Externalities and the problem with the outsourcing debate

As Hal Varian points out in his NYT column today, the problem with the outsourcing debate is that it doesn't treat costs and benefits in the same way.

The political problem with trade is simply this: when the dollars flow offshore, it is easy to identify those who are hurt. But when the dollars flow back, it is much more difficult to discern the beneficiaries.

The debates about trade are not about whether we should accept those good deals offered to us by cheap foreign labor - of course we should. The debate is all about who will capture the benefits from those deals and who will bear the costs.

Ideally, those who benefit the most from trade would compensate those who lose. In practice, virtually everyone benefits to some degree from cheaper goods and services, so compensation for those who lose from trade should come from general revenues.

As so often in the discussion of innovation (outsourcing being one, too), problems arise in dealing with externalities. The same goes for the problem of investments by 'knowledge seekers.' If it were possible to put a price on the benefits to a region of being an R&D hub and on the risk of having other regions catch up faster, there would be no need to suddenly fear FDI. A region could make a calculated decision on how much to pay (or charge) foreign firms. Unfortunately, there are often too many uncertainties involved to arrive at hard figures - especially in R&D intensive industries. But as it is, many of these regions probably do calculate and find that the positive externalities are worth quite a lot, i.e. multi-year tax-breaks, real-estate subsidies, etc.

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