The Perils Of Pragmatism: Outsourcing, Not The Cap, Is What America Should Fear

Immigration Daily ^ | May 15, 2003 | Gary Endelman

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The Perils Of Pragmatism: Outsourcing, Not The Cap, Is What America Should Fear

by

Gary Endelman

Announcing the obvious with an air of discovery, the 195,000 H-1B annual cap will not be renewed for Fiscal Year 2004. Supporters acknowledge that a return to the pre-1998 65,000 cap lies within the realm of political possibility. It gets worse. Even a sharply reduced cap could be saddled with new and potentially crippling restrictions. Representative James Sensenbrenner Jr., (R-WI),Chair of the House Judiciary Committee that is the gatekeeper for immigration legislation, told members of an Indian business group earlier this year that the H-1B visa progam will be "tightened" according to reports in Indian newspapers.

The reasons for such pessimism are not hard to find. Last month, unemployment rose to an eight-year high of 6% and may go higher still. Two million American workers have lost their job since 2001. According to the U.S. Bureau of Labor Statistics, unemployment among American-born electrical engineers has soared to 7% and among computer hardware engineers to 6.5%. According to the Institute of Electrical and Electronics Engineers, not exactly an impartial observer, in the past two years alone, this translates into a disappearance of 241,000 electrical engineering and 175,000 computer-related jobs respectively. In March, the Dow Jones Industrial Average stood at 8200, down almost 300 points from its close the same week in 2000. Looking for a convenient scapegoat, opponents have seized on the H-1B as the most obvious reason for the nation's economic woes with an almost fiendish delight.

The charge that corporate employers import skilled labor from foreign countries to displace US citizens is not a new one; indeed, it pre-dates the H-1B and is as old as immigration itself. Hard times have given these old accusations new life, making them infinitely more threatening and more believable. It is not only that critics claim H-1B aliens work longer hours for lower wages that makes the visa such an inviting target. There is a larger cultural reason as well. Nothwithstanding the greater H-1B mobility made possible by the American Competitiveness in the 21st Century Act, restrictionists eagerly point to the continued difficulty that H-1B workers have in changing jobs. "This system is an affront to free enterprise," Phyliss Schalfly thundered recently, "because the regulations confine the foreigners to their sponsoring corporations like indentured servants."

Members of Congress now clearly think that voting to lower the H-1B ceiling will stem the flow of jobs out of their districts. Recently, for example, U.S. Representative Nancy Johnson, a pro-business Republican from Hartford, Connecticut, sent letters to the chief executives of five Connecticut insurance companies asking how many Indians they now employ on H-1B visas and how many American IT workers they had laid off during the past two years. Johnson said she also wanted to know about the outsourcing of IT jobs to India. The law may make a distinction between dependent and non-dependent H-1B employers but most legislators do not. They think that the H-1B is to be used only when there is a shortage of US workers with the needed skills. The fact that most H-1B employers have to make no such showing would come as a rude and most unwelcome surprise on Capitol Hill. Nor is this a particularly American phenomenon. Australian newspapers and union officials recently accused telecommunications giant Telstra of contracting with two of India's biggest outsourcing companies, Infosys and Satyam, to replace Australian IT specialists earning $60,000 with Indian recruits making as little as $12,000 for the same job. Moreover, it is not just the H-1B that stands accused of stealing American jobs. Skeptics are clearly predisposed to believe that clever multinationals are trying to get around H-1B restrictions through using the L-1 intracompany transferee visa as a way to divert American jobs through outsourcing to Indian IT wage slaves. Recently, 20 US computer workers at the Florida office of Siemens ICN pointed an accusing finger at L-1 Indian replacements when they were given the pink slip.

Friends of the H-1B must confront the unpleasant reality that, while Congress is going to recast the H-1B based on gloomy financial news, numerous economic metrics show that the economy is finally beginning to turn around. That is, of course, easy to say for those that still have jobs, but it remains nonetheless true. Consider the following:

1. The Federal Reserve Bank of Dallas reported last December that business productivity grew faster in 2002 than it had for the past half-century;
2. After two years of consecutive cuts, corporate spending on new structures, equipment and software has finally begun to rise;
3. Corporate earnings in the first quarter of 2003 were up some 9% from a year earlier and this was on top of a strong 2002 profit showing;
4. Wall Street economist David Malpass of the Bear Sterns investment house reminded a House financial services panel last week that domestic employment, despite recent job losses, was still 1.5 million above the 1999 average. With a workforce in excess of 130 million, he testified, the number of workers receiving unemployment compensation remained a relatively low percentage of total jobs when compared with past business cycles;
5. Corporate earnings have benefited from the decline of the dollar relative to the euro and other major currencies. This increased the cash flow from the overseas operations of US companies as they converted their earnings from these other currencies into cheaper dollars;
6. The fall in oil prices as a result of the ability of coalition forces to prevent the destruction of Iraqi oil fields is, in effect, a tax break for the entire US economy;
7. Wall Street Journal columnist George Melloan this past week observed that "low interest rates are holding down the borrowing costs of both consumers and businesses, helping to spur faster economic growth" and he predicted that the rate of revival this year might "exceed last year's rate of 2.9% by a significant margin." Mr. Melloan also noted that Americans' personal income for March 2003 hit $9.16 trillion, a record level. UBS reported that its April survey revealed the sharpest one-month rise in investor confidence in survey history;
8. The US economy began 2003 with 10.3 million IT workers, up 4.2% from the start of 2002 . In fact, when comparing quarter to quarter, the economy actually added 86,406 IT jobs according to the 2003 IT Workforce Survey presented by the Information Technology Association of America at The National IT Workforce Convocation on May 5, 2003. Tech support personnel hiring rose the most, 8.8%. The ITAA called this " a hopeful sign, indicating that organizations may be adding the type of professionals needed to support new business initiatives and help firms implement and capitalize on new IT solutions." Notwithstanding the undeniable pain in the IT industry, the worst of the downsizing may, at long last, be over. The IT workforce appears to be stabilizing as the rate of reduction in staff by IT companies dropped almost 50%;
   

Beyond all of this, the most important truth is that the extent to which IT jobs are leaving the US has little, if anything, to do with whether the H-1B cap rises or falls. Keeping the cap high will not cause jobs to leave and slashing it will not keep them home. Employers will make these decisions for entirely different reasons. Noted immigration lawyer Cyrus Mehta got it right when he examined the interplay between the H-1B visa and today's economic downturn:

Linking the H-1B visa program to a quota makes little sense. Whether the number is 65,000 or 195,000, neither have any bearing to the economic reality. Immigration policy should allow market conditions to reglate the number of H-1B workers...

The ITAA survey offers several insights into why US companies may decide to move IT jobs elsewhere. Looking to cut costs is one, but not the only, or even the predominant, reason. Others include the need for product or service localization and the ability to add on a second or third shift as a strategy to penetrate new international markets. While politicians are falling all over themselves to attack the H-1B as root cause of IT unemployment, the ITAA survey found that more than low-end jobs were going off-shore. In fact, programming/software engineering was the job category most likely to leave the US ( 67%), followed by network design ( 37%) and web development ( 30%). No longer do US IT employers have to choose between overhead and excellence; now, the ITAA survey shows, they can have both:

As foreign countries nurture ever more sophisticated IT workforce populations, the traditional tradeoff between cost and quality begins to disappear. As a result, offshore development becomes more of an option to more employers for more types of IT work...large IT companies are the respondent group most likely to have made this move. Twenty-two per cent of respondents in this category say they have moved work offshore-three times as many as large non-IT firms.

It is not surprising that ITAA president Harris Miller recently promised to "closely monitor increased offshore activity to see its impact on US IT workers. This new phenomenon," he told reporter Roy Mark of the Internet publication CyberAtlas,"as a factor of cost and the relative portability of IT products, and the increased usage of broadband connections worldwide." Precisely because the movement of IT jobs has nothing to do with the H-1B cap, Harris Miller, long condemned by H-1B foes as the prince of darkness, has expressed little concern about, or enthusiasm for, saving the 195,000 H-1B cap. As reported by eWeek on May 2, 2003, Mr. Miller said that the ITAA was "just going to see the way things go," rather than push all out to keep the H-1B quota at its current elevated level. In the opinion of eWeek reporter Lisa Vaas, offshore outsourcing "has also contributed to the ITAA's disinterest when it comes to lobbying for a higher ceiling." Haris Miller put the whole issue of the H-1B cap in its proper perspective, and ironically underscored how difficult it is going to be to mount an emergency campaign this coming fall to save it, when he told eWeek that "Offshore is the problem, not H-1Bs."

The insistence by the USDOL that H-1B wages must be defined solely in a domestic context without reference to the reality of a global economy has, if anything, acclererated the flight of IT jobs out of the US to the detriment of the very American workers whose legitimate interests DOL is trying so hard to preserve and protect. The real threat to the American IT worker is not the H-1B replacement, upsetting though this is on an anecdotal basis, but the IT worker in India who never comes to the US. The greater the difference in wages between the web designer in San Jose and Bangalore, the more pressure that IT firm in Silicon Valley will be under to shift the work overseas so that its cost structure and profit margins can remain competitive. By seeking to make it more difficult for this Indian software designer to work in this country, critics of the H-1B are unwittingly promoting the development of the Indian computer industry. They are making it easier for this industry to achieve the necessary critical mass that will enable it to function on a consistent and long-term basis as a viable strategic alternative to Silicon Valley in the most profitable and cutting-edge technologies. When this happens, the true irrelevance of the H-1B cap will become utterly transparent. H-1Bs will no longer be sought after because the jobs will no longer be here.

The threat is not an idle one. Delta Air Lines has contracted two Indian companies to handle some of its customer reservations, the first US carrier to make such an arrangement. J.P. Morgan Chase & Company is setting up an equity research department in Bombay. Outsource Partners International, a New York-based tax preparer, had about 10,000 returns done in Bangalore this past tax year. American Express has opened its own processing center in India. A study by Forrester Research of Cambridge, Massachusetts estimated that IT outsourcing could send 3.3 million American jobs overseas by 2015. Where are they going? New York Times reporter Amy Waldman knows: "India, with its large pool of English-speakers and more than two million college graduates every year, is expected to get 70% of them." Well then, you say, crack down on the H-1B flood to prevent this from happening! Really? That is precisely what India hopes will happen: "In the face of rising unemployment in the West," observes Ms. Waldman in her bylined article entitled "More 'Can I Help You?' Jobs Migrate from U.S. to India," that appeared in this Sunday's New York Times, "resistance has grown to importing high-tech professionals from India. In the short term, that may actually prompt moving more work to India to reduce public resentment." Dr. Jagdish Bhagwati, a professor of economics and political science at Columbia University, predicts that, over time, "visa restrictions may actually loosen as countries decide it is preferable to have foreigners come in to work rather than see jobs migrate abroad."

The same argument is equally compelling when applied to ardent defenders of the H1B who insist that nothing about it can be changed. These stalwarts must demonstrate how the H may be used to create new jobs and prevent current ones from leaving this country. Even if the H-1B ceiling stays in the stratosphere, or is even raised to more olympian heights, if the jobs leave the US, who is helped? How many immigration lawyers will be needed to file H-1B petitions for jobs that have already left? What happened to the steel and shipping industries will happen in the IT industry with devastating consequences for our national security and global economic leadership. We will lose control over those technologies that will determine the future. By contrast, the H-1B should be thought of in a fundamentally new and different way, so that US workers have a stake in its success, and the level of support for H-1B migration will be so universal as to make possible H-1B levels that we can not now even dream about. It is precisely when our fears are highest and our economy seems most vulnerable, that more, not less, H-1Bs are needed to inject talent and raise productivity. It is only through such a surge in productivity that the centrifugal pressures of outsourcing can be successfully resisted.

How can this Nirvana come about in such perilous times? Only through a radical simplication of the H1B system that will be extremely painful to achieve. The amount of red tape and dollars involved in sponsoring an H-1B worker is insane but not particularly surprising given who is making up the rules. This is what happens when Congress senses there is a problem, but can't really figure out how to correct it because they get absolutely no help from either the regulators or the regulated. Legitimate users of the H-1B program must acknowledge its underlying flaws and try to be a part of the solution, rather than blindly defending all aspects of it. Honest opponents must recognize that the H-1B is essential for US companies to be diverse, seamless and productive in a global economy where wage pressures operate in a transnational context. The solution is to recognize that the H-1B does not belong to highly organized advocacy groups, whether they represent corporate employers, the immigration bar, or big labor. If the H-1B is to fulfill its potential as an engine of job creation, it must also belong to small business, all American workers and the H-1B beneficiaries themselves.

The only way this can happen is for the Congress to mandate an honest and sustained exercise in negotiated rulemaking, much as has already produced solid benefits in environmental compliance and workplace safety. Such negotiated rulemaking would provide a way to give Congress honest and constructive input as to what kind of regulations would really benefit both H-1B users and the American worker. Any attempt to initiate such a radical approach would almost certainly incite fierce opposition from those lobbyists and bureaucrats who feel most threatened by it. Some DOL regulators and some pro-H1B advocates fear negotiated rulemaking and the simplification that can come from it because, at bottom, they have little confidence in their own relevance, and little faith in the American economy and the contribution that immigration makes to it. For these reasons, defenders of the H-1B status quo on both sides view complexity and stalemate as necessary for their own self-preservation and institutional relevance.

The details of negotiated rulemarking are best left to Congress to decide. It is sufficient now to articulate in broadbrush strokes those general principles that should inform such an exercise. Try these on for size:

1. Eliminate costly red tape and lengthy processing delays that stifle progress.
2. Crack down on the use of the H-1B to hire cheap foreign labor whenever and wherever it occurs.
3. Give the H-1B workers themselves ownership of the visa so that they can vote with their feet to look for greener pastures elsewhere when they perceive themselves to be the victims of mistreatment.
4. Eliminate the labor condition application that will become obsolete once the H-1B becomes truely mobile and imbued with the spirit of capitalism.
5. Scrap the notion of the H-1B cap and limit the H to a limited period of validity without any extension.
6. Judge H-1B employers and beneficiaries by a points system that evaluates two things: First, whether the employer is acting in a way to help US workers. This could be hiring Americans; adopting profit-sharing plans; increasing internal opportunities for job training; improving industrial safety or being a better corporate citizen in the community. Other examples of positive behavior will doubtless present themselves. Second, whether the H-1B beneficiary has the skills and character traits to help create new jobs, promote profitability, and maximize economic opportunity. This could involve language fluency, education, specialized knowledge in cutting-edge technology, and familiarity with the customs and practice of both domestic and international commerce.
7. Eliminate the ability of job shops to use the H-1B visa either through outright prohibition or the imposition of negative points. Lock the bad guys out of the system so that the honest users can benefit. This will require major multinationals to institute vigorous recruitment campaigns overseas but this is a small price to pay for cleansing a process that is so manifestly in need of it.
8. Link the H-1B visa to occupational rates of domestic unemployment when adjusted for regional variances, while allowing US employers to demonstrate the ability to pierce such a cap by demonstrating how the approval of the H-1B petition will alleviate such unemployment in the area of intended employment.

Those who have most to lose by fundamental change will argue that, however interesting any or all of the above may be, it is politically impractical. They will talk sagely about what is politically possible and the hard realities of Capitol Hill politics. They will consult with coalition partners and carefully craft position statements. All of this is not be dismissed; indeed, rhetoric is not reality and sentiment is rarely a substitute for what works. Organized lobbyists are the necessary lubricant of democratic persuasion when their expert efforts serve a larger national purpose. We have come to a point in our national conversation on the H-1B when this may no longer be the case. In 1998, in far more bountiful economic times, the organized representatives of the business community and the immigration bar made a fateful choice to defer a serious push for expansion of the immigrant visa quotas in exchange for a temporary increase in H-1B numbers. Then, as now, talk of root and branch reform was shrugged off by those in the know as interesting but unrealistic. This cautious approach produced the inaptly named American Competitiveness Workforce Improvement Act. ACWIA did allow greater H-1B migration for a time but introduced several corrosive features into our H-1B jurisprudence, such as the training fee and the very notion of H-1B dependence. The damage done to the H-1B by this Faustian bargain will neither soon nor easily fade away. Now, precisely because the situation is so dire, the friends of the H-1B have been given a second chance to do the right thing. This time, let's avoid the perils of pragmatism and save the H-1B by redefining what is possible. Now, more than ever, we need to swing for the fences.

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About The Author

Gary Endelman practices immigration law at BP America Inc. The opinions expressed in this column are purely personal and do not represent the views or beliefs of BP America Inc. in any way.

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Thought and Comments?

[proxy_user]

Outsourcing is not as easy as it seems, although it is the corporate fad of the moment.

I suspect that somewhere clever guys are setting up a consulting firm that will teach companies how to bring everything back inhouse, after outsourcing and offshoring have totally screwed up their operations.

[RLK]

Among college freshmen and sophomores in the last several decades, there thas been a widespread tendency to add ism to any term or concept to disparage it, the walk off in an air of self-satisfaction having believed it is an analysis. We've had everything from racism, sexism, beautyism or whatever else can be conjured up. Well, I am an economic protectionist for reasons I have stated here and elsewhere many times. If we don't engage in more of it, this nation will become a gutted third world nation. Present policies and actions are destroying this nation. Various economic cultists will rage at me. So be it.

[Libertarianize the GOP]

http://www.freerepublic.com/perl/bump-list

[TaxRelief]

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Outsourcing,
has been in existence,
since the day that the first farmer,
hired another farmer,
who had a better team of oxen,
to come in and plow a field,
for a fair fee.

The term used to describe it may change,
but the concept of outsourcing,
will never go away.

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Great discussion of offshoring here: href=http://www.freerepublic.com/focus/f-news/894818/posts

Great discussion of outsourcing here:
http://www.freerepublic.com/focus/f-news/859791/posts

[Pylot]

The concept of outsourcing has been around for a long time.

The reality of outsourcing is that what was once very much a hit and miss proposition is now getting better in some limited vertical applications.

I suspect we are going to continue to see dramatic improvements in certain industry groups that were previously unimagined.

One example that is below the radar screen right now is the effect of Clear Channel radio on that industry. The economy of scale being realized has nearly totally transformed the Radio industry. Where there used to be one person in each market to perform a particular job, there is now one performing that job nationwide. There are significanly fewer reporters in the radio business as a direct result of this technology also. It took a large, organized player to do this.

IBM is now the worlds largest consulting firm to the IT business. They have the wherewithal to transform that industry by outsourcing that is first effective and second cost justified. Just as Clear Channel brought efficiency to our national market, IBM may just bring previously unimagined efficiency to the national IT market through the application of global resources.

If you are in the business of making widgets it is a curious notion that you must also be in the business of IT, sometimes on a scale and to a degree of complexity that would cause great anxiety to the widget maker if they knew what they were getting into. If your IT game is not conducted flawlessly, your widgets may become insignificant. If your core competence is widgets, finding an expert in IT is a logical exercise.

When a large competent player comes along and offers to unload some of the uncertainty and to save you money or at least constantly cost justify every move they make it is tempting to "outsource".

I think the notion of reducing H1B Visas is like trying to put your finger on a wet watermelon seed. The problem will only quickly go somewhere else. It is not the obligation of Americas business to preserve American Jobs, as much as that would be a nice thing to have as a priority.

And, it is also false to say that all Indians are excellent computer people. It is just that the talent pool there is so large that the very best constitute a large number of people. I am not sure it is a great idea to turn away very talented, hard working and smart people from our population.

I am not sure what the ultimate solution is to the global competition our local jobs face today. Restricting job access here is only a temporary solution that may make the problem (imposed on foreign workers) go elsewhere.

[TaxRelief]

Let's all be careful of the business terms that we use.

Outsourcing = Purchasing a business function or task from outside the company.

Offshoring = Purchasing a business function or task from outside the country.

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Companies choose to outsource because, some of the functions that the company must perform, are outside the company's areas of expertise.

For instance, most companies, big and small, must outsource their payroll processing, to a company such as ADP Payroll Processing. A cement contractor might outsource payroll because their area of expertise is cement mixing, pouring, testing and whatever else goes into the cement business. It would not make good business sense for them to buy the computer equipment, hire the accounting experts and the programmers just to keep all functions in house.

In this example, since ADP Payroll Processing is an American Company, no jobs are lost to overseas companies.

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A company may move some functions offshore for many reasons that have been discussed in several threads recently.

Offshoring is not outsourcing. Companies that move functions offshore may still be keeping the function as part of the company (but in a new location), or they may also outsource it if they subcontract the services of a company in a foreign country.

[Pylot]

Good point.

The success that is occuring in pure, in country outsourcing is now being extended in some offerings to out of country outsourcing.

For example, a call center. Another example (somewhat problematic but being worked on) is software development.

My point was that if US based firms are denied cheaper computer engineering talent (IT to development) then they are likely to seek ways to utilize out of country outsourced talent.

I don't have any good ideas on how to prevent this. Every time I try to think up a way to protect our incountry jobs from cheaper international talent, there is always a capitalistic counter argument that is hard to refute.

How about dropping all income taxes from all American Citizens and charging tariffs to imported goods to replace the lost taxes?

[TaxRelief]

Bingo! Eliminating all income tax is the obvious solution.

[bvw]

One aspect is always ignored. I belive it is one of most significant, of not the most significant.

It is the raising of good citizens. Without a replenshing stock of good citizens committed the foundation ideals of a nation, that nation will not long endure.

Any good libertarian is well fond of openess and open borders and trade. It is, in first considerations a thing truly of Liberty. Yet trade, immigrations, temporary fluxes of workers and refugees come with costs and dangers known and unknown. These costs and dangers can be significant, and at times very weighty.

Ignoring them is pixelated, looney-tunes, delusional.

Out-sourcing, being has it does not directly impact the quality of citizens and citizenship is preferred to quasi-immgration cheaper labor import policies like H1B and L1. In those cases we end up with base of wealthy, intellectual, learned and sopisticated people that ditored away from the national ideals, by a group of non-citizens untrained, unschooled, unfamiliar and even antagonistic to national foundation princibles, with lessor or negative respect and love for our Liberty, Constitution and princibles.

[philetus]

Maybe the CAPS too

Are Many H-1Bs Exempted From the Yearly Limit?

The short answer is YES

In the year 2000 President Clinton signed into law several bills which significantly changed the H-1B program. Prominent among these bills is the American Competitiveness in the Twenty-First Century Act (AC21). This act provided exemptions so that certain employers could hire H-1Bs without being counted towards the yearly limit.

There are large numbers of H-1Bs that can work in the United States even if the yearly cap (or quota) is exceeded. Unfortunately our government doesn't track how many are exempted but the loopholes in this portion of the law are huge.

Not counted against the H-1B cap are applications for H-1B visas for employees of higher educational institutions, their related or affiliated nonprofit entities or elementary and secondary schools. Also exempt are applications for individuals employed by nonprofit research organizations or governmental research organizations, or by any nonprofit entity which engages in clinical training of students at higher educational institutions. Physicians who have received a J-1 Conrad 20 waiver of the two-year home residency requirement and who must work for three years in H status are also exempt from the cap. An H-1B employee who changes from an employer exempt from the H-1B visa cap to a nonexempt employer will be counted towards the cap in the year in which the employee changes to the nonexempt employer.

[SauronOfMordor]

Every time I try to think up a way to protect our incountry jobs from cheaper international talent, there is always a capitalistic counter argument that is hard to refute.

The capitalistic arguments are hard to refute. The national-security arguments are even harder to deal with.

It's looking like China is working on a military alliance with India. Consider the national-security significance of companies' vital data being off-shored to a country that suddenly turns hostile. Or US IT and engineering being done by citizens of a country that suddenly turns hostile, and who would be expected to have their first loyalty be to the country where their families live.