For release: March. 25, 2004

Contacts:	Joe Elstner
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Outsourcing, Globalization Bring “Important Long-Run Benefits” To United States as a Whole: St. Louis Fed’s Poole

Link to speech.

MEMPHIS — Much of what William Poole hears and reads about international trade these days makes him apprehensive. Poole, president and CEO of the Federal Reserve Bank of St. Louis, addressed trade, wages and employment in remarks to students, faculty and businesspeople at LeMoyne-Owen College.

“Critics of free trade abound,” said Poole. “I’m convinced that outsourcing and globalization yield important long-run benefits for the United States as a whole. The case for free trade should not be offered defensively and apologetically, but clearly and forcefully.”

Poole noted that as is true of many developments increasing the nation’s well-being, trade gains are not achieved without cost. “It’s true that some workers lose their jobs and a number of them are unemployed, in some cases for periods too long to be labeled ‘temporary,’” he said.

Transitional costs stemming from unemployment caused by economic change have generated much discussion concerning the appropriate policy response, Poole said. “Some argue that public policy should attempt to counteract market forces driving outsourcing and other forms of increased international trade, while others argue that public policy should act in conjunction with market forces.”

Poole said that he is concerned that “fears associated with economic progress will lead to misguided policies that will generate large costs and minimal benefits even for those intended to benefit. My preference is for policies that allow markets to work better and that provide transitional assistance to those adversely affected.”

Recent controversy over international trade focuses on international outsourcing of activities such as computer programming and call centers. “What we’re seeing is an apparently new form of international trade—trade in services previously not subject to trade,” said Poole. “What makes service outsourcing possible now is a dramatic decline in the costs of communication, a result of advancing technology and the glut of fiber optic cable installed in the late 1990s.”

Changes in technology bring benefits, but they also force adjustment, Poole said. “If you work in a factory producing typewriters, you may not be pleased to see people buying computers,” he said. “If you work in a call center in the U.S., you may not be pleased to see companies contracting with call centers abroad.”

Protecting jobs by imposing trade restrictions imposes net costs on society, said Poole. Though trade restrictions produce benefits for some, the benefits are “more than swamped” by costs borne by others. Citing a study based on 1990s data, Poole noted that because of higher prices consumers had to pay as a result of trade restrictions, the consumer loss per job saved in the apparel industry was $139,000, an industry in which the average production worker’s wage then was less than $15,000. “In the sugar industry, the consumer loss per job saved was $600,000 and in the benzenoid chemicals industry, the consumer loss per job saved was over $1 million.”

Despite the inevitability of enlarged trade in information technology services, “the question remains how to limit adverse impacts on affected workers,” Poole said. “Firms have an obligation to do whatever they reasonably can do to cushion the effects of job losses, but there is only so much that individual firms can do. Costs incurred by U.S. workers stemming from job insecurity are therefore a public policy issue.”

Poole noted that since 1974, in certain cases where job losses can be tied to international trade, U.S. unemployment insurance has been supplemented by a program known as “trade adjustment assistance.” Qualified people may receive 52 additional weeks of unemployment insurance if they are enrolled in an approved training program. A similar program was set up for those losing their jobs as a result of the North American Free Trade Agreement.

In considering how to expand the job safety net, Poole cited one proposal by Lori Kletzer and Robert Litan to add wage insurance upon re-employment and subsidies for medical insurance to current unemployment insurance for full-time workers who have been dislocated, regardless of the reason, for jobs they have held for at least two years. “I have no position regarding the specifics of their proposal,” Poole said. “But in terms of making markets work rather than attempting to inhibit them from allocating resources most productively, the proposal has merit.”

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