Saturday, May 9, 2009

Mr. Obama, You need Lessons in Economics

Mr. Obama,

Chances are that you haven't read my open letter to you, posted some while ago. Chances are that you will not read this too.

In my previous letter I had a tiny paragraph on banning protectionism. For your convenience, here is the extract:

"Ban protectionism. Open up world trade. Will make you unpopular in America if you do it immediately. But has to be done and will happen whether America likes it or not. If the world has to prosper. Your call."

I am sure you are surrounded by economists of repute who advise you on important matters. I am therefore surprised how you could even dream of taxing outsourcing. The fact that you have been mentioning Bangalore quite often shows you are being misled. The roots of the US economic meltdown does not lie in Bangalore. Nor does Outsourcing to Bangalore or Beijing cause US misery.

One does not have to an economist to understand this. I am not. Fortunately there are many pop-economics books in the market that are very good. I would recommend that you go no further than Tim Harford's The Undercover Economist. Here is an excerpt:

A more extreme example may clarify things further. Think of a country whose government is very keen on self-sufficiency. 'We need to encourage our local economy,' says the Minister of Trade and Industry. So the government bans all imports and patrols the coast to prevent smuggling. One effect will be that a lot of effort will be devoted to producing locally what was once imported: this certainly is encouragement to the local economy. But another effect is that all of the export industries will quickly shrivel and die. Why? Because who would want to spend time and money exporting goods in exchange of foreign currency, if nobody is allowed to spend spend the foreign currency on imports? While one part of the local economy is encouraged, another is crippled. The 'no imports' policy is also a 'no exports' policy. And indeed, one of the most important theorems of trade theory, the Lerner theorem, named after the economist Abba Lerner, proved in 1936 that a tax on imports is exactly equivalent to a tax on exports.

Still wish to go ahead with taxing outsourcing, Mr. Obama?

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1 comment:

tushar dasgupta said...

hi!have read yr post..truly appreciate yr knowledge on economics and stuff relating to it.came to know many things i was unaware off..
please do not stop writing and keep it up...

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