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.

[phil_will1]

"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."

In addition to the suggestion posted above that we levy a tariff on overseas LD charges, I heard another idea that would seem to be worthy of consideration. That would be to require written permission from the client/customer before sending any confidential information, such as medical or financial records outside the US. With the legitimate concerns over privacy and identity theft, that would seem to be a reasonable measure.

Comments, anyone?

[A. Pole]

We had to turn to engineers who came here from India and the Middleeast. Meanwhile in the USA, we have high schools that produce kids ready to become environmentalists, diversity consultants, and democratic party campaign operatives.

Which is the cause and which is the result?

[Outsourcing=Competition]

The outsourcing is sending cheaper services to be done for less money. The better stuff: R&D and design remains here in the States. The biggest whiners are those expecting handouts or jobs for life.

[Happy2BMe]

You have heard of the "Dumbing Down" of America, right?

[Outsourcing=Competition]

Incorrect, USA, 1776-1930's.

What's that supposed to mean? That's the time when we expanded significantly from the narrow strip of land on the east coast to coast-to-coast and beyond. You want to compare a technologically primitive time to today?? Putting a ban on overseas trading today is almost as silly as Mass putting a ban on trading with the other states in 1776.

[Nataku X]

Regulations and taxes certainly don't help, BUT I doubt outsourcing would be reduced if we eliminated all regulation and taxes. Case in point: Factories are moving from Mexico to China. Why pay $10.00/hr if you can get someone do it for $100/mo?

[Nataku X]

Regulations and taxes certainly don't help, BUT I doubt outsourcing would be reduced if we eliminated all regulation and taxes. Case in point: Factories are moving from Mexico to China. Why pay $10.00/hr if you can get someone do it for $100/mo?

[Outsourcing=Competition]

A politician in New Jersey is trying to pass a law that all companies that outsource IT jobs cannot get State contracts.

Just like the politician who got a law passed that a foreign owned cruise liner couldn't go from one American port to another without a stop elsewhere. This was in an attempt to build up the shipbuilding industry -- it didn't work and American citizens can't get cruise liners that go from one island in Hawaii to the other, reducing tourism there. politicians...

[Outsourcing=Competition]

But did they think that only white college educated Americans could work a PC? They looked down their noses at blue collar "NFL" Americans all these years. Now it's their skill that has been cheapened.

Amen brother. There are more folks who can program nowadays so the price is falling and these guys ain't the prima-donnas anymore. So they're cribbing.

[Outsourcing=Competition]

None of them has managed to point to what "new" industries are prepared to employ the 4,000 to 6,000 people who get dumped on the street each day.

Well we made the same point when factories were going bust. And those folks got jobs didn't they? Well time moves on..

[Outsourcing=Competition]

You can have an export based economy, even if you are very rich, if you have a great comparative advantage,either in making something, or having some resource that is peculiar to your location (oil in the middle east, hydro power in Norway, etc).

Those are one horse economies. And what's the population of Norway? 5 million? How do you expect a big country like the US to be a one-horse economy?

[Happy2BMe]

It's not just the geeks losing jobs to overseas.

[Outsourcing=Competition]

Your identity could be stolen here in the US. in India they have the same laws -- they were forced to do so by companies here that don't want to get sued. The only place where a medical transcriptionist went beserk was in Pakistan which doesn't have those laws in place.

[A. Pole]

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.

Bad nasty engineers. They are too outspoken, too loud. Why don't they quietly go away like factory workers in the rust belt?

[Outsourcing=Competition]

Identity theft due to confidential personal financial information being available to offshore employees is a real issue. I expect we'll see some big stories on this in 2004.

I don't. The countries we're sending this stuff do would have to be stupid not to prevent any such instances happening or they would lose big bucks. And the cops elsewhere aren't so nice as ours.

[bvw]

Time moves on. And our national economy has become vastly more impaired.

Only by force of arms --- fear of those arms -- which we will be very hard pressed to keep in the forefront of, given that we've packed up all the machines and sent them to China -- do we stay the world's reserve currency.

At this time, what you are calling "outsourcing", is more like selling your children into the sex slave market.

[A. Pole]

Someone please tell me if I'm wrong, but it seems to me that income tax rates in this country play a major role in the outsourcing of services and production.

You are right. Tariffs should replace income/wage/payroll tax. The original system should be restored.

[A. Pole]

In order to maintain an export-based economy, the nation doing the exporting must always have a lower standard of living than its trading partners.

But running trade deficit does not mean that the standard of living will be higher (in the long term).

[Outsourcing=Competition]

GEt real, most of the outsourcing is big companies shedding non-core activities to other specialist companies -- and most of those specialist companies are in America. A bank outsources it's tech work to IBM AMERICAN workers so it can have a good year with lots of tech work one year and a leaner year the next without hiring and firing workers. AND it gets highly qualified workers. The highly qualified lot can do high level work without crests and troughs so they can hone their skills. It's like GM outsources it's parts to be manufactured by outside companies.

[A. Pole]

But, it wasn't just "an accident of history." Those resources were worthless until we applied ingenuity, sweat and freedom. The Indians had the same resources, and didn't do much with them.

One important point. In contrast with the Latin America (where top families own the most) the land taken from Indians was GIVEN FOR FREE to the all citizens in order to create the independent middle class. Freed blacks on the other hand did not get their "mule and forty acres" - results show until today.