Thursday, January 29, 2004

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The political economy of outsourcing

[UPDATE TO MSNBC READERS: If you're interested in all of my outsourcing posts, click here]

Virginia Postrel has two posts up today on the political economy of outsourcing.

The first post appears to reflect the limited power of

As a faithful reader of Dan Drezner's blog, I knew about Catherine Mann's important policy paper on the future of info-tech outsourcing (.pdf download here) almost as soon as it came out. I somehow assumed everyone else did too, equating blog awareness with widespread media coverage. Then I met Mann... and I also learned that Dan's blog and the New York Sun pretty much accounted for all the press attention the paper had gotten.

So I devoted my latest NYT column to Mann's work.

Two thoughts: first, to be fair, Bruce Bartlett also picked up on the Mann study. Second, Virginia, you're one of the people that helps translates blog awareness to wider media coverage. Counterintuitive ideas don't travel without your help!!

Postrel's column expands upon the Mann study I discussed here. Some good parts:

Compared with the end of 1999, which was still a good time for programmers, December 2003 data show a 14 percent increase in business and financial occupations, a 6 percent increase in computer and mathematical jobs, and a 2 percent drop in architecture and engineering jobs. New programming jobs may be springing up in India, but they aren't canceling out job growth in the United States....

These projections aren't much comfort, of course, to unemployed programmers. While their skills may be in demand, Dr. Mann explains, those jobs may be in new industries - a hospital, for instance, rather than at I.B.M. - and therefore be harder to find. Or programmers may need new training to move into systems integration jobs.

Read all of it.

Later in the post, Postrel criticizes Glenn Reynolds for hyping the outsourcing meme. Glenn responds here. [UPDATE: Virginia responds to the response.]

Meanwhile, Virginia's other post follows up on Paul Craig Roberts. Outsourcing opponents have embraced him as one of their own since he co-authored an op-ed with New York Senator Chuck Schumer in the New York Times last month.

Eugene Volokh gets to the root causes of Roberts' protectionist rhetoric. It's not a pretty picture.

That said, it would be equally unfair to assume that everyone who agrees with Roberts about outsourcing shares the same root causes. Thirty years ago, Roberts was a supply-side nutball. He's just morphed into a protectionist nutball. [UPDATE: Tyler Cowen defends some of Roberts' earlier work.]

posted by Dan on 01.29.04 at 11:28 AM


Okay, it's well researched and factual bunk but it's still bunk. The reason why is simple. The projections of future productivity are based upon past trends. Only those trends aren't holding. The idea that computer and math jobs being up 6% if good news when compared to Dec 1999 or three whole years ago, when GDP alone was recently tripping along at 8%, is complete bunkem. That number alone when looked at closely - that computer and math jobs up only 6% in three years in a supposedly hi tech and information driven economy is terrible. Do these economists ever think about what these numbers really mean or do they just think "positive - good, negative - bad?".

For another thing, as people have noted these structural economic modernization cycles are getting shorter and shorter. The computer PC boom lasted maybe 15 years. The Internet boom lasted less than 10. The idea that this outsourcing will lead to new manufacturing and information tech related jobs requires the assumption that we stay at least one step and preferably several steps ahead.

In fact socioeconomic analysis, interviews with businesses, research on education, and interviews with "experts" in various fields like CEO's or Peter Drucker etc. show that we are losing our edge on other nations. If we lose that edge, then outsourcing will then through competitive advantage in the market will reverse the direction of net wealth creation. In other words, they're hot on our heels.

The argument of Mann seems to boil down seems to be that we're still in positive speed territory. Well we are. But we're slowing down, and they're speeding up. Pretty soon, they'll overtake us and outspeed us. At that moment, the very same globalization process that has produced productivity gains and profit flows in our direction will reverse and start flowing in their direction. In other words, the shortening cycles indicate that we're about to top out. Add in the fiscal mess the long term projected US budget is in and the coming entitlement spending crunch, and you got one messed up situation staring us in the face. At the very moment that we'll need to massively invest to cause our society to leap forward, we're going to have to divert those funds to spending obligations and financing our debt.

That is the freaking problem with analysis like Mann's!!! Can't see the freaking forest for the trees.

posted by: Oldman on 01.29.04 at 11:28 AM [permalink]

"While their skills may be in demand, Dr. Mann explains, those jobs may be in new industries - a hospital, for instance, rather than at I.B.M. - and therefore be harder to find"

This suggests that Dr. Mann hasn't the first clue about what an IT person's job search is like.

You typically search for a job based on the kind of skill you have, not based on type of employer. If you have Java skills, you look for employers looking for people with Java skills. That could be a hospital. That could be a university. That could be a pharmaceutical company, an insurance company, a bank, a phone company, or a nail gun manufacturer.

There may be regions of the country where IT workers have the luxury of searching by company, rather than by skill. But in most of the country, that simply doesn't exist. There simply aren't enough IT-focused firms to support that.

Dr. Mann doesn't have a clue.

posted by: Jon H on 01.29.04 at 11:28 AM [permalink]

I wrote: "Dr. Mann doesn't have a clue."

Actually, it's worse than that. It's offensive that she thinks IT workers are so bloody stupid we'd be sending resumes to IBM while IT jobs remain unfilled at hospitals.

We're not stupid.

posted by: Jon H on 01.29.04 at 11:28 AM [permalink]


A question for you: what evidence would convince you that your beliefs about outsourcing were wrong?

I don't ask this in a mocking tone. I'm genuinely curious.

posted by: Dan Drezner on 01.29.04 at 11:28 AM [permalink]


I understand your point about eventually seeing India/China "overtake" us, but have you stopped to think of what we'll be actually engaged in when that scary moment happens?

That's right: The younger generations will be in the midst of taking care of retired, still wealthy, baby boomers. By that time, global competition will be a side issue as we'll have our own kvetching fits about how to pay for it. And trust me, it will be our own; India/China will have their own consumer societies to handle (if they don't already: The one big reason why per-barrel oil prices are high is that China is entering the market in a big way.).

posted by: Brad S on 01.29.04 at 11:28 AM [permalink]


Just because certain "Booms" have lower shelf lives then they used to, does not mean employment in those boom-creating fields has ceased. There is still computer/tech-related employment manufacturing in the US (Sanmina and Solectron, among others), and the IT field will evolve enough to create the need for direct IT hiring among individual businesses.

posted by: Brad S on 01.29.04 at 11:28 AM [permalink]

“However, I (Instapundit) do think that it's likely to be a political issue, and I thought that I was doing something useful by pointing that out, and talking a bit about the ramifications. I'm a bit surprised that Virginia thinks otherwise.”

I simply fail to comprehend what my fellow Texan, Virginia Postrel, was getting at. Job protectionism for both blue and white collars may very well win some elections for the Democrats---even possibly the White House. Have some folks already forgotten how the Republicans, at the very last moment, lost major elections in Louisiana due to these concerns?

As I’ve said before, people worry about themselves and not generally the greater good. The overall economy is improving. However, some people feel threatened by the insecurities of our modern day economy. Let us not forget, it is predicted that the young adults today will switch jobs ever few years. Job hopping has become the norm. Few stay with the same employer throughout their whole career. A growing and vital economy exacts a severe price tag. This state of affairs is disquieting to say the least. The Democrats won’t hesitate to take advantage of the situation. Heck, even some Republicans will chicken out when the going gets tough.

posted by: David Thomson on 01.29.04 at 11:28 AM [permalink]

Oldman, I'd like to piggyback on Dan and ask in addition: Given your scenario, what do we do about it? I'm especially interested in remedies that are realistic (as opposed to, say, overthrowing the government and mandating that all tax revenues go to job training).

I know the above sounds snarky, but it's not meant to be. The folks who are most alarmed do excellent jobs of expressing their alarm ... but I don't see a lot of ideas on how to stop the tide, especially if it has to come within our relatively free-trade current environment.

posted by: Steve in Houston on 01.29.04 at 11:28 AM [permalink]

I've added a post on my site providing insight from my own experience working in specific areas that are outsourced.

I think, with Dan, the problem is overrated, largely because the people who discuss it aren't familiar with the industry and its operation.

posted by: John Bruce on 01.29.04 at 11:28 AM [permalink]

Paul Craig Roberts is not merely a conservative. He has aligned himself with hard right. How hard? He is published by Chronicle Magazine ( These folks are of the “I’ll Take My Stand” variety.” They embrace the old Herbert Hoover protectionist legacy. It seems that the ultraconservatives naturally gravitate toward reactionary economics. But why should this be surprising? Capitalism is a destroyer of the status quo. It is a liberal phenomenon!

posted by: David Thomson on 01.29.04 at 11:28 AM [permalink]

"That number alone when looked at closely - that computer and math jobs up only 6% in three years in a supposedly hi tech and information driven economy is terrible"

I'm not sure how long this economy will remain "information driven." About 150 years ago we had a railroad driven economy. After a while the railroad industry stopped growing and "the next big thing" moved onto something else. The same will happen with IT. Computers have been the driving force of economic change for several decades, but that will not continue indefinitely. We've been hearing for ages that computers and the Internet are the future. Not anymore. They're the present. The future will belong to something else.

posted by: Xavier on 01.29.04 at 11:28 AM [permalink]

Dear Dan Drezner,


A question for you: what evidence would convince you that your beliefs about outsourcing were wrong?

I don't ask this in a mocking tone. I'm genuinely curious.

Thanks for asking this question. First let's define my beliefs. Based upon my own analysis and investigation, I kind of think outsourcing is a red herring. I think outsourcing is spurring productivity growth by forcing economic modernization and creating jobs. Really.

However, this job growth is dependent on there being a "next step" to jump to. I believe that the American "lead time" in technological edge is being seriously eroded. As it is being eroded, the boom cycle periods get compressed - and have currently contracted to be smaller than the retrain/retool time for both individuals and American society. "Creative jobs" are just fine - design, aesthetics, consultants, project managers, whatever - but it won't work unless we have a 20 decade lead time on other societies to stay on top. Right now our lead time is five years, tops for most fields. That ain't enough.

Furthermore, growth is slowing down structurally leading to slower job growth as a secondary result of the development of nations through outsourcing to them. I believe that the net jobs gained through a direct productivity/ROI analysis to be positive. However the secondary correction is getting larger and larger - the more we outsource the more they catch up with us.

I think people who point to outsourcing as "losing jobs" overseas are making an unsustainable argument. However, people see no jobs being created or very few. They want to blame somebody. So they directly blame overseas jobs transfers, which are kind of responsible but in a round about fashion of spurring competitiveness and development of other nations.

If you look at the trade policies, trade deficit, monetary policy, job growth numbers, expert analysis, etc. in aggregate I believe it's strongly supportive of my position. We're not losing jobs overseas, we're failing to grow because competitive advantage (either meritous or market distorted) is promoting growth overseas.

They grow the jobs there and then ship the products and services here. American labor and cost of living, if you add in trade policy distortions and market distorting manipuluations, are no longer competitive. Government subsidy of education is also a serious problem, as well as sheer numerical population demographics.


So I don't think you're *wrong* per se Dan. I just think you're missing the real story. For productivity gains to continue fueling job growth here, there must be some place for these displaced people to go. Right now there isn't. That's why there's such pain and lethargy. People are getting squeezed by job transfers but less and less "value-added" jobs are being created to compensate. In fact mathematically, without a change in competitive advantage one could predict a regime reversal - productivity gains will lead to net job losses for the USA at a near point in the future.

Anyway, I've gone on too long about it. Perhaps I'll post more about it at my blog, where bandwidth won't be an issue. This is a serious issue though Dan, the ground is shifting beneath your and our feet even as we make arguments about economic impact. I meant it when I suggested Mann was seriously dating herself in her projection assumptions.


What would convince me I was wrong about this? Well a decent comprehensive macroeconomic analysis with a viable operational definition for aggregate productivity growth and ROI improvement for capital investment (vs deflationary price competition) would be a start. An extensive heads up comparison of scientific and technical edge or "lead time" in R&D on other nations that showed us pretty far ahead - one to two decades - would help convince me. An analysis that showed that intellectual property rights and subsidy issues weren't leading to a systematic pillaging of intellectual capital / "brain drain" to the developing world because they're stealing our ideas - that would help convince me.

Furthermore, I'd be pleased to help do the analysis myself. These may be high standards, but that's because I believe that those who would argue that the current system doesn't have fatally market distorting interventions are dreaming. That's what would convince me. It's not an impossible or improbable demand. It's just that no one has really looked at it with rigor yet.

posted by: Oldman on 01.29.04 at 11:28 AM [permalink]

Um, correction. In the last post I accidentally said that we had to have a 20 decade lead time. That's ridiculous. A one to two decade lead time would suffice to "stay on top". 200 years ahead is not necessary, unless you're Cortez or something!

The problem with the current trade / market regime is that it disproportionately rewards the "guy on top" - which fortunately for us has been us. That is giving way now. Our choices are to press for a "level playing field" or accept that the same hierarchial trading regime that benefited us will gradually result in net wealth transfer to other nations who have out-competed us.

posted by: Oldman on 01.29.04 at 11:28 AM [permalink]

Dear Steve in Houston,

Thank you for asking that question. The answer is that we have to change the post-WWII international economic fiscal, trade, and market model. It was good for a time, and now imbalances will soon predominate matters. They way we have to change it, ironically, is closer to what a practical model of a truly free market would operate. By this I do not mean to endorse the present model of deregulation, which is wasteful not really deregulatory and creates market instabilities.

For instance, we have to change the currency system so that it's possible for currencies to float while remaining stable, which will remove the excuses of retaining currency account imbalances as a competitive trading advantage. We have to reform FOREX to minimize speculative arbitrage - perhaps by a (very small) transaction tax. Then we have to realize that going straight to an ideal market system - with anti-Keynesian fiscal austerity - for a developing economy is a failed (IMF) policy. We have to develop a new regime for a more successful phased in "micro-development" program for the third world, with a schedule of initial trade protections phased out toward more "pure market" regulations.

Then the developed world has to look at agricultural subsidies. They probably can't be gotten away from completely, but they need to be capped so that they don't become a monopolistic/vertical-integration tool by big agribusiness as well as depress world food production by encouraging monocultures. That's right, small diverse farms produce biomass more efficiently than large monocultures. Part of the employment problems both at home and abroad can be solved if we support a rebound in high quality "value-added" small farms at home and abroad. Certainly it would help stem rural flight.

Also we have to realize that the export-led "full employment" model of Japan, Taiwan, and the "Asian tigers" being mimiced ruthlessly by China is a moribund strategy in the long run. We to develop a new economic model that doesn't include the U.S. being the market for the whole world. The key is to adopt reforms (which I will not detail here, but would be happy to address elsewhere) to push the system toward true Ricardian comparative advantage. Currently the system operates in a very distorted way. Moving it toward a pragmatic realization of the Ricardian ideal is the only hope we have of helping to stem the job losses. But key to doing this is changing the system so that the "only" avenue for growth is NOT either striking oil or using an export-led "full employment" model. Only then can Ricardian comparative advantage prevail healthily.

After all of these systematic reforms, then there are internal/domestic reforms - fiscal, bureacratic, etc. that are too complex to detail here but are very relevant. I've estimated that the Department of Education performance for instance is a significant net long-term economic growth suppressor in the United States. I'd be happier to do a more exact calculation to support my point.

Overall, we have to grasp something. The previous international regime is no longer going to be benefiting us very soon. EITHER we can adopt a new regime which will benefit us, or we can continue clinging to the old paradigm in which case India and China will become "on top" in the next two decades and begin to disproportionately reap the benefits of the system - relegating the USA to a declining periphery. There are no other socio-economic choices on the table available.

In addition, we have to understand that in the new international economic order developing our most precious infrastructure investment will be in our education systems and reforming our social support networks. These networks vastly increased our labor flexibility. Daycare and elderly care isn't merely an act of "social compassion" - it's brutally practical insofar as making better usage of your workers. I can't predict what will be the next "big wave", but I do know that if we want to be on top and have a lead time (with the commensurate benefits economically that reaps) on other nations we have to make education reform a #1 priority in this country. It's as big a problem as the looming social security debacle, and you better believe that.

Now is changing all these things realistic? Not all at once, but there are only two choices. Do this or fall by the wayside. Whether or not America has the collective public strength of will to do this is debatable, but I do know for sure if they don't that the pain of not doing so will be MUCH greater. I don't endorse these reforms as a "goody-two-shoes". This is what it's gonna take to be prosperous and win. And it will work. It really will.

I hope this briefly (ha to that!) answers your questions on my view of what needs to be done to ensure the USA remains the greatest nation on the face of this earth to live in (economically). :-)

posted by: Oldman on 01.29.04 at 11:28 AM [permalink]

Dear Brad S,

I hear ya, and it's a tempting argument. But please show me some mature consumer economies that grew out of the export-led model? Japan didn't do it. Taiwan didn't do it. Siapore didn't do it. Hong Kong didn't do it. As a matter of fact, I can't think of anyone other than the US and Europe that did it. Don't underestimate the ability of India and China to cling to their present course even if it turns sour. It's just a lack of vision.

posted by: Oldman on 01.29.04 at 11:28 AM [permalink]

"However, this job growth is dependent on there being a "next step" to jump to. "

And that's where the regulatory environment comes in. Computers made a wonderful "next step" because it was practically unregulated. People could invest, work in the field, roll out new products and freely crush the competition, and buy things and try them out, all without waiting for anyone's permission.

We need to duplicate that regulatory regime all over our economy, so that we can keep ourselves gainfully employed working on the thousands of years worth of technological development that we still have yet to do. Anything that's dangerous to unwitting third parties can be handled with mandatory liability insurance; otherwise, let people get to work on something new that customers will consider worth buying as opposed to the same old crap that customers aren't interested in anymore.

And yeah, that new stuff will get outsourced too. Eventually. Then it's on to the next round.

posted by: Ken on 01.29.04 at 11:28 AM [permalink]

“EITHER we can adopt a new regime which will benefit us, or we can continue clinging to the old paradigm in which case India and China will become "on top" in the next two decades and begin to disproportionately reap the benefits of the system - relegating the USA to a declining periphery.”

So what? Why should we really care? I am more than willing to play the role of Devil’s advocate. Even if India and China economically pass us up---we will benefit from the overall increase in the wealth of the overall world. The United States does not have to be the per se leader to enable us to live a very good life. You are too much into zero sum economic models. They are ultimately senseless.

posted by: David Thomson on 01.29.04 at 11:28 AM [permalink]

Dear Oldman

Finaly, somone who is writing solutions that make sence!!!

Base line for solutions. "logical, economical, substainable, long term solutions.

Where do we start first? 1)That would have to be education. We should all upgrade our work skills and diversify those skills. And revamp the educational system.

2) Change all posible jobs to 12 hours a day, 7 days a week, with 7 days off. This would give those people the time to go to school and read (anything and everything) and then think about what they read.

3)we need to pay off the national debt (and most personal debt)

4)We need to minimalise the liabilities of the governments.

5)Check out Chile, their pension system, and their medical system. see-- Sort of a mandatory free market system.

6)Small farms and reduced agriculture subsidies. Tree farms, multiple species, cultivating in the 4 meter roles between the trees. Using composting and mixed varieties of vegetables (the old french way, small 'f')

7)Horisontal verses perimid style managment as per Robert Demmings, (the American father of Japanees management)

8)Leadership "REAL" versus position based leadership! With proper Real government leadership you would not need to pass all types of laws to get the people to do the right thing. Just plane common sence.

9)Accross the board DEFLATION, enginer it, the timeing is right in the economical cycle of America and the world. The ideal is that with the declining cost of living and prices, we could export more and inport less, we would become more competetive. In the beginning the dollar would go down but it would eventualy start to go back up. With the dollar going up, we hope that deflation continues, at least keeping the export prices level. Companies would have to invent the equipment to increase productivity in order to keep prices low and to remained competetive.

10)People need hardship inorder to grow,, motivate above adveradge, themselves colectively as a nation. The Great Depresion and the Wars have done this for America and her people. The right leadership at this time can point out the present day hardships, provided the goals and the motivation to acheave these goals.

I'm shotgunning this and giving a very incompleat argument for for my points. Basicly we have to get our house in order (big time).

posted by: Jim Coomes on 01.29.04 at 11:28 AM [permalink]

I've been following this off-shoring debate across the Internet and have found some great stuff, this site included.

However, for those of us who aren't economists, what's a "true Ricardian comparative advantage"? I.e. Who is Ricard? (a link is a good answer.)


posted by: mrsizer on 01.29.04 at 11:28 AM [permalink]

What I've never understood, for the rah-rah's "let the jobs go where they go" supporters. You look at how factory jobs got outsourced, and then see that we are still going, so it must be okay for our tech jobs to go. But I NEVER hear this fact dealt with: 30 years ago, the largest employer the US had was General Motors. We had a "GM Economy". Those were good jobs - could afford a house, 2 cars, etc, etc. However, with the demise of a lot of those jobs, we now DO have a new "revolution" in jobs, and this revolution is the new largest employer in the US, called Walmart. In WHAT UNIVERSE is this a step up?? For an employee of Walmart, to be compared to an employee of GM, is laughable - simply laughable. There is a way that this "new jobs" is not an improvement - and I would love to see the pro outsourcing (factory or tech) include this in their arguments. (Are the replacement jobs "truly" going to be better???) Also, include how the average GM guy, 30 years could support a family on his own, while now, the same guy has his wife working, and only together are they doing "better". Yes, they are, but it isn't comparing apples to apples. It is comparing an apple to an apple and a banana (or whatever. Hopefully my point is gotten across, despite the bad phrasing.)

posted by: JC on 01.29.04 at 11:28 AM [permalink]

Dear Mrsizer,

You can find a link to David Ricardo and some of his writings here. Here is a site on comparative advantage, here is a nice summary, here is a nice synopsis, and here is Brad Delong's on the subject.

He states:
"The most misunderstood concept in Economics is the concept of "comparative advantage." First developed early in the nineteenth century by David Ricardo, "comparative advantage" holds that we should export not those commodities that we can make more efficiently than people in other countries can make them, but those commodities that we can make most efficiently relative to the efficiency with which we make the average good or service. This principle has a corollary: we should import not those goods and services that we make less efficiently than other people make them, but those goods and services that we make less efficiently than we make goods and services in general.

I have found his writings to be of extremely great value. For instance his writing on land rents / distribution theory and his incomplete theory of labor value were seminal on my analysis of how the linkage between cycles of economic modernization and technological innovation are linked today in 2004!!!

Consider this excerpt from the summary:
He attempted to deduce a theory of value from the application of labour, but found it difficult to separate the effects of changes in distribution from changes in technology.
Combined with distribution theory and comparative advantage trading theory, it goes to the heart of the outsourcing question this very day!

Overall, his writings are somewhat dated like obviously his land rent analysis didn't itself become exactly true - but it introduced important economic princples still relevant to the modern international economic order and I find them a valuable reference when analyzing globalization and other complex modern phenomena. (He is tho by no means the final word on the subject, tho perhaps the first word.)

posted by: Oldman on 01.29.04 at 11:28 AM [permalink]

Dear JC,

I agree. By out-sourcing labor to lower cost of living places, one can reduce costs and increase profits. Theoretically these profits are then spent into the economy creating new jobs. This simplistic answer ignores several issues. One is that you are losing money to another economy by using their workers. Another is that you lose whatever you spend by transfering your production infrastructure to them (facilities, education demand, etc.). Another is that the net domestic gain is only positive if you have a ROI (return on investment of capital) greater than the losses. And it get's even more complicated than that.

One additional factor often ignored is market competitive pricing. With margins rising, there is a temptation to increase market share by cutting retail prices. This introduces delationary pressures into consumer prices. In addition, outsourcing causes other nations to develop - raising their working capacity and introducing broad supply / demand issues with the effect being broad downward pressure on labor wages.

And that's just the beginning. It get's way more complex from there on out. Suffice to say that the oldman could write a book - maybe several books - on the topic in order to properly treat it. But the bottom line is that without a sufficient technological edge to create new high quality jobs to replace the old high-quality ones, the default will trend toward low-wage, low-benefit, low-skill, low-satisfaction service jobs because these are the hardest to outsource.

I think even a brief look at economic numbers and reality that you point out - low wage increases, two income families, increasing debt, etc. support the idea that not all is well in America.

So I agree with you. The problem is that the issue is so huge and complex that even the oldman quails at the thought of writing a bristling economic thesis on the topic - probably several volumes long and in this modern day having to have some mathematical computational models to push the point. Sigh. And just think, the oldman ain't even a formal economist.

posted by: Oldman on 01.29.04 at 11:28 AM [permalink]

Dave Thomson,

You write:
So what? Why should we really care? I am more than willing to play the role of Devil’s advocate. Even if India and China economically pass us up---we will benefit from the overall increase in the wealth of the overall world. The United States does not have to be the per se leader to enable us to live a very good life. You are too much into zero sum economic models. They are ultimately senseless.

First of all your proposal has a host of historical and political problems with it. I will skip over these quite strong "real world" objections though to answer it as briefly as I can in this forum on an extremely complex topic on theoretical macroeconomic grounds.

First of all, note here a more sophisticated description of the Ricardian model. Second we must invoke the difference between Comparative versus absolute advantage. Then I will cite a recent paper on the role of absolute and comparative advantage along with technological superioty.

I cite from the abstract:
This paper obtains new results about absolute and comparative advantage, by introducing international technological differences into ... models ofopen-economy growth with optimal saving. For example, if a country has the same ... advantage in all industries, it exports the capital-intensive tradable, even though the technological advantage is only absolute rather than comparative. Alternatively, even a small comparative advantage for some good is sufficient for the advanced country to export this product, regardless of relative factor supplies. In either case, the fundamental reason for trade is technological superiority rather than factor abundance.

In grossly over-simplified terms, technological superiority when factored into absolute and comparative advantage is a "trumping" factor. As Ricardo himself found, the value of labor was redistributed by techological innovations.

Now in the past, America had both technological superiority and a higher cost of living (cost of labor). Other countries could benefit from comparative advantage, even though they were less efficient by specializing in an export (like coffee, chocalate, oil, you get the idea) whose opportunity cost was lower for them (it was an abundant natural resource typically). So they didn't have technological superiority but they had a lower cost of living - cost of labor / lower opportunity cost as well.

Reversing this logic, suppose America loses technological superiority but maintains a high opportunity cost (through higher standards of living / cost of labor) for its exports. This isn't sustainable because technological superiority both causes shifts in labor value distributions AND trumps comparative / absolute advantage as a driving force for trade. The result would inevitably be a requilibriation with a lower American opportunity cost - i.e. American standards of living would have to fall to compensate. We would become the "third world country" and they would become the developed technologically superior world.

After a period of time, we could begin growing again but you see it's not just a matter of standing in one spot while someone zooms ahead- in the switchover we'd have to fall back as the economic order re-equilibriated itself.

So that's why Americans should care. The switchover would be brutal.

posted by: Oldman on 01.29.04 at 11:28 AM [permalink]

yeah, i don't know why people need to make grand pronouncements and theories on the "political-economy" of outsourcing. it's simple really, other places are just more competitive than america and, in general, more educated (and harder working) than americans. china and india *each* have three times the science and engineering graduates than the US. to go shields up raising barriers won't change that. like when you point your finger, oftimes there's three pointing back at you.

it may make you feel better, but people like peter drucker and andrew grove don't want to *feel* better, they want to *be* better. businessweek also had a cover story on india recently, and one of the articles offered some suggestions on how to achieve that.

ignoring a problem that's staring you right in the face is the best way and shortest path to irrelevance. facing up to meet the challenge is supposedly what americans do best. increasingly, however, it seems devising ex-post facto rationales to describe how everything is alright is becoming our "comparative advantage," and i thought that was liberals' forte.

posted by: a concerned american on 01.29.04 at 11:28 AM [permalink]

“Reversing this logic, suppose America loses technological superiority but maintains a high opportunity cost (through higher standards of living / cost of labor) for its exports. This isn't sustainable because technological superiority both causes shifts in labor value distributions AND trumps comparative / absolute advantage as a driving force for trade.”

First of all, I doubt very much if America will lose its technological superiority. The gods of creative destruction simply must be allowed to do their duty---and we will be just fine. Secondly, countries like Holland and Switzerland who are not considered world leaders are not exactly wallowing in destitution. We merely need to stay competitive. Economics is not a zero sum game. It is to our benefit, If India and China become economic powerhouses. This hoped for state of affairs will lift all boats.

posted by: David Thomson on 01.29.04 at 11:28 AM [permalink]

I hate being so late to a really good party! Tried to post this morning, but all this sturm und drang appears to have crashed my server.

Kudos to Oldman for being SOO provocative Drezner himself gave a shoutout from the mountaintop. WOW!

Here's a synopsis of my over-wordy failed post.

I'm largely on board with the Oldman. A few point toward furthering the discussion: 1) let's really tease apart the "what's next?" dilemma. My thoughts: weapons and security systems will be a major driver here. See the WaPo today for a nice piece on a local firm making awesome battlebots. It passes Oldman's 1-2 decade ahead threshold and we can be sure the Feds are going to keep the cash flowing for such innovations. Plus, if someone can beat Rumsfeld with a stick, those R and D AND manufacturing jobs will be staying here. Sheesh, what's WITH that guy? Apart from the mil./ind. complex, we've got natural advantages in biotech and genetics research/development. Here's the problem: these fields are bumping against the outer limits of our ethical universe. I'm of two minds myself on things like stem cell research--see the potential but am sickened at the price. Other nations will not share our squeamishness. This could be a real dilemma. Any thoughts?

2) Let's try to learn something from the manufacturing debacle. Each corp. thought it was being cleverer than the next shipping production to China. Now they've all got the same problems: quality control, patent infringement, employee theft, not enough power, etc. What drove them initially was greed, then keeping up with the joneses. The government does not need to pass a lot of legislation to keep the same thing happening in other fields. But it needs some. Why? Because if everyone is worried that their competitor is gonna steal a march on him, he's gonna bolt and take all the jobs with him. If govt brokers agreements that no one is going to move more than, say, 20% of service jobs offshore (lest they pay penalties in taxes, a less vigilant attitude towards things like piracy, etc.) we may avert the worst. Things like this need to be discussed NOW.

3) DT has half a point in his last post--we WANT China and India to grow economically--they are excellent markets, potentially strong anchors in the international community, and it's what we've SAID we wanted all along (or do we really want the developing world to stay poor and dangerously unstable?). The trick will be staying a step or two ahead of them, integrating their labor and skill set smoothly with our own, not contributing to any monsters. Good luck, right? No, seriously, I think the right approach to this is a postive one. Believe me, I've spent time in India, and it will be a miracle if the tech sector can single-handedly lift that country out of its economic torpor. Still, it's great to see progress of any kind. We need to encourage it, but kind of manage it too.

posted by: Kelli on 01.29.04 at 11:28 AM [permalink]

This article highlights some language used by candidates on the stump, particularly in South Carolina, which has lost jobs for years due to the loss of jobs in the textiles industry. But it makes a distinction between manufacturing and service sector jobs, which encompass high-tech and high skill jobs which were suppose to be what those who lost manufacturing jobs retrained for.

The loss of IT jobs have gotten a lot of disproportionate publicity, given that the loss of manufacturing jobs drawf the loss of IT jobs. However, even the most staunch supporters of globalization struggled to justify the loss of these jobs at the recent World Economic Forum at Davos, according to a WSJ article. The reason is, IT and other high-skilled jobs were suppose to be what those who lost manufacturing jobs could retrain for. When high-skilled jobs leave the developed countries, what's left?

Here is however a more bullish view of offshoring in high tech, even though it struggles to answer the question of what Americans and Europeans could turn to after their white-collar jobs are offshored:

I don't think either party has really drawn out comprehensive policy positions to these new realities. Both parties supported NAFTA over 10 years ago and promised that people who lost jobs to Mexicans or other workers overseas could train in better-paying jobs. If they couldn't make that argument, NAFTA would have had a hard time winning passage. It was easy during the tech and Internet boom of the '90s, not to mention the overall job growth, to be hopeful that these promises would be fulfilled (even though a lot of former manufacturing jobs in fact went on to lesser-paying jobs).

Both parties have plenty of leaders who extol the virtues of free trade and argue against protectionism. Yet, they are not above protecting some segments of the domestic economy from international competition, like the agricultural industry and the steel industry. Those business however had both management and workers united in asking for those protections whereas the manufacturing companies who offshored wanted to move their operations offshore and the same is true for the companies (not just high tech but banks, insurance companies, etc.) who are offshoring IT work.

posted by: aghast on 01.29.04 at 11:28 AM [permalink]

Oldman, thank you. Digging through it...

A couple of points:

a) a lot of IT work is drudgery not that different from assembling the same part over-and-over again. It's only a matter of time before it's eliminted through automation, regardless of offshoring. Big Question: Who's going to develope the automation tools?

b) America is on the cutting edge of many fields (I'd add nanotechnology to the list above), but a lot of that work is being done by foreign graduate students. Knowledge is VERY portable. Which leads to..

c) We've got to do something about our educational system. We're turning out people who have no grasp of elementary speaking and writing (read some of the 'logical' arguments in blogs for some great? examples - syllogism? What's that?), let alone advanced science. Almost anything would be better than what we have now.

d) The "things are getting worse", "we have no free time", and "one has to have two incomes to survive" arguments are completely wrong. There is ample evidence that we're better off than we've ever been and that families CHOOSE to have two incomes, not that they require them. Houses are ridiculously large. Obesity is our biggest health problem. Most families own two cars. etc...

posted by: mrsizer on 01.29.04 at 11:28 AM [permalink]

Thanks everyone for the thoughtful discussion and especially Oldman for clearly taking a LOT of time to type out his thoughts.

Clearly a complex issue... should be interesting to see how things fall out.

posted by: Steve in Houston on 01.29.04 at 11:28 AM [permalink]


> a) a lot of IT work is drudgery not that different from assembling the same part over-and-over again. It's only a matter of time before it's eliminted through automation, regardless of offshoring. Big Question: Who's going to develope the automation tools?

That one is simple, the people using the tools. Let's not even go to the computer language example, look at emacs. Who created it, why? Was it meant to be used by so many people? Once all the development moves to India, we're promised to do the design work here. That's a lie, the design work will move there too, as we get less and less experienced people who need the tools.

Somebody said we don't have enough educated people in the sciences and engineering in this country, that's true. So the solution is to ship all these jobs out? What is the incentive to have people join these fields?

I have a Masters degree and was planning to get a second one in the field of bioinformatics, I'm sure many of you will consider that boring drudgery work. Anyways, I'm postponing that because this is in my view an offshorable job. With the high uncertainity, we just discourrage people from seeking education in these areas.

My grad classes had 3 native citizens in them, the rest were all from Asia. That's nice that we are educating the rest of the world on a state university, but doesn't anybody see a problem with this? We need to make sure we can continue offering these jobs in this country, and we need to make education for these available to US citizens who have to work (night classes, our masters programs don't have night classses, does that make sense?).

Another person said people in these countries work more than us, I must be an alien as me and a co-worker onced worked 2 nights and 3 days without going to sleep to finish a project.

I also like this "drudgery" thing, the height of arrogance.

posted by: ElCapitanAmerica on 01.29.04 at 11:28 AM [permalink]

I only took a quick read through this...but she seems to be assuming that the reason some industries have lower "IT intensivity" is that IT is too expensive for these industries. Isn't it more likely that the reasons actually lie in the nature of the industries? Planning and control systems for construction, for example, are arguably more difficult than planning and control systems for discrete manufacturing. And I've had personal experience running organiations that (among other things) were developing and selling systems to the health care industry. I don't think the IT adoption isses in this industry are primarily cost-based.

posted by: David Foster on 01.29.04 at 11:28 AM [permalink]

Dear all,

Just to cap off this discussion a few points. DT, you doubt that America will lose it's technological advantage and invoke the "creative-destructive gods" of capitalism. But according to your own logic, capitalism is a system of winners and losers. There is no "manifest destiny" to suggest that America cannot be one of the losers that are 'destroyed'.

Kelli, you are sensible as always. I'm regretting my failure to win your hand more every day! ;-) Yes, the key issue is lead time. If there was 10-20 years lead time there would be enough time to retool, retrain, etc. There would be somewhere for displaced "virtual" worker in the economy to go (a virtual worker is not a flesh and blood worker that changes their jobs, but an occupational unit of labor in the economy that allows the mathematical equivalent of people switching jobs).

Finally, as people have noted as well as me Carly Fiorina, Adrew Grove, Peter Drucker, as well as anyone with experience in scientific, engineering, or technical fields knows is that the other countries are beating the pants off of us in the next generation of knowledge-creation workers. For every American graduate student, there are many more foreign students. In fact, the present progress of American knowlege-creation is being powered more and more all the time by foreigners. I estimate that our current lead time in unclassified research is only about five years across the board.

This simply isn't enough lead time for a healthy "one step ahead" economy.

posted by: Oldman on 01.29.04 at 11:28 AM [permalink]

Why aren't these big companies worried about all these unemployed IT guys getting together, starting a company, and beating the pants off of them? Didn't Bill Gates do that to the bigger companies with Microsoft. Aren't most big inventions (other than drugs) invented by people on their own? Light bulbs, PC's, Windows, planes, telephones invented by independent workers? Therefore, isn't freedom more important than rote learning? I have noticed among baby boomers a tendency to not like their fellow citizens and think that any other country is better than their own? Most of these leftist types are in universities, can this be affecting admission policies, along with the great American disease greed? Don't university students get more money for foreign students? Both my brothers are electrical engineers and went to a private university; they were both snatched up by government contractors to work on defense work. All of their fellow students were native born Americans. Every government agency went to their university to recruit. I would appreciate someone's take on all of this if they have time. I don't really know a lot about all of this stuff. One thing I have observed in life is that experts are often wrong.

posted by: Lynne on 01.29.04 at 11:28 AM [permalink]

I don't agree with what I am reading about outsourcing of jobs overseas somehow creating more jobs in the US. How ? Where ? When a company moves jobs overseas, X number of its employees are thrown out the door like yesterday's garbage. Where do they go to get these "new" jobs ? If they have to go back to school for more training, how do they pay their tuition and household bills while they are at school ?

I keep reading that outsourcing is here to stay, and that it is bad to be protectionist. I say if a company wants to move jobs overseas, OK, BUT IT SHOULD NOT GET A TAX BREAK FOR DOING SO. Also, it should be compelled by law to provide training for displaced employees.

If the US continues to move jobs overseas unabated, what will happen ? Will all of GM, Ford and Crysler plants be overseas ? All of GE's plant, also ? WILL THERE BE ANY JOBS LEFT ? Our country cannot exist with all consumers and no producers.

In summary, I don't follow the theory of new jobs somehow being "created" when older ones go to India. I see outsourcing as a temporary profit source for a company, until the country collapses from a lack of industry.

posted by: Steve Weisert on 01.29.04 at 11:28 AM [permalink]

Well, I feel really out of place with all of these Doctorial thesis posts but as a subject of your chatter, I must respond.

Me! I! Until February 2001, $50/hour IT consultant to Verizon Wireless.

Now!!! $7.50/hour warehouse laborer. Thats after 2 years on the job and a 25 cent raise ever 3 months.

Now .. ask my opinion of offshore outsourcing ... any job that leaves our shores is an American out of work .. and higher profits by Corporations don't materialize to more jobs for Americans .. just better dividends for investors .. the rich get richer .. so does India .. the American breadwinner that has to work for a living is the loser.

posted by: LostinLaLaLand on 01.29.04 at 11:28 AM [permalink]

The previous speaker is correct. The basic formula of offshoring is this:
* Save overhead by using cheap labor. This requires the unemployment of people in the US living in a higher standard of living whom require higher salaries and the employment of people living in countries supporting offshoring whom have lower standards of living and lower salary demands.
* End Result? The unemployment of Americans, the employment of foreigners, and a net savings to the capitalists. How this net savings is distributed--the lowering of prices versus the increase in profits--determines the effect of offshoring. If all the savings were devoted to lowering of prices, then US consumers in general would benefit from offshoring at the expense of the unemployed. But if savings from offshoring become in any way profits for the capitalists, the net result of offshoring is that capitalists get richer, a foreigner is employed, and an American is unemployed.
The capitalists benefiting from offshoring do not care where their profits come from... if they pull out the rug from the entire populace of the US while in the process of making a profit, it doesn't bother them in the least. If the US becomes a horrible place to live, the wealthy whom have made it this way can simply move to a more suitable country and set up shop there. Just because they ruin the economic fabric of American society does not mean they have to endure the cataclysmic results of their greed.
Governments were created, ideally, to look out for the public interest. When any group encroaches upon the well being of the whole (as in the monopolies at the turn of the last century), the government is supposed to curb this group's asocial activities. Government is supposed to look out for the interests of the society which they govern.
In the case of the United States Government, they seem to be looking out for the interests of the wealthy, even though these interests erode the economic stability of our country.
It's that simple folks... when a society is based strictly upon supporting the profit-making capitalistic machinery, economic erosion is the end result. We are beginning to experience the negative returns of capitalism after years of seeing its benefits. A society focused on money-making becomes just that--a machine for making money for capitalists. Without a cohesive government ensuring the interests of our people, our country degrades into a bunch of individuals out to "get theirs" by whatever means possible. What unifying principles does our country have beyond greed? Education? Religion? Imperialistic expansionism? Scientific Advancement and the Quest for Truth? What do we all have in common beyond the basic necessities when we lose interest in everything but making money?
Who cares if you are a rich man living in a sewer? What good is money when the quality of life degrades around you to the point where you cannot leave your home without seeing despair and hopelessness staring you in the face at every street corner. When the wealthy realize that their own happiness is directly affected by the well being and happiness of everyone in their surroundings, then they can lift themselves up by lifting all those around them.
It seems right now, the older generation has a "not in my lifetime...I hope" attitude towards the eventual collapse of our country. The people who can make a difference care little for the future of our country and its inhabitants, and hope that everything doesn't go to hell in their lifetimes. What kind of attitude is this?
The solution to the general lassitude in our country is for everyone to make a stance right now and say "I'm going to do whatever it takes to improve the world around me." If you are working in a company where you are aware of unethical behavior, blow the whistle! If you see someone steal an ladies purse and you can trip him, trip him! Do whatever it takes to stop the corruption that you see around you! The only way people should expect to see any improvement in our well being is for every one of us to police our environment and expect the same of others. We cannot expect someone else to solve the problems that are looking at us within our own little fishbowls... what you see is what you get. When you see corruption in your workplace, use your cleverness, your connections, your resources to chip away at this corruption in every little way possible.
I firmly believe that very few of us want to experience a depression, or to have our children have nothing to hope for beyond low paying jobs and hardship that looms menacingly in our futures. Each and every one of us needs to stand up for what is right, and use our intellect to see that we are doing what we should be doing, and that everyone else around us is too. The time for "minding your own business" is over, because our own business depends on what other people are doing. These other people--be it our neighbors, our employers, or our government officials--need to be observed and corrected. Self policing and policing of those around us is what makes us strong. "Mind your own business" attitudes are what gives criminals the chance to slip through the cracks and rise to the top.
Come on people, stand up and start doing what is right! But do it silently, and cleverly.

posted by: Sean Blankert on 01.29.04 at 11:28 AM [permalink]

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