Wealth of Nations March 2006

A Third Industrial Revolution

A fascinating new article by former Fed Vice Chairman Alan Blinder argues that offshore outsourcing is potentially the timid beginning of a third Industrial Revolution.

Concerns about "offshoring"—shorthand for offshore outsourcing, or the migration of jobs from rich countries to poor—have subsided since the 2004 presidential election. John Kerry looked for traction there, but with no real success: His focus on the issue lent his campaign an un-Clintonian pessimistic tone, and his proposals, including tax penalties for American companies resorting to the practice, met with derision from most economists. The orthodox position on the subject, then and now, was expressed by Gregory Mankiw, at that time chairman of the White House Council of Economic Advisers. His view, politically awkward but applauded by most economists (and in this space as well, for what that's worth), is that offshoring is not such a big deal and, to the extent that it matters, is good for the economy and not bad.

A fascinating new article by Alan Blinder (in the March/April issue of Foreign Affairs) dissents from the first part of that consensus. Blinder argues that offshoring is potentially a very big deal. In fact, he believes that what we have seen so far is just the timid beginning of a third Industrial Revolution.

Aside from the merits of the article in question, Blinder deserves to be listened to. He is an outstanding economist—a professor at Princeton, the co-author of one of the best introductory texts on economics, a former member of the Council of Economic Advisers, and a vice chairman of the Federal Reserve. He wrote a marvelous series of lectures on central banking ("Central Banking in Theory and in Practice"), and his book Hard Heads, Soft Hearts: Tough-Minded Economics for a Just Society is probably the best treatise on economic policy for the general reader, bar none.

What makes Blinder's new angle on offshoring so interesting is that he is not afraid of the trend, nor does he want it stopped: He believes that nothing valuable can be done to deflect or retard it. He is well disposed to market forces, and in that sense is an optimist. Yet at the same time, he envisages enormous economic disruption, and urges policy makers to think hard, and urgently, about how to prepare for this.

His is a distinctive and very persuasive take on the issue. Most people opining on the subject have been either blasé (I plead guilty) or unduly alarmed. Blinder says that neither response is appropriate. Offshoring will be good for us in the end, but it could be a huge and wrenching phenomenon, painful for very many people, and a much bigger thing than generally acknowledged.

What is new in offshoring these days is that, for the first time, many jobs in services are at risk as well. Improvements in computing and telecommunications mean that when you pick up the phone to talk to your bank, you are quite likely to get Bangalore on the line. Yet, up to now, most economists have been relaxed about offshoring, partly because the numbers involved—large as they may sound—are really quite small. The evidence, such as it is (and Blinder rightly complains that the data on this are thin), suggests that less than a million jobs in services have been moved abroad to date. A million sounds a lot. Is it? No, in fact, not when you remember that ordinary job turnover in the United States displaces more than half a million people every week. As I noted in a previous column, Forrester Research, a consulting company, has estimated that 3 million jobs might move over the next 10 years (a forecast that aroused a lot of agitated commentary); but that figure is just 300,000 jobs a year, barely 1 percent of normal job turnover.

Blinder comes up with a very different ballpark figure of jobs potentially at risk. First, he says, there is the manufacturing sector, more or less the whole of it: about 14 million jobs. Because the vast majority of manufacturing workers make things that can be put in a box and shipped, those jobs are movable. Construction and mining jobs, nearly 8 million, will stay ("You cannot hammer a nail over the Internet"). Ditto, for political reasons, jobs in local, state, and federal government: an additional 22 million. Most retail trade, 16 million jobs, also requires a physical or face-to-face presence—but that is changing with the growth of online commerce: Some of those jobs will migrate. In addition, more than 70 million other jobs are in services of different kinds, and some of these services can be delivered electronically, either now or in the near future—education and health (17 million jobs); professional and business services (17 million); leisure and hospitality (12 million); finance (8 million); wholesale trade (6 million); transportation (4 million); and so on.

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