Wednesday, August 20, 2003

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Your source for outsourcing

Follwing up on some previous links on outsourcing, Brad DeLong has a long post on why outsourcing will not doom the U.S. economy. He's particularly trenchant on this point:

Remember: few would be worried about "outsourcing" if the U.S. unemployment rate were still close to four percent, rather than at the above six percent level that it is. To the extent that a structural cure is being proposed for what is really a macroeconomic problem, do not expect it to end well. And remember: a network-design job artificially kept in Sacramento when it could be done more cheaply in Singapore produces extra income for a network engineer in Sacramento, but has costs as well: in a diminished capital inflow that reduces construction and the earnings of construction workers, in higher costs for businesses installing their networks that shows up in lower salaries they pay their workers, in lower earnings and stock prices for HP.

That said, Glenn Reynolds is also correct in pointing out that precisely because of our current macroeconomic travails, this will be a campaign issue.

Why? Not because outsourcing is new, but because it's going to affect an entirely new set of professions. As Raghuram Rajan and Luigi Zingales (for more about them, click here) point out in Saving Capitalism from the Capitalists, (p. 282):

For centuries, technology has created new products and new ways of making them that render workers and their skills redundant. While the dislocation stemming from technological change is not new, its pace has increased tremendously. Moreover, it is now affecting the professions that have not much changed their way of doing business over the centuries (emphasis added).

That quote, by the way, provides the best counter to outsourcing anxiety. Opposing it perfectly akin to opposing technological progress. They're both Luddite.

[That's easy for you to say. You're an academic facing minimal market pressures.--ed.] Not true. Rajan and Zingales use academia as one example of a profession newly affected by technology:

Technology is also having a differential impact on within professions. Take our own, teaching in universities. Using new communication technologies, one gifted professor can teach students in many locations around the country. While technology will increase the demand for such superstar teachers, it will reduce the demand for the mediocre that may vanish completely. Teaching is a job that has been performed the same way for thousands of years, by people who have not feared becoming redundant even in the worst of economic depressions. This will change. While the new economy will increase the demand for education, it may not have room for all of us (p. 283).

posted by Dan on 08.20.03 at 11:40 AM


And in the case of higher education let us not forget the increasing adjunctification and so 'gifted professor' is much more likely to be 'available grad assistant' or 'cheaply hired adjunct'. In some ways you could say that academia has been showing the way on this issue.

posted by: JSAllison on 08.20.03 at 11:40 AM [permalink]

I don't agree that the overall effect of all this white-collar outsizing is benign-to-good for all concerned (with the exception of unlucky pols faced with rising anger and anxiety in the electorate).

The argument with manufacturing has always been (and again, not always correctly) that if it can be done cheaper and nearly as efficiently elsewhere it should be allowed to go. The problem here is that executives have every incentive to send first (on dubious forecasts of cost savings) and ask questions later. Once the lines have gone, the incentive will be to MAKE it work (whatever the cost) because your ass really is on the line now.

Now the same is said to be true of professional jobs, which begs the question, are all Americans supposed to have Ph.D./JDs/MDs OR fall into the min. wage realm? What is the "niche" to which we are being consigned in the global economy?

And let's raise another can of worms and ask whether this is good for countries like India, which stand to gain millions of jobs. Yes and no. Yes (duh?!) because much money will be made by a pitifully poor country. But no, because India already has a grotesquely unequal society in which an English-speaking minority gets state-subsidized perks while the majority gets the shaft (no school, no future). Now, it makes sense to build the one truly dynamic segment of that country's economy but it is dangerous to put all the nation's eggs in that basket. It makes India a satellite to the US economy, fails to address the dismal performance of every other sector, and exacerbates social/economic tensions to the breaking point. Spare a thought to this dilemma while you're reshaping the global economic order, Mr. pro-market economist.

posted by: Kelli on 08.20.03 at 11:40 AM [permalink]

It's worth noting that Krugman, in an essay around 1996 or so, put the boot into Robert Reich who then was touting "symbolic analysts" as being the up-and-coming part of the labour market. Krugman pointed out that information-based jobs would be the easiest to transfer overseas.

posted by: Tom on 08.20.03 at 11:40 AM [permalink]


I have to differ a bit. Sure the effort will be made to make outsourcing work no matter what for a while. Several years is not unheard of and five years is not uncommon.

Eventually though if the outsourcing leads to higher cost the work comes back to the US of A. I've seen it happen. It just doesn't get much national press.


Bucky Fuller predicted the automation of education at least 50 years ago. Other than his socialist/technocratic bent he was a real visionary.

posted by: M. Simon on 08.20.03 at 11:40 AM [permalink]


What do you know about comparative advantage?

In addition your analysis is static.

Do the IT jobs make more jobs for floor sweepers and food vendors? If the floor sweepers are doing better will that help or hurt their children? If the process takes 20 or 50 years is that too slow?

Is government fiat (the USSR) better than natural diffusion (India)?

Is exposure to English common or uncommon in India?

Should societies be ordered by coercion & violence (government) or should they be allowed to change at a natural rate?

posted by: M. ZSimon on 08.20.03 at 11:40 AM [permalink]


Is outsourcing good for India? You question the obvious benefit because outsourcing “makes India a satellite to the US economy, fails to address the dismal performance of every other sector, and exacerbates social/economic tensions to the breaking point.”

Post-colonial India is marked by a long history of autarky and disengagement with the world economy. Its level of trade is far from making it a satellite of the US economy. Also, just a thought, but in some posts (including yours), fears are expressed over overseas outsourcing because it makes the US dependent upon bad foreigners. Now you express fears for India that it will become a satellite? FWIW, Indians don’t have this fear. But fearing foreign trade as being bad for both the importer and the exporter country is wrongheaded and misunderstands the nature of voluntary exchange.

You also note that outsourcing “fails to address the dismal performance of every other sector.” India has its problems. But it would be both stupid and cruel for India to disallow outsourcing because it does not solve the problem of illiteracy or Hindu-Muslin tension.

You also mentioned that outsourcing “exacerbates social/economic tensions.” By far the biggest tensions in Indian society are religion and language. The Hindu/Muslim divide, which sparked murderous riots in Gujarat a year ago, insurgency in Kashmir and the recent bombings in Bombay. India is a multicultural mix, with over 20 official languages, and separatist movements that have threatened secession in dozens of Indian states, including Kashmir, Mizoram, Manipur, Punjab, West Bengal/Ghorka, etc. When was the last time that Indians rallied against the Bangalore-based software industry, much less stabbed Indian geeks? Most Indians are quite proud of the success of its IT sector. They are more concerned that all their most talented graduates of elite institutes of technology are quitting India for the US or the UK.

Obviously, outsourcing already is a political issue. The Clinton and Bush Administrations were aggressive outsourcers of government bureaucrats, and Federal employee unions are currently suing the Bush Administration over the policy.
The unions are concerned about outsourcing – though probably less so in software where their dues-paying members are not very organized.

The fact of outsourcing is that there are winners and losers. On balance, if we are going to keep having a higher standard of living, we [humans – Indians and Americans both] need the specialization and trade that outsourcing represents. I outsource the sewing of my clothes and the building of my house and the making of my household goods all the time; the cooking of my food is outsourced at least half the time. I don’t feel like I have lost any part of the lump of labor. I still work plenty. And so do Americans, who work more hours than almost any other developed nation.

posted by: Mark on 08.20.03 at 11:40 AM [permalink]

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