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.

[oceanview]

the same was said when people extrapolated decades ago about manufacturing. We are in our 42nd consecutive month of declining manufacturing employment. While manufacturing has different considerations then knowledge work (declining numbers of workers due to automation), the trends regarding US manufacturing are not in dispute.

[A. Pole]

The story was about Russia.

This was an implicit generalization. Testing a more abstract rule with another concrete example.

[Taliesan]

I agree that there are always trends.

[A. Pole]

The story was about Russia.

This was an implicit generalization. Testing a more abstract rule with another concrete example.

And the free market experts promoting reforms in Russia, were the same.

[Vermont Lt]

I just posted this on another thread, but I think it applies here as well:

Think about this the next time you bitch about outsourcing call center (service and support) jobs:

Are you calling for something inane, like the balance of your checkbook? Is it after normal business hours? Could you have found the answer some other way? (on line for example?)

Are you calling for product support before you even read the directions? Could you have figured it out some other way--like picking up the instructions?

Are you one of those people that cannot wait to find out of their Retirement, Social Security, or SSI deposit has made it into the bank? Are you afraid they are going to forget you this month? They aren't. The money will be there--just as it always is....and your phone call ain't gonna make a difference.

Are you calling in response to an advertisement on the TV that you absolutely must have right now? Or could you go online or to Walmart and get the same thing?

You see, the service jobs that are going overseas did not exist ten years ago. Our laziness and impatience with getting stuff now has driven companies to provide this "ultra service." That drives up costs.

I worked for a small local bank. We never had folks answering the phone. Then we started to provide that service to take the pressures off our deposit operations folks. Then we grew to provide service after normal hours. Then we expanded to new areas and took over other banks.

What started with 12 people is now nearly 400. What started with normal operating hours 9-5 is a 24/7/365 operation. And you know what--our customer base stopped keeping track of their checks, debits and credits. They expect us to watch thier stuff for them. By the time I left the company, they were outsourding nearly 3,000 lame phone calls a day--with more to come.

We couldnt hire folks to do the work because the hours sucked. The pay and benefits were good, but no one wanted to start working weekends and nights.

The nice little bank that started out helping people turned into a cold bureaucracy. All because we thought customers needed to be able to reach out and touch us. I hear they are exploring sending calls to Canada--because they sound "like us."

It sucks--but it is our own damn fault. There is a collection of funny stories about the idiot customers that called in at www.thefunnycustomer.com They were collected by a guy that worked in the same business with me.


So, in the end--think before you call. Solve your own problems. Read the F'in directions.

[Taliesan]

I said CEO's are paid what directors value them at. You responded with a story about three guys in Russia who were arrested for fraud.

I stipulate there is fraud. In every country.

I further stipulate there are exceptions to every rule.

I further stipulate that grass is green and the sky is blue.

There now.

[Taliesan]

I agree that some people in Russia advocated free market reforms.

OK, now?

[oceanview]

exactly right.

When people post about how we are offshoring the "buggy whip" products and new ones are right around the corner; they don't realize that the "new stuff" is being developed and manufactured offshore right out of the gate.

right now, sales and marketing is a good place to be if you want to work in tech.

[ZULU]

Interesting analogy.

The Roman Model is a little different than ours. The farmers who were impoverished were actually the soldiers who fought the war and captured the slaves. While they were out capaigning, they couldn't pay their land taxes, and the state often confiscated their farms. The rich oligarchs bought the farms up and transformed them into latifundia or plantations, which were then staffed by the slaves captured by the free farmers who were purchased from the state by the oligarchs. Sort of adding insult to injury.

Eventually the oligarchs separated into two classes, the Optimates or aristocratic conservatives and the Populares or aristocrats who were reformers and recognized the inequities created by the system and tried to ram reforms through an antiquated and corrupt structure.

The Roman citizen-soldier-farmer became increasingly disillusioned with the indifference of the Senate, particularly the Optimates towards their dilemma and began to look to their generals rather than the state to rectify these social issues. And so it began.

A series of military dictators and bloody civil wars ensued with eventual power being seized by demagogues of the Populares faction like Julius Caesar, and later Octavian, who in effect dissolved the REAL functions of the Senate while retaining the outward trappings and form of the Republican offials and government and ruled through the unabashed application of military power.

When Augustus freed the exhausted Roman citizenry from the obligation of military service and began replacing them with non-Roman soldiers, the yoke of tyranny became even tighter and led to the later collapse of the entire system. The military became the de facto government and in effect, made and removed Emperors. Eventually more civil wars between contending Emperor candidates and their largely foreign military forces put an end to the Empire.

I think the lessons we can draw from this is that the Democrats of today seek to address what are, in many cases, justifiable social problems, but attempt to use the wrong methods to solve them. Like the Demagogues of Ancient Rome, they are not interested in tradition, the Constitution, or the basic founding principles of the state. At the same time, we have switched to a largely professional military force instead of a citizen army of draftees, and a growing number of those soldiers are actually not even American Citizens. None of this is very good, and shadows to some degree what happened in Ancient Rome.

There are other omnious analogies also, such as the breakdown in public morality, the loss of a sense of patriotism and loyalty to the nation, etc., etc.

[Taliesan]

right now, sales and marketing is a good place to be if you want to work in tech.

But those will be outsourced soon. We know this, because there is a trend to outsource, and that trend is to be extrapolated to infinity.

Therefore, all jobs are doomed.

Find a cave with a freshwater source.

[A. Pole]

I agree that some people in Russia advocated free market reforms.

Not "some", "the same". A big difference.

[oceanview]

no. those jobs require a physical presence and interaction with the customer. do you think anyone is going to ink a contract with some dude on the phone from Bangalore?

[old-ager]

> Or put it this way: one man, one vote is a cruel master.

This is probably true. But it's considered the ultimate political heresy in this society. It creates two strata: the truly influential, whose power has nothing to do with their own vote, and the peons, who eash possess one vote out a hundred million -- essentially nothing.

[Taliesan]

I stipulate that three guys in Russia advocated free market reforms and them were arrested for fraud by the Putin government.

Also, just to lighten things up, a joke: do you know how many surrealists it takes to change a lightbulb?

Answer: the fish.

[Taliesan]

I can tell you that I am not going to ink a contract with some dude on the phone from Bangalore (quoth the raven, nevermore).

And yet, we were talking about the American economy.

[templar]

People cannot live in chaos for long. Cultures, states, communites, families and children cannot prosper in chaos. Even slaves will not tolerate chaos for long. And your money and cherished "property" would be devoured by chaos.

This is profoundly true. Almost all people need stability, it's the nature of man. Historically, the usual result of chaos is some form of totalarisansm to reestablish stability. Our global ruling class (both seen and unseen) are not ignorant of this. Our founding fathers weren't either.

[ninenot]

Pardon in inexcusable ignorance.

What do "gas lines" have to do with Standard of Living??

Is this some sort of economics they teach in Canada?

[ninenot]

You will find that the "studies" showing Chinese and Indian college grads are 'smarter' are un-founded.

Neither country submits to standardized testing--and there are CONFIRMED reports that both Indian and Chinese youth are purchasing 'degrees' wholesale.

The only diff: there are a lot MORE Chinese and Indian people--therefore, there will be, statistically, MORE who are in the top 10%.

But NOT proportionally more--the top 10 is just the top 10.

[old-ager]

> How'z it feel... geeks?

I agree that some payback was in order. But the worst of the know-nothing programmer wannabees are gone now. And the bigger issues are: what is our culture? (Hindu? Muslim?); what kind of place is it where people can't be gainfully employed in a dignified manner?; what will happen to this country if it cannot engineer anything -- such as advanced military system? Our security depends on being better engineers than, say, the Chinese. That's already gone, isn't it?

You know, it's pretty age-old wisdom that says that fast bucks are dangerous and deceptive.

[Alberta's Child]

The gas lines that you saw in this country (the U.S., that is -- not Canada) in the 1970s were a symptom of this country's declining standard of living in that decade. The dramatic increase in oil prices was the result of our collapsing currency, and the gasoline shortages were a direct result of our government's policy of imposing price controls that turned out to be the most idiotic "solutions" to a problem this country has ever seen.