How much is the job of a foreigner worth?

In my last post, I asked a basic policy question and mostly got denial in response. So I’ll try again, but in a kinder and gentler way.

Here is the question: How much is the job – or, more generally, the economic well-being – of a non-citizen worth?

The issue is plausibly raised by the debate over free trade. It is the widespread consensus of economists that eliminating barriers on goods and services delivered to the United States benefits the citizens of under-developed countries where those goods and services are manufactured or performed. Outsourcing jobs to India seems to be very good for India’s workers.

But free trade in goods and services might have some adverse effects on some Americans. Paul Krugman, for instance, argues that trade increases inequality between skilled and unskilled American workers. (See paper). The magnitude and causes of these effects are hotly disputed (by, among others, Lawrence Katz) and difficult to verify, because the data is apparently crude. But let’s assume some sort of distributively undesirable effect.

How should U.S. policymakers balance these effects? Should the welfare of non-citizens count at all? Or should we let Indians remain impoverished to prevent, say, a 15% drop in unskilled wages in the United States? The question is tellingly asked by "The Delmar Dog Butler: Is Outsourcing Killing America?", a must-see DVD produced by James Walsh, a University of Michigan Business School Professor. In the DVD, Walsh follows the career of Steve Relles, an engineer who is laid off by GE when his job is outsourced to engineers in India. Relles creates a business picking up the dog poop of neighbors’ pooches, and his salary drops from 50k to roughly 15k. Only his wife’s job allows the Relles family to pay their mortgage.

Walsh then travels to India to see how the Indians engineers are affected by out-sourcing. He interviews a young man whose life is transformed by his work at GE, despite what Americans would regard as an extremely low (15k) salary. Suddenly, the young Indian engineer can afford a moped, an apartment, and a marriage.

Walsh asks – and admirably does not attempt to answer – the question I ask here: How should policymakers balance these costs and benefits?

There are two basic approaches to this question. One is to grapple with it. The other is to deny that it exists. The latter approach involves the adamant denial that the citizens of under-developed countries are hurt by tariff barriers. On this account, there is no trade-off: Despite what virtually every academic economist says, everyone’s made worse off by globalization. This is largely the sort of response I received when I asked how Iraqi and U.S. lives ought to be traded off against each other. Several people simply said that the withdrawal of U.S. troops could not possibly lead to increased Iraqi casualties. It's all win-win, so why trouble oneself with unpleasant thoughts?

If you have an activists’ faith that your preferred policies cannot possibly hurt non-citizens, then, of course, there is no need to confront my question. I regard such zeal as a form of denial, although I envy such religious certitude. But for those of you with less faith and more doubt, I repeat my question: Suppose that it IS the case that trade is good for Indians but hurts some Americans? Suppose that there is a non-trivial plan that MoveOn.org is wrong about the effects of quick U.S. withdrawal – that the Iraqi casualty rate WILL spike? Just suspend your belief for a second: Assume that trade-offs of the sort I describe, if not certain, are at least plausible. How would you make them?

Would you, for instance, tolerate layoffs in the U.S. to prevent destitution – i.e., poverty unimaginable to any, even unemployed, American – in India? What's the right ratio between foreign and U.S. welfare?