Posted on 3/14/2004, 8:59:39 AM by Dallas59
Complaints about offshoring IT jobs reverberate daily through the halls of America's software development community. The complaints are not markedly different from those once made by manufacturing workers, except that manufacturing workers were urged to upgrade their skills and move into the IT industry, and now that "skilled work" is leaving the US, there is no clear career upgrade path left for most of us. But there is a way we can bring "lost" jobs back to the U.S. without any direct legislation, and the Bush administration has already taken the first steps to implement this program, even though it may be doing it by accident.
Before
we begin, let's lay down four basic postulates:
Top-end Indian, Chinese, and Filipino knowledge workers are just as smart as top-end American knowledge workers Average knowledge workers the world over are ... average The Internet gives everyone access to the same pool of knowledge Multinational companies have no geographic loyalty In other words, we're all dogs no matter which pack we belong to, and we are expected to eat each other willingly to maintain our positions because that's the kind of world we live in.
Right now the Indian, Chinese, and Filipino dogs are eating the American dogs, with Russian, Pakistani, and other packs sniffing around the edges, trying to get a bite or two for themselves.
The big advantage Indian dogs have over American dogs right now is that they can live on a lot less money, because living costs in India are far lower than in the U.S. And Chinese dogs can live on less than Indian dogs, so in the long term work may go there rather than India, which scares the Indians no end.
The problem is that all these dogs are trying to eat from the American trough, and if foreign dogs eat from it but American dogs have no jobs and can't keep replenishing that trough, soon it will be empty for everyone.
In formal economic terms, we're talking about the U.S. trade deficit, which grows every year. It's nice for Americans to be able to buy $300 PCs and $39 cordless phones because the people who make those items in China and elsewhere are paid below-starvation wages by US standards, but the flip side of this is that the money U.S. residents currently use to buy those phones and PCs is going out of the U.S. much faster than money is coming into the U.S., so the current world trade system's dependence on a strong U.S. economy can't go on forever.
Putting inflation in the bank
The US government and most of its corporate and individual residents are accumulating more debt every year. This puts short-term smiles on the faces of all the workers around the world whose products and services are sold to U.S. markets, because they are the ones getting the borrowed money. Many of them don't seem to realize that most of the products and services they supply to the U.S. are not essential; that sooner or later U.S. residents (and the U.S. government) will need to pay back some of their debts, and that when they are using their income to pay off loans they will be forced to keep their old computers and cordless phones and stereos longer instead of buying new ones whenever they want.
Average hourly wages for American workers are not going up. The only way we are able to maintain our current standard of living is by working more hours per family than people in most of the world. Two-income households have become our norm, not an exception. Two-income households, with one of the producers often working 60 to 80 hours per week, can afford houses with four bedrooms and two bathrooms, can buy a new car every two years (on credit), and load shopping carts at discount stores with clothes, toys, digital cameras, appliances, and other goods every week or two (as long as their credit cards aren't maxed out).
Now take away one of those two jobs -- or replace it with a job that pays less -- in 20% of American families. Suddenly sales of non-essential goods drop, not only among the families that have lost some of their income, but among families that know others whose incomes have dropped and are afraid to spend because they're worried that one of their jobs may also disappear (or be replaced by a new job that doesn't pay as much as the old one).
People will keep buying food, but may buy fewer "convenience" foods such as microwavable meals, and will spend less in fast-food outlets and restaurants. They'll tend to keep clothes until they wear out instead of buying new ones to keep up with fashion trends. They'll be less likely to buy four-bedroom, two-bath houses -- and may even try to sell the ones they already own and buy more humble dwellings -- thereby slowing the housing market, which will cut sales of building supplies and construction tools, and cause layoffs among construction workers.
Just as the US economy is supposedly in "jobless recovery" mode at the moment, it could easily slip back into "no-job-loss recession mode" and severely cut imports.
The reason job losses in a new recession might not show up strongly in official statistics is that officialdom only counts people actively looking for work as "unemployed," and if half a couple decides to stay home with the kids instead of looking for work, that person is not "unemployed" in any way our government currently notices -- nor is the person who is laid off from a programming job and takes a job as a bus driver for half his former salary.
Everything I've just described is starting to happen in the U.S., a little at a time. And our government has decided to cut taxes without a corresponding cut in spending, which means it's borrowing more than it ever has, just as U.S. residents have been spending borrowed money.
Governments usually pay back excessive debt through either repudiation or inflation. Repudiation usually takes a coup first, so the new leaders can say, "We didn't run up the debts. They aren't our problem. If you want to collect, go after the old leaders, who probably stole most of the money anyway." A coup or other violent change of regime is unlikely in the U.S., so we'll almost certainly end up taking the inflation route. At some point, when government debt gets high enough, it's politically irresistible to cut the value of a country's currency so that old debts can be paid off at a substantial discount. This route is especially attractive to the U.S., because most of our foreign debt is in dollars, not in another currency, so we can get away with discounting our currency more easily than most countries.
The funny thing is, the U.S. is seeing its currency lose value against other major currencies already, and this trend is likely to increase without any government action. When a government borrows massive quantities of money to keep inflation in check, it doesn't really stop inflation but just puts it off. It puts inflation in the bank, so to speak. And sooner or later that inflation will be withdrawn from the bank -- with interest -- by overseas creditors. Indeed, this has already started. Look at the multi-year downward trend in these charts that track the dollar as a commodity, and the trend is obvious.
A weaker dollar means more U.S. jobs
At the moment this was written, the "mid-market" rupee:dollar (Rs:$) exchange rate was about 45:1. Let's imagine the dollar dropping to the point where that ratio is 30:1. Suddenly an Indian programmer who is paid $12,000 in US dollars gets a 50% "raise" to $18,000 -- without improving his skills or working harder. His standard of living won't go up 50% because the whole population of India has gotten the same "raise," including the programmer's $35/month live-in maid, who now gets $52.50/week. But both programmer and maid will be able to buy more goods from the U.S., and from countries whose currencies are "tied" to the dollar in some way, so their standard of living will still go up at least a little bit.
The only problem with this rosy scenario (for the Indians) is that the Indian programmer is suddenly less competitive with an American one. If he's working for a typical offshore contractor, his services are being marked up by a considerable amount, and the actual user of his services is probably now paying at least $24,000 per year for his time -- plus benefits. Suddenly he's not much of a bargain to an American company. In much of the U.S., $24,000 is a living wage. It won't buy a new car every two years and a four-bedroom, two-bath home, but it will buy a used car every three years and a three-bedroom, one-bath house trailer, and generally support a family of four that cooks from scratch instead of living on prepared meals and fast-food junk, doesn't need a fancy wardrobe, and is otherwise thrifty. Add a second income to that household -- even a part-time Wal-Mart one worth $6,000 per year -- and this theoretical programmer's family is getting by okay, possibly even putting a few dollars away every month.
Meanwhile, the Indian programmer is out of work. So is his maid.
This scenario is somewhat melodramatic. Large countries' currency shifts aren't usually that abrupt. But over a 10 year span a 30% or even 50% less valuable dollar is entirely plausible, even likely. This will give U.S. auto manufacturers an almost unbeatable price advantage over foreign competitors. Suddenly it might not pay to assemble computers in Korea instead of Kansas or to make microprocessors in Taiwan instead of Texas, and it will make some of our big exporters' products more palatable than their foreign competitors' in world markets. (Boeing vs. Airbus is a prime example.)
The downside is that the made-in-China blender that now costs $15 at the discount store will cost $30, the low-end laptop will cost $1,499, not $799, the "$9.95 Shoe Store" will need to change its sign to read "$19.95," and a Hyundai will cost as much as a Cadillac.
A cheaper dollar, in a general sense, means we trade low-cost imports for a more competitive stance for our home-grown products and services both here and abroad. Vacationing in Europe will cost us more than going to New York, so we'll be more likely to spend money there than to spend it in Paris, which will make New York hotel and restaurant employees cheer while Parisian tourist industry workers sulk -- and deepen their sulks when they find that Europeans who otherwise might have vacationed in Paris have decided instead to take advantage of a discounted America by going to Florida instead.
But oil prices will shoot up. With a cheaper dollar we will not be able to keep driving our Hummers and 200-horsepower sportfishing boats. Right now oil is internationally priced in dollars, but if the dollar becomes "unstable" either by conscious choice of the U.S. government or because of international currency fluctuations, oil pricing could shift to euros instead. This could mark the end of the dollar as the world's dominant currency, the one to which most others are pegged, and that could lead to higher interest rates for U.S. government bonds, and higher interest rates in general, which means plenty of inflation.
Inflation means higher interest rates
Imagine 10% inflation. To net 5% banks and other lends need to charge 15%, and to net the 20% some of the less honorable credit card lenders like to see, they'd charge 30% -- or even more. Home values would plunge as the average monthly payment per thousand dollars of mortgage rose, which would nearly kill new construction. Maybe slowing our current trend toward ever-larger, more-expensive dwelling units would be good, and there is no question that plenty of existing four-bedroom, two-bath suburban houses would make perfectly serviceable duplex apartments. But then you need to deal with all the construction workers who suddenly have no jobs, and if McDonald's and other traditional employers of unskilled workers aren't hiring, they are going to be unemployed until or unless our manufacturing sector cranks up to take advantage of the dollar devaluation that will make it less expensive to produce physical goods in America than elsewhere. You can be assured, though, that a combination of a lower dollar and higher interest rates will lead to plenty of "painful readjustment" for workers in some industries.
Inflation benefits those who own houses or other real estates and have fixed-rate mortgages (or no mortgages); their housing costs only go up a little as property taxes rise, while renters and owners with adjustable-rate mortgages see annual increases that mirror the inflation rate. Salaries will go up with inflation, no doubt, but they never quite seem to catch up, and people on fixed incomes -- think Social Security -- will be in rough shape unless their payments are "indexed" to the rate of inflation, which is going to be very hard to pull off as the "baby boom" crowd starts retiring and the ratio of social security recipients to workers grows.
Inflation also leads to social instability. People who save get antsy as they watch the value of their savings drop. People who invest get angry as they pay taxes on their investment income even if that "income" is barely keeping pace with inflation. Politicians get blamed, and a "throw the bums out" mentality becomes common. Some countries react with riots, some with military coups -- and for the first time in U.S. history, we have an all-volunteer military that is large and well-armed enough to do a government takeover if it wanted to. (Before the Cold War, our "peacetime" military was generally small and underfunded. Back then we were an essentially isolationist nation that tried to stay out of foreign entanglements as much as possible, aside from the odd Marine invasion of a wayward Latin American country whose leaders irritated us, and when we "went to war" we relied on draftees -- and demobilized most of our servicemen and women after the war was over.)
Are you sure you'd rather "protect American programmers' jobs," considering the alternatives?
Most protectionist economic scenarios will lead to some or all of the dollar devaluation and inflation problems I've outlined. Whether they are "problems" may be open to debate. Perhaps a well-managed "soft landing" for the dollar on international currency markets would help make the U.S. economy more vital and more self-sufficient, and turn our country into a net exporter again.
Workers in easily-moved service industries, like programmers and other IT personnel, would be some of a dollar devaluation's first and most obvious beneficiaries.
But the phrases "well-managed" and "soft landing" are what make this concept dubious. Our government does not have a very good track record when it comes to economic manipulation or even economic prediction. Indeed, no one does! Economics is one of the fields where, for every world-renowned expert you can find who will state a position absolutely and positively, you can find another, equally-renowned practitioner who will call the first economist a liar. (Or, in the current jargon, accuse him or her of "choosing ideology over facts.")
The big news on the IT offshoring front, though, is that the U.S. government has already set in motion the currency devaluation and inflation that are the most potent ways to to reverse this trend without meaning to -- by increasing its borrowing to unprecedented levels at the same time it is cutting the percentage of taxes it takes in from the only people in America whose incomes are steadily rising -- the rich -- and placing a higher percentage of its tax burden (and therefore its ability to pay back debt) on the backs of working Americans whose incomes are either staying level or falling.
Currency traders and investment professionals are responding to this tactic by showing less faith in the US dollar than at any time in the last decade. Super-investor Warren Buffett is "loading up on foreign currency" because he doubts that current US government tax policies are healthy in the long run.
Me? I just stand on the sidelines and observe. I expect that as U.S. currency drops in value, I'll watch some of my programmer friends find their value increasing, at least a little bit, and we'll see at least a few more manufacturing jobs. This is good. But I am worried about some of the other, longer-term effects our current government's economic policies may have on American workers -- and just as worried about what might happen if, come November, we find ourselves with a "pro-worker" administration that makes moves that would be just as bad for us in the long run.
Meanwhile, on a personal level, I suppose all the traditional career advice still holds: Stay flexible, look for opportunities in emerging fields, and make sure your skills are always up to date. These basics are the long-term keys to success in the IT field whether you're in New Haven or New Delhi; in Athens, Greece or Athens, Georgia; and whether you're a CIO at the peak of your career or a new grad working at a help desk, hoping to get your first "real" programming job before long.
"military coups -- and for the first time in U.S. history, we have an all-volunteer military that is large and well-armed enough to do a government takeover if it wanted to. "
"Me? I just stand on the sidelines and observe."
Article is good overall but spiced with contradicting trash listed above. Again, what is the solution?
Most protectionist economic scenarios will lead to some or all of the dollar devaluation and inflation problems I've outlined.
I agree with what you've written about this piece being littered with contradictions. The blocked quote (above) comes toward the end of the piece but yet the author has presented his "four basic postulates" as a given already.
The information was useful but it seemed as though he cut & pasted good material from a web forum and then tried to reconstruct an original from all of it. The purpose and the title aren't in concordance and the transitions are poor.
I must admit LCJ that most of every (if not all of) thought I have is a form of cut and paste, then (re)arranged for my own comprehension. If someone were to ask me, "What do you think about job loss overseas and what would be your opinion as to how we might get them back" ... well, If my memory happens to be functioning at that particular moment, I'd more than likely use the words of others and express them as my own.
Usually these days my memory is on a field trip, so I copy, paste and print what I'd like to digest and then use the words and thoughts as if I was smart.
(Disclaimer ... the above words were from my own mind and in no way reflects the thoughts of others, unless, of course, others might agree with me, in which case, I give unto thee express permission to use/say them as your own)
BTW, I have printed out this article and is now sitting beside my reading chair for future, more comfortable ingestion.
My reading chair is in the bathroom.
That statement is too broad. Yes, average IT workers' salaries have dropped since the peak of the tech bubble in 1999...but there are far more American workers than just those in IT. Overall, average American wages are still rising...surprisingly...even AFTER those salaries are adjusted for inflation. But in the IT sector, that's not the case.
Yes, the U.S. Dollar will continue to fall globally from its over-valued peak. This won't cause much inflation, however, because the U.S. only imports 5% more than it exports...and the sum total of all of our imports and exports amounts to only 15% of our entire economy.
Because the U.S. economy is an internal, domestic economy, we are greatly insulated from inflation caused by mere currency depreciation.
Moreover, the fall of the Dollar is a problem not for the U.S., but rather is trouble for those countries who export goods and services to the U.S. because a weaker Dollar reduces the total amount of goods and services that their best customer will buy from them. That's why India has $110 Billion in U.S. currency reserves on hand right now...because they are trying to prop up the value of the Dollar.
But India, Taiwan, and China have other problems related to their U.S. trade. For instance, their cultures make it cost prohibitive to engage real controls on data. Put simply, people over there don't really care too much if your American medical records, stock portfolio access numbers, and credit card information is bandied about from one person to the next.
And in an Age of identity theft, this lax attitude about data security is going to bite those American CEO's who ignorantly allow such personal data to be viewed overseas in any form or fashion.
It's one thing for a corporation to have some of their foreign code copied and re-used by every Indian programmer who knows the foreign code's author...but it is a much more problematic thing for that same level of information sharing to occur with our personal data.
Trial lawyers are eventually going to eat up the American CEO's of hospitals, credit card companies, and other firms that are engaging in the currently popular fad of outsourcing such data into near-lawless regions. And by saying "near-lawless," simply look at the massive level of copyright violations, fraud, and outright theft/copying of shelfware in such regions. That much has at least made the mainstream American news (e.g. stolen MicroSoft programs being copied and packaged inside duplicate shrink-wrapped boxes, stolen Hollywood movies on CD's, etc.).
What hasn't made such news in any big way yet are all of the documented cases of corporate software and products that have been worked on overseas, then simply copied/stolen after the American projects were finished.
And in the future, the offshore theft of personal *data* will be an even bigger deal than the theft of such products and programs. The cultures that are offshore are simply seldom compatible with the rigid data security needed to prevent such misuse.
We were yesterday kicking around the level of risk in the Stock Market [ to use the football analogy, were on our own 2 yard line and the "other team" has the ball].
We began to speculate as to WHAT will trigger the fall in prices and the MASS EXODUS from the market by a whole generation of players.
The consensus was either terrorism or a litteral "MONKEYWRENCHING" [their word] of the Overseas Outsourcing trend, which is where virtually ALL the increase in Corporate Profits have come from.
These Stockbrokers could have justified Martha Steward's sale of ImClone at $60, as it broke long term support at $60 on a "Point and Figure" basis.
Remember when you have that SEVERE Market decline...terrorism OR bringing an ABRUPT halt to "Offshoring."
KFNN Wednesdays at 4 PM MST[6 pm EST] at www.KFNN.com.
I disagree, based on serious experience.
I'll tell you straight up -- outsourcing is not a significant risk to skilled US developers. In most cases, it's the last gasp of a failing IT shop. They fail to make software clients will pay for, so it's cheaper to fail with over-seas help. That stretches their existing dollars farther.
There was a bubble. IT employement soared, and salaries soared. This is the adjustment. Perhaps 1/2 of all IT workers in America are only doing their current job because during the bubble, anyone who could spell was hired at a big salary.
There must be a weeding out process. I'm sorry to be so cold, but it's the truth.
Off-shore IT shops are not the equal of on-shore, skilled talent. It takes them 3-4 times longer to produce, and the end-product is almost always a mess.
This will work itself out. It already has, from what I'm seeing. And from common sense -- once the news media finally get ahold of a story like this . . . and once the D party decides to use an issue like this . . . let's just say that neither is famous for understand complex issues quickly.
There was a bubble. IT employement soared, and salaries soared. This is the adjustment. Perhaps 1/2 of all IT workers in America are only doing their current job because during the bubble, anyone who could spell was hired at a big salary.
There must be a weeding out process. I'm sorry to be so cold, but it's the truth."
I agree. Most foreign software development, at least what development is done at bargain basement prices, is crap. PhotoShop isn't being made in the Phillipines. Outlook Express isn't being made in China. MicroSoft Office isn't being built in India.
So the danger of outsourcing isn't to skilled American developers, but rather is to American CEO's and American customers...because the real danger of offshore outsourcing is that of losing control of the *data* that gets sent overseas, out of American law enforcement jurisdiction and away from American data security protocols.
Eventually, the trial lawyers will eat up for lunch those American CEO's who authorized American data to be sent overseas. Data is very different from code. We can at least control and manage whatever code we get back, but data, once sent overseas will always remain overseas no matter what gets sent back here.
How do Indian firms dispose of their old hard drives? Do they have security measures in place to insure that no one can read *your* American data that once resided on those drives? Do they allow old PC's to be sent home with their employees? Does it matter that Indian outsourcing firms have a 60+% annual turnover rate in their employees who have access to your American data? Do they encrypt their internal personal email? Do they pirate software for use by their development teams? Do they have up to date anti-virus programs and firewalls on all of their developers' machines? Do they have data access protocols that log every query attempt on American data? Do they use robust data encryption at every stage of data access and manipulation? Do they control their physical building security or can anyone walk in at almost anytime of day or night? Are their servers physically secured? Are their backup tapes encrypted and secured? Do they control access to their data security and encryption keys? Do they monitor for rogue physical data taps into their networks?
Because if they don't manage all of the above well, then *your* American data is at risk out in a land that routinely pirates American movie dvd's and "shares" American proprietary code amongst themselves already.
You summed it up nicely, I think.
In the end, the consumer will be the one to pay the ultimate price, I suspect.
I started watching a basket of gold stocks last year, and they're up 30%. That says something about expectations regarding gold - or, in other words, expectations regarding the value of the dollar.
Frankly, I'm looking forward to the various elements within the article. The howls of the free traitors will be a joy and a pleasure to me!
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.