August 19, 2003

Outsourcing Our Future?

Dan Gillmor and others are worried that we are outsourcing our future.

Let's begin by clearing away some underbrush.

First of all, the number of jobs in the United States is not set by what happens on the sea lanes--on what exports and imports the container ships carry from port to port. The number of jobs is set in the Eccles Building, by the Federal Reserve, which tries to hit the sweet spot: high enough demand to produce effective full employment, without so much demand that vacancies become so abundant as to lead inflation to run away. Sometimes the Federal Reserve does a good job and is lucky, and we have full employment with price stability. Other times the Federal Reserve is unskillful or unlucky, and we have accelerating inflation or high unemployment. It is certainly true that what happens in international trade affects employment in America. But the Federal Reserve can and does offset and neutralize impacts of trade that push employment away from where the Federal Reserve thinks the sweet spot of full employment is.

So what, then, is the impact on the American economy when Singapore educates its people to become competent network developers, or India educates its people to become competent help-center technicians? It's not that jobs leak away. Remember: trade balances. Indians want rupees, not dollars: they will only sell us as much as we can pay for in rupees, and the only way we get rupees is by selling things to Indians. The things we sell to Indians are either goods and services exports, or capital exports--Indians buying financial assets or real property in America, the sale of which is used to finance domestic investment spending. Either way (if the Federal Reserve does its job) Americans' demand for imports made in other countries is recycled into foreign demand that employs Americans in industries that export goods, export services, make producers equipment, or build structures. This is a consequence of Say's law--an economic principle which is usually true, sometimes false, but which it is the Federal Reserve's business to make as true as possible as much of the time as possible. This means that nightmare scenarios--3.3 million high-tech jobs moving overseas--are beyond the bounds of short-run probability. The current account plus the capital account must balance: if the work that used to be done here by 3.3 million people is to be done there, that means that our export industries here must employ an extra 3.3 million people as well.

When foreign countries acquire the capability to make stuff, there are two impacts on the American economy. First, we can no longer sell the stuff we make abroad for such high prices as we did before: our exporters face more competition as they try to sell abroad. Second, our consumers and domestic businesses can buy things made abroad more cheaply: producers of import-competing goods and services find that they face more competition and must lower their prices, but other businesses find that their costs fall, and households find that their incomes buy more good stuff.

Which effect dominates? Theoretically, either one can. The opening of the Suez Canal and the coming of large-scale cotton production to India and Egypt after the U.S. Civil War was surely not good for the gross economic product of America's cotton south, and contributed (along with the boll weevil, the neglect of education and other public services, and the corruption of the herrenvolk democracy that set up Jim Crow) to the south's economic retardation toward the end of the nineteenth century (how big a role Egyptian and Indian competition played in this is not something I am confident that I can judge). But in the post-World War II world, it seems clear that the U.S. has gained much more than it has lost from the economic development of its trading partners. The U.S. as a whole benefits enormously from the fact that Japan is a rich industrial economy rather than something like Indonesia. The producer and consumer surplus the U.S. gains from trade with rich western Europe far exceeds what it gains from trade with poor eastern Europe. The way to bet seems to be that examples like the growth of other producers to compete with the cotton south are the exception, and win-win benefits are the rule.

If this is not to be the case in the future, there needs to be an argument made as to why the normal post-World War II pattern will be broken. And I haven't heard anybody make such an argument yet.

Moreover, it is important to distinguish between situations in which foreign countries do not acquire the capabilities to produce goods traditionally made in the U.S., and situations in which the U.S. imposes tariffs and quotas to protect domestic industries. The first may leave America better off: we sell them good stuff at expensive near-monopoly prices. The second does not: we can't make them buy our (now overpriced) exports, and trade barriers simply cut off the benefits from mutual specialization in areas of comparative advantage that David Ricardo identified long ago.

This leaves the question of what is the appropriate public policy response to successful high-tech "outsourcing": Imposing tariffs and quotas to protect domestic demand is surely a bad idea, for standard Ricardian reasons. Attempting to slow the rate at which modern technologies are transferred to other countries is surely a bad idea too: there is no surer way to store up huge amounts of economic and political trouble for the future than for the United States to embark on a policy of trying to slow economic growth in India, China, and elsewhere.

I think that the correct policy response is the one outlined by Robert Reich in his Work of Nations of a decade and a half ago: First, get our people out of industry segments where we are about to lose comparative advantage and where wages are about to take a big dive--this is the reason we Democrats like various forms of Trade Adjustment Assistance, for those who work in such industries are about to get shafted and have done nothing to deserve it (and have the ability to impose enormous costs on the rest of us through trade barriers if the political dice roll their way). Second, make sure the public investments in basic research are there to spark applied research and development to create new industries and new forms of high-tech in which our labor and our capital can be very productive (NIH, NSF, DARPA anyone?). Third, remember that the principal determinants of our prosperity and our productivity come from within: get public investment in infrastructure right, private savings and investment high, and investment in education high as well.

Remember: few would be worried about "outsourcing" if the U.S. unemployment rate were still close to four percent, rather than at the above six percent level that it is. To the extent that a structural cure is being proposed for what is really a macroeconomic problem, do not expect it to end well. And remember: a network-design job artificially kept in Sacramento when it could be done more cheaply in Singapore produces extra income for a network engineer in Sacramento, but has costs as well: in a diminished capital inflow that reduces construction and the earnings of construction workers, in higher costs for businesses installing their networks that shows up in lower salaries they pay their workers, in lower earnings and stock prices for HP. Given the all-thumbs hand the U.S. government has to try to guide industrial development through tools other than maintaining the infrastructure of a market society and the provision of basic research and other public goods, it is hard to imagine that the costs to the country as a whole will not greatly outweigh the benefits.

Dan Gillmore: outsourcing our future: Will America lose 3.3 million high-paid, value-added technology jobs in coming years? That's one estimate that John Chen, CEO of Sybase , has heard -- and it's not at all impossible, he told the Progress & Freedom Foundation's Aspen Summit this morning. This strikes me as one of the sleeper issues for the coming campaign, especially in places where technology has fueled the economy such as Silicon Valley. Companies are sending their work overseas at an accelerating rate.

The reason is simple: money. When they can hire qualified engineers at a third to a tenth of what it costs in California or Boston, for example, the urge is irresistable. But they should be honest about why they're moving jobs offshore. That's what was so offensive about a Hewlett-Packard executive's statements when the company recently announced it was setting up a networking R&D center in Singapore, according to the Straits Times (Google cache). The Times reported:

The technology information giant already has a facility to develop these products in Roseville, just outside of Sacramento in California. But last year HP found it difficult to find suitable manpower for the centre, said the company's vice-president and general manager for networking, Mr John McHugh.

No suitable people right next door in the San Francisco Bay Area, in Silicon Valley, where the unemployment rate -- especially engineers -- exceeds the national rate? Baloney. We need a national debate about the next wave of American job losses, the same kind of debate we've had over the manufacturing move overseas. It was painful but it left us stronger in the end.

Chen correctly calls for a deep study of this trend. We need facts and context, and so far we have mostly anecdotal evidence. But the United States seems woefully unprepared to deal with what's coming this time. We are systematically wrecking our schools (except our universities, which remain the world's best), destroying our government's fiscal base, encouraging inequality of opportunity and generally encouraging our international competitors to take advantage of our self-induced weakness. America's emerging plutocracy cares about profits, and doesn't care where they come from.

For the rest of America, it's not going to be so easy this time.


Business - Reuters: Delphi Globetrots to Cut White-Collar Pay By Justin Hyde

DEARBORN, Mich. (Reuters) - After years of shifting factory work from the United States to lower-wage countries, auto parts maker Delphi Corp. has begun to do the same with white-collar work such as engineering and bookkeeping.

While the moves to date have been fairly small, leaders of the world's largest auto parts supplier say more will be necessary to deal with continuous pressure to cut costs and carry the burden of pension, health care and research expenses.

"We're moving more and more of our engineering work to India, to Poland, to Mexico and to Brazil," said Delphi Chairman J.T. Battenberg during a presentation to analysts and investors earlier this week. "These are locations where talent is strong and costs are comparatively low."

Battenberg said Delphi's foreign engineering operations now include 2,800 engineers in Mexico, as well as 300 in Poland and 280 in India, part of 32 technical centers around the globe. For the cost of one U.S. engineer, Delphi can hire three in Mexico.

Several industries, from computer software to telemarketing, have begun aggressively shifting white-collar work out of the United States. Forrester Research predicted last year that companies would move 3.3 million U.S. services industry jobs and $136 billion in wages out of the country over the next 15 years.

The auto industry has shown few signs of such shifts. But with many major automakers barely breaking even as real vehicle prices fall in North America and Europe, automakers and suppliers are keen to use any tool that cuts costs.

Since its spinoff from General Motors Corp. in 1999, Delphi has expanded output from foreign plants while reducing its U.S. manufacturing base. It now has about 30,000 United Auto Worker union employees in the United States, down about 30 percent since the spinoff, and is reducing the remainder at a rate of about 7 percent a year.

Delphi has relied more heavily on factories in Mexico to supply automakers who have built plants there and to ship parts back to the United States. With 72,000 employees in Mexico, Delphi is one of the largest private employers in the country. That growth has been driven by wage differences; while a U.S. union worker can make as much as $20 per hour, the typical Mexican employee makes less than $3 per hour.

THE ENDLESS SEARCH

Battenberg and other Delphi executives said they needed to seek lower-cost engineering to maximize the company's research spending. Delphi's basing much of its future growth plans on making more high-tech parts than its competitors, and expanding with products such as its SkyFi satellite radio receivers.

"We've made a conscious decision -- we're not going to cut engineering and we're not going to cut R&D," Battenberg said.

Even as it looks for lower costs among white-collar workers, Delphi is also seeking lower manufacturing costs. That means expanding factories in Eastern European countries to supply Western European automakers, and could even mean moving work from Mexico to Caribbean nations.

"There's very little business where we're not looking for that kind of opportunity," said Dave Wohleen, head of Delphi's electronics, safety and interior business.

But executives said Delphi will not export more of its output from China, now considered the lowest-cost location for building auto parts in the world, because its Chinese plants have such heavy demand for parts inside the country.

Delphi is the largest auto parts maker in China, with about $700 million in revenues last year, of which about $135 million came from exports. Battenberg said in recent meetings with the leaders of Toyota Motor Corp. and Honda Motor Co.Ltd., both asked him if Delphi could supply their rapid growth plans for the Chinese market.

"Local consumption will take the vast majority of our production," he said. "We won't export that much out of there."

Posted by DeLong at August 19, 2003 06:25 PM | TrackBack

Comments

"The current account plus the capital account must balance: if the work that used to be done here by 3.3 million people is to be done there, that means that our export industries here must employ an extra 3.3 million people as well."

I wasn't aware that these things were measured in number of people employed.

Posted by: Ian Welsh on August 19, 2003 07:11 PM

Y'know, the more I think about this, the more it bothers me.

Because what the US is selling to the rest of the world in exchange for their goods is securities (debt mostly, but also equity).

That can go on as long as the rest of the world is willing to buy - which is quite a while, since if they stop buying those securities the US can't buy their exports and the entire tower of cards comes tumbling down.

There is no one-to-one job equity here - if one job moves to India, one job does not have to be created here. Remember, all a bond is, is an IOU - and all a stock is is a share in ownership. Some jobs, in theory, might be created in the securities industries, but we all know that in the real world, that isn't happening. Even if it was, it would be less jobs than those that are moved.

But what happens if the world decides to stop buying US securities? Hmmm? Well the US can't afford to buy their goods - and they lose those jobs that are dependent on exporting to the US. The US isn't going to automatically regain them, in such a case, however. Economic activity will take a big hit - it will drop.

No one wins from that proposition - and it is, given current government policies - the most likely outcome.

Probably I'm missing something - perhaps someone can explain it to me. But it seems to me that the US can indeed lose jobs, and a lot of them - and so can those who export to the US.

The only way out of it is to create new jobs - new industries to replace those lost, to generate new wealth from new activities. Perhaps in an energy revolution? The tech is available and it makes economic and geopolitical sense.

Which means, under this administration, it'll never happen.

Oh well.

Posted by: Ian Welsh on August 19, 2003 07:25 PM

"I think that the correct policy response is the one outlined by Robert Reich in his Work of Nations of a decade and a half ago: First, get our people out of industry segments where we are about to lose comparative advantage and where wages are about to take a big dive"

To expect a 45 year old Software Engineer, with kids to support, to take 3 or 4 years off to retrain himself in another profession is completely unrealistic. The most you could expect would be to somehow get through some 1 or 2 year technical program, and even that would entail a huge cut in salary.

"Remember: few would be worried about "outsourcing" if the U.S. unemployment rate were still close to four percent, rather than at the above six percent level that it is."

All jobs are not the same. A minimum wage job at the grocery store is not equivalent to a $90K Software Engineering job. Having an economy that creates lots of minimum wage jobs, or jobs that require 6 years of training, does not help unemployed engineers one bit.

Posted by: Michael Jones on August 19, 2003 07:36 PM

The problem isn't just that jobs in general are taking a hit. It is that the hit is concentrated in a very narrow area.

Software development (aka computer programming or software engineering) jobs are being taken away from US citizens and given to Indians (primarily) and Chinese (secondarily). This occurs not only through offshoring and outsourcing of work, but through the H-1B and the L-1 Visa programs. The scandals of these visa programs has te be understood. People are simply being laid off, often after being required to train their replacements. The replacements are temp workers without legal rights who are forced to work for substandard wages or lose their right to stay in the US.

Lowering the income of hi-tech workers is a disincentive for students to study engineering and computer science in college. And in fact, enrollments in these fields have been observed to drop when salaries drop.

See this page for more information:
http://www.nomoreh1b.com/links.aspx

The naive analysis based on Says law just won't hold water in these circumstances. It's more like a situation in which the Oil reserves deplete in Texas so we get oil from the mideast. A lot of wealth flowed from the US to the mideast to get the oil. Just as a lot of wealth will flow out of the US to get the software and engineering results out of India.

Posted by: Warren on August 19, 2003 07:43 PM

Interesting article. Shipping those jobs off to other countries frees workers in the US to do other work. However if US workers are not properly educated or the infrastructure is not available, then workers in the US will end up less productive than those in the other countries and wages will drop. Would you like fries with that?

Posted by: bakho on August 19, 2003 08:22 PM

As a policymaker who works on trade policy, and who has the scars to prove it, I have always vote for free trade policies, something not easy for a Democrat. After all, it's one of the few mathematically provable public goods. I often lurk on this site and appreciate the economic analysis it provides. The question that no one answers, though, is that, yes, the Fed sets employment rates, and, yes, consumers benefit, and, yes, we should follow Reich's advice. But the distribution of losses is concentrated in areas least able to adjust. I represent a rural area, and it's not much of a solution to tell people to move to San Francisco or Miami. And the loss of jobs for the high-school educated, which once provided for a stable middle-class, is just devastating. I'd like for someone to point me to some literature in the field that talks about the possible downsides to trade from a geographic perspective. Brad's mentioning of Suez and the rural South hits home. From my angle, that seems apropos of the moment.

Posted by: Johan Moss on August 19, 2003 08:51 PM

Bakho - "Would you like fries with that?"

Are you suggesting that in exchange for the products and services the U.S. purchases from other countries the other countries will demand to have fast food served to them in the U.S.? Unlikely.

And if your next response is that they will demand nothing in exchange other than an IOU then they will lower our interest rates and prop up our currency. So first they give away their labor for way too little, then they invest it here and when they try to cash out they take a big loss. That helps us more than them.

There's really nothing inherent about software jobs that make us rich. They were high paying because there was a relative shortage compared to other professions. If now there is no longer a relative shortage, how does it make us rich to have more? Anyway, the analytical skills will be quite transferrable, many people have career changes just because they get bored.

Posted by: snsterling on August 19, 2003 09:02 PM

"Anyway, the analytical skills [ in software jobs ] will be quite transferrable"

It would be absurd to suggest that, because I have almost 20 years experience in the software field, that I can use my "analytical skills" to get a job as a pharmacist or a microbiologist. Any job beyond entry level typically requires years of experience in specific skill sets.

Posted by: Michael Jones on August 19, 2003 09:53 PM

"It would be absurd to suggest that, because I have almost 20 years experience in the software field, that I can use my "analytical skills" to get a job as a pharmacist or a microbiologist."

No, but there's lots and lots of more closely related things. You'd be surprised at the parallels between economics thinking and software.....

Posted by: Jason McCullough on August 19, 2003 11:08 PM

"No, but there's lots and lots of more closely related things. You'd be surprised at the parallels between economics thinking and software....."

So you propose the 8-10M people in IT economists?

(hint: eyes rolling)

Posted by: John Silverberg on August 19, 2003 11:36 PM

Brad - it must be frustrating that most world citizens (or pundits for that matter) know Economics 101. One or two years of Econ should be required at the high school level, rather than relatively useless topics like Chemistry or Physics. (And I'm a physicist).

Posted by: ETC on August 19, 2003 11:41 PM

"Lowering the income of hi-tech workers is a disincentive for students to study engineering and computer science in college. And in fact, enrollments in these fields have been observed to drop when salaries drop."

Isn't this a desirable thing? Your argument is self-contradictory, for while you argue on the one hand for less competition from foreign workers, on the other, you complain about a decline in the number of Americans studying CS and engineering, a trend which, if true, would actually REDUCE competition for those students who stuck with the subjects, as well as for current domestic programmers.

"... a lot of wealth will flow out of the US to get the software and engineering results out of India."

I see that you subscribe to the zero-sum view of international trade. Has it occurred to you that BOTH parties must be benefiting if trade occurs between them? India's (or, to take your other example, the Middle East's) gain isn't necessarily America's loss.

Posted by: Abiola Lapite on August 19, 2003 11:59 PM

FWIW, here's an email I wrote to Paul Krugman about two years ago:


I don't know if you have seen Michael Moore's "Roger and Me", but whatever you think of Moore's other work or ideas, its a very funny, moving documentary of the economic pain the people of Flint, Michigan went through after GM moved its Flint plants to Mexico.

For me, the most interesting part of the movie was
watching Flint's politicians try to get the city's
economy moving again. Their attempted, and disastrous, solution was to attract tourist dollars (A common response of local officials everywhere, I think). Then they more or less gave up, content with attracting celebrities to give pep talks (Ronald Reagan's (not bad) advice: "Move to the Sun Belt, where jobs are plentiful")

So here are my questions: What should Flint have done after losing so much of its economic base? And what branch of economics, if any, do questions like these fall under?"


Here is PK's reply:


"The field is urban economics / economic geography. I've done a fair bit of work in it myself.

But Flint is a hard case - it's not a place you would really want to locate another industry."


I yield to no one in admiration of Krugman. But it seems to me that economists should have something more useful to say than "Gee, Flint is a hard case."

Posted by: roublen vesseau on August 20, 2003 12:13 AM

"It would be absurd to suggest that, because I have almost 20 years experience in the software field, that I can use my "analytical skills" to get a job as a pharmacist or a microbiologist."

Those fields are pretty ambitious for a career change since they require 4-8 year advanced degrees. The vast majority of people get by just fine without advanced degrees. Law, nursing, or physical therapy involve fewer years I think. Teaching should be possible without any extra degrees. Once Alan G tightens the job situation, there will be a demand for competent people in general; the best match might be something completely unexpected and come as a result of desperation of both employer and employee. I know plenty of people who entered IT this way (no college degree, political science degree, but the employer needed someone really bad). However, any switch from your expertise would most likely involve losing at least for a while your relative economic advantage over others (benefiting everyone else at the expense of you).


ETC - "One or two years of Econ should be required at the high school level"

I couldn't agree more. Considering how it directly affects politics and elections, running a business, purchasing a house, planning for retirement.... And the coursework could be used to help both math and reading skills. Most of the current high school curriculum is useless except for that it sharpens basic skills.

Posted by: snsterling on August 20, 2003 12:35 AM

Economic arguments about outsourcing aside, I think there's a structural problem which most of the arguments are missing: the general response to the issue of offshoring jobs has been to say that the economy will need to retrain, that white collar workers (not just computer programmers, as the trend includes customer service reps, financial analysts, accountants and lawyers) will need to learn new things to make themselves competitive. But offshoring is happening to the very sector most vulnerable: name a white collar job which can't be done easily by someone overseas with a pc, an internet connection, and a tenth the salary. Software engineers would be foolish to spend the money to retrain to "become competitive" - their competition is not in skill set, it's in $3 an hour wage for the exact same skills.

Posted by: Faisal N. Jawdat on August 20, 2003 03:54 AM

Economic arguments about offshoring aside, I think there's a structural problem which most of the arguments are missing: the general response to the issue of offshoring jobs has been to say that the economy will need to retrain, that white collar workers (not just computer programmers -- the trend includes customer service reps, financial analysts, accountants and lawyers) will need to learn new things to make themselves competitive.

But offshoring is happening to the very sector most vulnerable: name a white collar job which can't be done easily by someone overseas with a pc, an internet connection, and a tenth the salary. White collar educations in the US are expensive, and you'd be foolish to spend the money to retrain to "become competitive" - your competition is not over skill set, it's over a $3/hr wage for the exact same skills.

Posted by: Faisal N. Jawdat on August 20, 2003 03:56 AM

Alternatively your competition is with my ability to create two posts for the price of one.

Posted by: Faisal N. Jawdat on August 20, 2003 03:57 AM

Brad, your argumernt falls apart early when you claim that Indian software companies want rupees and not dollars. Unfortunately for your argument, and for American software engineers, the Indian outsourcing companies happily accept all the dollars you want to send them.

Posted by: Chuck Nolan on August 20, 2003 05:09 AM

I wrote a piece that gave a similar analysis, although as a non-Democrat I talked about individual responsibility rather than government responsibility. See http://www.techcentralstation.com/1051/techwrapper.jsp?PID=1051-250&CID=1051-071403D

Posted by: Arnold Kling on August 20, 2003 05:09 AM

FWIW: To my limited understanding I think I have observed "full circuit outsourcing" within the US ... most apparent to me within restaurant, retail fueling, small groceries, and lodging. Entreprenuers from outside the US with strong desire and skill have been buying older properties and then staffing them with immigrants. "Success" is achieved by working long hours at low pay under dangerous conditions. Profits or added capital investments upgrade the property. Management and accountancy are maintained by the foreign entreprenuers. The businesses prosper. Local unskilled labor is hired to maintain operations while the entreprenuer acquires another enterprise. The result is added employment in the US, and recycling of rupees/ dinars/yen and shekels. The net result is that the entreprenueral face of the USA is changing. The dollar trade imbalance returns to the USA for added investment and provides desired services at competitive costs. The added employment is for the "unskilled". But this is how the capitalist system works ... hopefully tempered by civic virtues of the entrepreneur. Thus entreprenuership is outsourced and recycled. It returns in the age-old opportunity quest. USA -- what a country! (IMHO)

Posted by: Don Majors on August 20, 2003 06:01 AM

Hmmm... Your basic premise seems to ignore the concept of Trade Imbalance... Something thast the US has on the order of about 1 trillion dollars per year... That means we but 1 trillion dollars more stuff and services from over seas than we sell. OK I suspect that you could bury all of the IT jobs with the 1 trillion dollars. Especially since it would transfer the money from the workers to the owners of the company stock in terms of increased profit by lowering the cost. Economics 101.
The only reason this would not continue is if obsticles are in place that lower the cost savings to the point of it being cost-effective to rehire the unemployeed american IT worker.
For a CEO the issue is not trade imballance, but how to raise profits so that he can get a bigger bonus or just keep from getting fired. And outsourcing will raise profits greatly for many CEOs.

Posted by: Bruce on August 20, 2003 06:25 AM

Ian Welsh wrote, "'The current account plus the capital account must balance: if the work that used to be done here by 3.3 million people is to be done there, that means that our export industries here must employ an extra 3.3 million people as well.' I wasn't aware that these things were measured in number of people employed." and "Because what the US is selling to the rest of the world in exchange for their goods is securities (debt mostly, but also equity)."

I'm with Ian here. Where does economic theory say that if we lose 3.3 million jobs in IT, we will gain 3.3 million in the export sector?

To add a few more details, MicroSoft exports a job to India, the Indian is paid in US$, which are then used to purchase US assets (real estate, stocks, bonds). The $s thus come right back to the US.

Posted by: Stephen J Fromm on August 20, 2003 06:25 AM

This outsourcing issue will ultimately hit higher education and force restructing of the antiquated and barrier-laden system into an efficient and cheap web-based system where the $3 an hour foreign Ph.d will displace the overpaid university professor. The value of a designer degree is in its ability to guarantee the bearer a high paying job and as white collar wages decrease, so should the cost of education unless of course the monopoly forces hold sway.

Posted by: Chicagocon on August 20, 2003 06:53 AM

"The vast majority of people get by just fine without advanced degrees. Law, nursing, or physical therapy involve fewer years I think. Teaching should be possible without any extra degrees."

Law - 3 years; nursing - 3-4 (except that the new graduate might be competing with RN's laid off by a hospital, in favor of LPN's and technicians). I knew a guy trying to get into PG back in the 1980's; it was very hard to get in, and required a couple of years of full-time training. According to http://www.bls.gov/oco/ocos080.htm, PT is heading towards being a graduate program.


In terms of people getting into IT without formal training, that was due to desperation - a labor shortage (if one truly existed in IT). With very large overseas white collar labor forces better integrated into the US economy, those should occur much less frequently, in any field which is doable over distance.

Posted by: Barry on August 20, 2003 06:59 AM

There may be non-economic elements to the outsourcing debate. I'm especially interested in the notion that we are outsourcing engineering jobs to China: arguably a hostile country. If we look at the problems on the Internet this past week, Im wondering what would happen if China deliberately introduced Trojan viruses embedded in hardware then presented us with an ultimatum over Taiwan in 10 years.

I think that there are also interesting intellectual property considerations. If, say, Peoplesoft outsources a significant portion of their software development, what is their recourse when those developers leave for a local company that is developing a competing product.

Im generally in favor of free trade, but Im hedging my bets by going back into defense work and operating my software business on the side.

BTW: The pain felt by the software professionals is acute because so many of them were paid well beyond their abilities and worth. I have been cleaning up lousy code produced by a group of such wonder-kids for the last three years.

Posted by: Robert on August 20, 2003 07:00 AM

A couple of things here (since I seem to be the only one here who's actually been through this stuff.) Retraining programs are all well and good--I've been through one. The problem is that companies do not want to hire you without experience. So you have people with training who still don't have jobs.

The bigger question in all of this is what it does to the economy of this country long term. If people are stuck in low paying service jobs, is it possible to still fund a strong defense? If people are making $8 an hour, are they going to be spending much money buying consumer goods? Do we want a country where the middle class is tiny, where the well-to-do are the only ones who do better every year and the bulk of people are stuck in low paying jobs, without a way to buy a home or move up?

I find that the people most in favor of outsourcing are those who think their jobs are not at risk. Corporate executives would not be in favor of it, if we were hiring Indian executives to do their jobs. Journalists wouldn't write positive stories about it, if we were hiring Chinese reporters for our papers. We're long overdue for a national debate on outsourcing, both in this country and out of it.

Posted by: Teri Pittman on August 20, 2003 07:14 AM

I've always hated the term "comparitive advantage". It masquarades as a neutral scientific term, distancing itself from grim reality so people can focus on the topic without emotional distractions, but in reality it's pure marketing speak. It's intended to evoke images of Demmingist, super-efficient Japanese auto-workers, churning out superior automobiles in 3/4 the time it takes the equivalent american assembly line. Not the inefficient, but spectacularly cheap, indian software engineers I have to work with.

As for Roach, the symbolic analyst jobs we were all supposed to train for 10 years ago are the ones that are being exported today. If "comparitive advantage" works that quickly, how are we supposed to retrain in time.

I think the most telling fact about the wonders of "comparitive advantage" is that it's biggest fans are immune from it's effects. I think there should be a web robot that automatically labels articles like this with "Rank Hypocricy From *Tenured* Professor".

(And what, praytell, is the "normal post-World War II pattern". As I understand it, there is a 1945-1975 (autarkic, high growth, rising wages) pattern and a 1975-today (free-trading, low growth, stagnant wages) pattern.)

msw

Posted by: msw on August 20, 2003 07:25 AM

What "new industries" are you talking about? It takes time and money to set up such new industries, and meanwhile there are families to feed and clothe.

Posted by: Lola Lee on August 20, 2003 07:32 AM

After many years, I've concluded that it's impossible to convince the general public that trade deficits and outsourcing don't translate into net job losses here. The fact that the trade deficit must be matched by an equivalent (and job creating) investment inflow is simply too abstract; while jobs lost through the deficit itself are clearly visible. About one-third of the responses here (an educated audience) simply amount to a denial of the basic balance of payments identity, however clearly it has been explained by Brad.

Many responses have raised a harder issue. The job losses due to the deficit or outsourcing tend to be concentrated in a particular industry or region, while the gains from trade are shared widely. Shouldn't we take measures to protect those industries or regions?

The problem with such a policy response is that there is no end to it. Yesterday steel, today software engineering, tomorrow something else. Soon enough, you have an economy that is locked into industries that reflect its old strengths, not its new ones.

Posted by: Matt on August 20, 2003 07:51 AM

After many years, I've concluded that convincing the general public that trade deficits don't result in net job losses is impossible. The fact that the deficit is matched by a (job creating) investment inflow is an abstract notion; the jobs lost due to the deficit are clearly visible. About one-third of the responses here amount to a denial of the basic balance of payments identity, however clearly it has been explained by Brad--and this for an educated audience.

Several responses raise a hard question. The jobs lost due to outsourcing or trade tend to be concentrated in given industries and regions, while the gains from trade tend to be widely shared. Why not take measures to protect those jobs?

The problem with such a policy response is that there is no end to it. Yesterday steel, today software programming, tomorrow something else. Soon enough, you have an economy that is locked into its old strengths, not its new ones, at an ever-mounting cost.

Posted by: Matt on August 20, 2003 08:06 AM

Let me address a few responses here:

Ian Welsh said: "But what happens if the world decides to stop buying US securities? Hmmm? Well the US can't afford to buy their goods - and they lose those jobs that are dependent on exporting to the US. The US isn't going to automatically regain them, in such a case, however. Economic activity will take a big hit - it will drop." This is incorrect. What will happen when the world decides to stop buying securities is that the dollar will depreciate. This will make imports more expensive and exports cheaper, and thus push the trade balance back toward zero.

msw said: "(And what, praytell, is the "normal post-World War II pattern". As I understand it, there is a 1945-1975 (autarkic, high growth, rising wages) pattern and a 1975-today (free-trading, low growth, stagnant wages) pattern.)" Actually, international trade grew very rapidly from 1945-1975. And productivity, wages, and economic growth all grew very rapidly during the 1990s, when the US imported more than ever. I don't think there's a link between trade and the overall performance of the economy.

International trade (like lots of types of economic activity) usually causes both winners and losers. I agree with Matt that the truly important issue raised here is what to do to help the losers from international trade. Since the winners win more than the losers lose, it seems an obvious situation to use government redistribution -- the free market isn't going to do it on its own. But just because we need some gov't redistribution to help the losers from trade (and I would suggest that a lot of the redistribution be in the form of education) doesn't mean that we should limit international trade.

Posted by: Kash on August 20, 2003 08:07 AM

Jeremy Rifkin's "The End of Work" [ http://www.foet.org/Books.htm ] is looking more and more prescient, albeit with a caveat [ http://t0.or.at/bobblack/futuwork.htm ].

Posted by: Bradley S. Felton on August 20, 2003 08:08 AM

The PK comment on Flint MI was telling. Flint is a good example of the failure to invest in infrastructure, diversify the industrial base and train workers. The result is a climate that is unattractive for any business that can locate elsewhere and is lacking in the training and financing needed to grow the economy locally. Once a local economy collapses, then the revenue (tax base) is no longer available to invest in its replacement. Americans have a lot of their savings in their homes and when unemployment skyrockets, housing values decrease markedly, exacerbating the problem.

Brad's post suggests that outsourcing jobs will free Americans to do other work. The other work Americans do will depend on investment and training. If we neglect our infrastructure then we become less competitive compared with other locations (countries) that do a better job with the infrastructure. If we don't have the investment and worker training to create high skill high paying jobs, then workers will be forced to take what can be offered, low pay low skill jobs. The problem with this current economic recession and the fiscal policy is that resources spent on infrastructure and training are being cut, especially by state governments that are forced to balance budgets.

The argument that outsourcing is good requires that the society be committed to investments in the future. That is not what we are getting in our national economic policy. Steel tariffs anyone?

Posted by: bakho on August 20, 2003 08:12 AM

Jeremy Rifkin's "The End of Work" [ http://www.foet.org/Books.htm ] is looking more and more prescient, albeit with a caveat [ http://t0.or.at/bobblack/futuwork.htm ].

Posted by: Bradley S. Felton on August 20, 2003 08:14 AM

A couple of points not being considered: The "outsourced" jobs are limited in scope. The jobs that have disappeared from my area have been very low-level, uncreative programming jobs that experienced US programmers wouldn't be interested in doing in the first place. And communication costs are still very high (Indian programmers take home 10-20% of what a US programmer, but overall savings due to communication costs are only 20% in general).

Most importantly, you're assuming a static wage market in India. But as Indian programmers become slightly less inefficient, their salaries will go up proportionally, and the advantage will disappear.

Posted by: ms on August 20, 2003 08:27 AM

Two concerns. The first is a non-free enterprise move of jobs. After world war II, the US rebuilt the Japanese infrastructure. During this time, the US allowed Japanese TV makers to maintain an internal monopoly, while dumping televisions on the US market. The end result was a near complete destruction of US television production. This also effectively gave Japan an artificial boost in competition of related industries. I am concerned that a political decision will give foreign companies an artificially low comparative price. China right now benefits from this. Chinese wages are truly lower than US. However the Chinese government policy of restricted access to goods not manufactured in China has caused an artificial transfer of technology and skills. This has caused a loss in skill advantage that the American worker had through a non-free trade mechanism.

The second concern is a loss of skilled US labor. In software, experience is worth far more than education. Its the difference between fixing or creating something in an hour vs. a week. The outsourcing decisions are made at the management level. Most often, at this level, its a pure salary cost comparison rather than a more accurate cost vs. result comparison. Outsourcing software based on an inaccurate cost evaluation, runs the risk of both short and long term loss. Short term loss in the area of efficiency. Long term loss in the one way transfer of skills.

Posted by: james on August 20, 2003 08:28 AM

The problem is vastly overstated anyway.
1) Salary isn't the only cost: there is added communication cost, meaning a total of maybe 20% savings for outsourced jobs.
2) These jobs tend to be limited to low-level work in the industry: Microsoft isn't outsourcing senior positions, and won't be anytime soon.
3) As Indian programmers become slightly less inefficient, they will be able to demand higher salaries and the 20% cost saving will disappear fairly quickly. All the panic scenarios I've read assume a static wage market in which overseas programmers never get raises or get richer.

Posted by: ms on August 20, 2003 08:34 AM

The outsourcing of technology jobs not only hurts today's engineers, but it greatly increases the risk for any young person thinking of pursuing any high-tech field of study. Why should anyone in this country pursue a master's degree in biotechnology or nanotechnology if that field is likely to be largely outsourced within a decade or two? Does it make any economic sense to spend five years studying for a ten year career? If all of these new jobs that are going to be created require five years of study, then is it going to be worth it to pursue them?

Honestly, I am much more pessimistic now about my future and my children's future.

Posted by: Michael Jones on August 20, 2003 08:37 AM

(Kash) "And productivity, wages, and economic growth all grew very rapidly during the 1990s, when the US imported more than ever. I don't think there's a link between trade and the overall performance of the economy."

median US individual wages (don't let household wage statistics fool you - mom wasn't workin in 1973) are at exactly the same place they were in 1973. Despite the small (compared to pre-1970's levels) increase in wages in the late 90's) (http://www.census.gov/hhes/www/income01.html).

As for trade, jeez, I'm supposed to be working here (so much for my supposed advantage over my bangalore counterparts). But are you seriously suggesting that pre-1970's america had an open trading policy?

(ms) "Most importantly, you're assuming a static wage market in India. But as Indian programmers become slightly less inefficient, their salaries will go up proportionally, and the advantage will disappear."

Let me re-phrase that: "Most importantly, you're assuming a static wage market in Mexico. But as Mexican auto-workers become slightly less inefficient, their salaries will go up proportionally, and the advantage will disappear."

Take that, Flint MI.

Just maybe, back of the envelope economic models don't capture the whole truth. The problem with this sort of panglossian free-trade speak is that those of us outside the university have enough experience with finding work to know that something is wrong with it. I know that economists join with other social scientists in their belief that popper is a four-letter word. But you'll find it hard to convince those of us who persist in the outmoded belief that IF THEORY THEN X, NOT X, THEREFORE NOT THEORY.

msw

Posted by: msw on August 20, 2003 08:39 AM

Interesting arguments all around. One thing that is being ignored:
The dollars aren't coming back. India, Taiwan and China are sitting on huge foreign reserves. The money which could be used to buy American products and services - thereby increasing employment to make up for at least some of the job losses - is sitting outside of the USA doing nothing.

The free market trading system assumes circularity - that participants will buy as well as sell. However the models followed by Japan and now emulated in China in manufacturing and India with services depend on "free-ridership" in the system. India and China are not buying American goods and services - as shown by the large current account deficits we run with those countries. For more information see this link at Newsweek: http://www.msnbc.com/news/953582.asp?0dm=s128k

Outsourcing is not the only force that destabilizes the American labor market. The visa system does as well. Under the current L-1 program, for example, the work doesn't even have to leave the country: the job stays but the professional is imported while being paid his (there are very few female L-1 visa holders) same salary in his home country. That may mean programmers being paid less than the minimum wage and enduring near-sweatshow type conditions. The L-1 threatens not only IT, but engineering, financial analysis, and even fields like nursing - any profession that is in demand, not unionized, and has a large overall business cost to foreign wage disparity.

Scott Kirwin
Founder,
IT Professionals Association of America
www.itpaa.org

Posted by: Scott Kirwin on August 20, 2003 08:48 AM

Interesting arguments all around. One thing that is being ignored:
The dollars aren't coming back. India, Taiwan and China are sitting on huge foreign reserves. The money which could be used to buy American products and services - thereby increasing employment to make up for at least some of the job losses - is sitting outside of the USA doing nothing.

The free market trading system assumes circularity - that participants will buy as well as sell. However the models followed by Japan and now emulated in China in manufacturing and India with services depend on "free-ridership" in the system. India and China are not buying American goods and services - as shown by the large current account deficits we run with those countries. For more information see this link at Newsweek: http://www.msnbc.com/news/953582.asp?0dm=s128k

Outsourcing is not the only force that destabilizes the American labor market. The visa system does as well. Under the current L-1 program, for example, the work doesn't even have to leave the country: the job stays but the professional is imported while being paid his (there are very few female L-1 visa holders) same salary in his home country. That may mean programmers being paid less than the minimum wage and enduring near-sweatshow type conditions. The L-1 threatens not only IT, but engineering, financial analysis, and even fields like nursing - any profession that is in demand, not unionized, and has a large overall business cost to foreign wage disparity.

Scott Kirwin
Founder,
IT Professionals Association of America
www.itpaa.org

Posted by: Scott Kirwin on August 20, 2003 09:33 AM

"Interesting arguments all around. One thing that is being ignored:
The dollars aren't coming back. India, Taiwan and China are sitting on huge foreign reserves."

So they send us computers, software, and textiles-furniture-toys-and-1000-other things...and we send them pieces of printed paper.

Sounds like a pretty good deal to me. :-)

Posted by: Mark Bahner on August 20, 2003 09:55 AM

The real problem is that economists are whores --paid to rationalize a government policy which lets benefits flow to wealthy capitalists and dumps costs onto the masses. Economists do not get grants, lucrative consulting contracts,etc by telling the truth, speaking on behalf of the common citizens, or by exposing the corruption/hypocrisy of our political and business leaders.

That is why free traders don't talk about the huge costs of empire --that global trade works only so long as US workers pay roughly $400 billion /year to maintain global security. Free traders don't talk about how the profits from the US empire flows to wealthy profiteers while the costs are dumped on the common citizen -- including drafting that citizen to risk his life in combat when the oil companies want access to the Caspian Sea oil deposits north of Afghanistan or control of Iraq's reserves.

Would US corporations move software development to India if they thought India might be hit at any time by a Pakistani or Chinese nuke? The first thing US corporations do in making foreign investments is to ensure that their investment will be protected by the US government/military. Global trade depends on the fact that military protection only costs the investor maybe $200,000 in campaign donations while the $billions in costs are dumped off onto the US workers ( via stealing $Trillions from their Social Security/Medicare Trust Funds.)


That is why free traders don't talk about why a nation attempting to develop a "comparative advantage" in competition with others would
enroll foreign students in its advanced technical programs --so that foreigners make up almost 25% of the student body in the technical graduate programs of our major (taxpayer supported) universities.

That is why free traders don't note that every
such trade empire has collapsed into a deep depression -- either because technology outflows of trade reduce the hegemon's relative military advantage or because the costs of maintaining military advantage bankrupts the hegemon's citizenry.

Posted by: Don Williams on August 20, 2003 10:01 AM

The real problem is that economists are paid to rationalize a government policy which lets benefits flow to wealthy capitalists and dumps costs onto the masses. Economists do not get grants, lucrative consulting contracts,etc by telling the truth, speaking on behalf of the common citizens, or by exposing the corruption/hypocrisy of our political and business leaders.

That is why free traders don't talk about the huge costs of empire --that global trade works only so long as US workers pay roughly $400 billion /year to maintain global security. Free traders don't talk about how the profits from the US empire flows to wealthy profiteers while the costs are dumped on the common citizen -- including drafting that citizen to risk his life in combat when the oil companies want access to the Caspian Sea oil deposits north of Afghanistan or control of Iraq's reserves.

Would US corporations move software development to India if they thought India might be hit at any time by a Pakistani or Chinese nuke? The first thing US corporations do in making foreign investments is to ensure that their investment will be protected by the US government/military. Global trade depends on the fact that military protection only costs the investor maybe $200,000 in campaign donations while the $billions in costs are dumped off onto the US workers ( via stealing $Trillions from their Social Security/Medicare Trust Funds.)


That is why free traders don't talk about why a nation attempting to develop a "comparative advantage" in competition with others would
enroll foreign students in its advanced technical programs --so that foreigners make up almost 25% of the student body in the technical graduate programs of our major (taxpayer supported) universities.

That is why free traders don't note that every
such trade empire has collapsed into a deep depression -- either because technology outflows of trade reduce the hegemon's relative military advantage or because the costs of maintaining military advantage bankrupts the hegemon's citizenry.

Posted by: Don Williams on August 20, 2003 10:03 AM

What large-scale whit-colar outsourcing might do, though, is decrease income inequality in the U.S. If lots of high skill workers are available elsewhere one would expect the comparative advantage of a college education in the U.S. to decline. I have no idea whether white-collar outsourcing would be a large enough phenomenon, but the argument seems straightforward to me. It would be quite ironic if white-collar outsourcing was the means to achieve a liberal goal (reduction in income inequality).

Posted by: CalDem on August 20, 2003 10:05 AM

The real problem is that economists are paid to rationalize a government policy which lets benefits flow to wealthy capitalists and dumps costs onto the masses. Economists do not get grants, lucrative consulting contracts,etc by telling the truth, speaking on behalf of the common citizens, or by exposing the corruption/hypocrisy of our political and business leaders.

That is why free traders don't talk about the huge costs of empire --that global trade works only so long as US workers pay roughly $400 billion /year to maintain global security. Free traders don't talk about how the profits from the US empire flows to wealthy profiteers while the costs are dumped on the common citizen -- including drafting that citizen to risk his life in combat when the oil companies want access to the Caspian Sea oil deposits north of Afghanistan or control of Iraq's reserves.

Would US corporations move software development to India if they thought India might be hit at any time by a Pakistani or Chinese nuke? The first thing US corporations do in making foreign investments is to ensure that their investment will be protected by the US government/military. Global trade depends on the fact that military protection only costs the investor maybe $200,000 in campaign donations while the $billions in costs are dumped off onto the US workers ( via stealing $Trillions from their Social Security/Medicare Trust Funds.)


That is why free traders don't talk about why a nation attempting to develop a "comparative advantage" in competition with others would
enroll foreign students in its advanced technical programs --so that foreigners make up almost 25% of the student body in the technical graduate programs of our major (taxpayer supported) universities.

That is why free traders don't note that every
such trade empire has collapsed into a deep depression -- either because technology outflows of trade reduce the hegemon's relative military advantage or because the costs of maintaining military advantage bankrupts the hegemon's citizenry.

Posted by: Don Williams on August 20, 2003 10:08 AM

The real problem is that economists are paid to rationalize a government policy which lets benefits flow to wealthy capitalists and dumps costs onto the masses. Economists do not get grants, lucrative consulting contracts,etc by telling the truth, speaking on behalf of the common citizens, or by exposing the corruption/hypocrisy of our political and business leaders.

That is why free traders don't talk about the huge costs of empire --that global trade works only so long as US workers pay roughly $400 billion /year to maintain global security. Free traders don't talk about how the profits from the US empire flows to wealthy profiteers while the costs are dumped on the common citizen -- including drafting that citizen to risk his life in combat when the oil companies want access to the Caspian Sea oil deposits north of Afghanistan or control of Iraq's reserves.

Would US corporations move software development to India if they thought India might be hit at any time by a Pakistani or Chinese nuke? The first thing US corporations do in making foreign investments is to ensure that their investment will be protected by the US government/military. Global trade depends on the fact that military protection only costs the investor maybe $200,000 in campaign donations while the $billions in costs are dumped off onto the US workers ( via stealing $Trillions from their Social Security/Medicare Trust Funds.)


That is why free traders don't talk about why a nation attempting to develop a "comparative advantage" in competition with others would
enroll foreign students in its advanced technical programs --so that foreigners make up almost 25% of the student body in the technical graduate programs of our major (taxpayer supported) universities.

That is why free traders don't note that every
such trade empire has collapsed into a deep depression -- either because technology outflows of trade reduce the hegemon's relative military advantage or because the costs of maintaining military advantage bankrupts the hegemon's citizenry.

Posted by: Don Williams on August 20, 2003 10:09 AM

Sorry for the multiple copies of my post -- my brower was looping indicating that my post had not been received by this site.

Posted by: Don Williams on August 20, 2003 10:13 AM

I think your comments on the trade balancing mechanisms to job loss to offshore economies are fair, but only to a certain extent. For policy's sake, it would all be fine if the shifts happened gradually based on constant adjustments. In practice, instead you have these dam-bursting events that grow from political events that can't be easily predicted or mitigated and render the retraining and competitive adjustment response ineffective.

Examples include the effect on Japan of the sudden revaluation of the yen in the 1980s. Extremely long overdue, this was finally a political decision which led to a massive shift in trade balances and loss of Japanese manufacturing jobs offshore, mainly to China and Southeast Asia. Initially the effects in Japan were mitigated by new growth in the same region -- increasing consumption volumes of all those goods so Japan-based plants could stay open -- and by the social welfare policies of Japanese corporations. But here we are, almost 20 years later, and Japan is still suffering the effects of the bubble that burst.

A second and concurrent example is China's opening. From the beginning of the 1980s, suddenly you had a massive supply of cheap labor, skilled and unskilled, flood the market. But they were really only available in China. Bang: every country around the world has experienced a shift of jobs to China faster than they can adjust to it. And because the labor supply in China is so huge -- just limited by the infrastructure access to it, which constantly improves -- the effect is a 30-year assault on jobs in other countries.

A micro-example: at the end of the 1980s Thai shoe manufacturers got upgraded to begin producing mid-range Nikes and such. This was a significant advance up the ladder. But then suddenly political changes in cheaper labor markets like China, Indonesia and Vietnam quickly took this away, before the Thais could get their skills to the point that they could move another step up the ladder, to Air Jordans and all. So the shoe industry which was competitive one year was suddenly under threat of being wiped out the next.

Add to the political event of China's opening the similarly opening economies in Eastern Europe and Russia, Mexico and the rest of Latin America, now increasingly India (which, fortunately for China, has never has the export-manufacturing acumen as East Asian countries), and you end up with a sudden massive economic event that can mean overly rapid displacement for a generation, whatever your central bank tries to do.

Even Singapore is not immune. The city-state itself has become a fairly high-cost economy and has mainly survived by importing/buying cheaper skilled workers from other countries, in particular China (but also executive help from the West).

Even so, Singapore is in a slump, with an uncomfortably high jobless rate, and a forced fall in salaries, partly explained by a tendency of potential investors to look beyond them to cheaper locations and Singapore's own inability to keep upgrading skills, retraining its work force, fast enough to contiue to compete for investment in the tier of high-cost economies. (It doesn't help that many well educated Singaporeans are Emigrating to more open societies.)

Singapore's challenge is unique to its own size and location, but it reflects the problem of dam-bursting shifts in the global economic power balance that can really shake societies no matter how well their own central banks have prepared the ground.

The lesson of Japan especially is that these shifts can undermine whatever policy-makers do.

Posted by: paul handley on August 20, 2003 10:46 AM

Matt said: "The fact that the trade deficit must be matched by an equivalent (and job creating) investment inflow is simply too abstract...."

Correct. So can you humor the third of us "educated" posters still in denial over the "basic balance of payments identity, however clearly it has been explained by Brad"? That is, can you explain it with more concrete clarity, without just rewording that already said?

Posted by: DLF on August 20, 2003 10:47 AM

I think your comments on the trade balancing mechanisms to job loss to offshore economies are fair, but only to a certain extent. For policy's sake, it would all be fine if the shifts happened gradually based on constant adjustments. In practice, instead you have these dam-bursting events that grow from political events that can't be easily predicted or mitigated and render the retraining and competitive adjustment response ineffective.

Examples include the effect on Japan of the sudden revaluation of the yen in the 1980s. Extremely long overdue, this was finally a political decision which led to a massive shift in trade balances and loss of Japanese manufacturing jobs offshore, mainly to China and Southeast Asia. Initially the effects in Japan were mitigated by new growth in the same region -- increasing consumption volumes of all those goods so Japan-based plants could stay open -- and by the social welfare policies of Japanese corporations. But here we are, almost 20 years later, and Japan is still suffering the effects of the bubble that burst.

A second and concurrent example is China's opening. From the beginning of the 1980s, suddenly you had a massive supply of cheap labor, skilled and unskilled, flood the market. But they were really only available in China. Bang: every country around the world has experienced a shift of jobs to China faster than they can adjust to it. And because the labor supply in China is so huge -- just limited by the infrastructure access to it, which constantly improves -- the effect is a 30-year assault on jobs in other countries.

A micro-example: at the end of the 1980s Thai shoe manufacturers got upgraded to begin producing mid-range Nikes and such. This was a significant advance up the ladder. But then suddenly political changes in cheaper labor markets like China, Indonesia and Vietnam quickly took this away, before the Thais could get their skills to the point that they could move another step up the ladder, to Air Jordans and all. So the shoe industry which was competitive one year was suddenly under threat of being wiped out the next.

Add to the political event of China's opening the similarly opening economies in Eastern Europe and Russia, Mexico and the rest of Latin America, now increasingly India (which, fortunately for China, has never has the export-manufacturing acumen as East Asian countries), and you end up with a sudden massive economic event that can mean overly rapid displacement for a generation, whatever your central bank tries to do.

Even Singapore is not immune. The city-state itself has become a fairly high-cost economy and has mainly survived by importing/buying cheaper skilled workers from other countries, in particular China (but also executive help from the West).

Even so, Singapore is in a slump, with an uncomfortably high jobless rate, and a forced fall in salaries, partly explained by a tendency of potential investors to look beyond them to cheaper locations and Singapore's own inability to keep upgrading skills, retraining its work force, fast enough to contiue to compete for investment in the tier of high-cost economies. (It doesn't help that many well educated Singaporeans are Emigrating to more open societies.)

Singapore's challenge is unique to its own size and location, but it reflects the problem of dam-bursting shifts in the global economic power balance that can really shake societies no matter how well their own central banks have prepared the ground.

The lesson of Japan especially is that these shifts can undermine whatever policy-makers do.

Posted by: paul handley on August 20, 2003 10:49 AM

Matt said: "The fact that the trade deficit must be matched by an equivalent (and job creating) investment inflow is simply too abstract...."

Correct. So can you humor the third of us "educated" posters still in denial over the "basic balance of payments identity, however clearly it has been explained by Brad"? That is, can you explain it with more concrete clarity, without just rewording that already said?

Posted by: DLF on August 20, 2003 10:50 AM

Too much comment to address more than a couple of issues:

Jobs moving overseas create effects overseas, especially greater income. Many of the things that the US has an advantage in making are "superior" goods--that is, as world income rises an increasing percentage will be spent on goods of this kind. This is one reason why we have such an interest in making others wealthy through trade.

Further, jobs overseas are tied, very often, to production networks centered on the U.S. (due to the importance of the U.S. marketplace and access to pools of capital, technology and management knowhow). Workers in the U.S. will play a lead role in such networks, perfoming some of the most interesting tasks.

Producing "superior" goods, or staffing the core of global production networks, demands creativity, high technology and high skills. These are good jobs at good wages. The task is to be imaginative in preparing our human assets and physical infrastructure so make the most of these opportunities.

Not all who lose jobs (whether from trade, or technological change or whatever) will be able to get such jobs. Opportunities exist in the non-traded goods sector, although not paying the premia formerly enjoyed by technology workers in the 1990s. But overall welfare in the U.S. will rise, and the opportunity set for the next generation will be greatly enlarged...

Posted by: Roland on August 20, 2003 10:51 AM

I think your comments on the trade balancing mechanisms to job loss to offshore economies are fair, but only to a certain extent. For policy's sake, it would all be fine if the shifts happened gradually based on constant adjustments. In practice, instead you have these dam-bursting events that grow from political events that can't be easily predicted or mitigated and render the retraining and competitive adjustment response ineffective.

Examples include the effect on Japan of the sudden revaluation of the yen in the 1980s. Extremely long overdue, this was finally a political decision which led to a massive shift in trade balances and loss of Japanese manufacturing jobs offshore, mainly to China and Southeast Asia. Initially the effects in Japan were mitigated by new growth in the same region -- increasing consumption volumes of all those goods so Japan-based plants could stay open -- and by the social welfare policies of Japanese corporations. But here we are, almost 20 years later, and Japan is still suffering the effects of the bubble that burst.

A second and concurrent example is China's opening. From the beginning of the 1980s, suddenly you had a massive supply of cheap labor, skilled and unskilled, flood the market. But they were really only available in China. Bang: every country around the world has experienced a shift of jobs to China faster than they can adjust to it. And because the labor supply in China is so huge -- just limited by the infrastructure access to it, which constantly improves -- the effect is a 30-year assault on jobs in other countries.

A micro-example: at the end of the 1980s Thai shoe manufacturers got upgraded to begin producing mid-range Nikes and such. This was a significant advance up the ladder. But then suddenly political changes in cheaper labor markets like China, Indonesia and Vietnam quickly took this away, before the Thais could get their skills to the point that they could move another step up the ladder, to Air Jordans and all. So the shoe industry which was competitive one year was suddenly under threat of being wiped out the next.

Add to the political event of China's opening the similarly opening economies in Eastern Europe and Russia, Mexico and the rest of Latin America, now increasingly India (which, fortunately for China, has never has the export-manufacturing acumen as East Asian countries), and you end up with a sudden massive economic event that can mean overly rapid displacement for a generation, whatever your central bank tries to do.

Even Singapore is not immune. The city-state itself has become a fairly high-cost economy and has mainly survived by importing/buying cheaper skilled workers from other countries, in particular China (but also executive help from the West).

Even so, Singapore is in a slump, with an uncomfortably high jobless rate, and a forced fall in salaries, partly explained by a tendency of potential investors to look beyond them to cheaper locations and Singapore's own inability to keep upgrading skills, retraining its work force, fast enough to contiue to compete for investment in the tier of high-cost economies. (It doesn't help that many well educated Singaporeans are Emigrating to more open societies.)

Singapore's challenge is unique to its own size and location, but it reflects the problem of dam-bursting shifts in the global economic power balance that can really shake societies no matter how well their own central banks have prepared the ground.

The lesson of Japan especially is that these shifts can undermine whatever policy-makers do.

Posted by: paul handley on August 20, 2003 10:52 AM

MSW: Inefficient but incredibly cheap Indian programmers _is_ comparative advantage. (Japanese factories that produce cars cheaper is _absolute_ advantage.) Comparative advantage means you end up specializing in doing the things that you are best at (compared to the things that you're worst at, which is where "comparative" comes in -- it's _not_ compared to what other countries are worst at). I think the term goes back to Ricardo (dead in 1823), so it's hard to see how it's supposed to invoke Demmingist anything.

Posted by: Walt Pohl on August 20, 2003 10:54 AM

"name a white collar job which can't be done easily by someone overseas with a pc, an internet connection, and a tenth the salary."

This I think is going to become a big problem.

The other big structural problem: think about who should really be the principal US high-end trading partners, to cover all those cheaper outsourced imports, W. Europe and Japan. It's here that the growth slowdown is really hitting, and it's this - in the last analysis - that's stopping the US getting traction.

Posted by: Edward Hugh on August 20, 2003 11:46 AM

Walt - I know what comparitive advantage means and where it comes from. What bothers me about it is that it's a pretty nice way of saying "because you expect to send your kids to college, own a home and a car, and your equivalent in India doesn't, there is less opportunity cost to the US for you to be flipping burgers while the rest of us trade stock in wallmart for that software engineering. Here's your 2 weeks severence. Nice knowing you." "Comparitive advantage" just doesn't capture the feel, ya know.

There are lots of dead economists we can go to for vocabulary. The fact that contempory economists chose Ricardo over Polanyi (or Marx) is hardly an objective choice...

msw

Posted by: msw on August 20, 2003 11:50 AM

"name a white collar job which can't be done easily by someone overseas with a pc, an internet connection, and a tenth the salary."

This I think is going to become a big problem.

The other big structural problem: think about who should really be the principal US high-end trading partners, to cover all those cheaper outsourced imports, W. Europe and Japan. It's here that the growth slowdown is really hitting, and it's this - in the last analysis - that's stopping the US getting traction.

Posted by: Edward Hugh on August 20, 2003 11:51 AM

Another issue, unequal market access. In the 1980's the US had a largly open trade system with Japan. During this same time Japan maintained a large number of protected marktes (rice, butchered beef, plexy glass, etc.) If the US going to run a free trade system it needs to ensure that its trading partners are also. This is not to say that the US is completely open, but the political side of this country tend to look at the short term.

Posted by: james on August 20, 2003 11:51 AM

Theoretically, one programming job going to India is a loss of a $100K job here and a gain of a $20K job there. This is a loss to the world economy of 4/5 of the purchasing power. But it's a gain for us IF the $80K difference is reinvested in our economy. We lose $80K of demand and gain $80K of investment.

That's a big IF. And it isn't what we're seeing - not by a long shot. What we're seeing is rapid concentration of wealth resulting in rapid concentration of political power, resulting in a shift of investment into military. That's what is actually happening.

Posted by: Dave Johnson on August 20, 2003 11:58 AM

Try this thought experiment: Germany sends every American a free BMW.

Does this make America better off?

What does it do to the American auto industry, especially the American auto workers?

Posted by: richard on August 20, 2003 12:02 PM

What I note in the applications software industry, where a few companies like Peoplesoft and SAP require large staffs to implement their products at a client company, 'outsourcing' is already the norm. That is to say when I buy the latest Peoplesoft product, I don't staff my installation with my own IT staff or Peoplsoft's, but with a third-party consulting business (who might be working with one of the big five who made the Demmingesque productivity recommendations to buy Peoplesoft in the first place). So the business practice of not hiring permanent IT staff that would understand Peoplesoft technology is already common practice. What accellerates domestic outsourcing to offshore outsourcing is the lack of domestic innovation at the level of the Peoplesoft-sized software development.

The first issue is that IT spending overall is down and Silicon Valley is emptying out. Which means there are no new Peoplesofts on the horizon, nor small startups that are forcing the old Peoplesofts to innovate.

After the ERP revolution, the CRM revolution was supposed to take place. It has not. So a lot of technology is stagnating. This stagnation commodifies software programmers' salaries. Experience counts for less when you have highly capable PhDs on the cheap fighting over the same lame technologies because the industry isn't expanding at its previous rate. We'll all be making 65k programming .NET at this rate.

This is advantageous to the corporate decision-makers because 'standards' will arise from commodity software, more offshore and IT services can be gotten on the cheap. This is disasterous for the highly skilled programmer in the contract labor market, and for small domestic specialty consulting firms.

The only thing that can save this is a revolution in IT shops themselves that corporate management can direct. It will put IT shops with full-time employees in more direct competition with the outsourcing third parties. My bet is that anti-asian sentiment and the migration of better project managers to full-time employment in corporate IT from the outsourcing firms will turn the tide. But that means they must adopt the standards and practices as line managers that the outsourcing firms use.

Again, visas will be the easy political target. Don't discount reactionary politics from domestic tech workers.

Posted by: Cobb on August 20, 2003 12:22 PM

So how can we help make the poor people outside the US richer without impoverishing ourselves?

If the system doesn't really depend on a pool of the immiserated - I'm not convinced one way or the other, but I prefer to act as if it doesn't - the faster we make the worse-off better off, the faster we'll be competing on fair grounds without enormous shocks.

Geekcorps is a start. Heck, so is retraining as civil engineers and getting commercial jobs outside the US. Unfortunately, we don't produce a lot of engineers or civil engineers and we have a monolinguism problem. Individually I'm sympathetic; as a nation sometimes I think "Dance, grasshoppers...".

The sympathy and irritation are twice as strong for IT pros, because I used to be one, and I remember how unsympathetic the zeitgeist was to all the people in US jobs we automated out of existence. "Ayn Rand has turned Her face from them because they did not learn Perl!"

Posted by: clew on August 20, 2003 01:19 PM

I see a few posts complaining about the abuses of H1B visa system. I had a few questions about that. Before I ask my questions, let me take a few things for granted
(a) There is abuse of H1B system
(b) The citizens of a country have every right to dictate who comes into their country from outside and on what terms
(c) The citizens of a country have every right to dictate what products & services come into their country from outside and on what terms

Now, we have been trying to preach free trade to the rest of the world. In effect, we have been advising the world (in most cases correctly I think), not to enforce (c). In fact, global organizations have been set up to ensure that (c) is replaced by a uniform global set of rules.

My question is if it is important that (c) be enforced, why not (b). How would permitting any qualified person from anywhere in the world to perform some work in this country as long as he abided by all reasonable laws in this country a bad thing. What I mean, as long as someone has a contractor's license which judges competence to do a job, I should be able to get a roofer from Zaire to do the job.

I understand that people moving to this country has other implications in this security conscious world. But what is the economic argument? I have not seen this addressed anywhere. Which means it is either a really stupid or a really good question.

Posted by: Dinesh Gaitonde on August 20, 2003 01:24 PM

I see a few posts complaining about the abuses of H1B visa system. I had a few questions about that. Before I ask my questions, let me take a few things for granted
(a) There is abuse of H1B system
(b) The citizens of a country have every right to dictate who comes into their country from outside and on what terms
(c) The citizens of a country have every right to dictate what products & services come into their country from outside and on what terms

Now, we have been trying to preach free trade to the rest of the world. In effect, we have been advising the world (in most cases correctly I think), not to enforce (c). In fact, global organizations have been set up to ensure that (c) is replaced by a uniform global set of rules.

My question is if it is important that (c) be enforced, why not (b). How would permitting any qualified person from anywhere in the world to perform some work in this country as long as he abided by all reasonable laws in this country a bad thing. What I mean, as long as someone has a contractor's license which judges competence to do a job, I should be able to get a roofer from Zaire to do the job.

I understand that people moving to this country has other implications in this security conscious world. But what is the economic argument? I have not seen this addressed anywhere. Which means it is either a really stupid or a really good question.

Posted by: Dinesh Gaitonde on August 20, 2003 01:26 PM

Wow. Brad, you could probably use this thread as a basis for a "things the public doesn't know about trade" symposium or something.

Posted by: Jason McCullough on August 20, 2003 01:34 PM

"The dollars aren't coming back. India, Taiwan and China are sitting on huge foreign reserves. The money which could be used to buy American products and services - thereby increasing employment to make up for at least some of the job losses - is sitting outside of the USA doing nothing."

The money that is "sitting outside of the USA doing nothing" in the reserves of foreign central banks is actually invested in US government bonds. The money is in the hands of the Treasury and is "used to buy American products and services" when the Federal government spends it, or when a recipient of a federal transfer payment or tax cut spends it, or when a domestic holder of Treasury bonds sells his bonds to the foreign central bank and invests the proceeds in a US business.

And if the money was really sitting there outside the country "doing nothing", that would be even better - those dumb foreigners are lending money to the US at zero interest! As long as the money stays locked up "doing nothing", the Federal Reserve can just print the money all over again and it can be used to "buy American products and services".

Posted by: Daniel Lam on August 20, 2003 01:37 PM

Brad, I do not feel you addressed comparitive advantage adequately in this post. Specifically, if the nations involved do not have a similar regulation of externalities, wouldn't the comparitive advantage be skewed?

I can imagine instances where a country might have an advantage over another in a given industry only if they allow child labor or only if they allow dumping of waste directly into a river.

Isn't the STRUCTURE of free trade agreements critical to an optimal outcome?

Posted by: Adam on August 20, 2003 01:47 PM

I believe Ricardo stated that his theory of competitive advantage applied only when the factors of production were immobile.

That does not apply today to most jobs, where capital, technology, techniques are all highly portable -- physical transportation is cheap -- and information movement instantaneous and almost free.

Also this discussion is too focused on IT. Economists, analysts, accountants, engineers -- all information processors whose jobs can now be done in emerging nations with high-quality infrastructure and education. I see announcements of this daily.

Worse, international exams show that our highly-funded but low quality primary education system ill-qualifies the US to maintain competitiveness vs. our new competitors.

Nor is competitivenss enhanced by our extensive and complex web of State regulations, or our almost senseless cancer-like litigation system.

Logic, theory and history all give no comfort for our situation. Difficult decisions and hard work appear in our future -- and perhaps some tough years.

Posted by: Larry Kummer on August 20, 2003 02:04 PM

OK, my boss (CFO of Fortune 100) told me to outsource at least 30% of my department to India. So 30 people getting paid $60,000 per person per year ($1.8 million) are now unemployed and I'm now paying 50 people in India $5,000 per person per year ($250,000). You assume that our profit goes up $1.55 million and somehow the $250,000 also comes back to the US. No, it is a bit more complicated. First, it just reduces our current losses. Mathematically, it is the same, practically, it is not. Second, trade balances balance -- in the long term. There are all sorts of trade imbalances in the short term.

Posted by: wol on August 20, 2003 02:04 PM

DLF, balance of payments is an accounting function. One side of the ledger equals the other side.

In the U.S. case, it is equal because many Asian countries are supporting a continual deficit in goods and services trade by purchasing U.S. bonds and other financial instruments. Effectively they are giving us free money to buy their goods. We print paper money and in exchange they give us their version of BMWs. The impacts of this process aren't felt evenly over the whole economy making the political pitch "its your money" an even bigger farce.

The basic reason to trade generally rests on a very abstract concept known as comparative advantage. Who has a comparative advantage in what depends not on absolute costs (who makes it cheaper) but on opportunity costs (what it costs to produce one more of one item versus another).

Some of the comments on this thread are extremely confused.

Posted by: Stan on August 20, 2003 02:36 PM

DLF, balance of payments is an accounting function. One side of the ledger equals the other side.

In the U.S. case, it is equal because many Asian countries are supporting a continual deficit in goods and services trade by purchasing U.S. bonds and other financial instruments. Effectively they are giving us free money to buy their goods. We print paper money and in exchange they give us their version of BMWs. The impacts of this process aren't felt evenly over the whole economy making the political pitch "its your money" an even bigger farce.

The basic reason to trade generally rests on a very abstract concept known as comparative advantage. Who has a comparative advantage in what depends not on absolute costs (who makes it cheaper) but on opportunity costs (what it costs to produce one more of one item versus another).

Some of the comments on this thread are extremely confused.

Posted by: Stan on August 20, 2003 02:37 PM

I believe Ricardo stated that his theory of competitive advantage applied only when the factors of production were immobile.

That does not apply today to most jobs, where capital, technology, techniques are all highly portable -- physical transportation is cheap -- and information movement instantaneous and almost free.

Also this discussion is too focused on IT. Economists, analysts, accountants, engineers -- all information processors whose jobs can now be done in emerging nations with high-quality infrastructure and education. I see announcements of this daily.

Worse, international exams show that our highly-funded but low quality primary education system ill-qualifies the US to maintain competitiveness vs. our new competitors.

Nor is competitivenss enhanced by our extensive and complex web of State regulations, or our almost senseless cancer-like litigation system.

Logic, theory and history all give no comfort for our situation. Difficult decisions and hard work appear in our future -- and perhaps some tough years.

Posted by: Larry Kummer on August 20, 2003 02:44 PM

I believe Ricardo stated that his theory of competitive advantage applied only when the factors of production were immobile.

That does not apply today to most jobs, where capital, technology, techniques are all highly portable -- physical transportation is cheap -- and information movement instantaneous and almost free.

Also this discussion is too focused on IT. Economists, analysts, accountants, engineers -- all information processors whose jobs can now be done in emerging nations with high-quality infrastructure and education. I see announcements of this daily.

Worse, international exams show that our highly-funded but low quality primary education system ill-qualifies the US to maintain competitiveness vs. our new competitors.

Nor is competitivenss enhanced by our extensive and complex web of State regulations, or our almost senseless cancer-like litigation system.

Logic, theory and history all give no comfort for our situation. Difficult decisions and hard work appear in our future -- and perhaps some tough years.

Posted by: Larry Kummer on August 20, 2003 02:45 PM

Is not the dollar used in some countries as an alternative to the official local currency?

DSW

Posted by: Antoni Jaume on August 20, 2003 02:53 PM

I believe Ricardo stated that his theory of competitive advantage applied only when the factors of production were immobile.

That does not apply today to most jobs, where capital, technology, techniques are all highly portable -- physical transportation is cheap -- and information movement instantaneous and almost free.

Also this discussion is too focused on IT. Economists, analysts, accountants, engineers -- all information processors whose jobs can now be done in emerging nations with high-quality infrastructure and education. I see announcements of this daily.

Worse, international exams show that our highly-funded but low quality primary education system ill-qualifies the US to maintain competitiveness vs. our new competitors.

Nor is competitivenss enhanced by our extensive and complex web of State regulations, or our almost senseless cancer-like litigation system.

Logic, theory and history all give no comfort for our situation. Difficult decisions and hard work appear in our future -- and perhaps some tough years.

Posted by: Larry Kummer on August 20, 2003 03:19 PM

Antoni...actually, a few countries (El Salvador and Ecuador amomg them) use the US dollar as the only official currency. Many more countries use dollars on the black market, in the foriegn reserves holdings or peg their own currency to the dollar.

I hope Brad responds to this thread, because I'm sure any Economist reading is shaking his head back and forth. Yes, wages go down in some sectors because of competitive laborers in that sector (though the same would happen in IT if, for instance, more Americans studied CS in college). The jobs don't disappear, but the going rate for the job decreases below the point at which most US workers would take the job. The benefits are huge, though - first, Ricardo, who is being seriously misunderstood in the comments, tells us that the growing Indian CA in certain white-collar work combined with the movement of US workers into jobs that US workers have a CA in will increase the total amount of goods produced in both countries without costing either country a dime. It is, indeed, the last free lunch of economics. Second, having a larger base of workers in an industry (that is, a global base and not a national base) decreases wages -> decreases prices that consumers pay on products from that industry. So Joe IT (or Joe Professor, for that matter) will see a wage cut, but every consumer of IT/Education will see lower prices. Third, IT workers (and other white-collar workers) will always be paid more that unskilled workers (no one would bother to get the education if they could make just as much without the education), but the IT workers can't expect to be making 100g's a year to do relatively uncomplicated programming and network work. Even without trade to Indians, salaries in that sector would be dropping because of a domestic increase in workers going into CS. Finally, for the liberals, by protecting these jobs, development is retarded in poor nations around the world, and US consumers lose the innovative benefits that could be brought by Chinese/Indian/Russian/whatever workers. Trade is almost always more effective that aid. Add to this balance of payments equivalence (as noted, we either are making goods to sell to India in exchange or Indians are basically giving us work for free, which isn't really a plausible theory), and trade is the best deal out there, even when it's trade in labor.

As for the question of why we don't hire roofers from Zaire (or DR Congo as the new naming goes), we functionally do this with immigration, although there are a lot of barriers in this market. It's similar to the argument that cities with better tax laws and more efficient use of taxpayer money will see citizens "buy" the town by moving there (I can't remember who suggested this off the top of my head).

Trade is a tough sell sometimes because it's easier to see the loss of a 50,000 dollar US job to India than 100,000 US consumers saving a buck each on the product that worker used to produce.

Posted by: cure on August 20, 2003 03:27 PM

I believe Ricardo stated that his theory of competitive advantage applied only when the factors of production were immobile.

That does not apply today to most jobs, where capital, technology, techniques are all highly portable -- physical transportation is cheap -- and information movement instantaneous and almost free.

Also this discussion is too focused on IT. Economists, analysts, accountants, engineers -- all information processors whose jobs can now be done in emerging nations with high-quality infrastructure and education. I see announcements of this daily.

Worse, international exams show that our highly-funded but low quality primary education system ill-qualifies the US to maintain competitiveness vs. our new competitors.

Nor is competitivenss enhanced by our extensive and complex web of State regulations, or our almost senseless cancer-like litigation system.

Logic, theory and history all give no comfort for our situation. Difficult decisions and hard work appear in our future -- and perhaps some tough years.

Posted by: Larry Kummer on August 20, 2003 04:07 PM

"Trade is a tough sell sometimes because it's easier to see the loss of a 50,000 dollar US job to India than 100,000 US consumers saving a buck each on the product that worker used to produce."

It may be hard to see that because the actual story is a loss of a 100,000 dollar us job to india in return for 50,000 consumers saving a buck each. That exporting jobs to the third world has a depressing effect on prices is a point that no one is arguing. That exporting jobs to the third word has a depressing effect on wages is something that no one who is being honest is arguing. The relationship between those two effects is the rub - if the first effect is more than the second, that is arguably a good thing (of course, like all simple economic arguments, this ignores a lot - for example, for this to be a net win for the US the costs of unemployment compensation, retraining, etc has to be recovered in the cheaper software prices. The social cost is something economists can't be bothered with).

This is not an a priori argument. Distasteful as most economists will find this, some empirical evidence is needed to decide the issue. For a first run, consider:

1. Wages in absolute terms can be measured.
2. The depressing effect on prices will be reflected in inflation.
3. Adjusted for inflation, us wages haven't budged in 30 years. Despite higher productivity.
4. The last 30 years is when this outsourcing of jobs from the US really started.

Sure, a lot has been going on in the last 30 years. So maybe it isn't foreign competition that is responsible for the stagnation of american wages. But what is a more plausible answer?

And yes, this is good for the third world. But as a form of foreign aid, it has the lovely effect of only being paid by people who work for a living. As usual, the top 1% - who earn their money by already having it - get the benefits of lower prices without all the unpleasantness of having to lose your home every now and then...

msw

Posted by: msw on August 20, 2003 04:08 PM

Our host enscribed:
"The current account plus the capital account must balance: if the work that used to be done here by 3.3 million people is to be done there, that means that our export industries here must employ an extra 3.3 million people as well."

But I feel compelled to point out that, while correct in the aggregate, this can be cold comfort to individuals. If one is an unemployed programmer in his fifties (as, oddly enough, I am) I will probably not get one of those 3.3 million new jobs. And if I do, it will certainly involve a big pay cut, since I no longer bring as much comparative advantage to the job. In other words, people are not fungible.
Does this mean that society should make some special arrangement for me? Efficiency says no, Pareto optimality says yes. Of course, the decision will be made by politics. I'm not holding my breath.

Posted by: Jonathan Goldberg on August 20, 2003 04:18 PM

Hello!

I think there are a few points that are being overlooked.

For one, why are we limiting this argument only to jobs that are lost to outsourcing? Technological change has been just as destructive to wages as change caused from plants moving to countries with cheaper labour.

Second, although I think that it has been made clear that in a an economy like the United States more trade is preferrable in the long run to less, I think the issue of the distribution of the gains from trade (and growth) has been ignored.

Evidence of this is not that hard to find. If you compare the data from 1977 to 1999, you will see that even though the general growth trend is upward, the distribution of this growth is not. 4/5 of US households saw their average relative income decline from what it was 1977, and 3/5 of US households actually saw their average absolute incomes decline from what it was in 1977.

The major gains went to the top fifth, and especially the top 1% of the one-fifth.

So I think there is a serious flaw when one contends that the loss in wages caused by imports from cheap labour countries will be offset by purchases of financial securities by cheap labour countries. When one takes into account that nearly 40% of all financial securities are currently in the hands of the top 1% of the US population, and that the vast majority of those securities are held by the top 10% of the population, it hardly seems to balance out at all.

Even more dubious is the characterization of US workers who try to protect their wages from being outsourced as greedy people who don't want to see workers in China or India see their wage levels rise. Why is it that the people on the lower end of job ladder have to bear the pain for an increased standard of living in China and India? Why isn't some of that pain passed onto the US elite who see a huge increase in their income because of increased profits and capital gains?

There have been many serious suggestions as to how to solve these problems. They range from (market oriented) solutions like an increase in the earned income tax credit, negative income taxes, as well as job training. I would also like to include universal healthcare and better access to primary and secondary education as a way to redress the pain caused by economic dislocation.

Posted by: Konrad Z on August 20, 2003 04:43 PM

Excellent and interesting post. After reading your post and Arnold Kling's, it seems that liberal Democratic economists and libertarian Republican economists aren't all that different after all. Weird...I do have one question, though. Do you (Brad DeLong) consider public choice type failures when you make your recommendations for government action? That's one of the key reasons I could never be a liberal (modern sense). Just curious.

Posted by: Scot Johnson on August 20, 2003 07:30 PM

A question for msw:

"What bothers me about it is that it's a pretty nice way of saying "because you expect to send your kids to college, own a home and a car, and your equivalent in India doesn't"

My question has nothing to do with the debate itself but I am curious as to why you would assume that the IT professionals in India don't aspire to own houses, cars and don't wish to educate their kids? I really don't understand the logic, if any, behind this assumption.

Posted by: Ritu on August 20, 2003 09:22 PM

The claims that folks can retrain for other jobs can be shown to be bogus by getting laid off. As a programmer, I am unable to find employment in the industry and am unable to get even a job changing tires or flipping burgers. If I was 14 years younger, I would join the military. After 7 months out of work, I would gladly take minimum wage: I cannot get it. In the last 3 years, I have spent more than 1 year out of work. I have already lost my house and car. I am living with friends. What else is there left to lose?

I sure wish that I had been making 100k as a programmer. I never met one. Every programmer I ever met earned between 40k and 60k. Where were these mythical 100k programming jobs? Did you get a free unicorn with one?

When the manufacturing jobs were shipped overseas, the excuse was that we were switching to an information economy. Now that the information economy jobs are getting shipped overseas, what else is there? A nation of people saying "would you like fries with that?"

Nations become wealthy by replacing imports with exports. When we switch to importing everything, we become a colony. We are squandering the wealth that our parents and grandparents built. The failure of our economy has its roots in the search for next quarter's results. Burning next years seed corn to make the quarterly reports "nice."

Posted by: Peter on August 20, 2003 09:39 PM

Kash wrote: "Ian Welsh said: "But what happens if the world decides to stop buying US securities? Hmmm? Well the US can't afford to buy their goods - and they lose those jobs that are dependent on exporting to the US. The US isn't going to automatically regain them, in such a case, however. Economic activity will take a big hit - it will drop." This is incorrect. What will happen when the world decides to stop buying securities is that the dollar will depreciate. This will make imports more expensive and exports cheaper, and thus push the trade balance back toward zero."

Ok - now what happens when you get a large currency devaluation like that - of the world's most important currency? What are the economic effects.

I honestly don't know.

But I'm betting they are bad.

Very bad.

Posted by: Ian Welsh on August 20, 2003 11:19 PM

The gentleman who was inquiring about Flint Michigan - and what could be done, might find Jane Jacobs a worthwhile read.

"The Economy of Cities" would be a good start - but any of her books on urban planning or economics are worthwhile reads and germane to the subject.

Jacobs also has a lot to say about trade and its' functions - some of which supports the general economic view that Brad and the other economists here are at pains to point out most of us don't understand - and some of which suggests that it isn't entirely correct.

Worth reading, whether you agree with her in the end or not.

Posted by: Ian Welsh on August 20, 2003 11:27 PM

Peter, do you live somewhere where the pay scales are low? For a major city on a coast, that salary range you gave seems really way off. People with a 4 year degree for quite some time had been walking out of colleges and making more than the bottom end of your range in various IT fields. I know many people doing even less technical work in IT who exceeded the top end of your range after a few years experience.

As to your job situation, unfortunately during a weak job market there are those who cannot find work. But that is a cyclical occurrence, and business cycles occur even if we don't trade with other nations.

"When we switch to importing everything, we become a colony"

That's backwards. The reason to have a colony is so you can import cheaply from it.

Posted by: snsterling on August 21, 2003 01:17 AM

A relevant article in Time about the development of consumerism in India. Evidence that India will serve as a source of demand as opposed to slave labor. It points out how quickly incomes are rising for them, which lessens the benefit of sending jobs there. Interestingly, this article lists fast food jobs as some of the better jobs in India along with the call center jobs.

http://www.time.com/time/globalbusiness/article/0,9171,1101030825-476405,00.html?cnn=yes

"Typical of the new trend is Samit Kapoor, 28, an assistant manager at Exl Service, a call center near New Delhi. Last year Kapoor took a mortgage to buy a two-bedroom apartment, and this year he purchased a car, a Hyundai Santro, for about $7,000. Four times a month, Kapoor visits New Delhi's top restaurants, among them Italian bistro Flavors or Indian-food specialist Bukhara, dropping as much as $40 a meal. In the process, he ran up about $4,200 in credit-card debt, spread over three cards. Since getting married six months ago, he has been persuaded by his wife to scale back and pay the debt down, but he was never too worried about it. "I see more opportunities to make money in the future," he says. Though not as extravagant as Kapoor, Pawanjit Singh, 25, a manager of a busy McDonald's restaurant in one of New Delhi's main markets, splurged on secondhand golf clubs, which set him back more than $400. He heads out to a golf course (golf is a prestigious hobby in Asia) or a driving range every weekend. "I don't think people my age right now want to save," he says."

Posted by: snsterling on August 21, 2003 06:14 AM

Re snsterling's comment "As to your job situation, unfortunately during a weak job market there are those who cannot find work. But that is a cyclical occurrence, and business cycles occur even if we don't trade with other nations."

Bureau of Labor Statistics show that the number of unemployed has increased by 3 million since Bush's inaugeration --from 6 million to 9 million. The unemployment situation is the worse it's been in decades. That is not a freak of nature --it's Republican policy.

The Republican Congresses increased H1-B visas in 1998 and 2000 , allowing 1.2 million foreign workers to be bought into the US for stays of 6 years. The Republicans betrayed US citizens for the sake of campaign donations from Silicon Valley executives wanting to drive wages down.

Why is it that free traders feel that America's plutocrats owe nothing to the workers who fight this country's wars and whose hard work, creativity, and sweat produce this country's wealth?

Is it because those plutocrats are the source of consulting contracts, grants, and university chairs? Is it because economists' idea of intellectual integrity is best summed up by the motto "He whose bread I eat his song I sing"?

Posted by: Don Williams on August 21, 2003 07:14 AM

Ritu -

"A question for msw:

My question has nothing to do with the debate itself but I am curious as to why you would assume that the IT professionals in India don't aspire to own houses, cars and don't wish to educate their kids? I really don't understand the logic, if any, behind this assumption."

What I said was that american programmers "expect" these things. As I understand it, Indian programmers make about 1/6th what american programmers do and even with relative costs being lower, that still implies a lower standard of living. Of course, I'm sure that indian programmers aspire to better things, as we all do. Unfortunately, Indian programmers are subject to the same logic that American programmers are - ask for too much and IBM will just hire philipinos instead. Modern communication technologies have massivly expanded the supply of "symbolic analysts". The demand for them is unchanged. We'll need to adjust our aspirations accordingly...

msw


Posted by: msw on August 21, 2003 07:28 AM

Don, although I agree with you that the redistributional effects of immigration should not be denied, I disagree strongly with your conclusion. When the available labor is low enough to cause massive wage inflation we know that labor is restricting the availability of products and services from a specific sector to the economy in general. I fully expect Congress undertake its duty to look after the general welfare of the many over those few enjoying wage inflation. In this instance, allowing H1-B visas increased the overall welfare of the U.S. by increasing its ability to produce high tech products for the rest of the economy.

Posted by: Stan on August 21, 2003 08:24 AM

"So Joe IT (or Joe Professor, for that matter) will see a wage cut, but every consumer of IT/Education will see lower prices"

That seems to me, a non-economist, to have a pretty big assumption. Namely, thats as wages fall, prices fall enough to make up for the fall in wages. In other words, for these things to help our economy, it seems to me that prices would have to fall enough to offset the decline in wages to do antyhing than lower the standard fo living. If its true that absolute wages have shrunk a bit over the last thirty years, it means that assumption has not been born out.

Another thing. If weages fall, how can we not lose the middle class? Even if some goods decrease in price, the largest single purchase and the largest source of wealth for most middle class people wont - their house. Mortgage payments do not fall with wages, after all. Even if houses decline in value, people who have had forclosures have an enormous difficulty in buying a new house. I do not mean to suggest that we are at that level, but it does seems reasonable to think that at some point, falling wages are detrimental to the economy?

Further, a lot of the things we take for granted in the middle class - forty hour work weeks, weekends, benefits - came from organized labor. The strongest weapon agaisnt organized labor is removing the job. How can we expect to keep these benefits if labor organization is next to impossible becasue jobs can simply be removed out of country?

Further, even assuming the job ration works as Brad says it does, why do we have to assume that the wages paid for the new jobs in the US would be comprable to those that were lost?

Combined with the fact that the turnover is happening in less than a generation, (as someone said, how do people train for five years just to get a ten year career?), and I do not see how this leads to anything but a decimation of the middle class.

Now, I am not an economist, and I would appreciate pointers to non bullshit books about the theories, from both sides of the question. But right now, there is nothing in the economics as I see it here that precludes a devestations of the middle class.

Posted by: kevin on August 21, 2003 10:16 AM

To get some perspective, read the article linked below:
http://www.washtimes.com/op-ed/20030817-105449-5018r.htm

Posted by: t-squared on August 21, 2003 11:44 AM

To get some perspective, read the article linked below:
http://www.washtimes.com/op-ed/20030817-105449-5018r.htm

Posted by: t-squared on August 21, 2003 11:44 AM

http://online.wsj.com/article/0,,SB106141948614575300,00.html

David Wessel is right about concentrating on demand stimulus, but doesn't do a very convincing job of refuting the naysayers of productivity I don't think; if you have farm industry service and symbolically analyzed white-collar IT work is now being outsourced overseas, people in general are still going to wonder what it is they're supposed to do; teach other people to be like us, schedule their retirement and plan for obsolescence?

Not that that's not the way to go, but hoping for something (defensible) to turn up to retrain for the "next thing" can't be very comforting; it's basically saying, "you're being made redundant, find something more productive to do," which amounts to "it'll all be better in the end. except for you!" Like there's no gentle way to deliver a kick in the pants; "permanent underclass" comes to mind; also "high gini coefficient," "concentration of power" and "calcification of cohorts"; at least we live in a democracy..:D

Posted by: Bradley S. Felton on August 21, 2003 11:52 AM

Ah ops! That's "farm --> industry --> service --> ..?" :D

Posted by: Bradley S. Felton on August 21, 2003 12:00 PM

Most of this discussion is over my head and I'm not qualified to judge the accuracy or lack thereof of most of what is being said here. However, ms wrote: "Microsoft isn't outsourcing senior positions, and won't be anytime soon."

This one I'm qualified to judge. The statement is not correct. Microsoft is, in fact, outsourcing entire development projects and teams, although still on a small scale overall, which means that it is outsourcing senior positions.

Posted by: PaulB on August 21, 2003 12:00 PM

Ah ops! That's "farm --> industry --> service --> ..?" :D

Posted by: Bradley S. Felton on August 21, 2003 12:14 PM

Ah ops! That's "farm --> industry --> service --> ..?" :D

Posted by: Bradley S. Felton on August 21, 2003 12:24 PM

Ah ops! That's "farm --> industry --> service --> ..?" :D

Posted by: Bradley S. Felton on August 21, 2003 12:28 PM

Ah ops! That's "farm --> industry --> service --> ..?" :D

Posted by: Bradley S. Felton on August 21, 2003 12:28 PM

Ah ops! That's "farm --> industry --> service --> ..?" :D

Posted by: Bradley S. Felton on August 21, 2003 12:30 PM

Ah ops! That's "farm --> industry --> service --> ..?" :D

Posted by: Bradley S. Felton on August 21, 2003 12:33 PM

Ah ops! That's "farm --> industry --> service --> ..?" :D

Posted by: Bradley S. Felton on August 21, 2003 12:39 PM

What I'm seeing from this discussion is that outsourcing/trade isn't the problem. The problem is that while the benefits are increasing they are being enjoyed by fewer and fewer people. CEOs are making millions, the top 1% and making hundreds of millions, and the rest of us are working longer hours, taking on the work of the laid-off, losing our health insurance and pensions, taking equity out of our houses and paying higher local taxes to make up for the tax cuts going to the top.

The poor workers in other countries are a handy target. The real problem is that our own economic system is no longer benefitting the average American.

Posted by: Dave Johnson on August 21, 2003 01:00 PM

Uh oh! I think I did a very bad thing :D

Posted by: Bradley S. Felton on August 21, 2003 01:11 PM

Marx was right.

Capitalism is not painless.

Marx was also right.

Capitalism will continue until profits stop.

==============================================

The masses will not give up on capitalism until their advance stops. Even an advance of 1% a year compared to a bosses 5% a year is enough to keep the masses happy.

==============================================

Given all that then the best thing to do is to not worry about saving jobs but advancing the rate of technology change.

We did not put enough into biotech to make the transition from computers seamless.

===============================================

The other thing to keep in mind is that if government spending was curtailed to only cover the Constitutional functions of government we could have an economy growing at 10% a year. Says Milton Friedman.

The biggest drag on US jobs is not India it is the US government.

Funny I didn't see that mentioned in the comments. But maybe I missed it.

==========================

"Concentration of wealth is a natural result of concentration of ability, and recurs in history. The rate of concentration varies (other factors being equal) with the economic freedom permitted by morals and the law democracy, allowing the most liberty, accelerates it.

Will and Ariel Durant

Posted by: M. Simon on August 21, 2003 05:00 PM

Had we had a 10% growth rate since 1950 instead of 3% we would be more than 25 times richer.

If those at the bottom only gained 10% of that increase they would be 2.5 times richer.

Would you be willing to let the rich get 25 times richer so the poor could have 2.5 times as much?

It would be fine with me.

The question is could the left live with it? Lieberman gets it(mostly). I expect the rest of the left will catch on eventually.

The center is pro war. Pro capitalism and pro civil liberties. Bush is 2 out of 3. Joe is 3 out of 3. Which is why he doesn't stand a chance in the current Democratic Party.

More is the pity.

Posted by: M. Simon on August 21, 2003 05:14 PM

M. Simon wrote: "The center is pro war. Pro capitalism and pro civil liberties. Bush is 2 out of 3. Joe is 3 out of 3. Which is why he doesn't stand a chance in the current Democratic Party."

Yes, imagine that the Democratic party doesn't believe in pre-emptive ware on false pretenses - don't believe that capitalism requires the majority of all economic gains to go to the rich to be succesful (as it was from 45 to 70, for example) and indeed believes in civil liberties.

And George Bush and 'Pubs will be pro-capitalist as soon as they stop huge giveaways to corporations and the rich. Welfare is welfare, wherever it goes.

If Americans are stupid enough to vote for someone like Bush Jr again they deserve what they get.

Posted by: Ian Welsh on August 21, 2003 06:05 PM

Regarding a comment made above, There was not a shortage of programmers in 1998-2000 when the Republicans raised the H1-B limits.

During the 1990s, millions of military personnel and defense workers, through no fault of their own, were laid off after the fall of the Soviet Union and the deep cuts in the defense budget. 40% of the Army was cut --and 25% of the Intelligence Community's personnel.

One of those affected was Bronze Star winner and Gulf War combat veteran Timothy McVeigh. Another was DC sniper John Mohammad.

The software industry was one of the few growing industries that offered a transition opportunity to the laid off defense workers --people who had unselfishly devoted themselves to the defense of this country from a nuclear-armed adversary. Their thanks from Defense Secretary Cheney, Bush 1, Clinton and the Republican Congresses of 1994-2000 for winning the Cold War was to be stabbed in the back by having to compete with cheap foreign workers during a difficult career transition. Companies who in the past had given new workers time to learn on the job now demanded perfect credentials and years of directly related work experience. People who had served their country and who wanted to make the necessary transition to a peacetime career were shutout. Did any economists raise a cry and advocate a fix for this? Yet there was big support from the economists for the bailout of wealthy investors who got overextended in Asia and Russia.

Anyone ever wonder why economists' most basic concepts are myths? Their statistical supply-demand curve assumes millions of suppliers/consumers in a free market--whereas the truth is that roughly 8% of the households own over 53% of the national wealth, that most major industries are controlled by two major corporations, that major investors don't risk $billions until they're sure that the US government's regulatory and legal policy is hardwired by bought politicians, and that the hundreds of billions spent by the federal government every year is subject to a deeply political process in which the idea of "the national interest" or taxpayer benefit is ludicrous.

Anyone notice how economists are reluctant in policy discussions to name names?? --to identify the major players involved, their agendas, who will win and lose with policy decisions, and the specific ties between political leaders and business interests. Anyone notice how economists are indifferent to the suffering of millions of workers but leap to rationalize billion-dollar bailouts for the wealthy whenever the investments of the wealthy develop problems?

Posted by: Don Williams on August 21, 2003 08:45 PM

"We hold these truths to be self-evident:

That all men are created equal; that they are endowed by their Creator with certain unalienable rights; that among these are life, liberty, and the pursuit of happiness; that, to secure these rights, governments are instituted among men, deriving their just powers from the consent of the governed; that whenever any form of government becomes destructive of these ends, it is the right of the people to alter or to abolish it, and to institute new government, laying its foundation on such principles, and organizing its powers in such form, as to them shall seem most likely to effect their safety and happiness. Prudence, indeed, will dictate that governments long established should not be changed for light and transient causes; and accordingly all experience hath shown that mankind are more disposed to suffer, while evils are sufferable than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same object, evinces a design to reduce them under absolute despotism, it is their right, it is their duty, to throw off such government, and to provide new guards for their future security."

Posted by: Don Williams on August 22, 2003 10:58 AM

As an Engineer I have taken pride in the work that I have done and in the creation of many very successful products. I recall while in college that those who could not cut it in engineering typically transferred to the college of business. Those who could not cut it in business typically transferred to the college of education, not engineering. It is ironic that business students are the ones saying that engineers are overpaid and that our jobs should be sent overseas to improve the bottom line of companies. Have any of these MBAs really done their homework? Do they know the cost of transferring a complex product to engineers that are not yet experienced in the technology? Have they factored in the cost of dealing with shipping delays, language barriers, learning curves, time zones, etc? Have they considered what types of jobs will be available to the many displaced engineers? Do they really believe that the elimination of such specialized jobs will not have a negative impact on the U.S. economy?

I have heard it stated that there will be jobs available to displaced engineers such as in automobile sales. This is extremely hard to swallow from engineering dropouts.

Posted by: Bill on September 29, 2003 07:01 PM

As an Engineer I have taken pride in the work that I have done and in the creation of many very successful products. I recall while in college that those who could not cut it in engineering typically transferred to the college of business. Those who could not cut it in business typically transferred to the college of education, not engineering. It is ironic that business students are the ones saying that engineers are overpaid and that our jobs should be sent overseas to improve the bottom line of companies. Have any of these MBAs really done their homework? Do they know the cost of transferring a complex product to engineers that are not yet experienced in the technology? Have they factored in the cost of dealing with shipping delays, language barriers, learning curves, time zones, etc? Have they considered what types of jobs will be available to the many displaced engineers? Do they really believe that the elimination of such specialized jobs will not have a negative impact on the U.S. economy?

I have heard it stated that there will be jobs available to displaced engineers such as in automobile sales. This is extremely hard to swallow from engineering dropouts.

Posted by: Bill on September 29, 2003 07:02 PM

As an Engineer I have taken pride in the work that I have done and in the creation of many very successful products. I recall while in college that those who could not cut it in engineering typically transferred to the college of business. Those who could not cut it in business typically transferred to the college of education, not engineering. It is ironic that business students are the ones saying that engineers are overpaid and that our jobs should be sent overseas to improve the bottom line of companies. Have any of these MBAs really done their homework? Do they know the cost of transferring a complex product to engineers that are not yet experienced in the technology? Have they factored in the cost of dealing with shipping delays, language barriers, learning curves, time zones, etc? Have they considered what types of jobs will be available to the many displaced engineers? Do they really believe that the elimination of such specialized jobs will not have a negative impact on the U.S. economy?

I have heard it stated that there will be jobs available to displaced engineers such as in automobile sales. This is extremely hard to swallow from engineering dropouts.

Posted by: Bill on September 29, 2003 07:06 PM
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