Tuesday, September 25, 2007
Wait, you mean that markets move towards equilibrium?
The New York Times' Anand Giridharads loooks at how India's outsourcing sector is maturing. He finds that -- gasp! -- Indian firms are outsourcing their outsourcing to other countries.... including, among others, the United States:
Thousands of Indians report to Infosys Technologiesí campus here to learn the finer points of programming. Lately, though, packs of foreigners have been roaming the manicured lawns, too.
Thursday, July 26, 2007
I'm very rarely right, so I'm going to savor this
Three years ago, I argued in Foreign Affairs that the growth projections about offshore outsourcing were wildly overstated. Others have suggested that growth projections about offshore outsourcing are wildly understated.
The latest quarterly report on the state of global outsourcing from TPI, a consultancy, was published earlier this month. It showed that both the number and value of contracts awarded during the first half of this year had declined in comparison with the same period in 2006. In 2007 the total value of contracts awarded in the first six months was the lowest since 2001....
Thursday, July 5, 2007
So how's the offshoring tsunami going?
Your humble blogger has been unusually consistent in his position on offshore outsourcing:
1) The initial offshoring of tasks will slow as a) mistakes are made and as b) labor markets begin to equilibrate;Let's see how things are going now, shall we?
No Joke:The rising wage problem is disputed by Nasscom, the Indian software association -- though they acknowledge that the shortage of high quality workers is a growing problem.The rising cost of paying engineers in Bangalore has prompted at least one Silicon Valley start-up to save money by closing its Indian engineering centre and moving the jobs back to California.It's almost as if there's this crazy... international labor market -- and higher value skills and greater value added lead to higher wages. And then when companies no longer save money by locating jobs abroad, the potential actually exists for them to return to the US.
The other problem is local knowledge, as this New York Times story by Steve Lohr suggests:
ďOnce you start moving up the occupational chains, the work is not as rules-based,Ē said Frank Levy, a labor economist at the Massachusetts Institute of Technology. ďPeople are doing more custom work that varies case by case.Ē
Lohr demonstrates the need for hands-on workers by profiling an IBM project for a Texas utility. IBM is using both domestic and international units to complete the assignment. For the domestic employees, the skill set required would be difficult, at best, to outsource offshore: The utility project I.B.M. is doing in Texas offers a glimpse of the global formula. The far-flung work team includes research scientists in Yorktown Heights, N.Y., and Austin, Tex.; software developers in Pune and Bangalore, India; engineering equipment and quality-control specialists in Miami and New York; and utility experts and software designers like Mr. Taft that have come from Philadelphia, San Francisco, Los Angeles, Chicago, Raleigh, N.C., and elsewhere.This kind of human capital formation raises an interesting question for economists like Alan Blinder who feel that we need to redirect K-12 education right now to address the offshoring revolution: if the skill set required to develop non-offshorable jobs comes largely from on-the-job training, how would educational reform address the offshoring "problem"?
Wednesday, June 6, 2007
Score one against the Blinder-Friedman hypothesis
One of the difficulties with the Blinder-Friedman hypothesis is that it can't really be tested right now (though perhaps this is where Blinder and Friedman disagree. Friedman already thinks the world is flat, whereas Blinder just thinks it will be much, much flatter over the next few decades).
Nevertheless, one would expect the industrial organization of call centers to closely resemble the future according to Blinder and Friedman. These were the jobs that everyone was yammering about disappearing a half-decade ago. Does this sector look flat?
Thanks to Cornell University's Industrial and Labor Relations school, we now have some data... and most of it does not support the Blinder-Friedman hypothesis. From the press release:
Contrary to what many people think, most call centers serving U.S. customers -- service centers in remote locations that handle telephone and Web-based inquiries -- are operated in the United States, not in India or other overseas locations.From the executive summary:
The mobility of call center operations has led many to view this sector as a paradigmatic case of the globalization of service work. And we find that the call center sector looks quite similar across countries in terms of its markets, service offerings, and organizational features. But beyond these similarities, we find that call center workplaces take on the character of their own countries and regions, based on distinct laws, customs, institutions, and norms. The Ďglobalizationí of call center activities has a remarkably national face....If the world is getting flatter, it's happening at a rather glacial pace.
Thursday, April 5, 2007
Score one for the Blinder-Friedman hypothesis
Let it be noted that Anand Giridharadas had a story in yesterday's New York Times that offers some support for the Alan Blinder-Thomas Friedman view of offshore outsourcing:
Outsourcing is breaking out of the back office.Meawhile, Tom Friedman looks at call centers opening up in Kenya by a firm named KenCall.
UPDATE: Friedman's column prompts a bizarre comment from Matthew Yglesias:
The reason KenCall works is that its wages are so low. Its wages, in turn, are low because in Kenya at the moment the IT infrastructure necessary to operate a call center is very scarce relative to the level of English competency necessary to work in one. If an undersea cable makes it significantly easier to start up call centers, that may change. It all depends on how large Kenya's "large pool of educated, English-speaking talent" really is.I think Matt's point is that offfshoring jobs are constrained in their ability to generate sustainable growth in the developing world. That's wrong -- India has had pretty sustainable growth even though their talent pool is a small percentage of the population.
What would be more accurate to say is that if the education picture remained constant, the returns to being an offshoring magnet are a) limited to the upper tier of the popilation, and b) decline over time as wages would go up for (relatively) skilled labor.
On the latter point -- so what? Offshoring flows would decline as wages rise -- and rising wages are a good thing. On the former point, here's the question you have to ask -- what's better, a society that has a relatively even distribution of income or a society where the poorest are not made worse off but the educated earn much higher returns for their education?
I suspect Matt would say the latter but not be happy about it. Over the long haul, however, market signals about the increasing returns to education would encourage an expansion of educated individuals -- which counters the effect that concerns Yglesias, and happens to be a good thing in and of itself.
UPDATE: Yglesias clarifies his position here:
Friedman is portraying the issue as one in which Kenya needs to build better broadband access, and then the IT jobs would come. The counterpoint I meant to make was that the real chokepoint here seemed to me to be the Kenyan education system. Only a very small proportion of Kenyans are qualified for KenCall-style jobs. At the moment, only a small proportion of the qualified people can get KenCall-style jobs precisely because the physical infrastructure to easily set up competing firms isn't there, which makes wages low by world standards which makes Kenya an attractive outsourcing destination. Build more infrastructure, you'll get more firms, the labor market will tighten, wages will go up, and then growth will slow down as future outsourcers look to other, cheaper countries.
Sunday, March 4, 2007
How offshore outsourcing continues to devastate the tech sector
Robert Weisman reports today in the Boston Globe on how the local IT job market is doing three years after offshore outsourcing devastated the tech sector:
Five years after the dot-com bust ravaged the technology industry, erasing tens of thousands of jobs in Massachusetts, the "Help Wanted" signs have been pulled out of storage. State figures released Thursday show several high-tech job categories growing at more than triple the rate of overall employment over the past 13 months.
Tuesday, February 20, 2007
One anti-offshoring advocate changes his mind
Via Greg Mankiw, I find this Andrew Cassel column in the Philadelphia Inquirer pointing out that, around or about three years ago, everyone was freaking out about offshore outsourcing. Yeah, what happened there?
[T]his month marks the third year since the Great Offshoring Scare of 2004.Gee, that sounds familiar....
UPDATE: Whoops!! The original title to this post read "anti-offhoring" rather than "anti-offshoring," which takes the conversation to places I do not want to go.
Tuesday, October 17, 2006
What do Boston and Bangalore have in common?
The demand for trained IT workers is having some interesting effects in both India and Massachusetts.
India first -- Somini Sengupta reports in the New York Times that skills shortages could act as a bottleneck for the Indian service sector:
As its technology companies soar to the outsourcing skies, India is bumping up against an improbable challenge. In a country once regarded as a bottomless well of low-cost, ready-to-work, English-speaking engineers, a shortage looms.[Oh, sure, all this outsourcing to India means demand for jobs there, but not in the U.S.A.!!--ed.] Au contraire, my italicized friend -- the Boston Globe's Robert Gavin reports on what's happening to the tech sector in Massachusetts:
Massachusetts' economic recovery has gathered momentum in recent months, and there's a good reason: The technology sector is back....This war for talent appears to be a global phenomenon -- be sure to check out the Economist's recent survey for more. Bloggers are mentioned.
Monday, September 18, 2006
Damn that cheap European labor force!!
The Financial Times' Francesco Guerrera and Alan Beattie report on a new trend in offshoring:
Multinational companies are favouring Europe over Asia when expanding abroad Ė a sign that they want to be close to customers and suppliers rather than simply tap into cheap labour and plants, according to a new study of outward investment.
Tuesday, April 25, 2006
The Labor Department (sort of) concedes the obvious on offshoring
I've debated a lot of people on the whole offshore outsourcing issue, and regardless of the position one takes, there has been unanimity on one subject: if the Labor Department provides Trade Adjustment Assistance to manufacturing workers displaced by trade, the program should be extended to include service-sector workers affected by offshore outsourcing.
According to this Paul McDougall story in Information Week, it appears that the Department of Labor has finally recognized this fact as well:
The federal government appears to have reversed a long standing policy that prevented thousands of "outsourced" computer programmers from collecting the same employment benefits routinely extended to factory workers who've seen their jobs disappear amid a flood of cheap, manufactured imports.Here's a link to the notice in the Federal Register. The notice suggests the effect of the ruling is still limited:
The Department stresses that it will continue to implement the
Monday, February 27, 2006
For once, I was ahead of the curve
As part of its cover package on India, Newsweek's Keith Naughton writes about the interesting fact that offshore outsourcing to India is not the political hot potato it used to be:
Not long ago, what seemed most possible was that India would steal the jobs of American workers. But as George W. Bush visits there this week, he'll find a maturing economy that is no longer all about call centers and basic tech support. Now big American investment banks and drugmakers are joining tech firms on the passage to India. R&D centers are springing up so fast that there's now a shortage of Indian engineers. And the stigma of outsourcing jobs to India is disappearing. American companies once afraid to put their names on the doors of their Indian offices now issue press releases touting their latest investments there. "American firms have gotten over their anxiety about India," says financial-services consultant Harrell Smith of Celent Communications. "Now the new anxiety is if you're not in India."Wow, you learn something new every day. Oh, wait.....
Friday, January 6, 2006
There is no engineering gap
Last year there was a lot of hysteria among the business press over the fact that China and India were allegedly graduating hundreds of thousands of engineers a year, while the U.S. could only muster around 70,000 or so.
I blogged last October about how even outsourcing critics were skeptical of these numbers. Now, courtesy of Duke University's Engineering Management Program, there are some harder numbers on this subject -- and it turns out there's not much reason to panic (link via the Wall Street Journal's Carl Bialik). Here's the report abstract:
The effect of the dynamics of engineering outsourcing on the global economy is a discussion of keen interest in both business and public circles. Varying, inconsistent reporting of problematic engineering graduation data has been used to fuel fears that America is losing its technological edge. Typical articles have stated that in 2004 the United States graduated roughly 70,000 undergraduate engineers, while China graduated 600,000 and India 350,000. Our study has determined that these are inappropriate comparisons. These massive numbers of Indian and Chinese engineering graduates include not only four-year degrees, but also three-year training programs and diploma holders. These numbers have been compared against the annual production of accredited four-year engineering degrees in the United States. In addition to the lack of nuanced analysis around the type of graduates (transactional or dynamic) and quality of degrees being awarded, these articles also tend not to ground the numbers in the larger demographics of each country. A comparison of like-to-like data suggests that the U.S. produces a highly significant number of engineers, computer scientists and information technology specialists, and remains competitive in global markets.And this is from the text of the report itself:
The outsourcing debate has been complicated due to conflicting definitions of the engineering profession....So, to conclude, offshore outsourcing will take place when the tasks can be segmented into discrete, simple and rote tasks, and does not pose a threat to engineers at the B.S. level or above.
Damn, that sounds familiar.
Friday, December 9, 2005
The ne plus ultra in outsourcing
David Barboza of the New York Times wins my Outsourcing Outrage of the Year award with, "Ogre to Slay? Outsource It to Chinese" :
One of China's newest factories operates here in the basement of an old warehouse. Posters of World of Warcraft and Magic Land hang above a corps of young people glued to their computer screens, pounding away at their keyboards in the latest hustle for money.Read the whole thing. This is the perfect outsourcing story to generate outrage among perennially indignant. Why?
1) The story highlights the apparent sloth and excessive affluence of Americans that inflames the passiuons of the puritanical left and right;I eagerly await the first calls for legislation banning this kind of offshore outsourcing.
Thursday, November 3, 2005
Offshoring tales from across the land
Writing about offshore outsourcing for a public audience carries many, many perks. One of them is getting e-mails like this one:
OK, I'm confused -- are my facts wrong, or is it that I don't have any of them? Really, it's very hard to keep track.
Seriously, I also get more interesting anecdotes about those who experience outsourcing first hand. Consider this e-mail from a colleage who is in the middle of getting a book published:
This is pretty interesting, in that the process that's described is not only about offshore outsourcing -- it's also about the fact that what used to be considered a complex task (the cottage industry of copyediting) has been segmented into a lot of very simple tasks (the person whose sole job it is to shorten the spaces after a sentence, for example). It's both high-tech AND low-tech.
This reminds me of something.... oh, yes, Karl Marx's Wage Labour and Capital (1849):
Sounds very dire.... except that Marx, for all of his understanding of the forces behind technological innovation, never really got the idea that such innovation also creates entirely new categories of complex, high-skill jobs. It took Schumpeter to figure that one out.
[Er.... what about the demise of copyediting jobs? Doesn't that mean that offshoring leads to a net loss of employment?--ed.] Not according to AFP:
[That's the number of jobs; what about wages?--ed.] The Global Insight page offers this tidbit on wages:
Click here to read the executive summary of the Global Insight report -- and click here to read my take on the 2004 version of the report.
Thursday, October 27, 2005
Anoint no economic superpower before its time
A common lament among those who like to prognosticate about America's future is that China and India are churning out more and better engineering students than the U.S., which presages their rise to superpowerdom.
Sounds ominous -- those figures were cited in a National Academy of Sciences study warning that, "In a world where advanced knowledge is widespread and low-cost labor is readily available, U.S. advantages in the marketplace and in science and technology have begun to erode." (link via Glenn Reynolds)
The thing is, those numbers don't hold up. Back in August, Carl Bialik of the Wall Street Journal's "Numbers Guy" column deconstructed Colvin's claim in Fortune and found some problems:
Kudos to Hira and Freeman for their intellectual honesty -- both of them are generally concerned about the effects in the U.S. of widening the global supply of educated labor.
[OK, so the number isn't as big as previously thought. It's still pretty big, right?--ed. This gets to the question of quality. Diana Farrell and Andrew J. Grant write in the latest McKinsey Quarterly that the quality problem could lead to a talent shortage in China:
UPDATE: Howard French has a nicely balanced account in the New York Times of China's effort to upgrade its top universities in order to attract top-drawer talent. The highlights:
French also provides his own engineering numbers: "In engineering alone, China is producing 442,000 new undergraduates a year, along with 48,000 graduates with masters' degrees and 8,000 Ph.D's."
Sunday, September 11, 2005
The New York Fed tackles offshore outsourcing
The following is excerpted from Erica L. Groshen, Bart Hobijn, and Margaret M. McConnell, "U.S. Jobs Gained and Lost through Trade: A Net Measure" in the August 2005 edition of the Federal Reserve Bank of New Yorkís Current Issues in Economics and Finance:
This is the part I found of particular interest:
Thursday, August 25, 2005
The future of computer science?
On of the common laments about offshore outsourcing is that it is causing a decline of interest in computer science and related engineering tasks.
Via Slashdot, I see that Steve Lohr had an interesting piece in the New York Times earlier this week that provides some support for this lament -- but the market is doing interesting things to the study of computers:
Read the whole thing.
Meanwhile, in India, the returns to offshoring are declining because of rising wages, according to CNN's Parija Bhatnagar:
Wednesday, July 27, 2005
How offshore outsourcing has devastated the high tech sector -- part deux
Six months ago I posted on how the IT sector seemed to be thriving as of late despite the rise of offshore outsourcing.
Here's a link to the Foote Partners press release that's discussed above.
It's also worth noting that beyond offshore outsourcing, there was an excellent reason for the drop in wages that did take place among IT services between 2000-2003: reduced demand. According to the WTO's report on offshore outsourcing, the annual percentage change in the U.S. IT market in the early part of this decade was as follows:
So it's a funny thing -- as demand has picked up in the US, the number of IT jobs and the level of IT wages has increased.
Oh, and for those IT readers of danieldrezner.com who complain about no jobs, I'll close with some anecdotal want-ads from the ComputerWorld story:
Thursday, July 14, 2005
A new outsourcing business model
There are a lot of things that don't make sense to me about this business model:
Tuesday, July 12, 2005
An immigrant's take on offshoring
Suketu Mehta has an op-ed in the New York Times on the rise of offshoring to India. Mehtu comes at this from an interesting angle, as he and his family "came to America in 1977 not for its political freedoms or its way of life, but for the hope of a better economic future." While acknowledging the anxiety caused in the tech sector by offshoring, Mehta's conclusions are straightforward:
Thursday, June 16, 2005
Projecting the demand for offshore labor
Peter Marsh writes in the Financial Times about what the global market for service jobs will look like with the rise in offshore outsourcing:
Marsh has another story about the MGI report here. One interesting bit:
This last point is stressed in the executive summary of the McKinsey report:
This jibes with data and analysis of the U.S. economy in recent years. In terms of employment, a glance at Bureau of Labor Statistics data shows that manufacturing has suffered far more than services (though in both cases the extent to which offshore outsourcing has been blamed has been much greater than its actual causal effect). Similarly, the figures for which service sector jobs are theoretically likely to be outsourced match up with Ashok Bardham and Cynthia Kroll's study from 2003.
Thanks to George Adair for the link.
Friday, May 27, 2005
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 painóbut it brings even more promise."
One anecdote that's given as an example of how offshoring saves and even creates jobs:
[Sure, but what about the jobs that will be destroyed in, say, the financial sector?--ed. Hmmm.... let's check out this Silicon.com report by Andy McCue:
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:
Click on this paper by Scott Noble to see some reasons why offshoring fails.
Wednesday, April 6, 2005
I'll be at Boston University today as part of "The Great Debate" series at Boston University's College of Communications:
They'll also be webcasting the event -- click here to see.
Wednesday, March 16, 2005
Outsourcing as an economic experiment
One of my favorite economics articles of all time is by Nathan Rosenberg, "Economic Experiments." Industrial and Corporate Change , volume 1 (1992). In that essay, Rosenberg pointed out that any dynamic economy had to let firms engage in experimentation to find out new ways to innovate and generate profits. Many of these experiments would fail, of course, but the successes would lead to massive economic gains. It was crucial that these experiments be permitted to fail, otherwise no useful information could be gleaned.
I bring this up because looking at economic enterprises as a rolling series of experiments is a great analytical lens to think about offshore outsourcing. Specifically, a lot of firms outsourced offshore as an experiment to boost profits. And, not surprisingly, a lot of experiments fail: Gartner recently predicted that 80% of customer service outsourcing projects aimed to cut costs will fail. That cannot and should not stop other firms from trying -- like MacDonald's outsourcing its drive-thru windows to remote call centers (if you click on the story, note that they're thinking of outsourcing to Norh Dakota and not Bangalore).
The great thing about experimentation is that the people conducting the experiments learn more from failure as success. As firms gain more experience from offshoring, they are starting to recalibrate what is outsourced and what is kept in-house. Kelly Shermach makes this point in CRM Buyer:
U.S. firms are also starting shifting the location of offshoring activities. Some firms are relocating their offshoring activities to the Philippines because of increasing costs of Indian offshoring. Cultural familiarity is also causing firms to switch some of their activities to nearshoring -- i.e., farming out operations to Canada (or, for western European firms, to eastern Europe).
These trends worry some Indian analysts. Sonia Chopra frets in India Daily:
It's with this kind of experimetation in mind that one should read Pete Engardio and Bruce Einhorn's excellent article in Business Week about the offshore outsourcing of R&D activities. The outsourcing of R&D is often considered the "line of death" for economic analysts. If that happens, the thinking goes, so does American technological leadership. Parts of the article sound ominous:
However, a closer read reveals that what's going on is experimentation:
Let the experimentation continue....
UPDATE: The EU, on the other hand, seems to disapprove of both outsourcing as experimentation and any report that signals that these experiments can be successful:
Wednesday, February 23, 2005
How offshore outsourcing has devastated the high tech sector
A year ago I was in the middle of writing "The Outsourcing Bogeyman" for Foreign Affairs. When it came out, I received a fair amount of static from tech workers explaining that I didn't understand the situation they faced. Since offshore outsourcing is an ever-increasing phenomenon, perhaps we should examine how offshoring devastated the tech sector over the course of the past year.
Hmmm.... well, just just means fewer tech people are losing their jobs. Surely it doesn't mean that these firms are hiring again, right? Let's check out this Kathie O'Donnell story for CBS MarketWatch:
Well, I'm sure this doesn't translate into increased demand for white collar workers across the board or anything.
Besides, as the smarter critics point out, what matters less than the number of jobs lost or gained is the downward effect that offshoring has on wages. Surely, offshore outsourcing would have put a damper on wages in the high-tech sector, right? Let's check out this Frauenheim story for CNET:
To be fair, there is contradictory information on the wage issue. This Dice survey suggests that wages fell overall in the computer sector in 2004. But even this report observes that:
This would be consistent with the homeshoring phenomenon of tech sectors doing well in lower-wage areas outside of Silicon Valley. The fact that the Dice survey does not appear to cover new tech hotspots like Oklahoma leads me to trust the Labor Department figures more.
[So things are better in 2004 than in 2003 -- but the labor market in IT has sucked for a couple of years. Why are you so giddy about one year of positive data?--ed. The downturn in the IT labor market was real, but there were a lot of reasons for that -- the end of Y2K, the dot-com crash, the recession, and, yes, offshore outsourcing. However, offshoring critics has insisted that the problem is only getting worse and will lead to devastating employment and wage effects on the IT sector. Clearly, offshoring is not going away in the IT sector -- but the 2004 data suggests that the g√∂tterdammerung assumption was, at the very least, a gross exaggeration.]
Sunday, January 23, 2005
More equilibrating mechanisms at work
One of the mantras of critics of offshore outsourcing is that countries like China and India have such large pools of low-cost, high-skilled labor that their wages will never rise enough to stop the flow of outsourced activity to those locales.
Siddharth Srivastava files a story that suggests otherwise:
Friday, January 14, 2005
When offshore outsourcing reverses course
Following the "homeshoring" meme, there are lots of reports this month about American firms souring on offshore outsourcing and reverting to onshore outsourcing instead. CNET's Ed Frauenheim has one story about tech companies outsourcing to a firm with operations in Oklahoma City. Another story takes a longer look at one homeshoring firm, Decisions Design:
Here's a link to a press release from Housteau, third homeshoring firm, opening up a new development center in Columbus.
With rising wages in India and other offshoring magnets, expect to see more stories about this trend.
[Hold on a sec; how can you simultaneously defend the practice of offshore outsourcing but still celebrate homeshoring?--ed. Ah, but remember what I actually wrote in "The Outsourcing Bogeyman":
I still think that offshoring, when done correctly, benefits the U.S. economy. But what we're seeing in the links above is the reversing of course.]
Sunday, January 2, 2005
Other sourcing trends
If 2004 was the Year of Offshoring, 2005 might be the Year of Homeshoring. CNET's indefatigable Ed Frauenheim reports that, "a number of companies are turning to a new method to meet call center challenges: getting workers to handle calls from their homes." That story was based on an IDC report, An Alternative to Offshore Outsourcing: The Emergence of the Home-Based Agent -- a bargain at $3500.00 for just seven pages!! Or, you could look at the summary in this press release. Key paragraph:
Similarly, Kamil Z. Skawinski reports for CCN Magazine that "several companies have recently sprung up in rural areas of the U.S. offering a variety of onshore outsourcing services." Click here for one example, Rural Sourcing.
Finally, Adam Kolawa offers advice to IT professionals about whether their jobs could be outsourced offshore in Information Week. Apparently, "although outsourcing may seem widespread, the jobs of many IT professionals are difficult to outsource and essentially immune to it."
Sexing up offshore outsourcing
Great, just great. Bruce Bartlett says in the Washington Times that yours truly is "an indispensable blogger" on matters of international trade, "especially outstanding on the so-called outsourcing issue and excels in staying on top of the research in this area."
So now I've got expectations to meet. How do I satisfy my expectant readership? [Sex up the topic!!--ed.]
With that suggestion, it's worth highlighting a McKinsey Quarterly analysis which concludes that even in a world where offshore outsourcing is possible, location still matters a great deal. This is especially true when trendy undergarments are involved:
Read the whole thing.
UPDATE: Gary Rivlin penned a less-sexy but similar-themed piece on Dell's decision not to engage in much offshoring in a New York Times piece behind their archive wall. Fortunately, the Charlotte News Observer republished it. Key paragraph:
Monday, December 6, 2004
So does this count as "good" outsourcing?
Whenever I talk to critics about offshore outsourcing, they tell me that the claim by proponents that offshoring addresses the problem of a skills shortage in the U.S. is bogus, that there are more than enough tech workers here to perform the necessary tasks. I don't think that holds for the late 1990's, when offshoring and the H1-B visa craze started, but that's neither here nor there. The point is, they argue that firms have no compelling need to to outsource offshore since the set of necessary skills resides in the United States.
Beyond the IT sector, however, there do appear to be instances where offshoring is a necessary and effective means of accessing a labor supply of specialty skills for which there is a shortage in the United States. Lindsey Tanner reports in the Associated Press of one example in radiology. The highlights:
Two questions on this:
UPDATE: This might be the most bizarre twist on outsourcing I've seen yet -- Europeans emigrating to India to work in offshored call centers (thanks to N.D. for the link)
Saturday, December 4, 2004
Back to offshore outsourcing
Keen readers of danieldrezner.com may have noticed that I haven't blogged much about offshore outsourcing since my NYT op-ed in late September. This has been for several reasons:
Well, the election is over, the book manuscript is off my desk, and a few months have passed since I've blogged about the topic. So... I'm back, baby!!
So what's been written that's worth reading on the topic since I've been away?
A couple of selections:
Thursday, November 4, 2004
Tyler Cowen reports from Bangalore
The good economist's assessment of the capital of offshore outsourcing:
Megan McArdle has further thoughts on this. Key line: "Trendline extrapolation is a silly business in almost any economic situation, but never more so than where trade is concerned."
Wednesday, September 29, 2004
Until the New York Times allows footnotes, this post will have to do.
Wondering whether my New York Times op-ed was based primarily on memos from the seventies that mysteriously reappeared this month? Relax, I have some footnotes for you.
The principal source for the op-ed was the GAO's report on the offshoring of services -- about which I've previously blogged. And a big thank you to the GAO staff for their professional and courteous responses to the myriad e-mails queries I sent them (not that they necessarily endorse anything I said in the op-ed)
This post also has some relevant material in terms of discussing the relative importance of different factors contributing to job losses.
Four other sources -- IBM's adventures with offshoring are summarized in this Industry Week story by Tonya Vinas. The Kodak anecdote came from a paper by Daniel T. Griswold and Dale Buss for the Mackinac Center for Public Policy. Kerry's quote was widely reported -- here's one link. Here's a link to the full .pdf version of their report, "Outsourcing Benefits Michigan Economy And Taxpayers." The polling data comes from this Foreign Policy Association report on public attitudes towards foreign policy. Alas, this also reveals the one error of fact in the op-ed -- Zogby's polling was conducted in August and not September.
Finally, readers who want to read more of what I've written on the topic should this June 2004 piece from The New Republic online, and my Foreign Affairs article from May/June of this year, "The Outsourcing Bogeyman."
An existential crisis for the blog
Those poor souls with enough time on their hands to click on this blog's "about me" page may recall one reason I gave for blogging:
Well, today I have an op-ed in the New York Times on offshore outsourcing. Here's the opening paragraph:
I'm less than thrilled with the title, "Where Did All the Jobs Go? Nowhere" because I'm not claiming that the employment situation is hunky-dory -- it's not. I'm claiming that the contribution of offshore outsourcing to that employment picture is prett minimal -- contrary to popular belief.
Anyway, I have every confidence that this will be the topic of discussion among policy cognoscenti for today!
[Ahem, did you see who wrote the other op-ed for the Times today?--ed. Hey, who are Americans going to listen to -- an untenured professor located somewhere in flyover country, or the guy who won the popular vote for President in 2000? Besides, the last time a prominent big shot shared a prominent piece of publishing real estate with me was when Sandy Berger had a Foreign Affairs essay in the same issue as me. And look at what happened to him!]
Anyway, an awkward question arises -- if I can publish in places like the New York Times op-ed page.... do I still need the blog for itch-scratching?
An internal debate worthy of only the most pure of egomaniacs.....
Wednesday, September 22, 2004
The GAO's Rorshach test on offshore outsourcing
Over a year ago, U.S. Representative Adam Smith (D., Wash.) asked the GAO (which used to be called the General Accounting Office, but has since been renamed the Government Accountability Office) to study "issues related to offshore IT services outsourcing." As the offshore outsourcing brouhaha heated up, more and more congressman dogpiled on top of this request, expanding the GAO's mandate beyond just the IT sector.
The first part of that report has been released today. It's essentially a literature review of available government data on the magnitude and impact of offshore outsourcing. There are two themes that come out from this: 1) the government data on this phenomenon is incomplete and imperfect; 2) what data exists suggests that offshore outsourcing is not quite the tsunami it's been made out to be.
This is from the Results in Brief (p. 3):
And this is from p. 15:
This is consistent with my own back-of-the envelope-calculations from earlier this year.
Now, what's interesting is the responses to this report. This is a snippet from the press release by two Seattle-based labor unions, SPEEA-IFPTE and WashTech:
A tip of the cap from everyone here at danieldrezner.com to U.S. Representative Adam Smith. Beyond the unbelievably cool-sounding name, Smith has acted like a responsible grown-up on the offshore outsourcing issue. His one op-ed on the subject didn't demagogue the issue, and offered an eminently sensible, constructive request -- expanding coverage of Trade Adjustment Assistance to include service sector workers. No hysterical claims that offshoring was destoying the American economy, or even his district. Just a sensible policy proposal and an appropriate request for more information. Also, in contrast to the aforementioned unions, it appeared he's actually read the GAO report.
A politician who seems reasonably well-informed and resists scapegoating a non-issue. Damn, that's refreshing.
Oh, and for those who just can't get enough of offshore outsourcing, the United Nations Conference on Trade and Development (UNCTAD) has just released its 2004 World Investment Report. If you download Chapter IV, there's a nice overview of the offshoring phenomenon.
UPDATE: Brier Dudley and Marilyn Geewax have dueling stories at the Seattle Times and Seattle Post-Intelligencer respectively. One data point that captures attention is the fact that "the number of business, technical and professional services, flowing into the United States, however is rising, from $21.2 billion in 1997 to $37.5 billion in 2002," as reported by Geewax (this is CNN's lead as well).
That's an increase of 76.9%, which sounds really bad. But it's only half of the picture. What about exports of business, technical and professional services?
Those precise figures weren't in the GAO report, so I e-mailed their staff to see if they knew -- and they promptly replied. As it turns out, during the same period, exports of these services rose from $44 billion in 1997 to $64.5 billion in 2002 (This is from the Bureau of Economic Analysis's Survey of Current Business, October 2003, p.65, Table E).
So in other words, between 1997 and 2002, when offshore outsourcing is supposedly taking off, the balance of trade in the services likely to be offshored went from a $22.8 billion surplus to a.... $27.0 billion surplus.
My heart be still.
FINAL UPDATE: In fairness, see this erudite comment below by an IT consultant. I certainly won't deny that offshoring can have a hard affect on indivudual workers -- I just don't think it warrants the hysteria that, say, this comment epitomizes.
Sunday, September 19, 2004
Paul Samuelson's mistake about offshore outsourcing
One of the more common critical responses to defenses of offshore outsourcing is the claim that defenders of the practice are being deluded by a set of archaic economic ideas that only work in the ivory towers -- they need to get out in the real world, man.
Beyond ignoring the intrinsic value of economic theory as a device for understanding the world, what's amusing about this line of argumentation is that protectionists throw it out the window the moment someone comres up with an economic theory that seems to support their argument. Which is fine -- except that, far more often than not, the models they embrace rest on assumptions that are often harder to satisfy in the real world than the standard neoclassical trade models.
For exhibit A on all this, consider Paul Samuelson's recent contribution to the outsourcing debate. In The American Prospect, Eamonn Fingleton has a rhetorical field day proclaiming that Samuelson's bombshell has eviscerated the orthodoxy of free trade. One excerpt:
There's just one problem with all of this -- Samuelson's paper has nothing to do with offshore outsourcing as it's commonly understood.
Arvind Panagariya -- Professor of Economics at Columbia -- provides a concise explanation for where Samuelson gets confused on offshore outsourcing (thanks to Asif Dowla for the link). Here's a long excerpt to explain what Samuelson was arguing:
Samuelson employs the standard Ricardian model, which assumes two countries (called America and China), two goods (called 1 and 2) and one factor of production (called labor). Because the endowment of labor is taken as fixed in the Ricardian model, any change in the total national income are reflected fully in the change in the real wage. If the real wage rises, real incomes of all individuals and therefore the nation rise. Alternatively stated, the wage also represents the per-capita income in the model....
Tuesday, September 14, 2004
WashTech's contribution to the outsourcing numbers
The Ford Foundation has sponsored a study by the Washington Alliance of Technology Workers (WashTech), a local of the Communications Workers of America (an AFL-CIO affiliate union), in conjunction with the Center for Urban Economic Development at the University of Illinois, Chicago, on IT employment since 2001.
Their press release paints a grim picture:
The sum total of the discussion about offshore outsourcing comes on p. 5 of the report:
That's it -- lots of data about the unemployment picture, one paragraph on the causal connection between offshore outsourcing and that employment picture.
Certainly, their analysis could be correct -- but I have my doubts. One of them is that it's not clear whether their data are accurate -- a point made in Ed Frauenheim's analysis of the report at CNET.com:
Why is that last paragraph so important? Because if you look at Frauenheim's story about the ITAA report, you find the following sentence: "ITAA said nearly 89 percent of new jobs came from non-IT companies, despite popular fears over mass job loss to outsourcing and globalization." If one really believes that offshore outsourcing is responsible for massive job losses in the IT sector, that last figure is a puzzling one -- because the line that management consultants continually push is that offshore outsourcing is great for firms that don't specialize in IT services and want to subcontract those operations to the lowest-cost provider out there.
If the UIC/CUED study omitted the strongest source of job creation, that's somewhat problematic.
Even the AP report contains the following:
Before angry IT workers start posting comments, let's make it clear that I'm not claiming that it's a rosy jobs situation for IT workers. But some of the unemployment numbers sound a bit overstated. And what this report does not say -- indeed, the quoted paragraph acknowledges that that the authors can't say -- is the extent to which offshore outsourcing is responsible. There's no attempt to parse out the relative explanatory power of each possible cause (dot-com bubble, Y2K overhiring, productivity gains combined with slack demand, offshore outsourcing, etc.)
UPDATE: Some of the press reportage of this study has been very good on pointing out the flaws in the report. Barbara Rose's story in the Chicago Tribune has the following:
This is from Diane Lewis' Boston Globe story:
Thursday, September 9, 2004
Paul Samuelson's outsourcing "bombshell"
Steve Lohr breathlessly reports in the New York Times that Nobel prize winner and undisputed godfather of modern economic theory Paul Samuelson is coming out with an article in the Journal of Economic Perspectives on outsourcing that contradicts the mainstream economic take:
Sounds like a radical break -- oh wait, let's get into the details:
Before I throw my two cents in, let me just add the following caveats:
That said, this dispute boils down to a few empirical questions:
In the past, my answers to these questions have been a) not as many as you think; b) no, c) yes, and d) not a lot. [On (d), see Tyler Cowen's and Arnold Kling]. Which is why I side with Bhagwati on the outsourcing question.
Furthermore, Samuelson appears to partially fall into the Douglas Irwin trap of firing a warning shot on outsourcing but providing little in the way of a solution that departs from those who believe outsourcing is not a problem. Indeed, Samuelson explicitly rejects the solution most favored by those who oppose outsourcing -- higher trade barriers.
So, in the end, I'm not convinced that Samuelson's dissent changes the substantive issues of debate. But as a political scientist, it is impossible to deny the extent to which Samuelson's article will alter the rhetorical balance of power in this policy debate. Samuelson will succeed in reigniting debate on this topic, as well as provide aid and comfort to those who wish oppose the practice of offshore outsourcing.
So let the debate be joined.
UPDATE: Arnold Kling links to a draft version of the response paper by Jagdish Bhagwati, Arvind Panagariya, and T.N. Srinivasan alluded to in Lohr's Times story. Kling's summary:
LAST UPDATE: Douglas Irwin ‚Äď who‚Äôs read the paper ‚Äď is underwhelmed. This is from an e-mail he sent to me:
VERY LAST UPDATE: One of the commenters linked to Joe Stiglitz's outsourcing essay in the Singapore Straits-Times from May of this year. That essay contains the following:
Sounds dispassionate, except for one thing -- I have not seen any estimate even remotely suggesting that "one job in two might eventually be outsourced." That's way higher than any of the upper bound numbers I've seen (the highest I've seen is 30%).
Readers are invited to post a link to any study that suggests otherwise.
Wednesday, August 25, 2004
Offshoring creates jobs in California
Yesterday, Virginia Postrel posted and linked to several stories about a Public Policy Institute of California study on the effect of offshore outsourcing on the Californian economy. Postrel wrote, "The study found that outsourcing actually increases employment in California. Now the Assembly is sitting on the study."
The Assembly may have sat on the study, but it now appears to be available to the public. I clicked over to the PPIC web site and found the report by Jon Haveman and Howard Shatz, which is dated today. Some of their analysis sounds awfully familiar. The good parts (from p. 22-24):
I look forward to the California state legislature's efforts to impose a tariff on services from Arizona.
Here's the report's conclusion regarding the bills designed to block the offshore outsourcing of government contracts (from p. 31):
[Sure, that's California. The rest of the country is losing jobs, right?--ed. Not according to this Business Week story from earlier this month]:
UPDATE: Ashish Hanwadikar has more links on this.
Monday, August 23, 2004
Deciphering Lou Dobbs
Lou Dobbs has just published a book, Exporting America : Why Corporate Greed Is Shipping American Jobs Overseas. To promote it, Dobbs gave a long interview to Bill Moyers on the latter's PBS program.
The interview provides a field day of contradictions and economic illiteracy, but the one thing that came through loud and clear is that Lou Dobbs is not the best writer in the world. Moyers quotes the opening passage from Exporting America:
I'm pretty sure I know what Dobbs meant by that second sentence -- but I can't swear complete certainty.
UPDATE: Thanks to alert reader gw, who actually went into the bookstore and discovered that the underlined sentence is written as: "Never have there been fewer business leaders willing to commit to the national interest over the selfish interest for the good of the country over that of the companies they head."
Slightly more intelligible, but I think the Pulitzer committee will be underwhelmed.
Sunday, August 8, 2004
Outsourcing's Human Face
Hi everyone. I'm looking forward to trading ideas this week while Dan takes a well-deserved break. We must all respect a man who, however unwisely, has put his blog where his mouth is and outsourced it. One or two readers have complained that we're not actually located in Bangalore, something we'll try and rectify in the future. If we had done this next week, I could have blogged while on vacation in Asia, which with time difference would have allowed the blog to run 24/7, demonstrating how outsourcing can release the full potential of American capitalism (to say nothing of web-based opinion journalism). And don't worry too much about our willingness to blog for no wages--so is Drezner.
If you've read our bios, there will be no prizes for guessing who the straight man is this week. So, rather than asking Reihan, "Who's on first?", let me jump in with a news item...
Thursday, August 5, 2004
Hillary Clinton does outsourcing
One of Bill Clinton's political gifts was to take at a divisive issue and frame it in a way that sidestepped traditional political faultlines. Quick example: his call for making abortion "safe, legal, and rare." That phrase epitomizes the vast American middle on the issue. One could argue that this is the core of "Third Way" politics in general -- Tony Blair's "tough on crime -- and tough on the causes of crime" would be another example.
Which brings me to Hillary Clinton and outsourcing. The good Senator from New York has managed to play both sides of the fence on this issue, blasting Treasury Secretary John Snow for suggesting that outsourcing helps the economy -- while simultaneously welcoming one of India's biggest outsourcing firms to Buffalo, NY. How to explain this? Some have accused her of lacking a firm grasp on policy issues -- but it could be that Hillary is stumbling around, trying to find a Third Way on the issue.
Which brings me to her Wall Street Journal op-ed of a few days ago. No stumbling here -- she comes up with a superior political response to offshore outsourcing -- that it's not as cost-effective as firms believe it to be:
The article then goes on to propose many of the things John Cassidy said wouldn't be discussed by politicians in his New Yorker essay. The political brilliance of this argument is that it allows the junior Senator from New York to blast the trend of offshore outsourcing without having to agitate for inane policy solutions like protectionism. Her argument is that if firms only realized the true costs, they wouldn't outsource to Bangalore, but to Buffalo instead.
Now, I'm pretty sympathetic to Clinton's argument -- it's a definite improvement over the position taken by the senior Senator from New York. It also buttresses a point I made in "The Outsourcing Bogeyman":
My one caveat: eager to learn more, I checked out the New Jobs for New York web site to find the Howard Rubin study. I found this press release and this summary of the Rubin report (co-authored with Patricia Jaramillo). What I did not find was any hard numbers to back up Rubin's findings. It's not that they don't necessarily exist -- I just couldn't find any copy of the full report, and the summaries provided no data on this point.
Lest I be accused of not doing enough shoe-leather reporting, I, like, actually picked up the phone and called New Jobs for New York. The executive director was very friendly, and suggested I contact Rubin directly. I've left a message with him.
Should I see hard numbers, the readers of danieldrezner.com will be the first to know.
In the meantime, consider this a case study of how Hillary is learning from Bill.
UPDATE: Rubin might have his own consulting prejudices -- according to Forbes, he's a VP for Meta Group.
Tuesday, August 3, 2004
The New Yorker does outsourcing
I got a lot of e-mail requests to discuss John Cassidy's New Yorker story from last week on offshore outsourcing. I resisted them because Cassidy's essay was not on the New Yorker website, so it seemed like it would have been weird. But the e-mails kept coming. So here goes:
What's weird about the piece is that it reads like Cassidy wrote it back in April and then put it in a desk until The New Yorker had some pages to fill. For example, the estimate Cassidy cites from Forrester Research on the number of jobs that will be outsourced was revised upwards in May -- which would bolster Cassidy's point -- but the older figure is used.
This paragraph is emblematic of the problems with the story:
OK, let's skip over the fact that 70% of those corporate execs have said they have no immediate or future plans to outsource. What's important is that Cassidy's small caveat about productivity gains allows him to commit a major fudge, blaming outsourcing for the larger, lackluster employment picture. This simultaneously ignores the importance of productivity and conveniently ignores the fact that the employment data doesn't back Cassidy up.
Both Schultze and Cassidy state that outsourcing and productivity gains can cause the gross destruction of jobs. However, Cassidy wants the reader to believe that outsourcing is the real villain -- Schultze shows that it isn't.
Cassidy closes with the following paragraph:
Brad DeLong has his own problems with this closing. For me -- beyond the dubious linkage between arts funding and outsourcing -- what's missing from the Cassidy piece is a recognition of American strengths in innovation for the future. Hell, even the Progressive Policy Institute -- in a policy brief on offshoring by Richard Atkinson that reads like Cassidy's wish list no less -- recognizes this fact:
When the Progressive Policy Institute agrees with the former head of the McKinsey Global Institute, it does suggest that this is kind of important.
Also on this point, Tammy Joyner has a long Atlanta Journal-Constitution story on the hidden costs that can come from offshoring -- in large part due to the infrastructure deficiencies that Cassidy elides in his essay.
Two other offshoring stories worth checking out:
1) Bruce Bartlett has a policy brief on insourcing vs. outsourcing.
2) William Bulkeley has a Wall Street Journal story on how IBM is adopting new policies to reduce layoffs due to offshore outsourcing. Key line: "IBM is increasing employment for the first time in three years. Earlier this year it said it expected to boost world-wide employment by 15,000 to 330,000 in 2004, including a net U.S. employment boost of up to 2,000, despite offshoring."
Tuesday, July 13, 2004
An outsourcing correction
However, it now turns out that there was an error in the underlying story -- a speech that U.S. Chamber of Commerce President and CEO Thomas Donohue gave to the Commonwealth Club about offshore outsourcing. Here's how the Associated Press initially reported the story:
Let me stress here that this is entirely the fault of the Associated Press; neither the Kerry campaign nor Marshall can or should be blamed for relying on the AP wire.
However, I do wonder if those in the blogopsphere who linked to this story will post the correction -- because it drastically alters the perception of what Donohue said. [Why?--ed. Because the new formulation sounds far less haughty. Iinstead of Donohue addressing others, the pronoun used is first person plural, implying that he is not placing blame.]
Friday, July 2, 2004
Josh Marshall outsources his research
I'd like to congratulate Joshua Micah Marshall for improving his productivity by recycling a John Kerry press release in his snarky post on offshore outsourcing. Sure, some bloggers might have dug a bit deeper to get more information -- like the fact that John Kerry's policy proposals on outsourcing would have zero effect on the job losses Marshall broods about. And sure, by completely outsourcing his research to Kerry's campaign, Marshall may have missed just a few of the nuances involved in the debate on offshore outsourcing -- but Marshall did post first on this. Congratulations, Josh!!
[Hey, didn't you just do this as well?--ed. Yeah, but I said it was a press release when I did it.]
However, the story goes on to quote some interesting research findings:
Click here for a case study that buttresses Slaughter's aggregate data. And here's the relevant table:
Tuesday, June 22, 2004
Lou Dobbs is a big fat hypocrite
If I wasn't busy trying to get tenure and all that, I'd be sorely tempted to write a quickie paperback with that title. Never mind Dobbs' tendentious reporting about outsourcing -- now he's got bigger ethical quandries.
Back in March, James Glassman pointed out in Tech Central Station that Dobbs was praising companies like Boeing and Washington Mutual as worthy stocks in his eponymous investment letter -- even though he was bashing these very same companies for offshore outsourcing on his CNN show, Lou Dobbs Tonight.
Last week, Zachary Roth at CJR's Campaign Desk followed up on this tendency of Dobbs to say one thing to his viewers and another thing to readers of his investment letter:
Read both Glassman and Roth. We here at danieldrezner.com are appalled -- there are actually people out there who would pay $398 a year for Lou Dobbs' investment advice?! To be fair, however, Glassman does point out in another column that on his TV show, Dobbs is the perfect anti-predictor when it comes to investment decisions.
Amazingly, Dobbs is proving to be somewhat two-faced in his response to the Campaign Desk post. In a follow-up post, Roth writes, "When we contacted him, Dobbs was unrepentant, saying that he didn't see a problem with using one hand to reprimand companies for outsourcing, while using the other to promote the same firms." However, when the Wall Street Journal came a callin', Dobbs changed his tune:
Lou, Lou, Lou -- it's never the original scandal that brings you down -- it's the cover-up to the scandal.
I'll give Roth the final word of this post:
Sunday, June 13, 2004
I promise this is my last outsourcing post for a while
However, before I get off my outsourcing high horse, it's worth noting that the phenomenon is not limited to the for-profit sector -- now the Catholic Church is getting in on the act. Saritha Rai has the details in the New York Times:
Thanks to alert danieldrezner.com reader R.S. for the link.
Friday, June 11, 2004
Same network, different worlds
CNN's Chris Isidore provides the most in-depth coverage of the BLS report showing that offshore outsourcing is responsible for a piddling number of lost jobs. Among other things, he has the only story I've seen that actually quotes anyone from the BLS.
Isidore's story provides a lovely contrast with to how fellow CNN employee Lou Dobbs ran with the same information on his show. Let's compare and contrast!
Read the whole thing -- Isidore does a good job of explaining the caveats to the BLS numbers, as well as giving critics an opportunity to make their points.
To be fair, Dobbs and Sylvester did not out-and-out lie in their version of events. They just left out
We here at danieldrezner.com salute Lou Dobbs for his unique ability to slant data that flatly contradicts his hypothesis -- as well as CNN's other reportage. Way to go Lou!!
For other treatments of this story, check out Paul Blustein in the Washington Post, as well as the New York Times and Financial Times. The Washington Post also has a nice round-up of other press treatments.
Thursday, June 10, 2004
The BLS weighs in on offshoring
One of the problems with the outsourcing debate is that the estimates about job losses due to offshoring are mostly coming from management consultants, who appear to be basing those numbers on some really shoddy guesstimates. Official data collection from the Bureau of Labor Statistics didn't sem to directly address this phenomenon. My back-of-the-envelope calculations from the BLS Mass Layoff data suggested that the number of people laid off due to offshoring was around and about 3% of total layoffs.
Starting this calendar year, however, the BLS decided to ask employers whether offshore outsourcing -- or onshore subcontracting that led to offshore outsourcing -- was the reason for the mass layoff.
Data for the first quarter are now available for extended mass layoffs -- and it turns out that my 3% estimate was incorrect. This is from the Bureau of Labor Statistics press release:
So, to conclude -- the percentage of jobs lost due to mass layoffs -- in turn due to offshore outsourcing -- as a percentage of total jobs lost through mass layoffs was not 3% -- it was a whopping 1.9%. If you drop out seasonal employment, the figure rises to 2.5%. So my back of the envelope calculations from a few months ago are an exaggeration. My apologies.
The caveats -- this data does not cover two other kinds of job loss via outsourcing -- 1) Those let go due to ousourcing when fewer than 50 people were let go; and 2) Those jobs created de novo overeas that may have been created in the U.S. instead were it not for the outsourcing phenomenom.
At the same time, this data also does not cover two kids of job gains via outsourcing -- 1) Those jobs created via insourcing, when a foreign firm hires U.S. workers; and 2) Those jobs created via the budgetary savings reaped from outsourcing.
The bottom line -- offshore outsourcing is responsible for a piddling number of lost jobs.
I'll be commenting on these figures this evening for Nightly Business Report on PBS. Check your local listings!!
UPDATE: Here's how Reuters plays the story:
Only trouble is, the headline says "OUTSOURCING CAUSES 9% OF U.S. LAYOFFS" -- which is true but includes onshore as well as offshore outsourcing.
Wednesday, June 9, 2004
Public opinion about offshore outsourcing
A while back, I blogged here and here about how American consumer behavior seems generally unaffected by the spectre of outsourcing -- i.e., Americans make choices based more on price than origin of production.
To be fair, some people do not think this way -- click here for a few examples courtesy of Newsweek. Beyond anecdotal evidence, however, what do Americans now think about outsourcing? And do these feelings affect their behavior?
Two recent polls -- one by the Employment Law Alliance ("the world‚Äôs largest independent network of labor and employment attorneys") and one by Ipsos (for the Associated Press) suggest some commonalities and cleavages on the issue.
On the one hand, the polls largely confirm that most Americans are mercantilists at heart. The Ipsos poll shows that 69% of Americans believe that outsourcing hurts the country -- and only 17% think it helps the economy. 58% of respondents in the ELA poll believe that companies outsourcing work that could be done by Americans to offshore contractors should be penalized by the US government.
At the same time, the ELA poll shows that 46% of Americans believe that offshoring has been exaggerated by the media. Still, it would be hard not to conclude that most Americans think offshore outsourcing is a bad thing.
So how does this affect actual consumer behavior? Here the answer changes. On the one hand, the Ipsos poll shows that when asked to choose between a product made in the USA and a similar one made elsewhere, 93% of Americans say that they'd buy the American product. However, if the foreign good is cheaper, that percentage falls to 54%. Furthermore, a slight plurality (38% to 35%) do not check product labels so as to "buy American."
The AP story by Will Lester goes on to suggest a generational divide in the economic reaction -- with younger folks more sanguine:
As the story concludes, "Fresh concerns about U.S. jobs being shipped overseas are not being turned into renewed public sentiment to buy American."
So, to sum up -- Americans do not like offshore outsourcing as a phenomenon -- but over time, and increasing number of them are happy to reap the benefits of it as consumers.
This is really the biggest intellectual divide on the outsourcing issue -- whether one thinks the most important effect of offshoring is on employment or on consumption. Most Americans say the former but do not act on it. The data I've seen suggest that outsourcing's effect on employment is negligible -- and the effect on consumption is a positive one.
Tuesday, June 8, 2004
More cost savings from protectionism
It seems that California is not the only state that is coming to grips with the costs that come from outlawing offshore outsourcing.
The AP's Allen Breed reports that in the wake of efforts to block the offshore outsourcing of government contracts, some state legislatures don't like the pricey hangover:
How IT salaries are affected by outsourcing
The Boston Globe's Diane E. Lewis reports on the effect that offshore outsourcing is having on IT salaries:
Read the whole article -- and you can download the executive summary of the META group report by clicking here (registration required).
Given that 2000 was the peak of dot.com hysteria, the salary rebound is pretty impressive.
UPDATE: This elaboration on salary structure comes from page 11 of the executive summary:
As for the magnitude of offshoring (from page 16):
Monday, June 7, 2004
I've outsourced my latest outsourcing post
Practicing what I preach, instead of posting my latest mini-essay on offshore outsourcing here at danieldrezner.com, I've outsourced it to... GlennReynolds.com. Regular readers will recognize some of the material, but there's a lot of new stuff as well!
Go check it out.
Friday, June 4, 2004
A real triumph for outsourcing opponents
Not often, but every once in a while, opponents of outsourcing manage to implement policy designed to thwart the subcontracting of tasks overseas. We here at danieldrezner.com feel that they should be congratulated for these efforts, as well as the transparently obvious economic benefits that such policy measures bring to our great country.
So let's hear it for the state of California's anti-outsourcing procurement rules, which are having quite an effect on the state's efforts to rebuild the Bay Bridge. Jean-Paul Renaud of the Los Angeles Times reports:
$400 million? It's a good thing the state of California doesn't face a budget crunch or anything! Way to stop outsourcing!!
Thanks to alert danieldrezner.com reader C.W. for the tip.
UPDATE: Thanks to alert danieldrezner.com commentor gw, who points out that the Buy American Act is a federal law. One wonders, however, how the cost differential of 25% was determined as meeting the "unreasonable cost" standard.
ANOTHER UPDATE: gw strikes again!! Here's the relevant link for an explanation of how Buy America affects steel. And here's a link to Michael Cabanatuan's San Francisco Chronicle story about the bridge, which has further details:
However, it appears that even California officials were temporarily confused by the provisions of the Buy America act:
Many thanks to gw for doing the cyberwork on this story.
Thursday, June 3, 2004
Outsourcing and insourcing the friendly skies
The Washington Post's Sara Kehaulani Goo has a story on how the outsourcing phenomenon is affecting aircraft maintenance. Turns out to be a two-way street:
The article also highlights a genuinely worrisome regulatory gap, however: "For example, airline maintenance workers in other countries do not have to undergo mandatory drug and alcohol testing or criminal background checks as they do in the United States." If I'm a terrorist wishing to strike fear into American travelers, this is an obvious loophole to exploit.
To be fair, the Transportation Safety Administration is planning on promulgating regulations this month to deal with this loophole -- I just hope they're implemented soon.
UPDATE: If you're interested in the topic, be sure to check out the Discovery Channel's "The Other Side of Outsourcing" this evening -- it's a documentary of Tom Friedman's trip to Bangalore. 10:00 PM, ET.
Wednesday, June 2, 2004
The Onion takes on outsourcing
Thank God The Onion didn't write this before my Foreign Affairs piece. It's shorter, funnier, and (particularly the last point) hits home.
Thursday, May 27, 2004
The rise of the Indian lobby
Joshua Kurlantzick has an interesting essay in The New Republic on the growth of Indian-Americans as a politically influential interest group, to be wooed by Democrats and Republicans alike. [So why is this filed under the outsourcing category?--ed.] Apparently, the Democratic rhetoric on offshoring have hampered their efforts to woo this bloc of voters. The good parts version of the article:
All that's left is for Pat Choate -- you know, the 1996 Reform Party candidate for vice president -- to write his follow-up to Agents of Influence, which was about how the Japanese were lobbying to take over the U.S.
Wednesday, May 12, 2004
The schizophrenic Senator Lieberman
Senator Joe Lieberman gave a speech this morning at the New America Foundation on offshore outsourcing and what the U.S. government should do about it. Here's a link to his white paper summary of proposals -- and here's a link to Grant Gross' coverage of the speech for IT World. Among other things, Lieberman calls for increased wage insurance, expanded Trade Adjustment Assistance (TAA), and a bipartisan commission to study the problem.
I'm of two minds about the speech and proposal. I like the proposals. Boosting R&D investment, expanding TAA, expanding education spending, getting our macroeconomic house in order -- I'm in favor of all of these, and promoted some of them in my Foreign Affairs article.
The problem is the speech, which is alarmist in the extreme. Here's one sample:
OK, lets count the inaccuracies in these two grafs:
Lieberman is correct about the education gap and the decline in public R&D investments -- but those problems have little to do with the alarmist tone of the speech.
Why wrap such sensible proposals around such exaggerated rhetoric? Because it's politically effective. The key Lieberman proposals --- education, R&D, macroeconomic prudence -- are smart things to do on their own. However, only the spectre of foreign competition seems capable of motivating Washington -- a fact that flummoxed Paul Krugman a decade ago.
While I'm very enthusiastic about the Senator's concrete proposals, I'm very, very queasy about the scaremongering tactics that are associated with them.
Those damn Indians
Oh dear -- Indian companies are messing with the dominant narrative that U.S. jobs are being outsourced to the subcontinent at an increasing rate. According to Contractor UK:
Damn Infosys and Bharti!! Next thing you know, Americans might actually realize that trade is a win-win game!!
The Campbellsville comeback
Christopher Miller has an interesting article in the Bowling Green Daily News about how the town of Campbellsville, Kentucky responded to the 1997-98 decision by Fruit of the Loom to offshore production:
Read the article to see how the town pulled this off.
A hint -- education and insourcing are involved.
Friday, May 7, 2004
Alexei Izyumov's Swiftian jobs program
Izyumov, an associate professor of economics and director of the Center for Emerging Market Economies at the University of Louisville, makes a modest proposal in the Boston Globe about dealing with the real villians behind recent job losses:
Thursday, May 6, 2004
Bwa ha ha ha!!
The Los Angeles Times reports that the political tide may be turning on offshore outsourcing:
It's just coordinated lobbying?! What about well-honed rhetoric backed by cogent analysis and hard data? [Yeah, you know it's actually the lobbying, right?--ed. Allow me my meager illusions of influence, OK?]
Part of the Times' reasoning is based on the E-loan experiment that I blogged about in March. Consumers are given a choice between having their paperwork processed in 10 days overseas or 12 days in the United States. According to the LAT, "In the three months that ended Monday, 85.6% of 14,329 loan applicants chose processing overseas."
Meanwhile, Miguel Helft writes in the San Jose Mercury News that data privacy concerns with regard to offshore outsourcing are grossly exaggerated:
Read both pieces.
Wednesday, May 5, 2004
Fun with BLS numbers
The Bureau of Labor Statistics has a Mass Layoff Statistics program, in which firms that lay off 50 or more workers must provide as reason for such a move to the BLS. Those reasons range from automation to product line discontinuation. Offshore outsourcing is not one of the options, but "import competition" and "overseas relocation" are options. So, it's possible to estimate the extent to which offshore outsourcing is respinsible for job destruction via mass layoffs [How do you know that the firms aren't lying to the government?--ed. You don't -- but since the names of the firms are kept strictly confidential, there's no reason for them to lie either]. You can do it too -- just click here to create your own table.
Here are the percentages of jobs lost through mass layoffs because of either import competition or overseas relocation for the last seven years:
Now, these figures do not cover instances when a firm let go less than 50 people, so clearly there's a bias in the data towars multinational corporations over small businesses. That said, these numbers reveal two important facts:
1) Offshore outsourcing is not responsible for a significant percentage of the jobs that have been lost.
2) There is no evidence that offshore outsourcing is responsible for an increasing number of jobs lost over time.
Finally, some have argued that the massive increases in U.S. labor productivity are due to sloppy GDP accounting: "[T]he work done by Indian software firms is being recorded as US economic activity and growth because it's been offshored." If true, this would be a serious measurement error, since the government would be overstating both economic growth and labor productivity
The BLS issued a memo in late March on this very issue back in March that's worth perusing. The highlights:
While we're talking about offshore outsourcing, here are a few stories about the benefits that accrue to the United States from insourcing. The Cleveland Plain Dealer's Stephen Koff reports on Honda's Ohio operations as an example of this phenomenon:
The Associated Press' Charles Sheehan makes a similar point in analyzing the effect of outsourcing and insourcing in Pennsylvania:
To be fair, some of the numbers on insourcing are contested. The Economic Policy Institute's Robert Scott and Adam Hersh argue that the number of jobs created due to insourcing isvastly overstated, because those figures include cases of acquisition rather than greenfield investment -- i.e., Daimler's takeover of Chrysler. Unanswered is whether foreign acquisition prevents those firms and jobs from disappearing entirely. For a counter, read the U.S. Chamber of Commerce's April report, "Jobs, Trade, Sourcing, and the Future of the American Workforce.‚ÄĚ
Some odds & ends on outsourcing:
1) For the most recent spate of reporting on the phenomenon, you could do far worse than what's been written by the Portland Press Herald's Edward Murphy or Fortune's Jeremy Kahn. The first article looks at the effect that offshore outsourcing is having on medical transcription. The latter looks at how offshore outsourcing is affecting small businesses. Both are complex tales, but there's a familiar pattern -- the jobs being outsourced are the ones that could also disappear through automation.
2) I received an illuminating e-mail from a call center manager at America Online's Arizona facility:
Wednesday, April 28, 2004
Outsourcing destroys good IT jobs. Oh, wait...
Eduardo Porter's report in today's New York Times reinforces what I said in Foreign Affairs about outsourcing and the tech sector -- that while more low-skill jobs will undoubtedly be created overseas, the complex tasks are going to stay in the United States. The good parts:
Read the whole thing.
Monday, April 19, 2004
Offshore outsourcing creates American jobs, redux
The Chicago Tribune reports today on how offshore outsourcing is aiding in the creation of more small business start-ups -- which help to create American jobs. The story focuses on one Chicago entrepreneur:
Virginia Postrel posts another example of how (onshore) outsourcing facilitates small business growth.
Tuesday, March 30, 2004
Outsourcing creates American jobs
Treasury Secretary John Snow apparently sparked some controversy in a Monday interview with the Cincinnati Enquirer. Why? Snow said what Greg Mankiw said last month -- that the outsourcing of U.S. jobs "is part of trade ... and there can't be any doubt about the fact that trade makes the economy stronger."
Hillary Clinton wasted no time in bashing Snow, saying: "I don't know what reality the Bush administration is living in, but it's certainly not the reality I represent, from one end of New York to the other."
Funny thing, though -- Snow appears to be right, according to this CNN report:
[C'mon, this study was sponsored by the IT industry -- can it be credible?--ed. According to the relevant Global Insight web page,
UPDATE: To clear up one source of confusion from some of the comments -- the study is not claiming that an economy with outsourcing will create only 317,000 jobs by 2008. The study says that holding other factors constant (population growth, fluctuations in aggregate demand, etc.) an American economy creates an additional 317,000 jobs.
Tuesday, March 23, 2004
A query to those worried about outsourcing
The lion's share of the critical feedback I've received from "The Outsourcing Bogeyman" essay has been targeted at my claims about the IT sector. I'm supposedly wrong on the IT side of the equation, and therefore better-paying jobs will follow lower-paying jobs overseas.
What's interesting is that I haven't heard much discussion about either the manufacturing part of the story or the business processes part of the story. Does this mean people are willing to acknowledge that these are sectors where standard trade theory apply?
[Now you're just goading your critics--ed. No, just curious -- plus, it might make a good article about public perceptions of economics.]
Monday, March 22, 2004
Critiquing one critique
Scott Kirwin posts his critique on why I‚Äôm wrong on outsourcing. It boils down to:
However, it‚Äôs worth pointing out that the current direction of capital flows bears no resemblance to what either Roberts or Kirwin fear. The U.S. currently runs a massive capital account surplus, which finances both our budget and trade deficits. When restricted to foreign direct investment, the overwhelming majority of U.S. outrward FDI goes to other OECD countries. This objection is the reddest of red herrings.
On relying too much on MGI data because they‚Äôre big into outsourcing ‚Äď hey, I‚Äôll relinquish MGI data if Kirwin and others renounce the use of data from Gartner, Forrester, Deloitte, etc. [You're being flippant!--ed. Here's a more substantive response.] All of these firms are equally into outsourcing but still put up overhyped guesstimates about projected job losses. As I pointed in the Foreign Affairs article, these firms also have a strong incentive make outsourcing a business fad. Think their job loss numbers might be exaggerated a tad?
On the future of better-paying jobs, Jacob Kirkegaard of the Institute for International Economics points out that the Forrester study that got everyone hyperventilating in the first place points out that most jobs projected to be lost are below the US average wage.
Certainly the data to date don‚Äôt support Kirwin at all. According to Kirkegaard:
Saturday, March 20, 2004
The outsourcing bogeyman
Regular readers might have noticed that I was focusing a bit on offshore outsourcing recently. There's only so much one can say about the topic in a blog post, however, so I figured, what the heck, let's turn it into a paper:
Here's a link to the bibliography and footnotes, but you should comment on the piece here.
Friday, March 12, 2004
An outsourcing bibliography
Welcome, Foreign Affairs readers! If you want to comment on the essay, please go to this blog entry. If you're reading this it means you want to know where all the facts, figures, and quotations from "The Outsourcing Bogeyman" came from. I don't blame you -- as an academic, I'm leery of publishing an essay without the proper acknowledgments and citations.
Bruce Bartlett and Sreenath Sreenivasan provided useful and informative links to the outsourcing phenomenon. Many thanks to Virginia Postrel, Sebastian Rosato, and Nick Schulz for reading draft versions of the article and providing trenchant feedback. I am also grateful to Daniel Kurtz-Phelan, Gideon Rose, and James F. Hoge, Jr. at Foreign Affairs for their sage advice during the drafting process. Through their links and commentary, Tyler Cowen, Brad DeLong, Mickey Kaus, Glenn Reynolds, and especially Virginia Postrel made the writing of this essay considerably easier.
A crude version of this paper was delivered -- crudely -- to my American Foreign Economic Policy class a few weeks ago (amusing side note: I had planned to give a lecture on the topic when I drafted the syllabus back in November. The week I wound up delivering it was coincidentally the same week outsourcing was the cover story of Economist, Time, Business Week and Wired. The students were very impressed with the topicality). They provided me with excellent feedback. And finally, lots of blog readers posted their own comments in response to my myriad posts on the subject. Agree or disagree, their feedback helped me to figure out how best to frame my arguments.
Sources for quotations:
Mankiw's comments come from Warren Vieth and Edwin Chen, ‚ÄúBush Supports Shift of Jobs Overseas,‚ÄĚ Los Angeles Times, 10 February 2004. Reaction comments from Edmund Andrews, ‚ÄúDemocrats Criticize Bush Over Job Exports,‚ÄĚ New York Times, 11 February 2004. I posted about this here.
Stephen Roach's comment comes from "Debating the Jobless Recovery" on the Morgan Stanley web site. It should be noted that Roach is hardly an advocate of protectionism.
The IBM official was quoted in Bob Herbert, ‚ÄúWhite-Collar Blues,‚ÄĚ New York Times, 29 December 2003. Nilekani was quoted in Steve Lohr, ‚ÄúMany New Causes for Old Problem of Jobs Lost Abroad,‚ÄĚ New York Times, 15 February 2004. Fiorina's statement came from Carolyn Lochhead, ‚ÄúEconomists Back Tech Industry‚Äôs Overseas Hiring,‚ÄĚ San Francisco Chronicle, 9 January 2004.
The billboard quotation came from Elizabeth Becker, ‚ÄúGlobalism Minus Jobs Equals Campaign Issue,‚ÄĚ New York Times, 30 January 2004. Kerry's line about "Benedict Arnold CEO's" has been everywhere, but here's James K. Glassman's use of it.
Tom Daschle's later quote comes from Ted Landphair, ‚ÄúOutsourcing, Costly for US Workers, an Issue in Election Year,‚ÄĚ Voice of America, 7 February 2004. Robert McTeer's very funny line comes from ‚ÄúDelta Air, General Electric Say Creating Jobs Abroad Helps U.S.,‚ÄĚ Bloomberg, 23 February 2004. The Bloomberg story was also the source of information regarding how Delta Air Lines was able to create additional American jobs via offshore outsourcing.
While not a quote, the Commerce Department report I referenced is Raymond J. Mataloni, Jr., ‚ÄúU.S. Multinational Companies: Operations in 2001,‚ÄĚ Survey of Current Business, November 2003. The relevant passage is on p. 89.
Sources for numbers:
Many of the sources can be found in the general references below. For the plethora of job loss projections, I relied on Clay Risen's ‚ÄúMissed Target," The New Republic, 2 February 2004; and CIO Magazine, ‚ÄúOffshore Outsourcing ‚Äď The Backlash,‚ÄĚ September 2003.
On the gap between Gartner's estimation of firm-specific job losses due to outsourcing versus Joglekar's estimates, see Thomas Hoffman, ‚ÄúResearcher Says Offshore Moves Don‚Äôt Leave to Big U.S. Job Losses,‚ÄĚ ComputerWorld, 22 December 2003. Professor Joglekar was also kind enough to speak to me by phone -- I wish more of what he said could have fit into the final version of the essay.
On the overestimation of call center outsourcing, see Dick O‚ÄôBrien, ‚ÄúOutsourcing threat is overstated,‚ÄĚ ElectronicNews.Net, 26 January 2004. The TPI estimates came from this press release and this report comparing European and American outsourcing trends. See also Justin Pope, "Some Managers Hold Firm Against Pressure to Move IT Jobs Overseas," Associated Press, 1 February 2004.
The effect of sugar tariffs on jobs come from Aaron Lukas, ‚ÄúA Sticky State of Affairs: Sugar and the U.S. Australia Free-Trade Agreement,‚ÄĚ Center for Trade Policy Studies, 9 February 2004. The total effect of steel tariffs on jobs was calculated based on annual costs projected in Gary Clyde Hufbauer and Ben Goodrich, ‚ÄúNext Move in Steel: Revocation or Retaliation,‚ÄĚ Institute for International Economics Policy Brief 03-10, October 2003, p. 10.
IBM's fund for displaced workers can be read about in Stacy Cowley, ‚ÄúIBM Starts Fund to Aid Displaced Workers,‚ÄĚ ComputerWorld, 2 March 2004.
The data on manufacturing output and employment can be found in this Alliance Capital Management report.
Data on insourcing comes from Michael Walden, ‚ÄúA Potent ‚ÄėInsource‚Äô of U.S. Jobs,‚ÄĚ Raleigh News and Observer, 2 February 2004, Lawrence Kudlow, "Outsourcing ‚ÄėOutrage,‚Äô" New York Post, 3 March 2004, as well as the Commerce Department.
Facts about the trade adjustment assistance program can be accessed at the U.S. Department of Labor's Employment and Training Administration Fact Sheet.
General references on outsourcing:
Space constraints made it difficult to cite them in the piece, but two worthwhile sources are Sreenath Sreenivasan's outsourcing page, which has tons of links, and Alan Greenspan's recent speeches and testimony that touch on the subject -- here, here, and here. Brink Lindsey has just written a policy brief, "Job Losses and Trade: A Reality Check," that's worth checking out. Finally, you can access all of my blog posts about outsourcing -- if you've read through the Foreign Affairs essay, several of them will look familiar.
Otherwise, here are the most in-depth treatments of the subject that I've seen:
International Data Corporation, Offshore Services: The Impact of Global Sourcing on the U.S. IT Services Market, November 2003.
Catherine Mann, ‚ÄúGlobalization of IT Services and White Collar Jobs: The Next Wave of Productivity Growth,‚ÄĚ Institute for International Economics Policy Brief 03-11, Washington, DC, December 2003
Jacob F. Kirkegaard, ‚ÄúOutsourcing ‚Äď Stains on the White Collar?‚ÄĚ Institute for International Economics working paper, January 2004
McKinsey Global Institute, ‚ÄúOffshoring: Is It a Win-Win Game?‚ÄĚ San Francisco, CA, August 2003
Rafiq Dossani and Martin Kenney, ‚ÄúWent for Cost, Stayed for Quality?: Moving the Back Office to India,‚ÄĚ working paper, Stanford University Asia/Pacific Research Center, November 2003
Ashok Bardham and Cynthia Kroll, ‚ÄúThe New Wave of Outsourcing,‚ÄĚ Fisher Center for Real Estate and Urban Economics, University of California At Berkeley, November 2003
Erica Groshen and Simon Potter, ‚ÄúHas Structural Change Contributed to a Jobless Recovery?‚ÄĚ Current Issues in Economics and Finance 9 (August 2003): 1-7
Jyotti Thottam, "Is Your Job Going Abroad?" Time, 22 February 2004.
Gene Grossman and Elhanen Helpman, "Outsourcing in a Global Economy," NBER Working Paper No. w8728, January 2002.
Daniel Pink, ‚ÄúThe New Face of the Silicon Age,‚ÄĚ Wired, February 2004
General references on globalization and the U.S. economy:
Douglas Irwin, Free Trade Under Fire (Princeton: Princeton University Press, 2002).
Raghuram Rajan and Luigi Zingales, Saving Capitalism from the Capitalists (New York: Crown Business, 2003).
Kenneth Dam, The Rules of the Global Game: A New Look at U.S. International Economic Policymaking (Chicago: University of Chicago Press, 2001).
Kenneth Scheve and Matthew Slaughter, Globalization and the Perceptions of American Workers (Washington: Institute for International Economics, 2001).
Consumer-driven offshore outsourcing
A common meme from those who blast offshore outsourcing is that it's driven by rapacious firms eager to maximize short-term profits. This raises an interesting question -- what if consumers are the ones driving offshoring?
CBS Market Watch has a story on this as well.
A question to those who oppose offshore outsourcing -- should this expansion of consumer choice be banned or restricted?
If so, what other limitations should be placed so this sort of thing doesn't happen? Eliminate Wal-Marts? Japanese auto imports?
In other words, to what extent is the outcry over outsourcing a slippery slope to policies designed to block all forms of trade and technological innovation?
UPDATE: This story talks about how other firms are dealing with the offshoring phenomenon in their marketing strategies. Key line: "'No outsourcing' could become the latest twist on the 'made in the USA' slogan."
Just to be clear, even though I've defended offshore outsourcing as a good thing, I have no problem whatsoever with this kind of marketing strategy. If consumers prefer to pay higher prices in return for the satisfaction of buying American, that's fine. Consumer choice should not be restricted in either way.
Wednesday, March 10, 2004
Bush defends trade -- Kerry defends reviewing trade
Brad DeLong is mostly correct in pointing out that the Bush administration has not been the most vigorous defender of open trade policies since the outsourcing brouhaha bubbled up. However, President Bush has apparently decided get off the fence and put the administration on the rhetorical offensive in reaction to Congressional moves to penalize corporations for offshore outsourcing. According to the Financial Times:
Here's a link to the entire text of the speech.
As part of the offensive, Zoellick's testimony before the Senate Finance Committee contains this opening:
Meanwhile, one of John Kerry's pledges on trade policy is as follows:
Looks like he'll be getting part of his agenda implemented through the help of Senate colleagues and the General Accounting Office:
Tuesday, March 2, 2004
A new source for offshore outsourcing
Sreenath Sreenivasan, an associate professor at the Columbia School of Journalism, has set up an ousourcing page with tons of links. Go check it out and see which fact/story you think is the most interesting.
My winner is this story by Sreenivasan about what piqued media interest in the offshoring phenomenon:
Alas, this confirms what I wrote here about the Reuters story.
This piece of information is also interesting:
Monday, February 16, 2004
Europe and outsourcing
How is Europe dealing with outsourcing? This article provides an interesting clue:
[Sure, that's what European firms are doing. But the European Union is cheesed off, right?--ed. Not according to this report:
UPDATE: This trend of European outsourcing to the United States is consistent with this editorial by Michael Walden from two weeks ago. The highlights:
Sunday, February 15, 2004
The New York Times tackles outsourcing
He also has an op-ed in today's Times as well. The good parts:
The most interesting part is Bhagwati's point that while many blame trade for job losses, it has far more to do with technological change:
For more on the technological driver behind the current creative destruction, Glenn Reynold's TCS column from last November is still salient.
The final outsourcing link of the day is the February 12th transcript from Lou Dobbs Tonight, during which Mr. Dobbs tangled with James K. Glassman on the subject. It was, to say the least, a yeasty conversation. [UPDATE: Dobbs' exchange with Bruce Bartlett is less yeasty but equally informative.]
Friday, February 13, 2004
In theory, trade is a Pareto-improving for an economy as a whole -- that is to say, through free trade, some people can be made better off without others being made worse off. Now, that doesn't necessarily work in practice, unless the losers from trade are compensated by the winners.
In other words, TAA is designed to facilitate workers let go due to trade pressures to find jobs in more competitive sectors.
Sounds great -- but it's not clear that, as currently written, outsourced workers would fit the criteria for inclusion. The criteria are:
Since a lot of offshore outsourcing takes place within a single firm, and it increases productivity, I doubt (2) would be met -- sales/output would increase and not decrease.
Here's my question to informed readers:
Wednesday, February 11, 2004
Mankiw speaks the truth on trade, and everyone goes postal
N. Gregory Mankiw, chairman of the White House Council of Economic Advisers, testified before Congress yesterday to present the Economic Report of the President. Here's what he said about outsourcing:
Later on, he told reporters, "Outsourcing is just a new way of doing international trade. More things are tradable than were tradable in the past and that's a good thing."
As I've argued ad nauseum, Mankiw's correct on the economics. Alas, on the politics, it looks like he's stepped on a land mine. Here's the Washington Post lead:
Kerry's statement is a shame -- until now, he had been the most adult Democratic candidate when it came to foreign economic policy save Lieberman [Given the rest of the field, he could say this and still be the most adult candidate on this issue!--ed. Plus, he needed to get out in front on the issue.]. What's more worrisome is that Republicans are making similar noises:
More from the New York Times:
Actually, the Senator owes an apology to every consumer in America, but I'm not going to hold my breath in wait.
FINAL UPDATE: Virginia Postrel chips in with this point:
Sunday, February 8, 2004
Now it's a depression
A few years ago, the Economist reworded an old aphorism:
Given the underlined passage, it probably won't generate many complaints, since the idea is to get greater coverage for less money.
Wednesday, February 4, 2004
The war of anecdotes
One of the problems in the outsourcing debate is that those who defend the practice lose the war of anecdotes. [What about economic models and statistical evidence?--ed. Then the arguments in favor of outsourcing win hands down. You'd think those pieces of information would be more important for public policy debates, but that's not the way it works. Between econometric models showing that trade is good for the economy and tangible anecdotes of job losses due to import competition, most citizens go with the anecdotes.]
It is easy to point to large multinational corporations laying off American workers because of offshore outsourcing -- cue IBM. However, the jobs that are either saved or created from outsourcing seem less impressive. In the case of jobs created, it's because a healthy share of new hiring takes place among smaller firms, the anecdotes of job creation seem much less convincing -- even though there may be more examples of the latter than the former.
In the case of jobs saved, the difficulty is that such statements require counterfactual reasoning -- "If outsourcing had not occurred, then a greater number of jobs would have been lost." Counterfactuals are extremely difficult to demonstrate beyond a reasonable doubt.
So, in the debates over trade and unemplyment, protectionists have juicy media stories, while those who favor an open economy are often left sputtering.
Bruce Bartlett tries to address "anecdote gap" on offshoring with this anecdote:
FINAL UPDATE: I've posted more on job growth here.
Monday, February 2, 2004
Differentiating between outsourcing and offshoring
He also criticizes those on the right who complain about "offshoring" which is outsourcing done overseas:
Simmins is conflating libertarians and conservatives on this issue. The former are free market advocates and the latter are economic nationalists. Economic nationalists value social stability and relative gains more than maximizing either static or dynamic economic efficiency. With this set of preferences, it's not surprising to see this group of pundits ract bash offshoring.
Thursday, January 29, 2004
The political economy of outsourcing
The first post appears to reflect the limited power of danieldrezner.com:
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:
Read all of it.
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.]
Tuesday, January 27, 2004
Not letting up on outsourcing
Two new stories on the web today about the outsourcing phenomenon, about which I've blogged here, here, here, here, here, here, here, here, and ... er, here. [Why don't you just create a new category for these posts?--ed. Hey, good idea!]
Meanwhile, Wired has an in-depth cover story (and a few sidebars) on the outsourcing phenomenon (thanks to axiom for the link). One the one hand, the main piece by Daniel Pink gets at the core of current frustrations:
On the other hand, Chris Anderson makes the most trenchant point:
Monday, January 26, 2004
Dissecting the outsourcing hypothesis
Clay Risen takes a hard look at outsourcing fears in The New Republic and finds them overblown:
Risen doesn't even mention the Catherine Mann study, which provides some hard data to back up Risen's conterarguments.
Thursday, January 8, 2004
Now this is bad economics
The opportunity cost of debating Brad DeLong over the operationalization of data sets is that truly stupid popular economic writing can slide by unscathed. Like the Senior Senator from New York, Chuck Schumer, who on Tuesday co-authored a New York Times op-ed that said the following:
What's wrong with this statement? Let's go to Noam Scheiber at TNR's &c.:
ANOTHER UPDATE: Michael Kinsley dissects the op-ed in Slate. Among the highlights:
This last point is one I have made before. The first point is spot-on. Going back to the op-ed, here are the sinister forces that, according to Schumer and Roberts, undercut the free-trade position:
More political stability. Better education. Lower communication costs.
Yeah, I can see how this devastates the free trade position.
[What about Joe Stigltz's gloomy op-ed on NAFTA on the same day? Aren't you going to pick on him?--ed. Well, according to Mark Kleiman, I'm supposed to tread carefully on the domain of other experts. But, I will point out that even Stiglitz acknowledges that Mexico's growth in GDP per capita since NAFTA's ratification is "better than in much of the rest of Latin America". Stiglitz also overlooks the political benefits of NAFTA in democratizing Mexican politics and improving the rule of law south of the border.]
Saturday, December 27, 2003
Protectionism never tasted so sour
The Chicago Tribune had another story this week on the outsourcing of American manufacturing jobs. The cause? American protectionism:
The good news -- if the Central American Free Trade Agreement is passed, manufacturers that rely on sugar as an input of production would no longer have the same need to relocate.
Thursday, December 11, 2003
Catherine Mann on globalization and outsourcing
The Institute for International Economics' Catherine Mann has a great policy brief on the globalization of IT services. There's a lot of interesting info, but the discussion of employment effects is particularly interesting:
By all means, read the whole thing.
UPDATE: Cold Sping Shops has further thoughts.
Saturday, October 4, 2003
Adam Smith on outsourcing
One of the perks of teaching at the University of Chicago is that the school requires much of its faculty to teach beyond their area of expertise. I'm teaching in one of the "core sequences" at the University of Chicago this quarter, entitled Power, Identity, and Resistance. You can access a copy of the syllabus here or on my teaching page.
We're currently immersed in Adam Smith's An Inquiry Into the Nature and Causes of the Wealth of Nations. There are many great qualities about the work, but what strikes me today is its topicality -- like all great works in social science, Smith's observations are constantly relevant.
For example, consider this passage from Book I, Chapter X, Part II -- "Inequalities occasioned by the Policy of Europe":
Thursday, October 2, 2003
An interesting point on outsourcing
Irwin Stelzer has an interesting essay in the Daily Standard on how economic interdependence can constrain U.S. foreign policy. Buried within it is this nugget of analysis:
UPDATE: In September the U.S. economy shed another 17,000 jobs in manufacturing, according to CNN at the horrible cost of creating 74,000 new jobs in services, most of them in the "professional and business services" category. Oh, wait...
Friday, September 19, 2003
Rural responses to lost manufacturing
Last month I talked about how the outsourcing phenomenon was affecting rural communities in particular, and how this would affect the 2004 election. What I did not talk about was how rural communities could respond to the secular decline in manufacturing jobs.
Last Sunday the Hartford Courant ran a story about how a rural area near and dear to my heart -- the northwest corner of massachusetts -- has dealt and is dealing with this phenomenon. The answer appears to be mass infusions of contemprary art:
Read the whole thing -- and thanks to Official Blogmom Esther Drezner for the link.
From this story, it's possible to carry Virginia Postrel's argument in The Substance of Style farther than she may intend for it to travel. It's already been argued that the cities that have the cultural endowments to attract a "creative class" do the best in terms of economic vitality. It's logical to believe that this could apply to rural communities as well. In the 21st century, aesthetics will play as crucial a role in determining national, regional or local competitiveness as proximity to raw materials played in the 19th century.
Sunday, September 7, 2003
Who benefits from outsourcing? Who could benefit from outsourcing?
The Washington Post had an article two days ago on why this employment decline is different from all others. The answer is that many of the jobs that have disappeared aren't coming back. The reason? Outsourcing:
Mickey Kaus -- who links to the story -- gives one spin on this phenomenon:
And that's Mickey's optimistic interpretation of events!!
Sounds bleak. Until you read these couple of grafs in the WaPo story:
If you go to McKinsey Global Institute's (MGI) summary of its own report, you run into this startling graf:
Click here to download the actual report (you'll have to register). It's not blind to the unemployment question. In fact, the report makes an intriguing proposal to cushion the blow:
This proposal would convert the static gains from outsourcing into a Pareto-improving move -- i.e., someone can be made better off without anyone being made worse off. Not eveyone understands this concept, but it's an important one in making policy decisions.
Dynamically, the gains from outsourcing will benefit all Americans. There will be a lag between the increase in the corporate rate of return, the concomitant increase in investment, and an uptick in the domestic economy.
But it will happen.
Monday, September 1, 2003
Not a good sign for free markets
Alas, Glenn Reynolds' prediction about the politicization of outsourcing seems to be coming true. Even though the election is more than a year away, President Bush seems fully prepared to pander to protectionist sentiments. From ABC News:
Let's be clear -- creating an assistant to the Commerce Secretary will have zero effect on manufacturing jobs. Stimulating domestic economic growth is the best way to affect this sector of the economy. The creation of such a position is pure politics. So maybe the protectionist sentiment is pure rhetoric.
What worries me is that the politics of this phenomenon suggests that Bush will be unable to ignore demands for greater barriers to foreign trade and investment. To understand why, go read this Chicago Tribune story on the effect of globalization on rural labor. The key grafs:
Bush, in order to win, desperately needs rural voters. He cannot and will not ignore this constituency. Which means more protectionist rhetoric and more protectionist policies to come.
[But don't these articles also highlight real economic pain?--ed. Yes, but these article are also emblematic of the "lump of labor" fallacies that I discussed last fall. Blocking either investment or trade flows will do nothing but act as a massively inefficient subsidy for manufacturers. It's a disastrous policy. So what policies would you propose?--ed. You mean besides letting the market sort itself out? Based on this article, introduce subsidies for plastic surgery (link via Virginia Postrel)].
Wednesday, August 20, 2003
Your source for outsourcing
Why? Not because outsourcing is new, but because it's going to affect an entirely new set of professions. As Raghuram Rajan and Luigi Zingales (for more about them, click here) point out in Saving Capitalism from the Capitalists, (p. 282):
That quote, by the way, provides the best counter to outsourcing anxiety. Opposing it perfectly akin to opposing technological progress. They're both Luddite.
[That's easy for you to say. You're an academic facing minimal market pressures.--ed.] Not true. Rajan and Zingales use academia as one example of a profession newly affected by technology: