democratic presidential front-

runner Sen. John Kerry, said the administration hadn't made "a serious attempt to deal

with the profound structural problems of an economy in transition as it affects middle-

class jobs."

Monday, Mr. Kerry joined in the Mankiw bashing, saying the administration wants "to

export more of our jobs overseas." But Brad De Long, a former Clinton treasury

economist, cautioned that Mr. Kerry ought to be careful with his word because the

outsourcing trend is bound to continue. "Linking outsourcing to aggregate employment

decline is a bit of demagoguery that will bite him in the butt next February if he becomes

president," Mr. De Long said.

From The Wall Street Journal