This is from John Robb's Weblog.

Business Week takes a position that I find annoyingly facile: that just because a corporation CAN pay higher wages due to productivity increases that it WILL. We have see no evidence of that here in the USofA…what makes anyone think that's how it will work elsewhere?

Business Week. Excellent article about outsourcing. The central idea is that comparative advantage is now giving way to absolute advantage. Those factors that drove the US comparative advantage -- labor (educated and hard working), capital (investment at favorable rates), and technology (infrastructure and new tech) -- is now available in China (and to a lesser extent India). Other contributing factors: security, climate, and geography are also now non-issues. This change provides an absolute refutation of Ricardo's theories and yields:

It's not really about trade but about labor arbitrage. Companies producing for U.S. markets are substituting cheap labor for expensive U.S. labor. The U.S. loses jobs and also the capital and technology that move offshore to employ the cheaper foreign labor. Economists argue that this loss of capital does not result in unemployment but rather a reduction in wages. The remaining capital is spread more thinly among workers, while the foreign workers whose country gains the money become more productive and are better paid.

Bing! What does this mean for the US? Global equalization of incomes (a rapid decline for the US and a slow rise for the rest of the world). A rapidly increasing trade deficit. Climbing budget deficits. AWOL multinationals. Radical intrastate income inequality. Political unrest. Protectionism. Domestic terrorism. The list goes on....

There is no silver lining for Americans. Unfortunately, our economists will continue to believe the world is flat. The invisible hand and comparative advantage will provide, they will intone. Time for some new thinking.