Highlights of Leamer review of the world is flat(sic)
Leamer_FlatWorld_060221.pdf (application/pdf Object)
From the countless facts that are material to whether or not The World is Flat, I have
selected just a few.
· The income distribution is not becoming flatter, neither between countries and nor within the US.
· Trade is a neighborhood phenomenon, close to home geographically and organizationally.
· Trade contributes to the decline in manufacturing jobs, but doesn’t seem to be the primary driver.
· Outsourcing of intellectual work is a small drop in a very large bucket.
· The US is extremely well positioned to compete in the Internet-based segment of the economy.
Outsourcing threat overblown:
1) Commerce declines dramatically with distance - not a small world after all. According to this empirical model, commerce between any two countries is proportional to the product of the masses (GDPs) divided by the distance
between them raised to approximately 0.9. An estimated
distance elasticity of -0.9 means that each doubling of distance reduces trade by 90%.
For example, the distance between Los Angeles and Tijuana is about 150 miles. If Tijuana were on the other side of the Pacific instead of across the border in Mexico and if
this distance were increased to 10,000 miles, the amount of trade would drop by a factor of 44. Other things held constant, expect the amount of commerce between Shanghai
and LA to be only about 2% of the commerce between Tijuana and LA.
2) GAO(2005) with “U.S. and India Data on Offshoring
Show Significant Differences.”
here is what the GAO (2005) has to say (BPT =
Business, Professional and Technical Services):
“The gap between U.S. and Indian data on trade in BPT services is significant. For example,
data show that for 2003, the United States reported $420 million in unaffiliated imports of
BPT services from India, while India reported approximately $8.7 billion in exports of
affiliated and unaffiliated BPT services to the United States.”26
Compared with an $11 trillion economy, those numbers are small potatoes, the Indian
estimate being less than 0.1% of GDP, less than the GDP measurement error by a wide
margin. Dividing those two estimates by say, $100,000 in revenue per job, that translates
into a low of 4,200 jobs to a high of 87,000. That compares with the US economy that
increases payroll jobs on average by almost 200,000 jobs per month.
3) The US has Extraordinary Advantages in the Use of the Internet.
There is one more thing that is really not flat: the Internet. The US is the primary home
of the Internet, and in many ways is the center of the New Economy. Fully 67% of
Internet hosts reside in the US (Table 3), and 23% of Internet users ( Table 4) compared
with a population fraction of 4.6%. Of course, China and India, because of their huge
populations, show up in the list of the top ten homes of Internet users, but my advice
nonetheless is: bet on the US.
4) A computer is both a forklift and a microphone. Clerks in MacDonalds no longer have
to be able to read or to compute - they only have to recognize the picture of a hamburger
on the cash register. That’s the forklift. It doesn’t much matter who punches the
buttons. Thus your intelligence advantage over me is eliminated by the computer, just as
your strength advantage was eliminated by the forklift. But for many other operations it
matters enormously who types on the computer. One example is computer
programming. The vast majority of people are incapable of producing commercially
viable computer code. That’s the microphone. It amplifies your natural advantages.
5) But: Physically, culturally, and economically the world is not flat. Never has been,
never will be. There may be vast flat plains inhabited by indistinguishable hoi polloi doing mundane tasks, but there will also be hills and mountains from which the favored will look down on the masses. Our most important gifts to our offspring are firm footholds on those hills and mountains, far from the flat part of the competitive
landscape. Living in the United States helps a lot, and will continue to. But those footholds will increasingly require natural talent.
From the countless facts that are material to whether or not The World is Flat, I have
selected just a few.
· The income distribution is not becoming flatter, neither between countries and nor within the US.
· Trade is a neighborhood phenomenon, close to home geographically and organizationally.
· Trade contributes to the decline in manufacturing jobs, but doesn’t seem to be the primary driver.
· Outsourcing of intellectual work is a small drop in a very large bucket.
· The US is extremely well positioned to compete in the Internet-based segment of the economy.
Outsourcing threat overblown:
1) Commerce declines dramatically with distance - not a small world after all. According to this empirical model, commerce between any two countries is proportional to the product of the masses (GDPs) divided by the distance
between them raised to approximately 0.9. An estimated
distance elasticity of -0.9 means that each doubling of distance reduces trade by 90%.
For example, the distance between Los Angeles and Tijuana is about 150 miles. If Tijuana were on the other side of the Pacific instead of across the border in Mexico and if
this distance were increased to 10,000 miles, the amount of trade would drop by a factor of 44. Other things held constant, expect the amount of commerce between Shanghai
and LA to be only about 2% of the commerce between Tijuana and LA.
2) GAO(2005) with “U.S. and India Data on Offshoring
Show Significant Differences.”
here is what the GAO (2005) has to say (BPT =
Business, Professional and Technical Services):
“The gap between U.S. and Indian data on trade in BPT services is significant. For example,
data show that for 2003, the United States reported $420 million in unaffiliated imports of
BPT services from India, while India reported approximately $8.7 billion in exports of
affiliated and unaffiliated BPT services to the United States.”26
Compared with an $11 trillion economy, those numbers are small potatoes, the Indian
estimate being less than 0.1% of GDP, less than the GDP measurement error by a wide
margin. Dividing those two estimates by say, $100,000 in revenue per job, that translates
into a low of 4,200 jobs to a high of 87,000. That compares with the US economy that
increases payroll jobs on average by almost 200,000 jobs per month.
3) The US has Extraordinary Advantages in the Use of the Internet.
There is one more thing that is really not flat: the Internet. The US is the primary home
of the Internet, and in many ways is the center of the New Economy. Fully 67% of
Internet hosts reside in the US (Table 3), and 23% of Internet users ( Table 4) compared
with a population fraction of 4.6%. Of course, China and India, because of their huge
populations, show up in the list of the top ten homes of Internet users, but my advice
nonetheless is: bet on the US.
4) A computer is both a forklift and a microphone. Clerks in MacDonalds no longer have
to be able to read or to compute - they only have to recognize the picture of a hamburger
on the cash register. That’s the forklift. It doesn’t much matter who punches the
buttons. Thus your intelligence advantage over me is eliminated by the computer, just as
your strength advantage was eliminated by the forklift. But for many other operations it
matters enormously who types on the computer. One example is computer
programming. The vast majority of people are incapable of producing commercially
viable computer code. That’s the microphone. It amplifies your natural advantages.
5) But: Physically, culturally, and economically the world is not flat. Never has been,
never will be. There may be vast flat plains inhabited by indistinguishable hoi polloi doing mundane tasks, but there will also be hills and mountains from which the favored will look down on the masses. Our most important gifts to our offspring are firm footholds on those hills and mountains, far from the flat part of the competitive
landscape. Living in the United States helps a lot, and will continue to. But those footholds will increasingly require natural talent.
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