Brad DeLong's Semi-Daily Journal (2004)

Im not a subscriber to Macro Advisors, so I cannot say with authority, but I recall that Macro Advisors had a fairly strong forecast at mid-year last year. That has proven correct so far. I don't remember whether they were looking for a strong showing in prior quarters, when things didn't go so well, but in general, these guys have a very good reputation.

The Fed quotes Berry chose are on the dovish side. My impression is that Fed officials are trying to make a case for hiking rates, just not right away. That is missing from Berry's piece. I would think that the Macro Advisors' prediction would depend to some extent on how long the expectation of steady rates extends.

I wonder if that analysis considers recent rising fuel prices? As for mfg, steel prices are now higher than ever and higher input costs will continue to price US mfg out of the game.

The Fed has been nothing but clear. The interest rates will rise EVENTUALLY but only after employment shows significant recovery. Thus I think Berry hits it spot on, "whenever the Bureau of Labor Statistics announces the first monthly gain of 150,000 to 200,000 jobs. It will take several such months before Fed officials become convinced such gains are here to stay."

Don't look for Fed rate hikes until employment builds momentum.

The O'Neill book gives a lot of insight into Greenspan. Who would have thought that Greenspan believes the Bush tax cuts are reckless?

Bakho,

How are ateel prices influential on American exports? Hell, the only thing America makes out of steel for export is Hondas, and that's a locked-in market: if the guy in Ochanomizu sells a model made in Marysville, there's only one place he can get it.

American mfg of steel parts are not only competing world wide, but are competing domestically with parts made elsewhere from steel and imported as parts. The weaker dollar makes foreign made parts cheaper, but it also makes some raw materials cheaper. Steel scrap prices went through the roof recently because foreign buyers are depleting the available supply.

Many products contain some steel. Think about it. Steel is used as a cheap pkg/container material (tin cans). Many items that are not "consumer" items are steel. Caterpillar is a HUGE exporter of industrial equipment (skid loaders, generators, tractors, FEL, dozers) farm equipment, there are railroad cars exported, truck trailers, all manner of environmental/pollution control equipment, just to name a few. Alternatives to steel can be more expensive.

Joel Prakken is an absolutely wonderful guy, and if I recall, Lawrence Meyers trained him. So you have to take the MA forecast seriously.

Still, I remember in the mid-1990s, MA kept forecasting an impending contraction, which stubbornly kept not happening. Foreign capital inflows kept fending off an expected correction in the current account. But I know a lot of forecasters who got fooled on that one.

about 2 years or so ago, Krugman pointed out that BushCo was setting things up for the summer of 04 -- tax cuts to kick in, extra spending, etc.

"Broaddus and some of his Fed colleagues are concerned that continued sluggish job growth could limit personal income gains and hurt consumer spending later this year. In its latest forecasting exercise, Macroeconomic Advisers concluded that wasn't likely, if strong productivity growth is the reason few additional jobs are created. If productivity grew at about a 4 percent pace this year instead of the 3 percent rate assumed in the base forecast, labor compensation and unit labor costs would rise less, profit margins would widen and inflation would slow."

Am I the only one with the arithmetic skills to see that this narrative doesn't make much sense?

High productivity growth is retarding job growth -- duh! High productivity is contributing to corporate profits, but not to wage growth, because low job growth is suppressing labor market competition. So, how can it possibly be that higher productivity leading to still lower job growth and no wage increases are NOT going to undermine personal income and consumer spending?

Someone needs to tell the truth, which is that Bush has delivered EXACTLY the economy, which his core constituency wants: no wage growth, low inflation and higher profits.

Unemployment always rises in Republican administrations, because Republicans prefer it that way!

First a question, where are these jobs supposed to be created? What sector? If they are just low wage service sector jobs, that won't help a whole lot.

Second, my understanding is that the demand for steel is largely being generated by China, and China's need for steel to build a modern infrastructure for its population exceeds the amount of steel available. So, surely when demand out srtips supply to this degree, we can expect prices on all steel products to go through the roof.

I am at heart a pessimist on our economy, especially in the area of jobs, for many years to come. The need for labor, and even trained/skilled labor appears to me to be rapidly displaced by technology. I don't know about you economists, but I see DARPA running a contest for independent fully robotic vehicles, and see the end of truckers coming down the road (pun intended).

I present a better argument in a post on 3/1/04 at my blog. I haven't learned how to link to particular posts internal to the blog yet, so I can't provide a direct link.

I for one don't credit BushCo with the savvy for setting things up for the summer of 04. I would say they are/were early with their tax cuts and will be surprised if the 200,000 employment numbers appear before Nov. This is where it's important to distinguish between incompetence and malfeasance, no?
Did MA take into account Japan's exit from fx? The record prices for crude? for median house prices? Hard to believe that I am less optimistic than Krugman. What am I missing?

There are a couple of things in this forecast that don't quite square with reality.

First, of course, is their employment forecast which is contradicted by their own statements regarding productivity growth.

Second, there is little slack left in consumer spending that could drive the expansion they're calling for. Worse, rising oil prices cannot help the situation. Their direct effect at the pump and their indirect effects on virtually every consumer good will be to drive prices up. Broaddus will get his bump in inflation, but it will wipe out what little slack there is in consumer spending--especially in the face of stagnant wages.

Finally, the growing belief that the Fed will be hiking interest rates immediately after the election will be reflected in rising consumer-credit interest rates. With average household unsecured debt at record levels (and rising), even a very slight rise in consumer credit cost will severely contract descretionary spending.

So, is their "200,000 jobs a month" forecast based on anything other than wishful thinking?

If this forecast doesn't come true, will Brad label Joel a liar, as he habitually accuses the CEA for its forecast errors?

"Finally, the growing belief that the Fed will be hiking interest rates ..."

And, the other finally: Around here, Michigan, there's constant talk of cutting state employees--teachers, fireman, administrators.

Not only will there be that many fewer Michigan consumers later this year, and more people competing for fewer job openings, it's also a grim headline that won't go away which is placing a spending drag on most of the ones who still have jobs. I think creative accounting at the state level has delayed the day of reckoning across the country but I can't see it lasting much longer.

Profits are now protected from taxes while wage income stagnates. Switching the government burden to property tax takes too long and consumption tax (a sin version is in the works here) will only make up a portion of the difference after further depressing sales.

Looking forward to seeing more opinions on MA's track record.

http://www.morganstanley.com/GEFdata/digests/latest-digest.html

According to Alan Greenspan, layoffs have not been the dominant force shaping America's jobless recovery. Instead, it's the lack of hiring. He argues that "Gross separations from employment, two-fifths of which have been involuntary, are about what would be expected from past cyclical experience, given the current pace of output growth. New hires and recalls from layoffs, however, are far below what historical experience indicates"
...
Fully 27 months into the current cyclical upturn, we estimate that private nonfarm jobs are tracking 8.3 million workers below the profile of the typical hiring cycle.

What Derelict said.

I don't know what sort of analysis has been done on household spending when a worker gets a new job after a long spell of unemployment, but the new job pays a good bit less than the old one.

We're going to be seeing a lot of this, and my gut feeling is that families making that sort of transition don't boost their spending very much or very fast. But if anyone knows of any studies that would support or refute my gut feeling, I'd be interested to know.

"If this forecast doesn't come true, will Brad label Joel a liar, as he habitually accuses the CEA for its forecast errors?"

Posted by: Bruce Bartlett on March 30, 2004 08:51 AM

Well, if Joel was already declaring it not valid, or if their forecast curves showed a (guessing) abrupt 60 degree turns from trend for no good reason, then yes.

I just read the forecast by Stephen Roach of Morgan Stanley that bubba linked to. (Here: http://www.morganstanley.com/GEFdata/digests/latest-digest.html) What he says in the way of the effects of outsourcing make perfect sense to me, which makes me wonder about his complete tin ear about the politics. Here goes:

"What matters most in shaping macro trends is change at the margin. The global labor arbitrage could well be having a differential effect on the gross flows in the US labor market. It's not that domestic jobs are being eliminated on a large scale in the US and shifted offshore to the developing world. Instead, it's far more likely that the impacts are being felt on the hiring side of the equation. US companies are now letting the "opportunity cost" of the domestic hiring decision be shaped increasingly by the alternative of highly-educated, well-skilled, low-cost workers now readily available in many developing countries. At the same time, by lowering the perceived incremental cost of the "next hire" in many occupational categories, the arbitrage could also be playing an increasingly important role in the wage determination process that effects a much broader cross-section of American workers. In other words, the globalization of labor input need not be large in the absolute sense to make a difference in shaping change at the margin. The increased prevalence of offshoring suggests that such a critical mass may well have been attained in the United States. As a result, US companies have no choice other than to become more global in both their perspective and structure."

OK, so at the margin, globalization will cause some Americans to lose their jobs, and give companies the leverage to negotiate the salaries of other American workers downward.

Hopefully, it shouldn't take a Ph.D. to see why workers might have a problem with this. But the promise is always that globalization will eventually produce newer, better jobs to replace those lost jobs. But here's Roach again:

"Like it or not, this is the way globalization is supposed to work. Which takes us to the toughest aspect of the problem -- the distinct possibility that there may be strong social and political objections to the very concept of globalization itself. The idea that job contracts need to get re-written because of trade liberalization and an increasingly integrated borderless world doesn't sit terribly well with disenfranchised workers on the front line of making the adjustment. Globalization may work well in the long run but it appears to have profoundly disruptive impacts in the short run. That could reflect its inherent asymmetries -- developing countries first come on line as producers long before they emerge as consumers. That leaves a very tenuous interregnum, where the creation of new markets in the developing world lags the penetration of old markets in the developed world."

So, how long is this interregnum supposed to last? A year or two? 3-5 years? 10-15 years? 20-30 years? What's the scale here? In the long run, we're all dead, after all. How big a bite are we taking out of people's careers, how big a disruption are we throwing in their attempt to save up toward a decent retirement?

Continuing with Roach:

"And that's what takes us to the most dangerous point of all -- the politicization of the offshoring debate. In this election year, the American body politic has been forced to take sides on this highly charged emotional issue. Analytics and empirics ring hollow in this deeply personal context. Free trade and now offshoring lie at one end of the spectrum -- protectionism at the other. For America -- complete with its jobless recovery and gaping trade deficit -- the pendulum is now swinging in an ominous direction. Out here in Asia, that is a huge and puzzling concern."

And I'd think Roach could explain this to the Asians in 25 words or less. People are afraid of losing their jobs. There's no certainty that they'd find another one nearly as good anytime soon. That's not rocket science.

There's also the missing factor in the equation: the employers. This is being played in the media (and by guys like Roach) as a worker-versus-worker affair, where we rich American workers need to suck it up, tough it out, and lose our jobs so that Asian workers can get good jobs and start catching up with us.

But unlike U.S. workers, U.S. corporations aren't hurting; their productivity is increasing, and their profits are increasing. So it's not America that's losing out to the Third World; it's one part of America that's losing out, and another that's winning big, as the world changes.

Two Americas. Why should one of them be a winner, and the other a loser, as globalization runs its inevitable course?

Eh, I think Brad's criticism was fueled by the fact that the CEA report was internally inconsistent.

It's another thing to make a logical statement that happens to be wrong; another to make an illogical statement that happens to conveniently look good for the President.

To Bakho:"It used to take a skilled programmer with HTML programming knowledge to make a web page. Now it is possible for grade school kids with no programming knowledge to make a web page. When the amount of training required to perform a skill declines, the value of that skill will decline. This is what we are seeing in the tech world."Excellent analysis, remembering 1995 all these "emergent-caps" and late in 1997 the implamantation of the "Netscape Composer?"...within the "Netscape Explorer"..."That's the Inter-Net...
Today concerning your statement:"Steel scrap prices went through the roof recently because foreign buyers are depleting the available supply."
Yes, but not the conventional supply.My opinion is :http://english.peopledaily.com.cn/200211/29/eng20021129_107678.shtml
"No coke, no steel :("

So, since Bruce wants to talk but not listening ("don't bother responding..."), we'll move on.

Remember the Fed's study of job growth patterns in this and the prior economic cycle, which concluded that structural change is at the root of job loss? (Sorry, I don't have time to provide a reference.) This, in the view of the authors, is what set these two cycles aparet from those that went before. If this is, in fact, the case, then job growth will not depend all that much on the pace of overall GDP growth. New employment will, the authors argue, come from creating new products and industries. We have little more than our suspicions to convince us that productivity growth will slow in the near term. The ability to generate profits by holding down labor costs in existing industries is an incentive to boost productivity. So it may be that we will have to wait for some lucky event, the creation of a new, major industry, for robust job growth to begin.

Job growth? I'll believe it when I see it. I've heard too many times in the past three years that prosperity is right around the corner.

The iron law of wages.

http://biz.yahoo.com/ap/040329/outsourcing_tech_survey_1.html

"Trust us, we, the rich, will happily invest in making you, the poor, richer."

The words Bull shit are not to strong to describe this report which says that high tech outsourcing without demand growth will be good for the US economy.

No, it will be good for the top .5% of the US economy, because they, and only they, have pricing power for their labor and money.

Not to knock this particular forecast, but the majority of forecasters have consistently over-estimated growth this cycle. Moreover, they continue to act as if the downturn was a normal inventory-inflation - fed tightening - downturn when in fact these normal factors played almost no major role in the downturn. The downturn was almost completely a function of the bust of the high-tech over investment boom. for example, this cycle saw no big downturn in consumer spending on durables -- for example auto sales have been above trend throughout the period. Consequently their is no pent-up demand this cycle and consumers have not reliquified.

Given all of these differences I would thing you should approach the forecast of every large scale model with a great deal of caution and focus on the point that the downside risk seem much greater than the upside potential.

Bakko -- Look at what is happening in the comercial construction industry. they are being killed by rising steel and other commodity prices.
This is an industry of many mid-sized firms --
middle market to banks -- and they are in a bind.
They bid contracts on the assumption of rougly stable prices and are now suffering a cash-flow
disaster. Moreover, they do not know how to bid on new jobs. If they build in higher costs they will lose the bid, but if they win the bid based on low steel prices it will ruin them.

"My point is that honest forecasting errors should not habitually be represented as lies just because they don't pan out, as Brad always does when refering to the CEA.

Don't bother to respond unless you are a forecaster who has never been wrong."

Posted by Bruce Bartlett at March 30, 2004 10:02 AM

How many days did it take the CEA to declare their forecast 'non operative' back in January? When there were no apparent macro shocks which could legitimately void a forecast?

AP Cincinnati 30 March 04 http://story.news.yahoo.com/news?tmpl=story&u=/ap/20040330/ap_on_el_pr/snow_outsourcing_3
Struggling to remain upright after a four-martini lunch with his oligarchist masters, Treasury Secretary Lord Snow launched into a vicious diatribe against those who would restrict the slave trade in foreign outsourcing, claiming that a loss of 3,000,000 American manufacturing jobs gone overseas was “good” for global trade, and therefore “good” for the US economy and GDP growth.

Using a crude non-verbal hand jesture to describe the penis size of his Democratic critics http://us.news1.yimg.com/us.yimg.com/p/ap/20040330/thumb.ny11903301929.snow_outsourcing_ny119.jpg
Lord Snow explained somewhat hyperbolically that by reducing the number of high-paid “living wage” jobs, while at the same time increasing the GDP through higher corporate profits, this allowed an incrementally higher share of the common economic wealth to flow to the remainder of US workers below the minimum-wage line, an indefineable “good” as well for all Americans when it came to tax time.

When queried by several Wall Street reporters who’ve actually read Keynes and wondered how the diversion of an even larger portion of GDP to the investing class and their Treasury-Bill wealth lockdown, (instruments that didn’t exist at the time Keynes framed his theories), could benefit the working class, Lord Snow engaged them in metaphor, describing a great fleet of small boats, a rising tide and free sailor suits for anyone willing to work, regardless of the wage being paid.

“America is a great country to live and invest in. As US workers race toward the bottom, we in the investment class can all enjoy watching this Tour de America on our plasma TV screens on our 30m yachts. This truly is the land of unlimited opportunity, gold under every rock and tree, and it’s a pretty damn entertaining life for those of us who’ve got ours, so bugger off, you gay maggots.”

But Lord Snow was talking to himself by then, all of the reporters having wandered off to sample the catering carts food offerings in the main ballroom, something with real red meat, instead of fluff.

"Remember the Fed's study of job growth patterns in this and the prior economic cycle, which concluded that structural change is at the root of job loss? ... This, in the view of the authors, is what set these two cycles aparet from those that went before. If this is, in fact, the case, then job growth will not depend all that much on the pace of overall GDP growth. New employment will, the authors argue, come from creating new products and industries."

Important enough to be considered and considered again! This is the worry.

http://www.morganstanley.com/GEFdata/digests/20040330-tue.html

March 30, 2004

Offshoring -- Myth and Reality
Stephen Roach (Bangalore, India)

In America, the global labor arbitrage has quickly turned into the major domestic issue of Campaign 2004. In Asia, the political backlash to the globalization of employment is seen as the single greatest threat to the hopes and aspirations of economic development. Nowhere is this more evident than in India, where I have just begun the final leg of my two-week swing through Asia.

It's worth reviewing the evidence on offshoring before plunging into the great debate. That doesn't take long -- in large part because the actual data points on the empirical magnitude of offshoring are few and far between. Not surprisingly, the consultants -- most of who are in the IT advisory business -- have tended to downplay the loss of jobs from the high-wage developed world to the low-wage developing world. The most widely cited estimate of the impact of offshoring comes from a study of US trends conducted by Forrester Research; they calculate that only about 400,000 business process jobs have been "offshored" -- a total they expect to rise to about 3.3 million by 2015. That may sound like a lot but it works out to annual job losses of only about 300,000 over the next decade -- not much of a dent in a US economy that currently employs 130 million workers....

http://www.epinet.org/content.cfm/webfeatures_snapshots

Soaring increase in high-tech exports from China erodes U.S. employment

It is often argued that free trade benefits all countries because it allows them to specialize in goods for which they have a comparative advantage, yielding increased efficiency and productivity in each economy. In the United States, economists and public officials frequently claim that trade will reduce production of low-tech goods such as textiles and apparel and increase production of high-tech goods in which the United States has a comparative advantage....

Slightly off topic, but I thought I'd post a notice here from the BOP site about the BLS revision of the household employment survey, since there have been previously several go-arounds at this site on the issue of its divergence from the payroll survey. The upshot is that the BLS has just made revisions downward of the census estimates of growth in population for Jan. 2004, given a reconsideration of immigration rates, in particular. Further, the BLS has made a study, factoring out elements of the household survey that differ from the payroll survey and smoothing out the data series to account for differing census adjustments. The upshot: case closed. Check out the graphs at BOP.

Bid in a steel price trigger. Prices of steel should peak by summer then level off.

200K jobs/mo over 9 months is less than 2 million. No where near the 3+ million in the CEA forecast. I am pessimistic about jobs, but I live in the Midwest.

What is it with Bush administration and outsourcing. It is not a winning issue for them. Are they trying to annoy the unions. I think the Kerry tax plan on overseas is a statement policy more than an impact policy. If the Congress is GOP, he won't have to worry about delivering on that one.

The problem with this administration is they have done very little to build jobs in the US. Thus Snow gets stuck trying to defend outsourcing with nothing positive to counterbalance.

rick: "First a question, where are these jobs supposed to be created? What sector? If they are just low wage service sector jobs, that won't help a whole lot."

I second that. Not long ago, I was dragged into one of those chain restaurants. (Not that I'm opposed to those, but usually I go out for beer drinking, not food.) Anyway, they had greeters who would take us to the table, somebody to take the order, somebody to deliver the order, somebody to carry off the dishes when done, all different people (in the sense that they had different groups for doing each of the tasks).

Maybe it has always been like that at the place (I only went to that chain once), but from earlier years I seem to remember that in most places you would have at most the greeters (table assigners) and waiters, and perhaps the dish cleaners that I increasingly became aware of after 2000/2001 which appear to be mostly hispanic, and more often than not seem to speak poor English.

So maybe we indeed have growth in the restaurant business, but in the form of more "specialization" from universal service towards separating out the lowlier tasks.

I would be interested in perspectives, although it is somehow off-topic.

dennisS: "... consumption tax (a sin version is in the works here) ..."

What, you have to pay a sex tax? (Horny adolescents being fleeced at the disco entrance ...) Sorry, couldn't resist. Maybe you are talking about alcohol? Looks like your local watering holes are in for more specials and happy hours sometime soon. Unless I completely miss the point.

Please provide details.

bubba: "According to Alan Greenspan, layoffs have not been the dominant force shaping America's jobless recovery. Instead, it's the lack of hiring."

I'm sorry, "duh" is the only comment the good man gets from me. Not you, but Greenspan.

spencer: "No, it will be good for the top .5% of the US economy, because they, and only they, have pricing power for their labor and money."

Which labor?

myself: "Which labor?" -- sorry, misattribution, it was Stirling, not spencer.

Stirling: regarding that yahoo article, if you parse it closely, allowing for ambiguities in setting missing punctuation, the only firm claims I can find are: "Savings from outsourcing allowed companies to create 90,000 new jobs in 2003, with more than one in 10 of them in Silicon Valley or elsewhere in California, researchers said. The report predicts that in 2008, outsourcing will create 317,000 jobs -- 34,000 in California."

That is, more than 9000 jobs in Silicon Valley 2003, and in 2008, 34000 jobs in "California". Where the other jobs are it doesn't say, by implication presumably in the US. That does not exactly sound fabulous, and it also does not say it is _net_ job creation. Perhaps they are talking about all those "outsourcing manager" positions that I have been hearing about.

To repeat a story I cited earlier, I know of a database/commercial application programmer in some IT department who is supposed to manage/coordinate IT work outsourced to India about 40% of her time in the future. I'm not sure it will be effective, but somebody is certainly looking towards a number of early morning/late evening phone calls.

cm writes: Where the other jobs are it doesn't say, by implication presumably in the US.

Here is what "executive summary" says: http://www.itaa.org/itserv/docs/execsumm.pdf
While global IT software and service outsourcing displaces some IT workers, total employment in the United States increases as the benefits ripple through the economy. The incremental economic activity that follows offshore IT outsourcing created over 90,000 net new jobs in 2003 and is expected to create 317,000 net new jobs in 2008.

So it is not that companies that outsource US IT jobs hired some people in US to manage outsourced workers (ex-programmer who is now "outsourcing manager".) It is that under some assumptions the savings from outsourcing will result in increased business activity and therefore more jobs - not specifically in IT.

For example: lets assume average pay for US programmer $75K/yr and Indian one $15K/yr. If the whole $60K/yr savings is invested back into the US economy and assuming 60% labor share we can hire 2 $21K/yr waiters for each outsourced programmer. I get it - outsourcing is a job-creation program!

In fact, these guys so not understand what their own numbers say: http://www.itaa.org/itserv/docs/execsumm.pdf
In the software and services area, the economy will create 516,000 jobs over the next five years in an environment with global sourcing but only 490,000 without it. Of these 516,000 new jobs, 272,000 will go offshore and 244,000 will remain onshore. Thus the U.S. IT workforce will continue to grow.

According to these numbers the positive economic effect of outsourcing is expected to be so small the number of jobs it adds is 5% - and the price is the loss of 50% of all created jobs to offshore. And of course it is interesting to compare these projections (250K new jobs in the next 5 years) with BLS (spells bullshit) projections of many millions US IT jobs by 2015.

And, finally, the trend through the 1990s was for around 60K-70K CS degrees per year (http://www.netl.doe.gov/ssl/PDFs/Varadan.pdf). If the trend continues (and enrollment in 2001-2004 was higher than during the 1990s) we will have more graduates than new jobs. Now add H1B program (through 1990s at another 60K-70K/yr) and you will understand that US IT workforce will continue to grow - unemployed.

Regarding bubba's comment, "...assume average pay for US programmer $75K/yr and Indian one $15K/yr. If the whole $60K/yr savings is invested back into the US economy and assuming 60% labor share we can hire 2 $21K/yr waiters for each outsourced programmer." Note that ultimately the $15K that went to the Indian programmer must also return to join the other $60K, either through purchases of US exports, or purchases of US assets, or investments in US securities (even if they come back indirectly via the BOJ buying short-term treasuries to suppress the yen). Every dollar that goes offshore must come back, one way or another.

observer writes: Note that ultimately the $15K that went to the Indian programmer must also return to join the other $60K, either through purchases of US exports, or purchases of US assets, or investments in US securities (even if they come back indirectly via the BOJ buying short-term treasuries to suppress the yen).

Indian programmer received his $15K paycheck and spent it on goods and services - mostly local (housing, food) and partially from all over the world (Japanese car, Korean TV etc.) Some of it somehow might benefit US economy to a small degree. However there is more justification to argue that entire $75K paid to US programmer returns to US economy.

observer: "Every dollar that goes offshore must come back, one way or another."

If it comes back, put me down for "another". Othwerwise, don't wish for it too hard. Think a little about what will happen when all the dollars that Asian and other countries are now banking to prop up the US market are coming back. These guys are not going to fly into various cities and go drink beer to the aggregate tune of billions of bucks, being served by 21k waiters.

But I heard the US has some nice pieces of land it may want to sell, just in case the Chinese are not interested in the "protection services" that the US military can offer.

bubba: The actual savings will be less than 60k. The Indian workers will have to travel to the US to receive on-site training, they will have to fly to project planning sessions that cannot feasibly be done over the phone, local managers will have to go there every once in a while to, well, see how things are going and give some face time, etc. (And I do maintain that either additional staff has to be hired to manage and oversee the outsourced activities, or prior developers/workers have to replace subject-matter work by management. No savings there as well, unless outsourcing managers take 21k.)

Then at least for software R&D positions of comparable experience and competence I am being told the ratio is smaller than 1:5, at least in certain industries. Add the above overhead costs, and the advantage is reduced further. Figure in that these guys are effectively detached (13.5/10.5 time zones), and the communication overhead is substantial, and the whole thing becomes strategic -- you have to offshore larger pieces of your business at least in those occupations where people will not work night shift, in order to minimize interactive communication needs.

Well, only time will show.

cm:

I was trying to show that claims of benefits of outsourcing for US economy are a deception.

1. US and Indian programmers have different productivity

2. Savings are partially retained overseas and mostly just wasted on useless projects and executive blowhards. Just acquisition of PeopleSoft by Oracle is going to make thousands of programmer-years of work obsolete together with all savings PeopleSoft and its customers "realized" by laying off PeopleSoft engineers in droves.

cm and bubba:

I think you guys are right about the "human capital"/embedded systems learning aspect of the outsourcing issue, and perhaps the bringing home of these costs will curb the outsourcing tendency at some point, though the salary differentials are so large that the temptations to it are strong. But you're missing something of what the IT industry report was claiming: viz. that outsourcing will so reduce costs/prices as to bring about a de facto increase in real wages, as well as foreign demand, so as to increase demand/sales for IT products and, from their ripple effect through the economy and the increase in both foreign and domestic purchasing power, bring about an increase in domestic growth. (And it was, in particular, the lowering of inflation and the corresponding low interest rates that were to add to this salutary effect.) Now I myself am dubious about economic studies that tote up various supposed marginal gains and pretend to predict the realization of an aggregate productive surplus, well before its occurrence; the precision of such measurements is doubtful, as well as, the delineation of an exact set of relevant factors,- (leaving aside the provenance of the report and the interests of the economists who authored it in pleasing their masters). But the report does speak to what I tried to say in my last post on outsourcing: that it emerges especially as a corporate strategy to deal with a disinflationary environment and the loss of corporate pricing power, attempting to maximize profits through cost/price reductions that increase sales and market share. But the implication is that this strategy leads to further increased deflationary pressure and to further concentration of corporate power, with its differential between cost and price.

Blame joblessness on the tax structure??

http://www.ajc.com/opinion/content/opinion/0304/29equal.html

He gets it partly correct.

john c. halasz writes: viz. that outsourcing will so reduce costs/prices as to bring about a de facto increase in real wages, as well as foreign demand, so as to increase demand/sales for IT products and, from their ripple effect through the economy and the increase in both foreign and domestic purchasing power, bring about an increase in domestic growth.

Well, this is how I said it: It is that under some assumptions the savings from outsourcing will result in increased business activity and therefore more jobs - not specifically in IT.

Sorry if it came out unclear.

"Every dollar that goes offshore must come back, one way or another."

It comes back when the arab, to whom the Indian paid money to fill up his gas tank buys another few shares of Citibank.

See Trade Deficit

"viz. that outsourcing will so reduce costs/prices as to bring about a de facto increase in real wages, as well as foreign demand, so as to increase demand/sales for IT products and, from their ripple effect through the economy and the increase in both foreign and domestic purchasing power,"

What's been happening is that it has shown up as corporte profits, which, thanks to reckless tax cuts, there is an incentive to fatten now.

Or as it escaped people that the rich know the party is going to end sometime, and they are, therefore, extracting what they can now?

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