The Harsh Truth About Outsourcing

Business Week ^ | March 22, 2004 | Paul Craig Roberts

[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.

[Southack]

Likewise, *this* official U.S. government source also shows U.S. wages rising since 1959 even after being adjusted for inflation.

[sarcasm]

Too soon to tell what's happening to wages right now.

I have a feeling that many already know.

[Starwind]

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).

You have selected a different data series, hourly wages, which given variations in weekly hours worked isn't the same. Select CES0500000051 if you wish to compare apples to apples. If you do so, you will see what I said was true for '70-'04 remains true for '64-'04.

However, even looking at the series you picked, over a forty year period from '64 to '04 hourly wages rose from $7.80 to $8.30 - that is what you call increased wages paid to America workers?

A 50 cent raise over forty years?

No wonder they used to give gold watches at retirement.

[Southack]

"You have selected a different data series, hourly wages..."

Yes, the point of contention was whether hourly *wages* had risen or fallen, after all.

And your source shows an inflation-adjusted *gain* in U.S. wages.

That's better than a loss, btw!

[Starwind]

Likewise, *this* official U.S. government source also shows U.S. wages rising since 1959 even after being adjusted for inflation.

They claim it the same BLS data which I graphed for you. If you look at the spreadsheet column "Average Weekly Earnings Total Private 1982 Dollars" in 1964 earnings were $283 and in 2004 $279.45 - a decrease.

Giving you the advantage and cherry picking the first lowest data point in 1959 earnings were $260.86, which yields a whopping $18.59 weekly raise in 45 years.

An $18.59 weekly raise in 45 years - from your own data source.

[Southack]

"An $18.59 weekly raise in 45 years - from your own data source."

Yes, an inflation adjusted *growth* of wages in the U.S.

It was a binary question, after all. Did "real" U.S. wages go up or down?

Per your source, my source, and even sarcasm's Canadian source...wages went up.

[Starwind]

And your source shows an inflation-adjusted *gain* in U.S. wages.

Please be specific. I do not see an "inflation adjusted" gain in the CES0500000051 '70-'04 data I posted. That data series shows a loss in real wages.

That's better than a loss, btw!

Whether from your chosen BLS hourly series CES0500000049 showing an inflation adjusted 50 cent hourly gain over 40 years, or your budget source showing an $18.59 weekly raise in 45 years is 46 cent/hour, both are about the same, and measured in pennies per year.

Pennies per year. Yeah, better than a loss.

It was a binary question, after all. Did "real" U.S. wages go up or down?

That is your excuse, after all? You'll declare economic victory for pennies a year (and relying on cherry picked data), just because in absolute binary terms a few pennies a year is "up"?

A few more pennies per year is the core of your argument?

[Nick Danger]

with regard to AI, computer chip manufacture, and that sort of thing - the argument ceases to be frivolous.

If you wish to advocate that people not invest there, have at it. If what you are proposing is that governmental force be used to compel other people to invest the way you think they should, count me out.

It must also be remembered that the Chinese will graduate 350,000 engineers this year to our 90,000.

Yeah, well, they don't have crazy lesbians running their school systems, trying to create a society where all the males have been drugged, shunted aside, and deliberately dumbed down so that the wimmins can have all the jobs. It's a wonder we have anyone left in engineering school except the Chinese and Indian students. In the graduate engineering schools, I think it is mostly foreign students. So the crazy lesbians are succeeding. Don't blame the Chinese... we all sat back and watched this happen to our schools. We still aren't doing anything about it, even though the only thing they have left to accomplish is to make it illegal for boys to attend school. The UnTaliban, right here in the good old USA. And you worry about the Chinese?

[Southack]

"Whether from your chosen BLS hourly series CES0500000049 showing an inflation adjusted 50 cent hourly gain over 40 years, or your budget source showing an $18.59 weekly raise in 45 years is 46 cent/hour, both are about the same, and measured in pennies per year.

Pennies per year. Yeah, better than a loss."

Yes, better than a loss. U.S. wages have risen, even after being adjusted for inflation. We are wealthier today than back in the past.

Thus, people are incorrect to claim that U.S. wages have fallen on average.

That was the fact being debated.

[lelio]

In the graduate engineering schools, I think it is mostly foreign students. So the crazy lesbians are succeeding.

So the recent 33% drop in application to MIT's comp sci department is due to ... crazy lesbians?

[Starwind]

We are wealthier by a few pennies per year today than 45 years back in the past.

[lelio]

We are wealthier today than back in the past.

By 50 cents an hour.

[Southack]

We are wealthier today by a few inflation-adjusted pennies per *hour* than we were half a century or so ago.

[Starwind]

We are wealthier today by a few inflation-adjusted pennies per *hour* than we were half a century or so ago.

Your math is wrong. Your "wealth" nets out to about 1 cent per hour over a 45 year period, by either source you quote.

Find a bank that will pay interest on such a substantial deposit.

[Southack]

Well it only took 175 posts or so, but we've managed to come to a *consensus* that Marx was wrong after all...that wages really aren't down in our capitalistic society...that we really aren't impoverishing ourselves...and that we really aren't doomed to rebel against some mythical "ruling class."

U.S. wages are up, it seems, by every source listed so far.

[Southack]

"Your math is wrong. Your "wealth" nets out to about 1 cent per hour over a 45 year period, by either source you quote."

Don't you mean, by over 1 inflation-adjusted cent per hour *per year* on average?!

[Texasforever]

Find a bank that will pay interest on such a substantial deposit.

Well how high do you want interest rates to go?

[lelio]

U.S. wages are up, it seems, by every source listed so far.

If you want to rally around being able to buy an extra cup of coffee a day, go right ahead. Just don't be surprised when people who stayed with this thread just laugh.

[Texasforever]

If you want to rally around being able to buy an extra cup of coffee a day, go right ahead. Just don't be surprised when people who stayed with this thread just laugh.

I am having trouble finding the humor. I have been following the thread and it seems that Southack has made his case.