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.

[Myrddin]

My wife teaches technology in a GA high school. From what I have heard from her, in a 'typical' class there will be a handful of bright overachievers that are really sharp and mostly bored by the dull pace of school. Add to the mix a handful of special ed kids who would be thrilled to graduate knowing how to tie their shoes. The vast bulk of the class is made up of 'average' kids whose writing skills are atrocious and who hate math and literature and mostly just hang out doing the minimum until they can get home to microwave some food and continue hanging out.

I taught an class in basic microprocessors and firmware design at a junior college for 3 1/2 years. That distribution of skills sounds like a normal classroom. I usually started with 60 people and about 35 finished. There would be 1 to 3 hotshots who needed minimal direction to succeed at an outstanding level. At the bottom, I had 1 or 2 that were tenacious enough to stay in spite of enormous difficulty in comprehending the subject matter. In the middle, I had trainable people who could follow directions and succeed. The class was dual funded by the college district and the Regional Occupational Program. The ROP folks reported that 91% of the students that completed my class over 3 1/2 years were hired by DEC and IBM. BTW, the age range was 15 to 71. Quite a span of age, experience and maturity.

[harpseal]

Tariif's on internet data transfers van be collected vis the corporate income tax return with no real additional infrastructure.

[phil_will1]

"'Worst economy' etc. was intentional fiction, written by Democrats to get votes. The people who wrote the phrase were sitting in a $800,000 house when they wrote it."

I spoke with a friend this morning. His wife works for a bankruptcy firm. He said that, prior to 2001, that firm almost never had as many as 150 filings in one month. Since then, they have had one record month after another. They are now up to somewhere in the 800 range per month and next month will probably be another record.

I met with a Democratic congressman recently, but he isn't really a far leftist. He said that back in the 60s the pay multiple of CEOs vs average workers was something like 40 or 50. That multiple is now up around 1500, if memory serves. The gap between the haves and the have nots is growing exponentially. This does not bode well for our society. Republicans who are in denial (like the current administration) may be in for a rude awakening. I saw a poll just yesterday that said that that the economy and jobs was the #1 issue on voters minds.

This is reality, not fiction. This administration's response seems to be "but look at the Dow!" This reminds me very much of 1992.

[oceanview]

first off, no one talking about offshoring here is saying its the worst economy since the depression.

But what is being described is real, its really happening. Now it may well be affecting a relatively modest group of workers right now, with respect to the overall mix of workers and jobs. But its the trend that is potentially devastating for the middle class. If you look at the totality of "knowledge jobs", there is a potentially huge number of them that can be done overseas. Look across disciplines in many industries, basically any job that can be done by someone sitting at a desk with a computer, whose physical presence is not needed, can be done overseas. Extrapolate that, and you can see what the potential effects on the white collar private sector middle class can be in 10 years. We've lost most of manufacturing, if we lose "knowledge jobs", we'll have just service jobs and government jobs left.

And with respect to these "industries of the future" that are going to create all these new jobs, there is no reason that those industries and jobs won't be offshore right out of the gate.

US corporations are changing their business model: profits in the US, protections of the US legal and intellectual property systems, highly paid US corporate executives, and every job they can figure out how to move offshore will go. That shift will wipe out the US tax base. A $70K tech or white collar corporate staff worker or who ends up working at Home Depot for $40K, pays no federal income tax, and probably switches their vote to Democrat.

In addition to the economic dislocations, this trend will create a permanent Democratic majority in the US, the private sector middle and upper middle class is the only demographic keeping the Republicans afloat.

[looscnnn]

" I am not sure what all the displaced tech workers will be "retrained" to do."

Don't you know; they are going to start their own businesses, become doctors, become nurses, do construction, etc.

Of course the business owner will have to compete with the imports and outsourced jobs. Construction workers will have to compete with immigrants. Doctors and nurses will have to compete with immigrants, deal with high insurance premiums and lawsuits. Also, there is the problem of saturation of too many job seekers and not enough jobs.

[A. Pole]

A $70K tech or white collar corporate staff worker or who ends up working at Home Depot for $40K, pays no federal income tax, and probably switches their vote to Democrat.

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

[Glenn]

but thats a gripe for another thread

No. It is not. It belongs square on here.

Are we being asked to compete or capitulate for the sake of quarterly profits?

Either way you've hit it on the head. India and China do not consume mass amounts of the GDP worrying about government compliance in any area, much less our invented areas of affirmative action, sexual harrassment (sp), OSHA, ADA, unemployment insurance, pension guarantees, et al, et al, et al.

Remove them and we might have something representing global free trade, though I doubt it.

Just how many decades will it take for India and China to willingly price themselves out of the global market? What, exactly, is it we plan on selling them to recoup some of our sacrifice?

And one more thing: Where will the CEOs dig once the shareholders have normalized profits with the inclusion of outsourced labor?

[ZeitgeistSurfer]

A major (and I mean major) manufacturer of networking equipment already has its next generation of products being designed in Asia. Its manufacturing is all outsourced as well as its customer service. The core that's left is sales, marketing and finance. THAT is the future. Asia is manufacturing very inexpensive components today. Tomorrow they will integrate them into systems. No exclusively American company will be able to compete with these products. The same thing that happened to consumer electronics will happen (is happening) to computer and information technologies. Silicon Valley is today a virtual ghost town. Larry Ellison essentially said that the party is over. He should look over his back too, because open source versions of databases that will compete directly with Oracle are just around the corner. Think innovation will save us? Think again. Very little venture capital is going into new start-ups. Almost all the money is going into established companies and very low risk ventures.

Yes, there are still entrepreneurs and smart people here. The Indian entrepreurs of Silicon Valley formed self-help (ethnically-based) affinity groups to support each other. They will probably prosper in the new world order. There is a revolution happening here and only a blind person can't see it.

[looscnnn]

"Foreign students studying in US schools generally work a lot harder than our US students. "

That is because, as you pointed out later, US students don't have to work harder. They are given passes for just existing. The standards are lowered, thus not forcing US students to work to pass. Foreign students don't get that luxury.

[looscnnn]

"Did Japan drop all its import-controls and tariffs??"

No, they still have them on different products.

[A. Pole]

The Indian entrepreurs of Silicon Valley formed self-help (ethnically-based) affinity groups to support each other. They will probably prosper in the new world order.

"ethnically-based", "support each other"? How quaint.

[ZeitgeistSurfer]

It may be quaint, but it works.

[phil_will1]

".....this trend will create a permanent Democratic majority in the US, the private sector middle and upper middle class is the only demographic keeping the Republicans afloat."

Thats an excellent point, oceanview. And if the gap between the haves and the have-nots continues to expand with Republicans controlling the WH and both houses of congress, who do you think will take the blame?

[Taliesan]

There is no gap between the haves and the have nots. There is a spectrum of incomes. It ranges from 0 to 100 zillion or so. It used to range from 0 to 50 zillion or so.

CEO's make more money now because boards of directors value them more. Some of these valuations are accurate, some are not.

Yawn.

[A. Pole]

CEO's make more money now because boards of directors value them more.

Really? So that is why the "reform minded oligarchs" with "Western democratic credentials" like Khodorkovsky, Gusinsky and Berezovsky made billions in a few years?

[Taliesan]

But its the trend that is potentially devastating for the middle class. If you look at the totality of "knowledge jobs", there is a potentially huge number of them that can be done overseas. Look across disciplines in many industries, basically any job that can be done by someone sitting at a desk with a computer, whose physical presence is not needed, can be done overseas. Extrapolate that, and you can see what the potential effects on the white collar private sector middle class can be in 10 years. We've lost most of manufacturing, if we lose "knowledge jobs", we'll have just service jobs and government jobs left.

Whatever you extrapolate will fill the hypothetical universe.

[Taliesan]

Uh, that was a story about fraud in Russia.

Are you ok?

[scan58]

*ping*

[A. Pole]

Uh, that was a story about fraud in Russia.

Shock "therapy", "free" market reforms, privatization were a fraud?!

[Taliesan]

The story was about Russia.