Monday, January 26, 2004

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Dissecting the outsourcing hypothesis

Clay Risen takes a hard look at outsourcing fears in The New Republic and finds them overblown:

While offshoring is definitely an economic trend, there is no statistical evidence pointing to the massive employment drain activists call the "coring out" of America's best jobs. In fact, recent studies show that the opposite is true: While offshoring may displace some workers in the short term, in the medium and long terms it represents a net benefit for both domestic businesses and their workers. In fact, the greatest threat from outsourcing is that its opponents will use it to force a new wave of protectionism.

The frenzy over offshoring got going in late 2002, when Forrester Research released a startling study showing that 3.3 million white-collar jobs would move overseas by 2015. Then, in July of last year, the research firm Gartner trotted out its own study saying that as many as 5 percent of all information technology (I.T.) jobs could move abroad between mid-2003 and the end of 2004. And a 2003 report from Deloitte Research said that the top 100 financial-services firms plan to move $356 billion in operations and two million jobs overseas in the next five years.

But those numbers aren't as scary as they sound. For one thing, while offshore outsourcing is definitely occurring, it's difficult to say just how large a trend it is at present. The Forrester research is based primarily on surveys of business leaders who are merely speculating about future offshoring decisions they might make: "There is no objective data to prove all these jobs are going overseas," says Michaela Platzer of the AeA (formerly the American Electronics Association). "There's just a lot of anecdotal evidence." Some point to the jobless recovery as evidence of offshoring's impact, but the lack of jobs is just as likely the result of booming productivity and the economy's (until recently) anemic pace. "I think people are confusing the business cycle with long-term trends," says Daniel Griswold, an economist at the Cato Institute. "People are looking for someone to blame. They say, 'Aha, it's because our jobs are moving to India.' If you look at the late 1990s, though, all these globalizing phenomena were going on." In other words, it wasn't that offshoring practices changed; it was that the economy slowed.

Risen doesn't even mention the Catherine Mann study, which provides some hard data to back up Risen's conterarguments.

Another story suggests that reports of the outsourcing of call centers has also been greatly exaggerated.

posted by Dan on 01.26.04 at 05:57 PM


This month's Wired (not yet online) has an excellent article along the same lines albeit strictly along the IT jobs to India thread.

The article suggests that the jobs are following past trends. Agriculture jobs go international, creating a market for industrial jobs. Industrial jobs go overseas, creating a market for technological jobs. Now as technological jobs are going to India, the next wave will be creative.

It makes the case that America innovates and the rest of the world produces.

posted by: Scott on 01.26.04 at 05:57 PM [permalink]

“It makes the case that America innovates and the rest of the world produces.”

I agree completely. Nonetheless, many of those losing their jobs could care less about the big picture. They worry only about themselves. The Democrats are more than willing to exploit these fears. Never, never, never fail to distinguish between macro and microeconomics.

posted by: David Thomson on 01.26.04 at 05:57 PM [permalink]

"the next wave will be creative."

So why won't the creative jobs go overseas too?

Furthermore, there really aren't that many creative jobs. That's why there's a stereotype of the "starving artist", or about every waiter in Hollywood being an actor or screenwriter.

What you're describing doesn't leave very many high-wage jobs. It's like the executives have cut the ladder off undeneath them. They're still climbing up, but underneath the cut, the ladder is sinking with everyone on board.

posted by: Jon H on 01.26.04 at 05:57 PM [permalink]

I have a post covering practical experience with offshore outsourcing of computing functions on my site at A Case Study in Offshore Computing. (Because this is Blogger you will need to scroll down).

There are two practical obstacles -- one is time zones, because between the US and Europe your are from five to eight hours off, but between the US and India or the Far East, you're even farther off, and it's somewhere between very difficult and impossible to communicate on simple matters requiring adjustment or coordination.

The other issue is differences in national character, and this leads to dodgy problems over communication, what seems important, etc., as well.

posted by: John Bruce on 01.26.04 at 05:57 PM [permalink]

Surprisingly you started to hear a lot about outsourcing on the internet when it started to affect those who work with computers.

I am looking forward to reading that Wired article, sounds very interesting.

posted by: Rich on 01.26.04 at 05:57 PM [permalink]

Rich writes: "Surprisingly you started to hear a lot about outsourcing on the internet when it started to affect those who work with computers."

Shouldn't be a surprise.

After all, lots of factory workers (and others) were told that their ticket to success and higher income was a job with computers. Hell, they're still being told that by technical schools and community colleges.

Whoops! Sorry, try again. Go back to school, stretch your credit cards out a bit more, learn a new field, and hope it doesn't get hit before you've paid off the loans.

posted by: Jon H on 01.26.04 at 05:57 PM [permalink]

Over the past year I have had to call HP for support four times, SMC once, and Intuit three times.

Two of the calls went to HP in Canada. All the others went to India. Talking about TurboTax with a CSR who had obviously never filed Form 1040 was an especially frustrating experience.

posted by: Andrew J. Lazarus on 01.26.04 at 05:57 PM [permalink]

First of all, I'm amazed that Dan here wants to treat the issue as if all the authorative comment is for the current trading regime, that the job losses are cyclical rather than structural, and that criticisms of "free-trade" are all protectionist or pandered for partisan advantage.

Here is a link to a book arguing that the losses are strucutral and not cyclical. Here is Peter Drucker's book, arguing that the knowledge economy is here and he's also argued that America is already being outcompeted by India and China. Here is Tony Blair, acknowledging what anyone who works at a research university knows: there are literally several dozen scientific researchers from China for every single new American graduate student.

Also India has highly protective domestic corporation laws, that put strong limits on foreign investment. In addition, China has massive intellectual rights problems. Even if one were to buy the argument that outsourcing jobs to China doesn't eliminate US jobs, it's still a terrible policy because the Chinese get to effectively steal US trade secrets to produce brand name imitations or knockoffs of their own. This "patent" piracy is rampant in China as any US exec who does business there can tell you.

"Free-trade" market liberalism without an equal playing field in foreign capital investment and intellectual property rights protection is a suicide pact!

The primary assumption being bandied about is that manufacturing and now hitech services outsourcing to India and China is "okay" or even "good" because US brand name merchandizing forces repatriation to corporations here in the US leading these corporations to spend money, and then through "trickle-down" economics this eventually leads to the creation of compensatory jobs.

This proposal is dependent upon several assumptions 1) That the US will remain the knowledge-capitol of the world 2) That US brand-name merchandizing allows repatriation of profits (and therefore the lob losses are cyclical and not structural) and 3) that intellectual property rights and foreign capital investment rules are an "even" playing field so that the other nations can't steal US R&D and then set up shop with protected companies that the US companies can't get at.

Well as it turns out, every single one of these assumptions is either wrong or soon about to be proved wrong.

Okay, wake up people. It's not just about a few jobs going and new ones replacing them. It's about the US being displaced completely as the commercial and innovative center of world capitalism by being sheer outcompeted by India and China. Now unless you happen to have a "magical" belief that no matter what the US will remain "on top" and that profits will disproportionately always flow to the US mainland, and that capitalistic market competition doesn't apply to countries the same as it does to companies, then the only logical conclusion is that this country is in serious trouble.

posted by: Oldman on 01.26.04 at 05:57 PM [permalink]

This is just prima facie wrong. All Drezner has to do is go ask a CS prof how is students his students are fairing, and the prof can give him the low down. IT/Engineering jobs have practically disappeared. Partly due to the boom, but many of htem have gone overseas. Almost everyone in IT or engineering will tell you this.

More over the jobs moving over are of a completely different sort than manufacturing jobs. They are "white collar" jobs. Don't kid yourself. Even if manufacturing jobs moved over seas, a lot of the design work was done here. Oracle, IBM, EMC, and lots of others aren't just moving over slave-labor work, but they are also opening up (there instead of here) new research centers, etc.

Unless your job has some sort of geographical constraint (i.e. service jobs), I'd be worried.

posted by: N R on 01.26.04 at 05:57 PM [permalink]

You'd imagine that outsourced services would show up in "imports, services" in the national economic accounts, right. So, here are service imports, as % of GDP, for 1989 (peak of previous economic cycle), second quarter of 2000 (peak of most recent economic cycle, third quarter of 2003 (now, in case you missed it): in order, 2.0 %, 2.3%, 2.4%. Are you kidding me? The disturbance to the American job picture from outsourcing isn't even detectable in the economic data. This is a phony issue.

posted by: T. Aldrich on 01.26.04 at 05:57 PM [permalink]

I read the Wired article last night. The rebuttal against opponents of outsourcing is that Indian technology firms are not only a signifigant cost savings, but also better code. They cite the progress made by Indian firms where many of them receive the ratings comparable or exceeding European or North American software firms.

The beauty and ease of software development really is a wart for any nation's economy. Many operations are easy to move. For example, even some Indian firms complain about competing with Russian, Filipino or Pakistani firms. Literally, an entire project can be auctioned around the world and first world economies will have a hard time competing at the price level. The first world has to exercise its advantages over smaller economies somehow.

Politics is another chapter to this saga. Opportunistic electors will no doubt nurture a base of activists to draw attention to this subject as a way of maintaining their electibility, but what is there to criticize here other than centuries of political pandering for power.

What really is the thorn in the world that software brings is that nobody can control it. The only means to control it are to control human decision. Software isn't a resource you can invade your neighbor to acquire. The creative aspect to the United States will be to see what other tools we can create that nobody can control. Beginning with software there will be more ventures to create objects to change the way nations, peoples and cultures react to eachother.

posted by: axiom on 01.26.04 at 05:57 PM [permalink]

Great comment by the Oldman. We do have a huge problem with property rights in China and India. The things that we do best in the world (like make mass media creative products like video games and movies) are being outright stolen in most of Asia. Meanwhile we are playing by the rules and paying for the things that they are good at. We should use our growing leverage as a customer of China to force them to treat our products fairly.

Second thing: to T. Aldrich: Importing of services is an incredibly difficult thing to measure. You can't just throw out a few numbers and think that will explain the problem. You do have to look at what people are saying on the ground and what companies are saying. And the reason this is an issue is that all people are saying the same thing...I can do this cheaper (and often times better) overseas. Additionally, even that data tells a story that you are not reading. Our GDP increased dramatically, but the percent of services being imported increased more. And there is not a one to one ratio of what is imported to what it displaces. These services are being imported because they are cheaper. So each dollar of imports might be displacing $5 that might have been spent on American workers.

posted by: Rich on 01.26.04 at 05:57 PM [permalink]

I'm getting a little sick of hearing that there's just "anecdotal" evidence of service jobs going overseas. Everyone I talk to in the corporate world has a story to tell of THEIR company setting up at least a "small, experimental" office in India--just something to "test the waters" and keep in step with competitors.

This is more than slightly reminiscent of what happened with manufacturing in the 90s. We'll just set up a small plant (replacing an out of date, expensive one stateside) to take advantage of cheap labor. Nothing requiring any skill. A decade later, the "safe" (skilled, profitable and high-tech) product lines are in the midst of following their "expendable" predecessors, and a "coring out" of manufacturing in this country is well underway. Probably irreversible.

Once these small back-office setups are in place in India, the pressure to move more and more IT and service jobs there as well WILL grow. Even if it means pouring good money after bad, the prestige of executives who ordered the initial move will be on the line and they will not back down.

Only one thing can prevent a worst case scenario: monumental cockups on the part of the Indian and Chinese governments. These may be in the pipeline. In China the gov. has not built a necessary power infrastructure, threatening existing and future growth. In India, a government used to killing golden geese is talking about taxing overseas corporations with offices in India (raising prospects for double taxation of MNCs, some of which are already planning to pull out or scale back operations). Moreover, they are threatening to retaliate against the US government for any attempts to stop govt service jobs from moving overseas. This is waving a red flag in front of politicians in an election year, and could bite the Indians in the ass.

In short, while TNR and Drezner are right that this problem MAY be overblown in the short term, the long term potential for serious damage is worth our attention.

posted by: Kelli on 01.26.04 at 05:57 PM [permalink]

And, so far we have some data, countered largely by Andrew Lazarus' anecdotes about his experiences with customer service outsourcing. Wonder which I'm going to place more weight on?

posted by: Slartibartfast on 01.26.04 at 05:57 PM [permalink]

The Wired story referenced earlier is now avialable online.

Come to think of it, why do I subscribe? My delivery is usually a week after I see it on newstands. I shall vent to Kable.

posted by: axiom on 01.26.04 at 05:57 PM [permalink]

"the next wave will be creative."

This has already happened. It's called "study abroad". All those American students studying at foreign universities are taking jobs away from highly paid, creative, research university professors in America. But I doubt that those on university campuses who protest outsourcing would even think about this, let alone recognize study abroad for how it outsources domestic jobs. But, then again, day care centers are where many of them outsource their childrearing. Now that's creative!

posted by: Peter on 01.26.04 at 05:57 PM [permalink]

As a meta-comment, let me conjecture that the subject of offshoring is becoming either stale or lessening in severity, because this thread has attracted only 16 comments so far - a few weeks/months ago there would have been 3X as many.

Er, and that thingy today in New Hampshire might have people's attention...

posted by: Bruce Cleaver on 01.26.04 at 05:57 PM [permalink]

The problem is that no one has examined the true macro-economic issues in a "big-picture" way. It's because the economy is so huge, that even business experts and economists really don't understand it - except from the point of view of their speciality such as management, illegal alien labor, trade, etc.

It's this lack of understanding that has allowed the market liberalists in order to argue, using mostly confusing and inappropriate arguments, that it "must" be leading to greater wealth in America and will eventually lead to more jobs. The problem is that when you put their macro-economic arguments under the microscope, they mostly fall apart. Arguments for productivity gains ignore trade protections problems. Arguments for labor modernization ignore that foreign investment leads to development and a greater supply-demand competition lowering prices for all jobs. Arguments for corporate profits ignore deflation due to price-competition and the subtle ROI argument. Arguments for holistic macro-economic ROI from total deflation ignore the difference between inflation as measured by CPI or PPI and Cost of Living which includes factors like health care, education costs, housing costs, insurance costs, etc. The arguments comparing it to automation or info tech ignore the problem of production infrastructure and "leakage" to other economics. Offshoring arguments in general ignore Outcompeting arguments.

In this thread and the next one, I've begun to tackle these issues. But the bottom line is that it's far from clear that the "free-trade" proponents are correct - even from the POV of their own macroeconomic and market competition principles. In fact, if you carefully apply the arguments ... they're dead wrong most of the time. But it's a shell game. You make one objection, they shift to another argument. You make a host of objections, they claim it's "just" anecdotal evidence.

Well I'm here to say that there are serious practical and theoretical problems with their argument - period! It's not just anecdotal ... this doesn't pass the smell test even in the realm of ideas.

posted by: Oldman on 01.26.04 at 05:57 PM [permalink]

The Wired article seemed to have been written by a lobbyst of the "Outsourcing" industry.

They ask an Indian worker if outsourcing is good for the US. Then they interview a VISUAL BASIC programmer and compare him against better educated and trained Indian professionals. Goodness gracious, they don't even pretend to be fair!

Then they throw a bone to the US workers, "You are more creative!" "The next wave is to be creative!"

What that means, I have no idea. There's a lot of creativity in software design, more than science. Those jobs are going. There's lots of creativity in scientific research, check, jobs are going there too.

How about artistic endevors? Well, guess what, another industry I considered (I was going to study commercial art instead of CS) was the animation industry. Oh guess what, that's been gutted by the Philipines, South Korea and guess who else, India! All the TV shows our kids watch are drawn overseas while the stories , storyboard and character designs are done here. How long, until all those animators over there get tired of taking creative direction from people who soon won't know w thing about animation.

3D animation, lots of US people doing that, don't expect it to last too long.

Graphic Design, lots of stuff here, but lots of work being done overseas as well.

The next wave is being "creative". Perhaps we should start by not buying any more Wired crap, and be more creative with our money.

posted by: Augusto on 01.26.04 at 05:57 PM [permalink]

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