Skip to comments.The Reality of Outsourcing
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.
A low-priority task holds a resource needed by a high-priority task, and so the high-priority task can't execute until all intermediate-priority tasks have been serviced.
How about a quick exposition on the merits of FSK, PSK or QAM?
The latter allow more data to be exchanged in a given bandwidth, but are more complex and more sensitive to frequency-dependent timing distortions.
Would you choose CSMA/CD or token passing for best deterministic response?
How did Shannon improve upon Nyquist's sampling theory?
Did he clarify the exact way in which frequencies above f/2 fold back, or had Nyquist already done that?
When they outsource all the jobs they can and bring in guest workers for all the jobs they cannot, who the hell is going to be paying the taxes to support this government?
I asked this question of a political science professor today and his answer was that nobody has the answer to that.
That being the case, what the hell are they doing this for if they don't know the consequences of their actions?
Bruce Bartlett on the unfair advantage that unemployed IT types have over other unemployed Americans. The nerve. ;)
That's an excellent point.
Many losing their jobs, I might add, are refugees from factory offshoring who retrained for the promise of better jobs. Now combine the quote from above with a post from another thread. To wit,
"The offshoring model in fact is the opposite of free trade. It is not trade at all but labor arbitrage. Unlike real arbitrage, the act of exploiting the wage differences is not ending the arbitrage opportunity. US companies create captive offshore centers in which the local employees are used to fulfill demand in the US while their wages are kept isolated from that same world demand."
See also the writings of Stephen Roach.
This ain't your great-grandfather's Ricardo. This is about a glut of readily available cheap labor worldwide and IMO is more akin to 19th century capitalism instead of comparative advantages among free trading countries. Fine.
There's also the those pesky "capitalists" depending upon tax supported Ex-IM Bank, OPIC, special programs, etc. Not so fine, IMO. But it's a riot hearing free traders complain about government "interfering" with capitalism when their pocketbooks are threatened. "Capitalism" has come to mean always having government money there if and when a capitalist needs it? Hands off! everybody else?
RE: "Few of the rockets that put the satellites into orbit were privately financed by the companies that now exploit them."
That's another taxpayer service, all the risks and R&D that built the rockets and facilities. BTW, I thought most of what makes cross-border IT-enabled services possible was the cheap underseas bandwidth.
Yes. The undersea cables were placed before we figured out the world of satellites. Network routing rules prohibit a voice path from traversing both forward and reverse paths via satellite because of the huge delay introduced.
I'm a former Bell System employee and very familiar with the helps and hindrances that government introduced into the telecom industry from the earliest days. Anyone who doubts the ability of government to lay taxes and tariffs on telecom need look no further than the monthly bill. I get my wireless activity in excruciating detail...along with some general taxes. The excruciating detail that you see in the billing records is evidence of the fine granularity of modern billing systems. It would be simple to impose targeted tariffs. Custom programming of the operational support systems was my specialty before I left PacBell.
Pretty good, now that I just trashed your credit rating. ;^)
Probably made in China too.
I think it goes further. I just retired from the domestic auto industry. Even in spite of Jacque Nasser's divide and conquer diversity initiatives, we could not find enough talented American engineers when we hired. We had to turn to engineers who came here from India and the Middleeast. Meanwhile in the USA, we have high schools that produce kids ready to become environmentalists, diversity consultants, and democratic party campaign operatives. Additionally, just from the domestic auto industry perspective, we could not, and they still cannot get those "quality" union people who are hired to come to work full time, and who receive expensive full time health care benefits to come to work everyday prepared to work. The benefits still get paid at the full time rate, and part time or sick/lame/lazy employees get put on the job in the absence of the qualified qualilty union employee. Companies owe an obligation to stock holders, and they will look for a way to make good on those obligations.
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