Friday, May 27, 2005

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The latest on offshore outsourcing

Ted Balaker and Adrian Moore have written a lengthy report for the Reason Foundation entitled "Offshoring and Public Fear: Assessing the Real Threat to Jobs." Click here or a more concise summary of the report. Nut sentence: "Outsourcing is not a newly created threat to jobs. It is merely a version of trade, and like previous versions of trade it brings some pain—but it brings even more promise."

One anecdote that's given as an example of how offshoring saves and even creates jobs:

Offshore outsouring also helped Donaldson Co. Inc., a Minnestota-based technology components company. Facing competition from overseas manufacturers with much lower prices, Donaldson shifted production to China. The design work stayed with its American team of engineers, chemists, and designers. Offshoring production helped increase Donaldson’s U.S.-based employment by 400 employees since 1990. What if the company had refused to go offshore? “We’d be out of business,” says an executive.

[Sure, but what about the jobs that will be destroyed in, say, the financial sector?--ed. Hmmm.... let's check out this report by Andy McCue:

Two-thirds of financial services firms still have no plans to outsource any operations to low-cost overseas countries such as India, according to a new report.

But the worldwide study of 400 IT directors by analyst Datamonitor found those banking firms which have already used offshore outsourcing are planning to increase the scope of it and extend it to more complex and core financial services processes.

Anders Maehre, financial services technology analyst at Datamonitor and author of the study, told there is an increasing polarisation in the banking industry between firms which choose to offshore and those that don't.

"The vast majority of companies will not consider offshore for anything. But two-thirds to three-quarters of those who already do offshore plan to increase it, so the logical conclusion is that some of the fears these firms have don't materialise and they do experience benefits," he said.

Only about a fifth of financial services firms are currently using offshore outsourcing and another 15 per cent said they are likely to go down that route in the near future, while the rest said they are "completely unlikely" to use overseas resources, according to Datamonitor's figures.

But the figures can be slightly misleading if not put into context: most of the big global financial institutions make up that small number of firms which are offshoring.

So there's a complex trend going on -- some big firms are increasing activity, but almost all small firms are not. My hunch is that the overall effect on employment is a wash.]

Meanwhile, a new book coming out suggests that estimates of jobs lost from offshoring are both exaggerated and reversible:

Douglas Brown and Scott Wilson, authors of "The Black Book of Outsourcing," say many executives they've interviewed are reconsidering offshoring because of the high price of fuel and airfare, management challenges, customer complaints and the increasing cost of labor in foreign technology hubs such as Bangalore, India, and a simultaneous lowering of some white-collar salaries in the United States.

By 2015, Brown and Wilson say, the United States will likely rank as the No. 3 destination for outsourced work, behind only China and India.

"Offshoring undoubtedly offers significant financial benefits for companies across a wide range of fields and sizes," Wilson said. "Undertaking such a venture, however, requires a cost-benefit analysis that includes downsides such as political instability, language and cultural barriers and time-zone differences."

Instead of farming out work to countries a dozen time zones away, Wilson said, many U.S. companies are looking for relatively low-cost destinations closer to home, including Canada, Mexico and South America. He terms it "nearshoring."

Click on this paper by Scott Noble to see some reasons why offshoring fails.

posted by Dan on 05.27.05 at 03:26 PM


" brings some pain...."

Tell it to the families in Ohio and Michigan who have filed for bankruptcy and lost their homes, after giving decades to manufacturing.

This is the richest country in the history of the world, yet we treat displaced workers like yesterday's trash.

Meanwhile, back in DC, the steak and lobster crowd are enjoying the benefits of free trade.

The backlash is coming..........

posted by: save_the_rustbelt on 05.27.05 at 03:26 PM [permalink]

It seems to me most people involved in the free-trade debate are talking past each other.

Anyone who's had Econ 101 will immediately see how "offshore outsourcing" fits the free-trade-is-good model. Comparative advantage and the beauty of free trade ... yeah, I read about that (in a Paul Krugman textbook, as I recall). Outsourcing supporters repeat this Econ 101 argument ad nauseum. (E.g., the "nut sentence" in Dan's post.)

Meanwhile, opponents of outsourcing, like "Rustbelt" above, talk convincingly about the impact on individuals of shocks to the economic system -- like that posed by a change like offshore outsourcing. They can tell, again ad nauseum, stories about workers whose lives are severely disrupted by outsourcing.

So, the question is: What does one do, when he's digested the Econ 101 Kool-Aid, but also has a "bleeding heart"?

In the long term, offshore outsourcing is good. In the long term, we're all dead. It seems to me somebody's gotta find some common ground.

We need to continue taking advantage of the free market, but also to make sure that people have the opportunity to be full citizens in our society. The whole premise of America is that we are a citizen-governed polity. The pride, confidence, and moral-backbone necessary for a self-governing system are only possible if individuals have some degree of confidence that their future is not subject to arbitrary forces. The hard work and dedication citizens put in to build lives, careers, families, and citizenship are meaningful, and to leave that effort to the whims of the invisible hand sacrifices the social good to the economic good.

If you support free trade, great. But don't give aggregate statistics to justify the destruction of an individual's life. It's not entirely clear that 1.001 jobs created are worth 1 job lost. We can do better.

posted by: Andrew Steele on 05.27.05 at 03:26 PM [permalink]

Agreed. I consider myself a pretty dogmatic free-trader, but I always found the libertarian endorsment of free-trade, as a utopian scheme that always brings good tidings dishonest. Those who support free-trade (and I do), have to be honest about it, that it's a system with costs and trade-offs just like any other, and try to argue convincingly, but honestly that the benefits will offset the costs with room to spare.

posted by: Dustin Ridgeway on 05.27.05 at 03:26 PM [permalink]

The problem with Andrew's argument is that there cannot be growth without change. In other words, if we want to keep posting increases in our standard of living, so that our children are richer than we are and so that we can afford to do the collective things we want to do, then people's economic roles are going to have to be subject to change without notice. Economic progress is basically synonymous with changes in what is produced and sold and changes in the division of labor.

The bizarre thing about the fixation on foreign trade is that it is not the most obvious source of economic instability in people's lives. Changes in technology and organization, as well as intra-US regional shifts, continue to be the big stones dropping in the pond and sending out ripples that shake up everybody's lives.

The textile industry of the South, now under threat from foreign competition, was built by destroying the New England textile industry through competition. The Rust Belt is more affected by auto plants in Kentucky and South Carolina and southern Ohio than by anything in Germany or Japan.

And regional factors are even less important than technological ones. By far the greatest driver of reduced manufacturing employment is greater efficiency and productivity--supposedly even the Chinese are losing manufacturing jobs. Once, almost everybody was engaged in agriculture. Now it's less than 3% or so. Manufacturing is going the same way in the long run. That's a good thing, if you want to have an improving standard of living.

If you want to discuss policies that reduce the impact of these shocks on individual workers--portable pensions, portable health insurance, reduced licensing restrictions in service occupations, etc.--that's a worthwhile discussion. But the economy's relentless, decentralized, trial-and-error search for an improved division of labor, intra- and internationally, will always be necessary for per-capita income growth. Freezing the economy in place guarantees stagnation (and new forms of instability in people's lives), as the more dirigiste countries around the world demonstrate.

posted by: steve on 05.27.05 at 03:26 PM [permalink]

I dunno, Dan. I was at the bookstore, and I picked up a couple of "When I Grew Up, I Want To Be" books. I picked up Doctor and Plumber, and left Computer Programmer on the shelf.

I'm in high tech and so is my husband. But I won't tell my kids to go into it. It won't be there. Our policy means that Burlington, MA and Burlingame, CA will end up looking like Flint, Michigan. I'm only going to encourage my kids to do things that have to be done in person.

posted by: Lisa Williams on 05.27.05 at 03:26 PM [permalink]


Excellent post.

I am not opposed to free trade or outsourcing. I'm not a bleeding heart or a whining socialist. I'm a "Reagan Repub" but unlike most of the leaders and elites in this country I acutally know people with callouses on their hands (and with a little practice I could run a bulldozer again, but don't get too close). I've spent a lot of time with hard hats and with college professors, and I prefer the company of the hard hats. Sorry Dan.

When NAFTA was sold to the midwest we were told:

1. jobs would be lost
2. we would soon be flooded with high tech jobs and high-value service jobs


(One of the fed reserve governors from Chicago (I think) gave a brief but excellent speech some time ago about the difference of an unemployed worker and a "displaced" worker - if I can find the link I will publish it).

Ohio has set records three years running for personal bankruptcy and home foreclosures. Is this really necessary? Should children go without medical care because their parents made the "mistake" of being employed in manufacturing?

[And the guys on Wall Street and K Street continue their crime sprees, but the rules do not apply to the rich and powerful.]

The Rove administration, er, the Cheney administration, oh, you know, has a benign neglect policy toward the "Rustbelt." Maybe we should leak something about Michigan having weapons of mass destruction.

And yes, we have made our own mistakes. Google Governor Bob Taft or General Motors for more on that topic.

In the irony department.......

Some manufacturers are now complaining young people want nothing to do with manufacturing jobs. Maybe that is because dad, after 25 years in manufacturing, is now selling lumber at Home Depot, making $8 an hour. Kids pick up on these things.

Why be loyal to an employer who is looking to destroy your job next week - month - year?

Change is inevitable and constant. How we manage the change is up to us. So far, we have done a lousy job.

posted by: save_the_rustbelt on 05.27.05 at 03:26 PM [permalink]

The Wall Street Journal ran a story yesterday about some sock manufacturers dealing with global trade. The ones who supported global trade had replaced some American jobs with factories around the world. The ones opposed to global trade had replaced American jobs with machines. Either way, low-skilled American workers are screwed.

posted by: noone on 05.27.05 at 03:26 PM [permalink]

Re: Dan's comment on financial services, if large firms are increasing offshoring activity and smaller firms are not, it's hard to see how the effect on American jobs can be a "wash."

So maybe that's just a bad hunch. More generally, though, comments made above about disruptive changes coming from sources other than foreign trade are quite right. It has probably always been true that the majority of economic growth is produced by a minority of the working population. This may be more true now than it has ever been.

Now that subsistence agriculture has all but vanished in North America (and is rapidly declining in the rest of the world), a lack of relevant job skills means a life of dependence on the state. There are ways to mitigate this reality for this and future generations but I'm not sure we can alter it completely.

posted by: Zathras on 05.27.05 at 03:26 PM [permalink]

"Since 1999, 70,000 computer programmers have lost their jobs, yet, at the same time, companies created 115,000 higher paying jobs in software engineering."

What I've seen as an IT professional in one of the 'big three' auto companies is a previous trend to reduce employees for contractors being shifting to a conversion of the shrinking employee base (which often includes the contractors now) to 'project managers' who increasingly use blends of out-sourcing to exploit reduced labor costs available elsewhere. The company wants to control IT at a business level and has abdicated its expertise in hands on IT work to a large extent. This is not black and white, there are multiple transition threads going on, technology shifting to the web, competing paradigms (J2EE - .NET), new technology layers like data mining tools being added, as well as business models being revised.

The bottom line from my perspective is that slightly more people are working, but usually at lesser pay and benefits than in the 70-80-90's - yes I'm a dinosaur but a fairly adaptive one.

Computer programming used to be predominantly a white male profession but now my office looks like the United Nations. Now we have a predominance of Indians (curiously, still mostly male). The larger company staff involved in IT (as opposed to actual programmers) has exploded and is harder to characterize.

What we may be seeing is IT getting more layers (which parallels OO software design) and becoming more complex in order to acheive flexibility. I'm not sure this works, but it seems to be the trend. The layers which may be a way to reinvent the American worker upwards may collapse as competition increases and they are seen as unneccesary overhead. From the company's viewpoint this blend of labor to get the maximum IT bang for the buck is limited as complexity rises. We may see some retrenchment as some IT problems become unmanageable with too many middlemen involved in getting a business concept into software and deployed.

I understand how some of the arguments work that Dan is presenting, but my experience is that Americans will get a less pay as world-wide competition opens up. Sure goods get cheaper, but many big ticket items (food, housing, trans, health) are based in the American bubble and will not decrease quickly enough to match the leveling of incomes that globalization entails long term.

My belief is that globalization is inevitable and at some point synergy or something kicks in and everyone in the world is better off. I don't think a simple analogy of equalizing the levels of various pools works such that those in the upper pool must neccessarily end up lower, but in this model you don't want to be caught at the flow-rush point. People are getting hurt by being at the wrong place at some point in time.

posted by: jdwill on 05.27.05 at 03:26 PM [permalink]

Reason Magazine notwithstanding, hat's off to Paul Craig Roberts, assistant treasury secretary in the Reagan Administration for the trenchant observation that offshore outsourcing is not trade - it's labor arbitrage. That is, it's the replacement of high-priced domestic labor with cheap foreign labor which converts domestic goods into imports.

Warren Buffett has observed that our nation's current situation, a $660+ billion trade deficit, is not trade, which is the exchange of goods (or services) for goods (or services)- rather it is the exchange of goods for assets, purchase of goods financed by selling off assets (equity, gov't bonds repayable with interest, etc).

As he so poetically put it we are creating not an ownership society, but a sharecropper's society.

As for the hunch that the loss of jobs to outsourcing is not as bad as we think, I say, Who knows? No one - not the gov't, private sector or anyone else is keeping track of how many jobs are being sent offshore. Oops.

We do know, however, that unemployment in the high tech sector is above the national average. So much for those hi-tech jobs that would replace the lost manufacturing jobs. Oops again.

We also know that the overwhelming majority of jobs created in the last few years have been in low-wage, low-skill areas that face no competition from imports or outsourcing.

Steve, this is not a promising scenario for our children having a better standard of living than us.

I'm glad the agriculture example came up. It's not a valid analogy to today's situation. Yes, a large % of Americans once worked on farms. They stopped working on farms and went to work in factories making the machinery that replaced them. It's not like we decided to start importing all our food because it would be cheaper to have Chinese coolies grow it and expected new better jobs for the displaced farmers to magically appear.

As for Economics 101 textbooks, Paul Samuelson has distanced himself from panglossian 'free trade lifts all boats.' He observes that trade has definite winners and losers. Anyone who doesn't see large swaths of America on the losing end of this so-called free trade equation needs to get out (of NYDCLA) more.

I believe that free trade is by its history and nature a utopian scheme, not unlike communism. Historicaly, it has been promoted by idealist true believers who felt it was the way to dissolve borders and make the world lay down its arms and live together happily ever after. While this is a laudable sentiment it hasn't worked out that way in practice.

And going back to Economics 101, I draw attention to something Henry Ford said when he decided to give his workers (in his factories around the world, I may add) 6 days pay for 5 days work:

"The people who consume the bulk of goods are the people who make them. That is a fact we must never forget -- that is the secret of our prosperity."

As the driver of our economy has changed from industry to finance, as occurred in Great Britain before us (not a positive development since the financial sector can never employ as many people as a healthy industrial sector), we have forgotten this bit of common sense.

We now have our best minds creating financial (rather than mechanical or electronic) instruments; they have discovered a way to make a fast buck by replacing well-paid domestic labor with cheap foreign labor.

In the process, they are - in the not very long term - destroying the very market for the goods they seek to sell at a higher profit margin.

But they'll leave that mess to be cleaned up by those who come after.

Meanwhile, we're told it's a) inevitable and b) good for us.

But as the returns today show in France, not everyone is buying it anymore.

posted by: CurtisE on 05.27.05 at 03:26 PM [permalink]

From what I see in the Bay Area, from the point of view of the technology worker, globalization is a rip off. The South Bay is still losing tech jobs. All the big companies hire for R&D (the top end R&D) in India now. Globalization is like crystal meth for the corporations - for a little while longer it will float profits and the stock price. Eventually it will become clear that we've chased profits and our technological base clear out of the country. What then?

"I believe that free trade is by its history and nature a utopian scheme, not unlike communism."

CurisE, you funny guy. What I see is that NONE, repeat NONE, and I mean NONE of the blathered promises of the economisties about the copious jobs in the brave new export industries which Americans will dominate through innovation and comparative advantage have appeared anywhere on the horizon. They are like nowhere, so would you econ dudes shut up or put up? Bio tech doesn't count because I'm talking about significant employment opportunities to replace 100Ks jobs lost.

American workers cannot compete with the low wages paid in Indian and China. We Can Not Compete. We can't survive on those wages. Those two huge workforces are bearing down on us like tsunami.

I also have gotta say that no Republican has a *right* to complain about the destruction of the American standard of living under the current regime. If you support Bush, hate unions, hate the minimum wage, hate 'socalized' medicine (forget the 18K poor souls who die because they lack health insurance *every year*), hate workplace safety, social security, etc, etc, you have orchestrated this decline and you bear a share of the responsibility.

posted by: camille roy on 05.27.05 at 03:26 PM [permalink]

Curtis: excellent summary

Camille: No all Republicans are "Bushies." And don't forget, Clinton stuck us with NAFTA, promising a wave of new high tech jobs we ain't seen yet.

posted by: save_the_rustbelt on 05.27.05 at 03:26 PM [permalink]

It seems to me that both sides of the offshoring argument are missing the point. Right or wrong, we cannot prevent corporations from seeking the cheapest labor. Also, we cannot force China to respect the rights of workers, or to protect the environment, or to allow their currency to float. These things arguably give China an unfair advantage. But we don't have grab our ankles so willingly.

When an American engineer or computer programmer loses his/her job and ends up in the "service economy," I assure you that he/she is not fully employed. Meanwhile, their former boss and stockholders are making more money than ever, so ON AVERAGE, we're doing just fine, according to the stats. But that doesn't mean that all is well. Daniel, your lack of concern for those less fortunate than you is disturbing. What we need is to make American workers more competitive.

It seems to me that Washington can help. Here are some suggestions, for what it's worth is:

1. Tax reform. Less reliance on income taxes would help level the field. Consumption taxes impact imports as well as domestic production, whereas income taxes effect primarily domestic production.
2. Tort reform. The resulting reduction in health care costs alone would make a big difference in the cost structure of American employers.
3. Environmental law. It does no good to make American manufacturers jump through hoops to protect the environment, only to see the production move to China, where they have no concern for how much pollution they're spewing into the air. We've just moved the source of pollution to the other side of the world.
4. Mid-career training. Our current approach is a joke.

Bottom line: we've got to stop arguing about whether free trade is good or bad, and start figuring out how to compete!

posted by: Larry on 05.27.05 at 03:26 PM [permalink]

save_the_rustbelt: Camille: Not all Republicans are "Bushies."

Perhaps not all, but the element that isn't doesn't rate much more than statistical noise. Bush has one of the highest approval ratings *ever* among voters of his party.

Larry: Your suggestions are goofy. Shift to a consumption tax? That's a hack right wing suggestion, endlessly put forth, regardless of evidence, or political or social context. Let's see... The American consumer is driving the world economy. But *ideologically* the righties disapprove of income tax... so what to do? I know! Let's drive the world economy right off a cliff, by taxing *consumption* in America!. Great idea. Maybe someday, after we get our very own VAT, we can aspire to European growth rates!!

And since the Chinese and other 3rd world competitors are devastating their environments - let's destroy ours too! Great idea! Forget democracy. Let's emulate the Chinese, yeah. They really know how to run an economy, after all.

And Tort reform as a means of reducing health care costs - you have really been drinking the Koolaid.
You might want to try some non-partisan reading some time.

posted by: camille roy on 05.27.05 at 03:26 PM [permalink]

I have a sense that economists like Daniel and workers like myself are arguing about different things here. Let me take a stab at explaining where.

Daniel is correct when he observes that outsourcing isn't a major factor in the loss of skilled and manufacturing jobs in the US. It's at most an exacerbating factor to larger trends.

When IT crashed after the internet bubble most of the jobs were lost into a kind of economic black hole. Outsourcing to India made a bad situation worse, but was not the primary cause of the pain.

I think many economists have a blind spot of their own about the effect this is having on skilled workers in the 'developed' world. Skills in IT age quickly and an IT worker out of work for as little as 2 years essentially has to start over or work at Wal-Mart.

Much of the problem appears due to management's propensity to run in packs. One year everyone has to do internet, the next it's outsourcing. Management like to 'eat the seed corn' - consume workers skills without investing in new skills.

Whether it's intentional or not the result is that the used-up worker is dumped like an old PC in the end. Some recover from this but many do not. The 'retired' IT worker in his 50's used to be a cliche - except it's increasingly in her 40's or 30's. Why? This cannot be good for the economy or the society. It's a massive waste of talent & experience.

Workers have to think about investment in skills on a long-term basis - which can be next to impossible to do in an environment filled with passing management fads. The government does nothing and employers have very little

This is an externality - a much more important externality than pollution is these days. Yet I see no recognition of this in the popular press. There may be some recognition of this among academics - but I've seen nothing.

I think that academic tenure has had an ill effect here in that scholars simply do not experience this problem the way that other knowledge workers do. Nor do academics obsessed with 'poverty' or other supposed social ills seem to take any interest in this class of knowledge workers and our troubles. We pay the freight while we are strong but when we fall beneath the wheels there are few will take the trouble to see what has gone wrong.

posted by: Don on 05.27.05 at 03:26 PM [permalink]

Wow, we are getting a little testy here.

Spent an hour checking on the benefits of "free trade" for Ohio.

Hundreds of thousands of permanent job losses, the few jobs being created are of very low quality.

Inferior real incomes.

Skyrocketing povery rates.

Brain drain (college educated leaving to find jobs).

Declining tax base and infrastructure.

Extrapolate these trends out 20 years and it gets pretty grim.

If we assume globalization and expanded trade are inevitable, then WE NEED A DIFFERENT APPROACH.

If change is inevitable, how we manage the change is up to us.

The great thing about George Bush is he cannot be re-elected. In fairness, his trade policies are just extensions of Clinton's.

posted by: save_the_rustbelt on 05.27.05 at 03:26 PM [permalink]

Camille, I'm new to this, and I guess I didn't express myself very well. I suggested less reliance on income taxes; not that we should have a VAT in addition to existing taxes. I'm fully aware that income taxes are politically more palatible than consumption taxes, because of their progressive nature. But we cannot be blind to the effect that it has on our economy. If it's the progressivity that you are so fond of, let's find a way to tax ourselves in a way that is progressive and DOESN'T harm our competitiveness.

Also, I am not suggesting that we should trash our environment. I am suggesting that the toxins and greenhouse gases dumped in to the air in China impact the whole world. We need a policy that reduces the total impact on the environment. Our current policy pretends that we are green while at the same time buying products that are produced with even more pollution than when they were made in the US.

I'll concede the point on tort reform. Maybe someone else can argue that point better than I could. Thanks for making me think, Camille.

posted by: Larry on 05.27.05 at 03:26 PM [permalink]

The link for a speech by Michael Moskow on "Displaced Workers" versus unemployed workers.

posted by: save_the_rustbelt on 05.27.05 at 03:26 PM [permalink]

Larry, I agree 100% we cannot force the Chinese to respect workers, the environment or let their currency float. (Our army is already tied down in Iraq. Seriously, though ...)

Want to start figuring out how we compete?
One word:

Tariffs. Better than an income, Vat or consumption tax. For the first hundred years or so our federal government was funded entirely by tariffs.

What did Reagan say? Want more of something subsidize it, want less of something, tax it. Tariffs are taxes on imports.

Adam Smith said when a domestic industry pays a tax and a foreign industry does not, one should impose a tariff to bring the cost of the imported goods in line with domestic manufacture.

Our environmental, OSHA, minimum wage, Social Security laws etc amount to taxes on domestic industry. It is nothing short of suicidal (to domestic industry) to allow imported goods, whose prices include none of these taxes, to compete directly with domestic goods. Tax 'em at the border. Suddenly we can compete.

In 1891 the (Republican) presidential campaigners said
"Open competition between high-paid American labor and poorly paid European labor [it was 1891, remember] will either drive out of existence American industry or lower American wages."
True then, substitute Asia for Europe and its just as true now. The solution, then as now - the tariff.

And by the way, the Chinese use tariffs. For us not to amounts to unilateral disarmament.

Don, if I understand you, you're saying shedding workers amounts to an externality, bsuiness shifting the costs on to someone else. I agree, and this is the principle (in the reverse) behind Japan's lifetime employment system. Corporate managers are not to lay off workers because doing so would simply be shifting the burden to someone else, shirking their responsiblity as managers and to society.

posted by: CurtisE on 05.27.05 at 03:26 PM [permalink]

Here's how college students are reacting to outsourcing:

Student Interest in Computer Science Plummets
Chronicle of Higher Education

Students once saw computer-science classes as their ticket to wealth. Now, as more technology jobs are outsourced to other countries, such classes are seen as a path to unemployment.

New data show students' interest in the discipline is in a free fall. The number of newly declared computer-science majors declined 32 percent from the fall of 2000 to the fall of 2004, according to a report released this month by the Computing Research Association, which represents computer scientists in industry and academe

posted by: bhaim on 05.27.05 at 03:26 PM [permalink]

The more I think about CurtisE's description of free trade as a 'utopian ideal' the more apt I find it. Livelihoods and family welfare are being ground to dust because of corporate greed justified by the utopian fantasies of some over-pampered academics.

Economisties talk about tariffs as if they'd result in our economy going off a cliff when in fact we industrialized under a tariff regime.

What we have now are soaring corporate profits and declining or stagnant wages. This was once a democracy. If we remain one, this can't last.

posted by: camille roy on 05.27.05 at 03:26 PM [permalink]


From what I recall, profits are up for the last couple of years for corporations, but this has yet to have an effect on real wages for the average worker.

Someone said it above, but it isn't helpful to look at the aggregate - thus including skyrocketing CEO pay.

While we are on that topic - at some point you need to refresh my memory why this is an example of the laws of supply and demand

posted by: jc on 05.27.05 at 03:26 PM [permalink]

First time on Drezner, blog now bookmarked. There are some compelling debates here.

A minor footnote to the discussion, from the Balaker/Moore Reason Foundation report PDF summary: "Take the case of Delta Airlines. Delta outsourced 1,000 call-center jobs to India, saved $25 million in the process and then hired 1,200 Americans for higher paying reservation and sales positions. Notably, the company outsourced without laying off any employees."

Uh, I would recommend that the "1,200 higher paying reservation and sales" workers quickly update their resumes:

Salt Lake braces for possible Delta bankruptcy.

Pilots, steward/esses and baggage carriers are well-advised to do so as well.

Free-market economists and academics in general with tenure and guaranteeed pensions are fairly disingenuous. There is a "real world" out there, but they're sure not it.

I'll stick around for the commentary from others, if not from Dan.

posted by: jjg on 05.27.05 at 03:26 PM [permalink]

JJG, Welcome. This week was the first time I commented on (or any blog for that matter) and promptly got flamed by a protectionist. (Sorry, Camille, feel free to deny it.) The offshoring debate seems to be all about whether we should use tariffs or trust the free market to work its magic. Am I the only one who thinks there might be a third way? Are there not other ways our govt might help make US workers more competitive? I think we should avoid tariffs only because it would invite retaliation by other countries. But our current policies (see my comments above) amount to a reverse tariff. Anyone care to suggest a solution that does not include tariffs?

posted by: Larry on 05.27.05 at 03:26 PM [permalink]

The problem with Bush's tax cut for the rich --funded by stealing $Trillions from middle class
America's Social Security Trust Fund -- it that it
created jobs -- but in China. From 2001 to 2004, US Direct Investment Abroad increased by $102.8 Billion. By contrast, US Fixed Investment,NonResidential (i.e., business investment in the USA) increased by only $52.7 Billion.

Like the Roman Republic of 100 BC, the US elites are using the US military advantage to create a global empire in which the profits go to a few while the heavy costs --in blood and money --are dumped off onto a middle class which is rapidly falling into poverty. (Paying off their share of Bush's IOUs would deplete the savings of most Middle class households. But if those IOUS are not paid, there's no money for Social Security checks when the baby boom starts retiring in 2010.) Globalization requires military protection -- which in turn requires a $400 Billion/YEAR subsidy from the US citizens.

posted by: Don on 05.27.05 at 03:26 PM [permalink]

Daniel Drezner has scoffed in the past at the loss of computer jobs due to outsourcing. See, e.g., his article in Foreign Affairs.

However, a look at Dell Computer's 10-K annual reports shows that Dell had 23,500 US employees in 2000 and 13,000 foreign employees.

Five years later, on March 2005, Dell US employees had only increased by 1,100 to 24,600. By contrast, Dell foreign employment incresed
by 27,600 employees!! to 30,600.
(Note that Dell's US employment actually dropped below the 2000 level in intervening years ).

Drezner doesn't address quantitative data -- rather, like a medieval priest, he sprouts a bland theology called "free trade" --without noting that "free trade" capitalists depend upon a huge subsidy from the very Americans that they discard like used toilet paper.

In 1776, historian Edward Gibbon noted that priests have always been on the side of the powerful, vice advocating the rights of the common citizens.
Priests support the powerful because the powerful ensure that priests do not have to work for a living.

(see , select 10-K for 2005 and 2000 and search for "employees" )

posted by: Don on 05.27.05 at 03:26 PM [permalink]

I have been watching labor markets for 30 years, and with a couple of exceptions (nurses, truck drivers) I have never seen such a soft labor market 3 years after the end of a recession.

Certainly only a part of this is due directly to outsourcing, and much due to the systematic gutting of our manufacturing sector.

Extrapolate these trends out 10 or 15 years and we have a major problem.

If the labor market is soft now, what happens during the next recession?

posted by: save_the_rustbelt on 05.27.05 at 03:26 PM [permalink]

CurtisE wrote: "Don, if I understand you, you're saying shedding workers amounts to an externality, bsuiness shifting the costs on to someone else. I agree, and this is the principle (in the reverse) behind Japan's lifetime employment system. Corporate managers are not to lay off workers because doing so would simply be shifting the burden to someone else, shirking their responsiblity as managers and to society."

Yes, pretty much. The externality I'm speaking of is twofold and that is half of it. The other half of the externality is grounded in the fact that skills in many professions (particularly IT) have a short half-life. I was a C++ programmer in 2000, and I could see that C++ was not a viable main skill in the long run. I wished to work in Java (another language, but one with a future). My employer at the time tried to prevent me from doing this. Their reasoning was that I was more valuable to them doing C++ in the short term - and there was NO long term from their POV. It wasn't their worry - it was mine, and mine alone.

They weren't going to invest a red cent in helping me keeping my skill base up to date (despite contractural promises to do so) because they had no plans beyond the immediate.

This is what I meant when I wrote about 'eating the seed corn'. There was a cost in what they tried to do, a cost to me personally and to society and even to 'business' generally - cost - a very high cost. But not chargeable to a single company in the short term.

I learned quickly enough to survive. I financed my own books, learned on my own time, and quit them - to work with technology with a future.

But something similar happened to a lot of good IT people who fell out of the field. This is the real cost of outsourcing - the loss of productive people with modern skills to the national wealth.

posted by: DonS on 05.27.05 at 03:26 PM [permalink]

BTW, there are two Don's posting now, so I changed my handle to DonS. The chap posting on June 1st isn't me.

posted by: DonS on 05.27.05 at 03:26 PM [permalink]

I think the Japanese system has it's own externalities (and always did, even in it's heyday). It's also pretty much dead from what I understand.

One problem with the 'lifetime' employment model is that it was for males of Japanese race only - women, Koreans, Chinese need not apply. Not that different from the US system prior to the 60's.

It appeared to work in a rapidly growing economy but had a huge crisis during the Japanese depression of the 90's - with similar symptoms of underinvestment in skills as we saw in the US recently.

posted by: DonS on 05.27.05 at 03:26 PM [permalink]

I think there are two big problems with outsourcing and the IT worker.

1. Even when companies don't fire domestic workers, they shift hiring abroad. It's not accurate to look at job cuts and say 'not so bad'. Look at: job growth typical for a recovery compared to what is happening today -- we're off by millions. Look at: hiring abroad, establishment of R&D labs abroad. Huge and rapid growth in Bangalore, for example.

There's been huge growth in IT jobs at Dell, IBM, etc, but it is abroad. Even startups hire in India, they have to, to get VC funding.

2. Look at outright salary declines, job insecurity, cuts in benefits. The jobs still here are of lower quality.

3. Lack of investment in re-training for currently employed engineers.

Perhaps a dollar crash will bring back the American software industry. From what I've read, the crash would have to be of such a magnitude it would bring a big share of our economy down with it. Is that preferable to tariffs? Why? This country developed its manufacturing under tariffs.

It seems to me we have this work, tariffs, which is 'bad'. Then we have this other phrase, 'currency peg' (the yuan) which is, if not good, at least relatively neutral. Well, why? Is not a currency peg equivalent in effect to both an across the board tariff on American imports, as well as an across the board subsidy on Chinese exports?

posted by: camille roy on 05.27.05 at 03:26 PM [permalink]

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