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The Reality of Outsourcing
Townhall.com ^ | Bruce Bartlett

Posted on 02/17/2004 5:35:48 PM PST by phil_will1

Last week, Council of Economic Advisers Chairman N. Gregory Mankiw ran into a buzz saw. He committed a major gaffe, which in Washington means he spoke the truth, by defending the concept of outsourcing -- contracting with foreigners for information technology services. With a lack of job growth being the central economic issue in the country today, Mankiw's comments were assailed across the political spectrum. President Bush quickly distanced himself from his aide's remarks, House Speaker Dennis Hastert, R-Ill., repudiated them, and many Democrats called for Mankiw's dismissal.

There is at least one person in Washington who knows precisely how Mankiw feels: Federal Reserve Chairman Alan Greenspan. Back in 1974, Greenspan held the same position Mankiw now holds. Shortly after his confirmation in September of that year, Greenspan participated in an economic summit. At the time, the United States was in the middle of the deepest recession of the postwar period and inflation was rising rapidly. That year, the Consumer Price Index would rise 12.3 percent.

Greenspan was asked whether the Ford administration's policies were benefiting the rich over the poor. He replied: "If you really wanted to examine who, percentage-wise, is hurt the most in their incomes, it is Wall Street brokers. I mean their incomes have gone down the most."

Needless to say, Democrats had a field day attacking Greenspan for seeming to worry more about the problems of rich Wall Street brokers than those of common people. Although he quickly apologized, many observers believe that Greenspan was permanently scarred by the incident and forever afterward became far more circumspect in his public and even private comments.

Of course, when one gets caught in one of these Washington firestorms, there really isn't much one can do except apologize, hunker down and wait for the storm to pass. That is what Mankiw is doing. Unfortunately, the result is that debate on serious issues is often short-circuited and the political establishment draws erroneous conclusions. In this case, it may conclude that the issue of outsourcing is radioactive and everyone may rush to support ill-conceived legislative fixes with harmful economic consequences.

Here is the offending statement in the Economic Report of the President that has led to calls for Mankiw's head: "One facet of increased services trade is the increased use of offshore outsourcing in which a company relocates labor-intensive service industry functions to another country. ... Whereas imported goods might arrive by ship, outsourced services are often delivered using telephone lines or the Internet. The basic economic forces behind the transactions are the same, however. When a good or service is produced more cheaply abroad, it makes more sense to import it than to make or provide it domestically."

One would have a hard time finding a reputable economist anywhere who disagrees with this analysis. No nation has ever gotten rich by forcing its citizens to pay more for domestic goods and services that could have been procured more cheaply abroad. Nations get rich by concentrating on doing the things they do best and letting others produce those things they can produce better and more cheaply. It is called the specialization of labor, and it is the foundation for economic growth. That is why even Democratic economists like Janet Yellen, Laura Tyson, Brad DeLong and Robert Reich have come to Mankiw's defense.

What is different about outsourcing and why it has aroused so much protest is that it is affecting workers who thought they were immune from international competition. Blue-collar workers in manufacturing have been suffering from outsourcing for 100 years. It is worth remembering that textile jobs in South Carolina today were originally outsourced from Massachusetts. While in the short run, the transition was painful for Massachusetts textile workers, they soon found better jobs in new industries. That is why per capita income there is and always has been far higher than that in South Carolina.

It would be grossly unfair to say that it is OK to move manufacturing wherever production is cheaper, but wrong to subject information technology services to the same competition. It is mostly because of the Internet and the fact that IT people know how to use it that they are getting attention disproportionate to their numbers. Moreover, if we hadn't just gone through a painful economic recession, most of these people probably would have already found new jobs and the problem of outsourcing would not be worth writing nasty emails about to politicians and people like me.

In any case, even if the federal government tried to stop outsourcing, it cannot. We can put quotas and tariffs on goods that cross our borders, but it is impossible to stop people from importing software and data over the Internet. The only response that is possible is to adapt, innovate and stay ahead of the curve.


TOPICS: Business/Economy
KEYWORDS: brucebartlett; outsourcing
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To: Alberta's Child
Not only that, but I never understood how someone in the IT field whose job description didn't even exist 15 years ago could expect to find any long-term stability in his job.

Your statement implies that there are fields that are stable. I have yet to see anyone tell us just what the stable jobs are. Everyone who thinks outsourcing is good has no clue what the next jobs will be. You're taking on faith that they (the new jobs that is) will appear.

61 posted on 02/18/2004 6:46:01 AM PST by stig
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To: stig
Your statement implies that there are fields that are stable. I have yet to see anyone tell us just what the stable jobs are. Everyone who thinks outsourcing is good has no clue what the next jobs will be. You're taking on faith that they (the new jobs that is) will appear.

Y'all told us that new jobs would appear when the factory jobs went. Well they did and here we are.
62 posted on 02/18/2004 6:50:42 AM PST by Outsourcing=Competition (I'm voting for Bush. What about you?)
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To: Outsourcing=Competition
A non-stabled high-performance team can beat every other model in the economy of the world.

I know that in my own life and work, and better I can point to the one industry which has revamped itself to use such teams almost exclusively -- Hollywood! The movies.

Goof and great films poured out of the wholly captured and owned stables of talent banks the Studios had up through the early 60's. Yet they paled in comparison to the market and quality of films out of the US once we went to a complete cobbler's model of throwing together independents and independent teams on high-turnaround projects. Amazing leaps in quality in all except script character and plot development, where by my view, the quality mix has been more-or-less constant.

BUT HEY! Don't be confusing the issue! That example is a side-issue -- the pertinant issue is wholesale looting of techonological capability from our shores and also ravenous and homosexual sex-lke (buggering) models of "trade", of imports without balanced tariffs.

63 posted on 02/18/2004 6:58:49 AM PST by bvw
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To: Outsourcing=Competition
There is one shining indicator of "where we are" -- shining like a great pharoah -- LIGHTHOUSE beacon that, is!

And shows us wrecked and near wrecked on the shoals. That indicator is interest rates. Just as like that when the lighthouse beacon beams in the Captain's cabin bright enough to read by is a sign of immediate and happening danger, so to are these low interest rates.

64 posted on 02/18/2004 7:03:00 AM PST by bvw
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To: RushLake
Meanwhile in the USA, we have high schools that produce kids ready to become environmentalists, diversity consultants, and democratic party campaign operatives

My experience (I'm in the IT industry) is that US developers are far superior to those from India, etc. But maybe it's just because I'm good and have good co-workers, and our development team in India is sub-par....

65 posted on 02/18/2004 7:19:28 AM PST by Theo
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To: calawah98
RE: offshore tax prep.

Yes, a few weeks ago this was a topic here. David Lazarus of the San Francisco Chronicle has written about threats to both medical and financial personal data.

"A tough lesson on medical privacy/Pakistani transcriber threatens UCSF over back pay" and "PRIVACY TAKES A BACKSEAT," David Lazarus, San Francisco Chronicle

Links to both are at http://www.privacy.org/archives/001191.html

in case you have not seen Lazarus' work. Or google, "David Lazarus" "PRIVACY TAKES A BACKSEAT"

I can see lawyers going after Big Finance soon. Big Tobacco had mere billions. Banks, insurance, etc. have trillions.

66 posted on 02/18/2004 7:23:32 AM PST by WilliamofCarmichael (Benedict Arnold was a hero for both sides in the same war, too!)
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To: bvw
Once the pool of Americans pursuing tech careers shrinks, you lose the critical mass required to produce real stars, and hence the R&D edge is lost to offshore talent.
67 posted on 02/18/2004 7:24:26 AM PST by Jim Cane
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To: Jim Cane
Once the pool of Americans pursuing tech careers shrinks, you lose the critical mass required to produce real stars, and hence the R&D edge is lost to offshore talent.

Also if you eliminate entry level jobs - no more people will enter the field.

68 posted on 02/18/2004 7:30:37 AM PST by A. Pole (The genocide of Albanians was stopped in its tracks before it began.)
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To: WilliamofCarmichael
I worry about the same thing, that the types of jobs leaving the US are not merely manufacturing or farm labor but rather our intellectual capital. The very high tech jobs such as writing software code for future networks and operating systems are not just "retraining opportunities", these jobs are more or less eternal jobs of the future now that they're here...we will always need new software written, etc.

So if irresistable economic forces push all the software and chip fab technology etc out to the low wage countries, I am not sure what all the displaced tech workers will be "retrained" to do. Perhaps this is all part of the "great circle of life", hakuna matata and all. Perhaps the US is cycling back towards a time in which we will largely work in retail and service industries, grow food for the rest of the world, and buy our technology from them. I wonder what kind of license fees China and India will demand for keeping my PC running? Maybe it will become too expensive to support the Indian IT workers lavish lifestyle and Chinese companies will sub the work out to us?

/rant off

69 posted on 02/18/2004 7:32:03 AM PST by Sender ("This is the most important election in the history of the world." -DU)
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To: phil_will1; A. Pole; Willie Green; harpseal; Lazamataz
It is called the specialization of labor, and it is the foundation for economic growth.

Actually, Brucie boy, it's called labor arbitrage, which has everything to do with profits and nothing whatsoever to do with "specialization."

Bartlett's argument fails: there is NO "special" labor which can be done only in China or India.

However, it IS done cheaper.

Let's call a spade a spade, Bruce.

70 posted on 02/18/2004 7:37:17 AM PST by ninenot (Minister of Membership, TomasTorquemadaGentlemen'sClub)
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To: Alberta's Child
In order to maintain an export-based economy, the nation doing the exporting must always have a lower standard of living than its trading partners.

Well, that certainly explains American dominance of exporting from 1950-1985. Catch a course on econ history, AC.

71 posted on 02/18/2004 7:41:00 AM PST by ninenot (Minister of Membership, TomasTorquemadaGentlemen'sClub)
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To: Sender
I worry about the same thing, that the types of jobs leaving the US are not merely manufacturing or farm labor but rather our intellectual capital.

Bingo!

72 posted on 02/18/2004 7:42:09 AM PST by Jim Cane
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To: Alberta's Child
but the average American had a lower standard of living than the average resident of the countries I identified well into the 20th century.

I don't believe that you can prove this contention.

73 posted on 02/18/2004 7:43:10 AM PST by ninenot (Minister of Membership, TomasTorquemadaGentlemen'sClub)
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To: A. Pole
Meanwhile in the USA, we have high schools that produce kids ready to become environmentalists, diversity consultants, and democratic party campaign operatives.

I had to laugh at this quotation. Truth be told, our high schools produce kids who are ready for...nothing. Our colleges aren't much better at the Freshman and Sophomore level. The simplest math (i.e., basic algebra) is well beyond them. Basic English exceeds their capabilities, even with all the tools that Microsoft Word provides. And they are so very satisfied with their profound ignorance.

Foreign students studying in US schools generally work a lot harder than our US students. A further point - US based BS. and BA degrees are generally perceived as being of less value than a great many offshore degrees.

The problem is that we've decided to do a lot of social work with education that does nothing to prepare the students for working in a global marketplace. Affirmative action is one small element. The idea that everyone should have the opportunity for higher education is another. The distribution curve dictates that most people are not capable to master advanced concepts - one winds up wasting limited resources on them, or lowers standards so that anyone who can convert oxygen to carbon dioxide can succeed. We're doing both. So on the one hand, we need to promote fair trade instead of free trade - but on the other hand, we need to realize that some children WILL be left behind.

74 posted on 02/18/2004 7:45:09 AM PST by neutrino (Oderint dum metuant: Let them hate us, so long as they fear us.)
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To: Alberta's Child; BohDaThone
AC claims that Japan's income source is 'taxation of labor.'

What!!! Did Japan drop all its import-controls and tariffs??
75 posted on 02/18/2004 7:45:19 AM PST by ninenot (Minister of Membership, TomasTorquemadaGentlemen'sClub)
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To: A. Pole
But running trade deficit does not mean that the standard of living will be higher (in the long term).

That's true. But you are getting the cause/effect backwards. The trade deficit does not cause a higher standard of living in this country -- it is the result of a higher standard of living in this country.

Japan's recent history offers an excellent case in point, because it progressed from an "outsourcing destination" to a "high standard of living" in a very short period of time. It wasn't all that long ago (the late 1980s, to be specific) that people were complaining that Japan was going to "own the U.S." because so many of our manufacturing jobs had been sent there. The implicit assumption, of course, was that the economic advantages Japan enjoyed at the time would remain in place for a long period of time.

And yet it wasn't very long at all. Japan's status as an "outsourcing destination" pretty much ended when their standard of living (and hence, the cost of doing business there) began to approach that of the U.S.

It's utterly ironic that the one area where Japan competes on what is close to a level playing field with the U.S. is auto manufacturing, and Toyota is poised to surpass Ford as the #2 auto manufacturer in the world at the same time they are bulding record numbers of their vehicles in the U.S.

76 posted on 02/18/2004 7:47:01 AM PST by Alberta's Child (Alberta -- the TRUE North strong and free.)
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To: phil_will1
Authoritarians are scared to death of letting people make their own arrangements for pursuits of industry and improvement. It reduces their power to manipulate others for their own benefit.
77 posted on 02/18/2004 7:48:03 AM PST by Protagoras (When they asked me what I thought of freedom in America,,, I said I thought it would be a good idea.)
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To: Jim Cane
That's when we will need genuine PROTECTIVE tariffs of rates 50%, 100% and above to regrow what we gave away, or become a second world nation.

An honest tariff rate of 15% now -- the historically fair rate -- might keep us from calamity.

78 posted on 02/18/2004 7:52:21 AM PST by bvw
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To: phil_will1
The biggest factor, it would seem, is that there are huge pools of educated workers who will gladly work for a fraction of what their US counterparts would require.

Phil, that's a myth.

Read the book "Re-Engineering the Corporation" in which it is flatly stated (and truly stated) that most jobs in the USA were designed for high-school graduates. Not ALL jobs--but MOST jobs.

There's no "higher-skill" level in China or India; they are just plain CHEAPER.

And yes, taxes and regs impose significant costs here which are not imposed elsewhere.

79 posted on 02/18/2004 7:53:48 AM PST by ninenot (Minister of Membership, TomasTorquemadaGentlemen'sClub)
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To: phil_will1
steel tariffs. They solved one problem and created others.

That's because the pointy-heads at Commerce don't understand industry, at all.

It's hard to do so when the closest you've been to manufacturing is looking at a factory several miles from Yale.

Tariffing steel, but NOT fabricated steel, gave every fabricator in this country an enormous disadvantage. Offshore fabricators bought the steel cheap, fabricated it, and sent it here--cheap.

80 posted on 02/18/2004 7:57:14 AM PST by ninenot (Minister of Membership, TomasTorquemadaGentlemen'sClub)
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