Newsweek column on outsourcing

Newsweek ^ | 8-07-2003 | Michael Rogers

[samuel_adams_us]

Aug. 7, 2003 / 5:32 PM ET Readers on outsourcing: I’ve been corresponding with readers this week about two Newsweek pieces, one on the “jobless recovery” phenomenon and the other on offshore outsourcing. It’s a major hot-button topic, particularly among IT workers, but the mail for the most part has been quite reasoned, if somewhat sorrowful and resigned. A few readers asked some pointed questions:

Name: Marc Hansen Hometown: Seattle When all the Microsoft, Oracle, and IBM software production has been outsourced offshore, and when all Intel factories are completely automated, and when all Home Depot stores have self-check-out lines. ... my question is: Who, in America, will be able to afford the food that the McDonald’s robots cook?

Name: EV Hometown: Annapolis, Md. Where do all of these upper level managers think they will be when everyone has been outsourced? Guess they better learn Hindi or one of the other 18 dialects. You are only a manager if there is someone left to manage.

Name: Daniel E. Platt Hometown: Putnam Valley, N.Y. Sixteenth century Spain was quite rich on gold from America. While they funded the industrial revolution in the rest of Europe, they were largely left behind in the end. Are we doomed to the same fate? Or should we purchase a future at the cost of lower profit margins now?

Rogers replies: All good questions. Here are some personal tales from the trenches:

Name: Toni Klinger Hometown: Massillon, Ohio I am so angry. My husband is 59 and lost his job to Canada four months ago. Yesterday, my sister-in-law was notified that her skip-tracing job was going to India. Hey, no problem, she’s only been with the company for 21 years! I have never been so frustrated in my life. People in their 50s just can’t start over. I hate life!

Name: G. Popsworth Hometown: Dallas, Texas I am struggling with what to suggest to my children for a course of study at college. It is becoming more and more difficult for college grads to find employment. Now with outsourcing rampant, they need something stable for their career opportunities. A small town dentist, doctor or lawyer might be appropriate.

Name: Thela Jinseet Hometown: Clinton, N.J. Here’s my story: I am a journalist for an online publication, and I’m bracing for impact. My employer’s entire technical staff is from India, making up nearly 50% of the employees here. The owners of the company are also Indian and they outsource to a team in India. Our Indian employees are a real bargain because they work ungodly hours: 10- to 12-hour days every day and on the weekends. They are also extremely bright. And it’s for low pay. But there’s more. My husband lost his electrical engineering job four days after 9-11 from a major Japanese company that closed its plant and moved its operations to France. Despite graduating with honors from a top university, it took more than a year for him to find work. And just in time: We had two weeks of unemployment benefits left, which was barely enough to pay for our mortgage. This time, he saw a substantial cut in pay. I am truly frightened after our experience. I am scared to buy another house. (We had to sell ours for his new job.) I am scared to have a baby. We can’t afford to save for retirement. Pensions are a thing of the past. My company doesn’t even have a 401(k) plan or even direct deposit for paychecks. I fear we will be poverty-stricken when we retire at 75. Why isn’t Congress listening?

Rogers replies: There were also some suggestions about what to do:

Name: Bill Hometown: Roswell, Ga. Outsourcing customer service jobs overseas is a double-edged sword. One side slashes the number of jobs that are available to U.S. employees and the other side slashes the income taxes that the federal government can collect. Uncle Sam ends up funding unemployment benefits for U.S. citizens who are denied jobs that have been sent overseas. One solution may be to penalize these outsourcing companies in the form of a negative subsidy so that they can help pay benefits for the unemployed.

Name: Mike K. Hometown: Aurora, Ill. Outsourcing makes for some really profitable companies, but fewer consumers have the money to buy that company’s products. That profit won’t last for long. Remember the big “Buy American” kick back in the 80s? I think we’re on the way to the “Hire American” craze. Find out who outsources and who doesn’t and support those who support America by hiring Americans.

[Markd0713]

Preditory pricing or dumping product below cost is not fair. China has taken 80 of the electronic industry. Engineering and manufacturing for Circuit Board shops in the US are being laid off in droves. More than half of the domestic PCB manufacturers have shut their doors. I have Electrical Engineer friends that have been out of work for more than 1 year. Some have given up and are in real estate. One committed suicide. I guess the arguement boils down to, do you want cheap things, or are you willing to pay double and have a job? The jury is still out.

[Markd0713]

Preditory pricing or dumping product below cost is not fair. China has taken 80 of the electronic industry. Engineering and manufacturing for Circuit Board shops in the US are being laid off in droves. More than half of the domestic PCB manufacturers have shut their doors. I have Electrical Engineer friends that have been out of work for more than 1 year. Some have given up and are in real estate. One committed suicide. I guess the arguement boils down to, do you want cheap things, or are you willing to pay double and have a job? The jury is still out.

[hedgetrimmer]

Its a little long, but pertinent I think. My comments are at the bottom.

Free Trade (JOURNAL OF AUSTRALIAN POLITICAL ECONOMY)

The traditional case in favour of free trade is based on what economists call the ‘theory of comparative advantage’. Put simply, the theory says that everyone will be better off if countries specialise in producing and exporting the goods and services that they can produce comparatively more efficiently. Goods and services in which a country does not specialise are then imported. Two countries can benefit from trading with each other even if one country can produce everything more efficiently, because it is better for each country to specialise in what it can produce relatively more efficiently.

A number of strong assumptions about how the world works must hold for this theory to work in practice. These conditions include:

• For both countries to benefit there must be ‘perfect competition’, that is, a large number of buyers and a large number of sellers. In fact, world trade is dominated by large corporations that can often manipulate markets to suit their interests.

• There is no unemployment in either country. When there is unemployment, it may be better to protect against some imports even if it means consumers pay more for those goods because resources that would otherwise be idle are put to use

• Production of goods does not involve pollution or other costs that are not reflected in the prices of the imports and exports. Free markets are ‘efficient’ only when market prices reflect all of the costs of production, including the costs imposed on the environment.

None of these conditions hold in practice, so the core theoretical economic argument for ‘free trade’ is seriously weakened; yet the theory of comparative advantage remains the basis for those advocating further ‘liberalisation’ of the world trading system. This does not mean that trade is bad; it does mean that a strong economic case can be made for restrictions on certain types of trade and promotion of certain activities contrary to the rules of ‘free trade’.

The case for trade liberalisation has been backed up by the results of economic modeling studies, such as those using the ORANI/MONASH model by the former Industry Commission. But even though these models are built on a worldview that embodies the assumptions of freet rade, the results show that the economic benefits of bringing down tariff barriers are small (Hart 1992; Productivity Commission 2000).Moreover, the costs of structural adjustment and environmental damage due to the freeing of trade are generally left out of the models.

http://www.jape.org/jape48_4.pdf

**********

Perfect competition cannot exist in our world. I wonder if the idea of perfect competition falls out from the communist idea that with "perfect knowledge" any system can be manipulated ostensibly for the creation of that utopian heaven the communist state, by those people with perfect knowledge.

The question then becomes is perfect competition promoted by free traders another construct of "perfect knowledge" to promote communism? I have seen many quotes by Karl Marx backing up the idea that free trading will promote the communism.

[LS]

I find that hard to believe. A brand new plant was just built in Indiana about 4 years ago.

[LS]

Yep. You hit one of the nails on the head. You can't have ultra-high union benefits that aren't competitive with real-world prices and hope to sell steel.

[harpseal]

The comparative advantage theory of Free trade by the ecnomist Riccardo and he differentiated between comparative adbvantage and absolute advantage. Absolute advantage was confered by uthe use of slave labor or very low wage labor. Then instead of each nation producing what it could most efficiently the absolute advantage would be used to maximize profits for theholders of slave or those who employed the very low wage labor. a nation using absolute advantage in Free trade Riccardo said should face tariffs for its exports.

[SouthParkRepublican]

”The companies are going to charge the consumer whatever price they think the consumer is willing to pay.”

Correct. Any CEO who came out and said that they were going to sell a product below market value because they were able to reduce operating expenses would be out of a job himself.

The only way prices come down are lack of external demand and/or competition. In some distant time when ALL services that can be exported are exported we will see prices drop as a result of corporations willing to sacrifice margins to gain market share. The question is if we will have the money to buy these products at that point.

[LS]

No kidding. I work in a university, and while my university isn't yet overrun with Indian/Asian teaching assistants, I know many that are because of EXACTLY the reasons you say. Moreover, at my school, I ask for a show of hands from the freshmen: how many want to go into owning their own business (maybe 1-2 out of 35); how many are in science, math, or engineering (maybe 2-3, in engineering. None in hard sciences and never anyone in math).

Harp and his cronies can whine and call names all they want but the fact is, they are in competition to produce value, and if the value isn't produced, the companies will flat leave.

[Dialup Llama]

> Just for the heck of it I was comparing prices for polo shirts. I saw one that had the "Made in USA" label. Kind of unusual, I thought, I didn't know we had much of a textile industry. Very nice product, good material, priced at $19.99. There was another rack with similar items, labeled Made in China, priced $17.99. Not bad stuff, not as comfortable-feeling as the domestic product. We ended up buying the American product not because of patriotism or price or because I love the "Union Label" (Lord knows I don't), but because we thought it would be more comfortable to wear.

>Now, a $2 price difference. How much do you think that shirt cost to made in China and bring over here? I sure don't have exact figures, but what's a reasonable guess, maybe a couple of dollars, given what we know about what Chinese workers make? So where is the big savings for the consumer?

Exactly right! I have some interesting experiences like that to relate. I was trying to buy an auto battery recharger. Everything was made in China and they were those cheapo trickle chargers with plastic cases.

In ONE store, I found a wonderful rapid charger with a heat sensitive cutout (much more electronics and safety than the trickle charger). In was made in the USA and CHEAPER than the Chinese chargers which seemed to be present at every auto store I went to. The USA charger had a steel case and was well made. As ham operator, I know what to look for. It was great. Where are the consumer savings for the much cheaper to make Chinese charger? I'm not seeing them. I'm sure the US company is now out of business, but they had a superior product that was CHEAPER yet the inferior Chinese charger which crowded them out.

And what about those legendary Indian programmers who work 10 cents to the dollar? Any end cusomer of programming services IS NOT going to get a discount of 90%. What the Indian firm will do is simply lay in a bid slightly lower than the lowest bid. There are no end consumer savings in offshoring all this programming. It all goes to the executives' pockets.

[hchutch]

And if the ChiComs really tick us off, we can send their economy to FUBAR. We also have the ability to shut down their trade.

They got a problem - it's one that happened to the Soviets and caught up with them by the late 1980s. They got a nasty overspending problem, too. And, oh, by the way, they're behind us technologically. Why else do you think they engage in wholesale patent infringement?

But that is beside the point. The real point is that "achievement" and "profit" have become a pair of dirty words in American society - and until that is undone or mitigated, no amount of protectionism will end the cycle. Too many people buy the class envy that is going on, including some who call themselves "conservatives".

[harpseal]

'Traitor' is one of the more mild names; one poster commonly calls supporters of free trade 'marxists'First Marxists should be capitalized. and actualy it is a fair description of many who support the current trade ebvirornment. Marx was an opponent of tariffs because he thought they interupted the free flow of capitalism arround the world and would delay the onset of communism by allowing some nations to have a proletariat taht was better off. Marx was familiar with the 19th Century British tariffs that were done away with in 1848. Now tariffs are plainly irreleveantin a communist world and the dictatorship of the proletariat has no need of Tariffs (see Lenin's writings on the subject.) Since the state controls all imports and sets the prices at which they are sold for the good of the state we need no tariffs except for any vestigages of capitalism taht remain. he actually did impose non tariff barriers to imports by ordinary citizens. Now the People's Republic Of China maintains tariffs for consumer goods. because they a re a non Marxist entity now or perhaps because tehy have adopted some Captalist elements to goalong iwth their Marxist ideaology.

To call a "Free Trader" a Marxist may have justification. Since the PRC is still nominally a Marxist nationcertainly adherents of teh PRC might well be called Marxists at the very least Free Traders should be termed Clintonistas. Now is there a difference between a Clintonista and a dedicated Marxist? That is beyond my ken.

[LS]

Republican platforms supported subsidies to railroads (dumb), government-monopolized money (bad idea, and tariffs (terrible business/competitive policies). The Republicans succeeded because of their CORE value, liberty of the individual---"free labor" (note, not "subsidized labor") and no slavery.

The problem was that the Dems believed in even LESS individual liberty---no companies at all; a rigid gold standard that didn't allow people to start banks; and slavery. Of the two, the GOP had the better policies, but hardly perfect. If you are trying to find cohesion in the economic policies of the early Republic or the early GOP, good luck. Hamilton never even read Adam Smith as far as I know---he was an old fashioned mercantilist at a time that Spain was COLLAPSING in mercantilism. But what Ham. did know was that the best way to fund the government was through loans of the wealthy (i.e., bonds), not taxes and not tariffs. The tariff was for "protection," which, by all studies we have now, was negligible in its impact and certainly was harmful after 1840.

[LS]

By your definition, if you don't like the income tax (a constitutional amendment) you are a traitor?

[Alas Babylon!]

BFL...

[hchutch]

I've never argued for them. I just said we had no right to force them to remove the tariffs.

We have the OPTION to reciprocate - I have never said we don't. I just don't think we need to exercise it, particularly as a cover-up for bad public policy decisions we've made that created a difficult business climate. America needs to be mature enough as a nation to undo the bad decisions we've made.

[harpseal]

No kidding. I work in a university, and while my university isn't yet overrun with Indian/Asian teaching assistants, I know many that are because of EXACTLY the reasons you say.

someone who claims to work in a University should really be more rigourous in their thinking.

Moreover, at my school, I ask for a show of hands from the freshmen: how many want to go into owning their own business (maybe 1-2 out of 35); how many are in science, math, or engineering (maybe 2-3, in engineering. None in hard sciences and never anyone in math).

Now a whole lot depends on the specific class you teach at this University. Do you get a random sample of students? Is 1 or 2 out of 35 unusual for those who desire to be entrepneurs while in college? This numbe ris meaningless. now as to those who want to go into engineering,ath or teh hard sciences given the current employment opportunities and why would a bright yound student wish to invest $100,000 plus or minus in a difficult ciuriculum to fwind up only being employable is a Wal Mart or Burger King?

Harp and his cronies can whine and call names all they want but the fact is, they are in competition to produce value, and if the value isn't produced, the companies will flat leave.

I totally agree companies are at least in theory in competition to produce value and that prodcing such value requires captial investment with a risk.return ration to justify said capital investment. Our current trade envirornment involves a government subsidy (OPIC) that places the political risk of overseas investment on the US taxpayer (along with currtency convertability risk) while doing nothing to improve the rate of return in teh USA. Products created in the USA face high tariffs in China along with non-tariff barriers and a manipulated currency. This artificially diverts American invest from where a free market would have it. If one does not like tariffs then one has a responsibility to come up with some other bargaining chip to trade with China for teh opening of their markets. I will leave aside for now the past effects of currency manipulations etc for India and subsidized industries for many nations.

Care to step up to the plate or do you just enjoy one line lies?

[SouthParkRepublican]

”By your definition, if you don't like the income tax (a constitutional amendment) you are a traitor?

I might have missed something (long thread) but I don’t think anyone was saying that not liking something in the constitution makes a person tratorious. There does seem to be a bit of a conflict if you support a communist nation’s (China’s) right to impose tariffs on US exports but rail against the US reciprocating.

[superloser]

Our parents and grand parents would be disgusted with what this country has become.

ARE disgusted. My grandfather once said to me, "I went to war to fight for this?"