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The Harsh Truth About Outsourcing
Business Week ^ | March 22, 2004 | Paul Craig Roberts

Posted on 03/20/2004 12:30:25 PM PST by sarcasm

It's not a mutually beneficial trade practice -- it's outright labor arbitrage

Economists are blind to the loss of American industries and occupations because they believe these results reflect the beneficial workings of free trade. Whatever is being lost, they think, is being replaced by something as good or better. This thinking is rooted in the doctrine of comparative advantage put forth by economist David Ricardo in 1817.

It states that, even if a country is a high-cost producer of most things, it can still enjoy an advantage, since it will produce some goods at lower relative cost than its trading partners.

Today's economists can't identify what the new industries and occupations might be that will replace those that are lost, but they're certain that those jobs and sectors are out there somewhere. What does not occur to them is that the same incentive that causes the loss of one tradable good or service -- cheap, skilled foreign labor -- applies to all tradable goods and services. There is no reason that the "replacement" industry or job, if it exists, won't follow its predecessor offshore.

For comparative advantage to work, a country's labor, capital, and technology must not move offshore. This international immobility is necessary to prevent a business from seeking an absolute advantage by going abroad. The internal cost ratios that determine comparative advantage reflect the quantity and quality of the country's technology and capital. If these factors move abroad to where cheap labor makes them more productive, absolute advantage takes over from comparative advantage.

This is what is wrong with today's debate about outsourcing and offshore production. It's not really about trade but about labor arbitrage. Companies producing for U.S. markets are substituting cheap labor for expensive U.S. labor. The U.S. loses jobs and also the capital and technology that move offshore to employ the cheaper foreign labor. Economists argue that this loss of capital does not result in unemployment but rather a reduction in wages. The remaining capital is spread more thinly among workers, while the foreign workers whose country gains the money become more productive and are better paid.

Economists call this wrenching adjustment "short-run friction." But when the loss of jobs leaves people with less income but the same mortgages and debts, upward mobility collapses. Income distribution becomes more polarized, the tax base is lost, and the ability to maintain infrastructure, entitlements, and public commitments is reduced. Nor is this adjustment just short-run. The huge excess supplies of labor in India and China mean that American wages will fall a lot faster than Asian wages will rise for a long time.

Until recently, First World countries retained their capital, labor, and technology. Foreign investment occurred, but it worked differently from outsourcing. Foreign investment was confined mainly to the First World. Its purpose was to avoid shipping costs, tariffs, and quotas, and thus sell more cheaply in the foreign market. The purpose of foreign investment was not offshore production with cheap foreign labor for the home market.

When Ricardo developed the doctrine of comparative advantage, climate and geography were important variables in the economy. The assumption that factors of production were immobile internationally was realistic. Since there were inherent differences in climate and geography, the assumption that different countries would have different relative costs of producing tradable goods was also realistic.

Today, acquired knowledge is the basis for most tradable goods and services, making the Ricardian assumptions unrealistic. Indeed, it is not clear where there is a basis for comparative advantage when production rests on acquired knowledge. Modern production functions operate the same way regardless of their locations. There is no necessary reason for the relative costs of producing manufactured goods to vary from one country to another. Yet without different internal cost ratios, there is no basis for comparative advantage.

Outsourcing is driven by absolute advantage. Asia has an absolute advantage because of its vast excess supply of skilled and educated labor. With First World capital, technology, and business knowhow, this labor can be just as productive as First World labor, but workers can be hired for much less money. Thus, the capitalist incentive to seek the lowest cost and most profit will seek to substitute cheap labor for expensive labor. India and China are gaining, and the First World is losing.


Paul Craig Roberts is a former Assistant Treasury Secretary in the Reagan Administration and a former BusinessWeek columnist.


TOPICS: Business/Economy; News/Current Events
KEYWORDS: offshore; offshoring; outsourcing; trade
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To: sarcasm
"You're neglecting the minor detail of state and local taxes."

Of the U.S.'s four most populous states (California, Texas, New York, and Florida), half of them have no state income taxes at all.

Nor does every city have an income tax.

So if you want to factor such things in, go right ahead...just don't expect me to do it for you (it's simply not worth my time and would hardly apply anyway).

141 posted on 03/20/2004 10:14:11 PM PST by Southack (Media bias means that Castro won't be punished for Cuban war crimes against Black Angolans in Africa)
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To: Southack
Yes, but what your Canadian study doesn't point out is that more Americans obtain more education each year...making data on the educational level wages of 1960 meaningless compared to 2000 simply because so many more Americans fit into the "college" catagory now than back then.

What percentage of the population has a college degree? Those who do not still compose a majority of the workforce.

Your Canadian study also uses a non-standard CPI calculation to adjust their wage data, and even then they conclude that American wages increased (albeit at a slower pace).

The non-standard CPI calculation that they used was devised by the Clinton administration in an effort to show that real wages hadn't declined - a good try by Robert Reich.

142 posted on 03/20/2004 10:14:20 PM PST by sarcasm (Tancredo 2004)
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To: lelio
What about state, local, property, and sales taxes? Oddly those have gone up.

Property taxes are tied to home values and state and sales taxes vary widely by state. I am not sure what the point is?

143 posted on 03/20/2004 10:15:31 PM PST by Texasforever (I am all flamed out.)
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To: lelio
"What about state, local, property, and sales taxes? Oddly those have gone up."

Not in Texas, which has no state income tax...nor in Florida, which also doesn't have an income tax...nor in Tennessee or Nevada or Alabama or any large number of other states.

I suppose a few states have passed increases in their income taxes, but some others such as California have REPEALED some of their taxes (e.g. car tax).

Now if you want to factor all of that in, go right ahead, but that's a bit beyond my interest in this thread.

144 posted on 03/20/2004 10:16:39 PM PST by Southack (Media bias means that Castro won't be punished for Cuban war crimes against Black Angolans in Africa)
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To: MegaSilver
I just don't see the point in allowing a nation like China to gain wealth.

I fully support your right to keep your own property out of the hands of the Chinese. I don't invest there myself. But as soon as I start thinking I have the right to tell other people what they can do with their money, I have to sign up for them telling me what I can do with my money. Collectivism works both ways. I don't want any part of it.

145 posted on 03/20/2004 10:19:16 PM PST by Nick Danger (Give me immortality... or give me death.)
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To: Texasforever
I am not sure what the point is?

That overall taxes have gone up. While people can point to recent decreases in federal tax rates (which are accompanied by an increase in the deficit) more services are pushed to the state level, and people have to pay more taxes then. You have to pay the piper.

Plus I don't consider it to really be lowering taxes if the deficit increases. Its just pushing payments further out.
146 posted on 03/20/2004 10:19:57 PM PST by lelio
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To: Southack
Sure - only 43 states have income taxes. A minor detail which shouldn't concern anyone.
147 posted on 03/20/2004 10:20:08 PM PST by sarcasm (Tancredo 2004)
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To: sarcasm
"The non-standard CPI calculation that they used was devised by the Clinton administration in an effort to show that real wages hadn't declined - a good try by Robert Reich."

Nonsense. The *actual* U.S. Government CPI, as linked in Post #50 on this very thread, shows that real, inflation-adjusted wages have INCREASED.

That hardly creates a demand for some new hybrid CPI calculation to show that wages haven't declined. That sort of thinking won't even pass the smell test...

148 posted on 03/20/2004 10:20:19 PM PST by Southack (Media bias means that Castro won't be punished for Cuban war crimes against Black Angolans in Africa)
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To: sarcasm
"Sure - only 43 states have income taxes. A minor detail which shouldn't concern anyone."

That's very true (finally). It shouldn't concern anyone since the point of contention was how many had *raised* their taxes, not that simply had them...

149 posted on 03/20/2004 10:22:46 PM PST by Southack (Media bias means that Castro won't be punished for Cuban war crimes against Black Angolans in Africa)
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To: Southack
That hardly creates a demand for some new hybrid CPI calculation to show that wages haven't declined. That sort of thinking won't even pass the smell test...

If you don't believe me why don't you research the issue?

150 posted on 03/20/2004 10:23:27 PM PST by sarcasm (Tancredo 2004)
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To: Southack
That's very true (finally). It shouldn't concern anyone since the point of contention was how many had *raised* their taxes, not that simply had them...

I suspect a goodly number have - mine sure have increased, even though we have a {cough} Republican governor.

151 posted on 03/20/2004 10:25:34 PM PST by sarcasm (Tancredo 2004)
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To: lelio
"That overall taxes have gone up. While people can point to recent decreases in federal tax rates (which are accompanied by an increase in the deficit) more services are pushed to the state level, and people have to pay more taxes then. You have to pay the piper."

So the answer to your question would reside in whether or not you can show that half or more states have raised their income taxes since the Bush tax cuts.

Can you show that, or is that not the case?

152 posted on 03/20/2004 10:26:37 PM PST by Southack (Media bias means that Castro won't be punished for Cuban war crimes against Black Angolans in Africa)
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To: lelio
Plus I don't consider it to really be lowering taxes if the deficit increases. Its just pushing payments further out.

Not really unless you believe economic growth will be flat from now on.

153 posted on 03/20/2004 10:27:50 PM PST by Texasforever (I am all flamed out.)
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To: sarcasm
That hardly creates a demand for some new hybrid CPI calculation to show that wages haven't declined. That sort of thinking won't even pass the smell test...

"If you don't believe me why don't you research the issue?"

What an ABSURD thing to say! Are you a listbot? Am I talking to a program rather than a person...because a cognitive human adult should reasonably be able to comprehend that I *already* researched the issue in order to first post the official U.S. government data showing wages are up (message #50, this thread) as well as listed examples of increases in personal wealth nationally (e.g. air conditioning in 98% of Southern homes now versus 1959, more cars per household, more Americans now own their own homes than back then, more Americans invest in the stock market, those stock market portfolios are larger now than then, etc.).

But all of a sudden I'm starting to have the opinion that I'm talking to last-word-itus software that simply tries to be annoying for as long as any humans will dare to post to it...

154 posted on 03/20/2004 10:31:34 PM PST by Southack (Media bias means that Castro won't be punished for Cuban war crimes against Black Angolans in Africa)
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To: Southack; sarcasm; lelio
Wages of US workers in real terms have generally decreased. They are lower than what they were in the '70's and '80's.

Here is the BLS data series CES0500000051 published in the BLS monthly Real Earnings releases for Total Non-Farm Average Weekly Real wages in 1982 Dollars:

Series Id:     CES0500000051
Seasonally Adjusted
Super Sector:  Total private
Industry:      Total private
Data Type:     AVERAGE WEEKLY EARNINGS, 1982 DOLLARS

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual
1970 314.15 314.46 313.90 311.58 312.65 311.17 312.30 313.36 311.94 311.32 309.85 311.86  
1971 312.90 313.06 314.82 315.06 316.08 317.19 315.69 317.54 318.42 319.39 320.38 322.34  
1972 327.62 328.58 329.53 331.23 330.44 331.41 330.69 331.63 332.70 334.60 333.77 333.87  
1973 334.01 334.26 333.82 332.34 331.78 331.94 333.64 327.99 328.76 326.66 327.23 324.96  
1974 321.48 319.78 318.04 317.23 317.94 318.31 317.25 316.39 314.08 312.91 308.37 308.09  
1975 306.48 304.43 303.58 303.33 304.92 305.32 303.23 306.41 304.97 304.63 305.03 305.53  
1976 306.05 308.55 306.71 306.90 309.16 308.81 309.09 309.70 309.43 308.22 309.59 309.24  
1977 306.39 309.66 309.05 310.23 310.46 310.21 309.59 309.73 309.97 312.68 311.54 310.34  
1978 306.85 309.66 311.22 312.10 310.91 312.12 311.41 310.31 310.13 309.66 308.56 308.38  
1979 307.37 306.78 306.65 298.65 300.82 299.52 297.84 296.97 296.20 294.47 293.28 291.83  
1980 286.69 286.14 283.85 281.18 279.40 278.12 278.64 280.31 279.67 280.40 280.81 279.89  
1981 280.85 278.05 279.63 279.35 279.07 278.07 276.33 276.59 274.20 274.86 275.52 273.12  
1982 268.82 276.22 276.00 274.72 274.33 271.74 271.77 271.91 272.69 270.47 271.68 274.65  
1983 276.54 275.53 276.30 276.23 277.29 277.43 277.98 275.63 277.91 280.38 279.39 279.45  
1984 279.53 280.26 280.00 281.60 279.67 280.47 280.47 277.33 278.14 275.72 277.15 278.73  
1985 276.37 275.27 276.01 275.89 275.71 276.23 275.18 275.88 276.32 274.77 274.48 275.59  
1986 274.78 274.87 276.90 277.35 277.96 276.23 275.75 276.92 275.14 275.51 276.80 275.58  
1987 274.98 276.27 274.09 273.20 274.18 272.22 271.81 274.00 271.80 272.54 273.32 271.58  
1988 271.19 271.52 269.85 270.72 271.26 270.65 270.72 268.34 268.65 270.74 269.09 269.55  
1989 270.42 268.83 267.88 267.89 264.53 264.99 266.29 266.55 266.23 268.36 265.77 265.30  
1990 264.41 264.21 265.02 264.17 264.29 264.96 263.51 260.90 259.98 258.20 258.69 258.44  
1991 257.68 258.18 257.54 257.97 257.77 258.95 259.07 258.75 258.75 259.38 258.00 257.99  
1992 257.81 257.99 257.98 259.43 258.61 257.43 257.93 258.35 258.38 257.45 257.39 257.33  
1993 258.32 258.02 257.33 258.88 258.13 258.01 259.06 258.30 259.35 258.58 258.93 259.10  
1994 259.39 258.46 260.20 260.54 260.48 259.90 260.31 258.75 258.17 259.89 259.43 259.60  
1995 259.15 258.84 258.79 257.47 256.67 257.81 258.53 258.46 258.80 259.02 259.29 258.31  
1996 255.06 258.78 258.23 257.96 258.49 260.22 259.40 259.94 260.74 260.36 260.62 260.82  
1997 260.43 262.11 263.17 264.20 264.50 263.88 265.12 266.73 266.55 266.93 268.43 269.07  
1998 269.58 270.80 271.07 271.75 271.76 271.06 271.78 273.12 272.78 273.54 273.84 273.80  
1999 273.59 274.37 274.24 274.42 275.12 275.73 275.61 275.61 275.36 275.28 275.36 275.36  
2000 275.93 275.60 273.89 276.20 275.51 274.75 274.95 275.05 274.49 276.00 275.50 274.39  
2001 274.64 274.10 275.87 274.89 274.12 274.42 275.75 275.51 274.08 274.86 277.27 279.28  
2002 277.83 278.28 277.76 277.38 277.34 279.99 278.29 279.09 279.41 278.90 279.30 280.07  
2003 279.00 278.16 277.49 276.67 279.19 279.29 279.24 278.08 277.33 278.96 281.09 278.80  
2004 279.68(p) 279.48(p)                      
p : preliminary

You can verify the source yourself. Go to http://data.bls.gov/cgi-bin/surveymost?ce and check "Total Private Average Weekly Earnings, 1982 Dollars - Seasonally Adjusted - CES0500000051" then retrieve the data and chnage the year range to include 1970-2004.


155 posted on 03/20/2004 10:34:20 PM PST by Starwind (The Gospel of Jesus Christ is the only true good news)
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To: WilliamofCarmichael
I was hoping they'd explain how Europe and Japan can outsource to us and do Okay but our corporations have to outsource to "developing nations'" cheap labor to survive.

Europe has a high labor cost/tax structure compared to the United States. My company bid software work at a schedule and price that no European company could legally match. That was in 1998. An Indian company could have eaten our lunch with their much lower labor rates (comparing rates today). The Indian competition was not there in 1998. It is here now. The 15 engineers that implemented the 1998 contract are now spread all over the U.S. in new assignments. They can not economically compete from the San Diego office that was so viable in 1998.

BTW, an Indian company could kick our butts on labor rate today, but I seriously doubt they could beat us in the areas of quality and schedule. For short fuse projects, we can deliver the goods before the Indians can even figure out what is desired.

156 posted on 03/20/2004 10:37:02 PM PST by Myrddin
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To: Southack
You're becoming testy and increasingly obnoxious. I merely stated that you might research the CPI-U-X1 and the connection with Robert Reich.

BTW, I still reject your conclusions. It's also laughable that you would call me a "listbot" while repeating the same argument that I already dismissed.

157 posted on 03/20/2004 10:40:37 PM PST by sarcasm (Tancredo 2004)
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To: Starwind
Thank you!
158 posted on 03/20/2004 10:42:54 PM PST by sarcasm (Tancredo 2004)
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To: Starwind
BLS Shows Average Real Wages Higher in 2004 Than in 1964

Your BLS source shows a net *rise* in wages if you go back beyond the stagflation spike of the early 1970's (when unemployment was high and far fewer women and minorities were available to the skilled labor pool). Click on the link above to illustrate.

159 posted on 03/20/2004 10:44:05 PM PST by Southack (Media bias means that Castro won't be punished for Cuban war crimes against Black Angolans in Africa)
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To: Starwind
Thanks for the informative post. From what I can tell it looks like Reagan put the brakes on what was a drastically reducing weekly salary (that fall of in just 1979 is scary), and then it started to fall under Bush I. Rose under the last bit of Clinton's term, probably mainly due to the dot com economy. Too soon to tell what's happening to wages right now.
160 posted on 03/20/2004 10:44:19 PM PST by lelio
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