The Reality of Outsourcing

Townhall.com ^ | Bruce Bartlett

[phil_will1]

Last week, Council of Economic Advisers Chairman N. Gregory Mankiw ran into a buzz saw. He committed a major gaffe, which in Washington means he spoke the truth, by defending the concept of outsourcing -- contracting with foreigners for information technology services. With a lack of job growth being the central economic issue in the country today, Mankiw's comments were assailed across the political spectrum. President Bush quickly distanced himself from his aide's remarks, House Speaker Dennis Hastert, R-Ill., repudiated them, and many Democrats called for Mankiw's dismissal.

There is at least one person in Washington who knows precisely how Mankiw feels: Federal Reserve Chairman Alan Greenspan. Back in 1974, Greenspan held the same position Mankiw now holds. Shortly after his confirmation in September of that year, Greenspan participated in an economic summit. At the time, the United States was in the middle of the deepest recession of the postwar period and inflation was rising rapidly. That year, the Consumer Price Index would rise 12.3 percent.

Greenspan was asked whether the Ford administration's policies were benefiting the rich over the poor. He replied: "If you really wanted to examine who, percentage-wise, is hurt the most in their incomes, it is Wall Street brokers. I mean their incomes have gone down the most."

Needless to say, Democrats had a field day attacking Greenspan for seeming to worry more about the problems of rich Wall Street brokers than those of common people. Although he quickly apologized, many observers believe that Greenspan was permanently scarred by the incident and forever afterward became far more circumspect in his public and even private comments.

Of course, when one gets caught in one of these Washington firestorms, there really isn't much one can do except apologize, hunker down and wait for the storm to pass. That is what Mankiw is doing. Unfortunately, the result is that debate on serious issues is often short-circuited and the political establishment draws erroneous conclusions. In this case, it may conclude that the issue of outsourcing is radioactive and everyone may rush to support ill-conceived legislative fixes with harmful economic consequences.

Here is the offending statement in the Economic Report of the President that has led to calls for Mankiw's head: "One facet of increased services trade is the increased use of offshore outsourcing in which a company relocates labor-intensive service industry functions to another country. ... Whereas imported goods might arrive by ship, outsourced services are often delivered using telephone lines or the Internet. The basic economic forces behind the transactions are the same, however. When a good or service is produced more cheaply abroad, it makes more sense to import it than to make or provide it domestically."

One would have a hard time finding a reputable economist anywhere who disagrees with this analysis. No nation has ever gotten rich by forcing its citizens to pay more for domestic goods and services that could have been procured more cheaply abroad. Nations get rich by concentrating on doing the things they do best and letting others produce those things they can produce better and more cheaply. It is called the specialization of labor, and it is the foundation for economic growth. That is why even Democratic economists like Janet Yellen, Laura Tyson, Brad DeLong and Robert Reich have come to Mankiw's defense.

What is different about outsourcing and why it has aroused so much protest is that it is affecting workers who thought they were immune from international competition. Blue-collar workers in manufacturing have been suffering from outsourcing for 100 years. It is worth remembering that textile jobs in South Carolina today were originally outsourced from Massachusetts. While in the short run, the transition was painful for Massachusetts textile workers, they soon found better jobs in new industries. That is why per capita income there is and always has been far higher than that in South Carolina.

It would be grossly unfair to say that it is OK to move manufacturing wherever production is cheaper, but wrong to subject information technology services to the same competition. It is mostly because of the Internet and the fact that IT people know how to use it that they are getting attention disproportionate to their numbers. Moreover, if we hadn't just gone through a painful economic recession, most of these people probably would have already found new jobs and the problem of outsourcing would not be worth writing nasty emails about to politicians and people like me.

In any case, even if the federal government tried to stop outsourcing, it cannot. We can put quotas and tariffs on goods that cross our borders, but it is impossible to stop people from importing software and data over the Internet. The only response that is possible is to adapt, innovate and stay ahead of the curve.

[Redcloak]

How are goofball industries any less "productive" than more traditional sectors. The money's still green, isn't it? It's still taxable. What difference does it make if the tax was paid by a widget maker versus a "diversity consultant"?

[riri]

right now, sales and marketing is a good place to be if you want to work in tech

Yeah it is. My husband just switched jobs. He went from a position at a manufacturing company to one at an engineering firm. (he's not an engineer, or IT,etc). But these guys working the sales end, aint a one of 'em bringing in less than $200,000 a year with all the perks. A couple of the better ones, VP's and such are kicking back close to half a million with their bonus plans.

[dljordan]

How funny! Now these arrogant American Geeks are getting theirs. You must feel gratified.

[XBob]

108 - "You can pay Americans to work for you and to not kill you at the same time."

At the rate we are going, I would think a lot contribute to WOMD laid out on Washington DC in the not too distant future.

[ninenot]

Nope.

YOU make the argument that the US SOL was lower than Europe's before 1950 and lower than Japan's after 1970--so YOU have to define SOL.

Most of us take the term as an economic indicator--you know, toilets/person, running water inside, heat, light, telephone, paved roads, availability of foodstuffs.

Regular old SOL.

[old-ager]

Yeah, the bull$shitters always make the big bucks. For a short time, the "geeks" got in on it, but too many of them were full of bull$hit too, and they got hammered. You can kind of take your choice in life: care about real, hard skills and actually making or fixing something, and maybe make enough to survive, or learn how to schmooze, manipulate, lie, and generally spin a line of bull, and make some real money.

[old-ager]

> sales and marketing is a good place to be if you want to work in tech

Sure, if you don't mind switching from actually creating, building or fixing things to manipulating, schmoozing, and lying.

[XBob]

126 - ""Home Depot for $40K"? I would rather think it is $20K."

40 K = 19.25/hr - great, where do we sign up, oceanview?

[Sender]

What happens, however, is the 2 see the problems, and do their best to get out of them. Thus, when we get the real immigrants, we are getting the 'cream' of the corp. What is happening however, with the illegals from Mexico, we are getting the 'french friers', who didn't have the forsight to get a good education and apply for visas.

Thanks for the insight.

[superloser]

You're absolutely dead-on.

I guess the term "standard of living" nowadays means the ability to consume what you desire on demand.

Most friends of mine who are observant note that we have become a "whats my monthly payment" society. The cost doesn't matter so long as the monthly payments can be made.

I wonder what will happen when the house of cards finally falls apart and the monthly payments cannot be made -- after all, in international trade, one has to have something of value to offer in exchange. If we're not producing anything, eventually, even our money will be worthless.

[XBob]

148 - "right now, sales and marketing is a good place to be if you want to work in tech."

most engineering types are lousy at this, as they are used to dealing with facts, not lies and dreams.

[Noumenon]

"One of the serious adverse affects of the industrial revolution (in all parts of the world, not just the U.S.) is that for the first time in history we had an enormous class of "free" people who relied entirely on employment by others for their livelihoods. "

Precisely. In some respects, a 'steady' job is an invitation to laziness. This wave of labor dislocation has occurred many over the last coupel of centuries. After reinventing myself and my career several times, I am now once again running my own IT consulting business. I've shifted my focus to SOHO and small to medium sized businesses who cannot afford an IT staff and who are most certainly not going to be outsourcing their needs. So far, so good.

[Alberta's Child]

People can go out an buy a new chinese made wardrobe, and chinese DVD players, and chinese furniture. But they can't afford to pay for health insurance.

You have got to be kidding me.

If people were willing to accept the same quality in health care that they are willing to accept in the manufactured products you've listed, health insurance would be cheaper than dirt in this country.

And if a Chinese manufacturer of DVD players faced a multi-million dollar "malpractice" lawsuit every time it sold a defective product, nobody would be able to afford DVD players.

[iconoclast]

We had to turn to engineers who came here from India and the Middleeast.

Awww ... save a few bucks in the transaction?

[oceanview]

if the choice is poverty, or lying. They'll learn to lie.

[A. Pole]

You live in a chaotic universe, get used to it.

People create the society and culture in order not to live in a jungle. Free marketeers should move to some jungle in Guyana or else and stay there.

[oceanview]

yes, I guess you are right. that's what you get for living on long island, where the public school teachers are making $100K, I guess I thought $40K for a home depot worker was fair.

[XBob]

engineers are lousy liers. Apparently you haven't worked with many. I have worked on both sides of the fence, engineering and sales.

Actors, lawyers, politicians, salesmen, entertainers - similar personality types.

Gardeners, engineers, carpenters, masons, computer programmers - similar personality types

[oceanview]

we can debate the medical care question another time.

my main point was: Americans standard of living as measured by material goods more reflects their ability to afford items whose true cost has been masked by the effects of globalism, in contrast to the cost of the US healthcare system, which has not been masked, and is thus unaffordable to most americans without government or employer provided assistance.

If we had hospitals costing $5 per day, doctors making $2/hr. and nurses making 50 cents an hour, providing our healthcare, the cost of the health insurance would look like the cost of that DVD player.

Not that I am complaining mind you, I've always said that at least when manufacturing went offshore, Americans got some benefit in the form of these lower priced manufactured goods. But I do not see any benefit coming back to me when my credit card company goes to India. My interest rate is the same, my cash back bonus is the same, and my customer service is much worse and they are selling my personal information on the streets of Bangalore.

[XBob]

197 - "
http://www.aft.org/research/survey01/index.html

The average teacher salary continues to fall well below the average wages of other white-collar occupations. While mid-level accountants earned an average $52,664, computer system analysts an average $71,155 and engineers an average $74,920, teachers averaged only $43,250 in 2001. Even in the schoolhouse, teacher salaries increased at a slower rate in 2000-01 than the salaries of superintendents, principals, school secretaries, teacher aides, custodians, cafeteria workers and bus drivers.

Teacher salaries vary considerably across the states. Connecticut had the highest average salary at $53,507. The other top five states were California at $52,480, New Jersey at $51,955, New York at $51,020 and Michigan at $50,515. South Dakota had the lowest average salary at $30,265. "

[Notebob] - teachers in Texas start about 24-26k, dependinging on area. walmart/home depot jobs $6-8/hr.