April 02, 2004

Thinking About Outsourcing

Stephen Cohen and I have a first rough cut on what we think about outsourcing...

Our Outsourced Future

Stephen S. Cohen and J. Bradford DeLong Draft 1.3

Politically, today's fears about job losses and international trade got their start last summer; they will heat up during the campaign and cool off in a year or so. Economically, they are just starting, and are likely to develop over the next years into serious questions of economic theory and policy.

In 2001, 2002, and 2003 the Bush administration used concerns about recession and stagnant employment to fuel its successful effort to pass tax cuts that did little to cure the recession or stimulate employment. The big and, critically, permanent tax cuts for the $300,000+ a year crowd, the cut in dividend taxes--these were things that powerful factions within the Bush administration wanted but that would do next to nothing to cure a sick macroeconomy. The Bush administration placed a bet. It believed that it was very likely that the labor market would strengthen and employment would grow on its own. So why bother with a real employment stimulus package? They gambled, and the rest of us--America--lost.

So come the summer of 2003 the Bush administration needs an explanation for why the number of jobs in America is not growing. They don't dare say, "Our 'jobs and growth' package wasn't really a jobs package. We thought the labor market would recover on its own, you see. We were wrong. Sorry." So, instead, they begin to talk about China's undervalued exchange rate, and how China isn't playing by the rules of the international trading system, and how unemployed manufacturing workers in Ohio should recognize that their problems were made in Beijing. The Bush administration soon eases off: Don Evans's speeches about how trade with China doesn't benefit America because China doesn't play by the rules are (i) politically ineffective, and (ii) offensive to large chunks of the establishment.

Nevertheless, over the subsequent nine months this meme grows. Not just manufacturing jobs, but white-collar service-sector jobs as well. Not just China, but India--with its pool of well-educated English-speakers. Not just traded goods coming via container ship, but traded services arriving via fiber-optic cable as a result of "outsourcing." And not just Republicans, but Democrats--and by now more Democrats than Republicans, for Democrats believe that Jobs can be their big issue. For each Speaker Hastert talking about "Benedict Arnold CEOs" there are two Democratic counterparts (For most Democratic representatives and senators believe that they need to be two steps more protectionist than their Republican counterparts in order to be politically viable.)

Thus the political debate over "outsourcing" will burn for the rest of the barely-started 2004 campaign season. We will hear about Benedict Arnold CEOs. We will hear about Indians and Chinese willing to work for semi-starvation wages who are stealing the jobs that are rightfully ours. We will hear lots about undervalued exchange rates. And we will be told that the real solution is education, education, education: to upgrade the skills of America's labor force so that we can productively work in those occupations that cannot be outsourced and be the bosses of the overseas workers in those occupations that can.

This issue will burn fiercely. TV newscasters, newspapers, and magazines will respond to the demand for stories about outsourcing. We will see and read about how "outsourcing" is performing a magic trick and making lots of white collar jobs disappear. And as likely as not the jobs shown vanishing will be jobs for highly educated, high paid financial analysts and software engineers as well as jobs for single moms in call centers and for tech-support people whom you desperately need to communicate with when your computer just will not compute. Call centers; software; travel reservations; getting, tracking, organizing and interpreting the data for financial analysis; reading MRI scans and X-rays; tracking overdue bills; on and on it it will go--and it will come nerve-wrackingly close to what many of us, perhaps most of us, do for a living. Every other day we will see or read a feature piece profiling nice men or women in the U.S. whose jobs went to India. And we will see a photo of very nice, well-educated, clean, hard-working, and ambitious young people in India with college educations who have gotten those jobs at between 1/5th and 1/10th the pay, and who are now working on the details of perfecting their accent and slang, and learning typical seasonal weather patterns in American cities.

And then, come 2005 or at the very latest 2006, the political debate about outsourcing will die away.

With the end of the election season, the benefits from polarizing the electorate on "outsourcing" will vanish. With the recovery of employment--which will come someday--and the return of the amount of slack labor in our economy and the duration of unemployment to more normal levels, there should no longer be a Great Fear on the part of Americans that the jobs that ought to be theirs are (or are about to be) done in Bangalore. Forrester Research, first out of the gate with an exciting outsourcing Number, estimated that over the next decade some 4 million jobs in business processes are likely to go offshore. That is 30,000 per month--not a huge amount in an economy of 130,000,000 jobs where we need an average rate of job growth of 150,000 per month in order to hold the unemployment rate steady, and where every year some 1.5 million net jobs are destroyed between December 20 and January 12 as we step-down from the Christmas season. some 250,000 per year. In context, "outsourcing" is not a first-order feature of the U.S. labor market.

Moreover, it is a truth universally acknowledged (except in campaigning seasons) that the level of employment in the United States is not set by levels of imports and exports, but by whether the Federal Reserve's monetary policy manages to tune the level of aggregate demand to that sweet spot where there is neither high unemployment nor accelerating inflation. (And whether the Federal Reserve is properly supported by fiscal stimulus in those rare occasions--like today--where it finds itself out of ammunition.) "Outsourcing" is neither cause nor cure for the large gap between the number of Americans who have jobs and the number who want jobs. And as that gap closes over the next several years, concern over outsourcing will diminish.

But concern over outsourcing will return, perhaps very quickly; perhaps it will not be a huge deal for many years.. But eventually it will become a huge deal indeed, because though not the number of jobs, it is the wages they pay, that’s at play.

The basic facts are simple enough: The second half of the nineteenth century saw the invention of the steel-hulled steam-powered ocean-going steamship and the submarine telegraph cable. You could use the telegraph cable to tell your agents in ports on the other side of the world what to ship, and you could use the steel-hulled steam-powered ocean-going steamships to ship not just precious goods (rare porcelains, jewels, spices, foodstuffs with interesting neurochemical properties) but staple manufactures and agricultural products: grain, hides, meat, wool, furniture, machines, and eventually motor vehicles, computers, and consumer electronics. We got accustomed over the twentieth century to the spectacle of industrial workers or agricultural workers losing their jobs to foreign competitors, who could produce more cheaply abroad and then export. Malaysia could produce rubber more cheaply than Brazil (which, as the home of the rubber plant, had lots of pests and parasites that had evolved to eat rubber plants). Illinois could grow wheat more cheaply than Prussia could grow rye. And, in the 1970s and 1980s, we learned that Yokohama could make better and cheaper cars than Detroit.

Now the first half of the twenty-first century is seeing a transformation quite as great. The trans-oceanic fiber optic cable, the communications satellite, and the internet are making much of white-collar service work as potentially tradeable as anything else. Broadband cables and satellites can connect India or China or Bulgaria to the US instantly, seamlessly--and almost costlessly. A huge, new swatch of our jobs will become vulnerable to foreign competition over the next years. (?). This new set of potentially tradeable jobs are in many cases jobs held by people who are not accustomed to layoffs. Often they are high paying, clean, good jobs. Some are the best jobs. The people who hold them are quite convinced that they are on top--that they have these jobs and that these jobs are well paying--because they are the best people who deserve to have them: they are smart and industrious. In school they worked, hard while others screwed around. Sacrifices were made in order for them to attend college. They worked hard in college.

The economists say that this wave of service trade-driven globalization will, like the last wave of goods trade-driven globalization, be a positive-sum game. There will be more winners than losers, and the winners will win more than the losers. As long as the Federal Reserve does its job to make Say's Law (the claim that the demand will always appear to soak up increases in supply, and so higher productivity means higher incomes and not higher unemployment) true in practice even though it is not true in theory, the most that the losers will suffer in the long run is a fall in their incomes. And other workers and consumers will see their incomes rise and their spending power increase to make the process taken as a whole a good thing for the country, and for the world.

The economists are right. In response to Forrester and to the wave of political upset, McKinsey (as well as others) have hurried out quick pro-"outsourcing" studies. McKinsey (using its truly proprietary--that is, opaque--methods) calculates that every $1 spent on offshoring business practices generates 50 cents in business cost reductions--which show up as higher profits and higher investment in America, generates higher exports to the offshore site, and calculates that displaced American workers do find new jobs, and suffer on average only small wage losses.

But the economists are also wrong. For we have not, we do not as a country make the investments in retraining and rebuilding needed to transfer some of the gains from the winners to the losers, and so make the process of economic change truly a win-win one. There were no regional adjustment funds provided to the cities of Lowell and Fall River Massachusetts in the 1940s and 1950s as their textile manufacturing base pulled up stakes and headed for the lower-cost Carolinas. There was little money spent on Flint and Detroit in particular and Michigan in general in the late 1970s and 1980s to cushion the economic impact of the coming of Toyotas and Hondas to America's shores. Consumers in Boston and San Francisco drove their Accords and Corollas and pocketed the gains rather than having them diverted to rebuilding the Midwest.

As Paul Krugman puts it, free trade is a salable policy only if accompanied by a well-built social safety net and confidence in full employment. Our safety net is full of holes, and confidence right now that employment will be full is shaky. Preserving free trade in the 1970s and 1980s was a near-run thing, even though the magnitude of imports was not that great and the shock to America's distribution of income and employment not that large.

This is worth thinking hard about, for when "outsourcing" truly arrives--whether in one or two or three decades--it is likely to deliver a shock an order of magnitude larger to the American economy.

Consider: the income gaps in the case of "outsourcing" will be much greater than in the case of trade in manufactured goods. The income gap between Japan in and America in the 1970s was a matter of one-to-two. The income gap between India and America tomorrow will be one-to-ten. On the one hand, economists will say that the gains from trade will thereby be that much greater for the economy as a whole. On the other hand, the potential downward pressure on loser workers in rich countries will be that much greater as well.

Consider: trade in services potentially affects a much larger proportion of the labor force. Sectoral trade deficits in manufactured goods have rarely, rarely exceeded 3% of GDP. But what is the upper limit to the sectoral trade deficit in long-distance document-image pushing?

Consider: the assault by manufactured imports on American mass-production manufacturing in the 1970s and 1980s was something done to American workers and firms standing together. The process of outsourcing will look very different: it will be something done by internationalized American firms to American workers. The politics of GM, Ford, and UAW asking for help together to deal with foreign competition will be very different from the politics produced by workers vs. CEOs.

And, conversely, consider India. Put 10 million people in India to work at $26,000 a year providing white-collar services to the industrial core, and you have boosted India's standard of living by 50%. And you have displaced only 4% of the potential target industries, for there are 240 million service-sector workers in the First World today.

Because this is an economic transformation that is going to hit not in one shot next year but over the course of the next generation, we have plenty of time: time to build the social safety net, the education and retraining programs, the social and economic institutions needed to turn the coming of trade in white-collar services from a win-lose to a win-win affair for America and Americans; time to rebuild confidence that employment will be full and the duration of unemployment spells short. But we will need all this time, because the magnitude of the approaching economic trade shock will be much larger than anything in our historical memory.

What confidence do we have that the shock will be large? A lot. Consider this: There is nobody in America who in the early 1990s worried more about the impact of trade on the wages of Americans in industries that came under pressure from foreign competition than H. Ross Perot. In his political career as advocate of deficit reduction and foe of NAFTA, there was nobody who clearly and visibly cared more about the long-run economic destiny of average Americans than H. Ross Perot. Yet on February 7, 2004, the Times of India reported that Perot Systems is going to double its employment in Asia from 3,500 to 7,000--which will then be half of Perot Systems' worldwide employment. Remember how H. Ross Perot used to talk about the "giant sucking sound" of U.S. jobs going to Mexico? It's not giant, but it is a sucking sound as people working for Perot Systems process medical bills and design software for other outsourcing operations in India. If the economic logic of "outsourcing" is the overwhelmingly powerful consideration for H. Ross Perot, for what American businesses will it not prove irresistible?

Posted by DeLong at April 2, 2004 04:39 AM | TrackBack | | Other weblogs commenting on this post
Comments

This is a superb article. Your call for combining a long-term trade liberalization program with renewed attention to a social safety net is truly welcome.

I do wonder a bit about your long-term forecast as to the likely sectoral breadth of the outsourcing phenomenon (I believe the "(?)" in the relevant section means you do as well). Are there good studies predicting which "non-tradeables" are likely to become tradeable? Obviously the canonical haircut is a long way from being outsourced overseas (although perhaps with a Flowbee and a broadband connection...). In addition, there is a lot of evidence that people prefer local goods for reasons not considered by economic theory (McCallum's "border effect"), and it seems quite possible to me that this effect would be stronger for services than for manufactured goods.

I've posted similar comments on my blog (http://geffen.blogspot.com), including some relevant links.

Posted by: Daniel Geffen on April 2, 2004 05:10 AM

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Brad,
Very well balanced commentary.
One of the best yet I;ve seen on this topic.

Thanks

Posted by: avedis on April 2, 2004 05:20 AM

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I'll have to re-read this article, but I just caught the Jobs Report for March - three hundrd and seven (or eight, depending on the ticker) thousnad non-payroll jobs, and a revision upward for January's from ninty-seven thou to one hundred fifty-senven thou. These numbers appear unreal to me based purely on reading the want ads every Sunday for fifteen years. Usually when jobs start to grow, it is reflected to a certain extent in the number of jobs advertised. Often, it is truck drivers, or other job category that supports other industries' expansions. I have seen no increase in the running averages of jobs advertised.

So, I'm curious, just where were these jobs?

Posted by: Rick on April 2, 2004 06:07 AM

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Okay, isn't it simpler to say when the supply of labor exceeds demand, the value of labor goes down. When women entered the work force in large numbers in the '50s and '60s, and ever since, a virtual doubling of labor, has that not depressed wages? I'm not sure how much potentially qualified labor globalization will make available to employers, but I imagine it is such that I do not expect real wages to rise for at least the next generaton.

So, I agree with you, I just wonder if the argument can't be made simpler.

Posted by: Rick on April 2, 2004 06:18 AM

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That's some scary stuff. What I get out of this article is that the current wave of outsourcing is minor compared to what's coming later. Then there's the usual unrealistic blather about strengthening the social safety net. It's a fine idea, but get real, it's not gonna happen. At this point we'd be lucky to save what social safety net we already have.

So what's a young person to do? Pick a hands-on career that can't be done remotely? I don't want to find my field dissappearing when I'm too young to retire and too old to retrain. As far as I'm concerned the risk of that happening outweighs any possible benefits of outsourcing. I'd rather have a $40K/year job in a stable field than a $60K job in a field where my skills could become useless at any time.

Posted by: rps on April 2, 2004 06:19 AM

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Minor point: Indians taking American white collar jobs aren't working at "starvation wages." They're actually making good, middle-class money in India. What's going on in India is not the same as having our clothes manufactured in Vietnamese sweatshops.

Posted by: Amitava Mazumdar on April 2, 2004 06:29 AM

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As an amateur trying to get my head around this I still don’t quite get it.

I see that open trade is a positive sum game. What I don’t see is that any net gain necessarily happens in the United States. If a company saves 50 cents on the dollar by performing work off shore, why would they reinvest those increased profits here? If they saved that money by closing a manufacturing facility here and building a new one in China, might they put their new investment into expansion in China rather than rebuilding anything here?

“We will see and read about how "outsourcing" is performing a magic trick and making lots of white collar jobs disappear”

I don’t know about others of your readers but I don’t need to read the news to “see” jobs disappear to outsourcing. Over the last four years I have watched personal friends laid off as management aggressively pursued the outsourcing of jobs overseas. I have seen no indication of new opportunities that might be attributed to re-investment of the resulting gains.

The final point concerns “fair” trade. I am quite sure that the multinationals have ensured that places like India and China have business climates or rules consistent to what they are use to here. Is it really wrong to demand that these and other countries also adhere to a standard of worker rights and environmental standards? In the long run I expect that quality of life would even out across the global economy. The question will be how much we will descend to their standards or their citizens will be elevated to ours.

In addressing these points it would be nice to see a bit of crystal ball gazing to see even see a possible specific future with abundance of good paying stable jobs. What are these jobs? Why are they stable and not candidates for out sourcing?

Posted by: Boelf on April 2, 2004 06:38 AM

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::applause::

It's good to finally see a free trade advocate address the political side of the equation, of whether the larger society benefits when we expand the pie. And you did a hell of a good job of it.


Now, two suggestions, followed by some grammatical proofreading:

Suggestion #1: Brad, you open your last paragraph with "What confidence do we have that the shock will be large?" before moving into the Perot example.

There's a possible comparison with the entry of women into the US workforce as a whole (as distinct from the teaching/secretarial/nursing ghetto) during the 1970s through 1990s. I'm assuming that economists have attempted to measure the effects of this transition on wages and salaries.

With outsourcing, we're potentially expanding the labor pool available to US employers by a much greater amount, and there's the disparity of wages between countries to be factored in as well. But if the comparison is germane, then it might be a more solid support for your answer of "a lot" than the for-instance of Ross Perot.

Suggestion #2: when you say we have "time to build the social safety net, the education and retraining programs, the social and economic institutions needed to turn the coming of trade in white-collar services from a win-lose to a win-win affair for America and Americans," some specific prescriptions would be welcome, IMHO, along with a sense of the size, the scale of the changes that you feel should be made.

Grammatical stuff: (1) at the end of the 10th paragraph, that should be "it is the wages they pay, that's *in* play," not "*at* play." (2) In the 12th paragraph, the sentence "In school they worked, hard while others screwed around" needs to lose the comma.

Posted by: RT on April 2, 2004 06:45 AM

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Nice piece: good sense of balance.

Meself I think it's good that the transformation of the impoverished world at last seems to be happening. When I was four and five years old in London we always had African and Asian students around the house, and I grew up assuming that my generation would see both decolonialisation, which it did, and all these students going back to their countries to make them just like mine. Well, uh...

Maybe now, effectively two generations later, it may be starting, though Africa doesn't look too good yet.

I had a bit of a frisson, though, the other day. Over the last few years I've become accustomed to telephone operators not knowing what city I'm phoning from, but this reached a new height recently when I phoned in a traffic light out of order at the corner of my street. The guy wanted to know where the traffic light was, so I told him "corner of King and Jameson." That wasn't the problem, nor did he want to know what city I was in. He wanted to know what *country* I was phoning from.

Posted by: David Lloyd-Jones on April 2, 2004 07:32 AM

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I hope this works. But the same competitive pressures on wages also affect the ability to collect taxes from industry, and the same consumers who want to buy cheap products also want to pay low taxes, so I don't see how the safety net will be paid for.

I can agree in part that outsourcing is a scapegoat and that the economic slump and Bush's delusory policies are primarily at fault. But voters who are impacted mostly respond to the gross facts: unemployment, underemployment, discouraged workers -- and if globalizers wanted their program to work politically, they really had to do what was necessary to keep the gross facts tolerable. At this point, with only half of the package in place, free trade is lumped in with all the other causes (gross causes) of the negative gross facts. And not completely wrongly, because many of the free-trade people supported the rest of the Bush program.

I come from politics (both practical and academic) rather than economics. Reading pure economics theory it is hard to see why nations should exist at all, why they should favor their citizens over citizens of other nations, and especially why anyone should have any regard for the needs and opinions of propertyless people who have no salable job skills. Why should they be treated any more kindly that unprofitable enterprises, unsaleable products, uneconomic mines, or unproductive farmland? Just take 'em out of the system.

And sure, certain things only come up during elections. That's the only time when the losers have any voice at all. Without elections, they could be ignored forever, and frankly I think that a lot of conservative economists would prefer that solution.

American freetrade ideology often seems Utopian to me. It also does too much averaging over large numbers of people in order to prevent awareness of who specifically the winners and losers are. I understand that the fully-successful free-trade world economy would be entirely wonderful, but I'm apprehensive about what partly-successful globalization will end up being.

My Marxist friends talk about restratification. To them, the illegals standing on streetcorners looking for day labor are not an immigration problem, but pioneers of the economy of the future. (Hard-core freemarketers, Randians, and Libertarians love immigrants, though I doubt they'd want to be one). Not to be too harsh about this, but the ball is in the liberal free-traders' court.

Posted by: Zizka on April 2, 2004 07:35 AM

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nice comprehensive analysis.

Thanks!

Posted by: djs on April 2, 2004 07:39 AM

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"For we have not, we do not as a country make the investments in retraining and rebuilding needed to transfer some of the gains from the winners to the losers, and so make the process of economic change truly a win-win one."

I would also add that we have not made (and probably never will, given the incestuous relationship between the lawmakers and the wealth accumulators) structural changes needed in CEO pay, corporate governance, shareholder, employee and consumer rights, all of which will ensure that gains that are made through present and future outsourcing are properly channeled to all the entities (whether within our borders or outside) that have earned these gains.
If these changes are not paid attention to, I predict that in 50 years we will have disintegated into the kind of feudal system of the 1800 and 1900s that we thought the principles of "liberte, egalite, and fraternite" (not sorry that had to be in French) had put a firm end to.
What outsourcing, incredibly, is doing, is leveraging the tremendous energies of the world population and harnessing them into mere slave-power, for the exclusive benefit of the handful of powerbrokers and connected blue-blooded 'noblemen' of our day. Not quite what the Statue of Liberty poet had in mind when he wrote "Give me your tired, your poor,
Your huddled masses yearning..." And trickle-down it is not, either. If you look at our income distibution, it has not only worsened over the past decade, even at its best it was as bad as Brazil or other 3rd world nations.
Truly when history repeats itself, only will we awaken; in fact when I saw the images of the planes hitting the twin towers, my first gut reaction was that this was really the storming of 21st century Bastille; in group theory one of the roles played by the "outs" of a social group, is that of funnelling the group's angst and negativity, for what eventually can become, (if the "ins" or "elites" of the group heed it), a basis for positive change; and to me the message of 9/11 was that those 19 "outs" in the airplanes were messengers to the 1st world - 'Clean up your act!' We may want to believe they and their ilk had no social value, but strange as it may seem they do serve a purpose; the stories of outsourcing and terrorism are not disconnected - Tom Friedman had an article describing the 2 phenomena as 2 faces of developments in the 3rd world - but I think they intersect, and bring a message.
If we heed the message, and use regulatory and central government power (the military is not the only machinery the government needs to learn to trot out!), to reinvest in the world as much as we expect the world to give us; keep our own CEO:serf pay ratios in line; keep all parts of the national and international economy transparent (media, communication costs, health costs...); we should only see rising wages, (within and outside the US) and improved growth as the rest of the world converts their slums into little edens, build their autobahns, and supermalls, become producers as well as consumers.

Posted by: Mercy J on April 2, 2004 07:39 AM

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Boelf,

The benefit of outsourcing is not necessarily the extra investment here at home, it's in the receiving of cheaper goods or goods and services that would not otherwise have been available.

A small case in point: the Brazilian kitchen knives and Chinese scissors that you can buy at the dollar stores today are the same kind and quality that you used to buy from Germany for forty bucks twenty years ago.

What used to be luxuries of the American upper-middle and yuppie classes -- the accoutrements of the Pierre Franey kitchen -- are today the everyday goods of ordinary working American.

Posted by: David Lloyd-Jones on April 2, 2004 07:41 AM

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Brad writes: Nevertheless, over the subsequent nine months this meme grows. Not just manufacturing jobs, but white-collar service-sector jobs as well. Not just China, but India--with its pool of well-educated English-speakers.

What nine months? The problem have been around for years. The reason it risen up to national prominence is a jobless recovery/massive growth in outsourcing. When companies report new layoffs every day, when people disappear from the workforce in startling numbers, when qualified professionals cannot find jobs for months the soothing talk about benefits of free trade just does not work anymore.

Posted by: bubba on April 2, 2004 07:43 AM

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Zizka writes:
"why anyone should have any regard for the needs and opinions of propertyless people who have no salable job skills. Why should they be treated any more kindly that unprofitable enterprises, unsaleable products, uneconomic mines, or unproductive farmland? Just take 'em out of the system."
What mechanism would you recommend?
Just gradual tailored deprivation of food and drink, or something a little speedier like the Rwandan genocides or the gas chamber?

Posted by: Mercy J on April 2, 2004 07:50 AM

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Finally, analysis with some nuance beyond good vs. bad. However, Boelf above has stated the issue that Brad needs to work on: why oh why would all this profit derived from the advantages of outsourcing ever be invested in US jobs if the growth in jobs is overseas? Friedman has gone to great pains in his columns to stress the American participation in the ownership of these offshore service companies. I think a lot of the benefit will be used to accelerate the offshoring process.

And interesting that he cites McKinsey; I heard through the grapevine some time ago they outsourced 'all their back office processes' to the Philippines because a motivated college grad goes for $3k a year there. Sorry, no link, just a comment from someone who works there.

Posted by: Nat on April 2, 2004 07:58 AM

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Or here is an alternative outcome. An interesting paper from Robert Blecker--
http://www.american.edu/cas/econ/faculty/blecker/financial-revised.pdf
--an economist at American U, makes the following basic points:
Exchange rates do not follow any discovered fundamentals in the near or medium term.
Hence exchange rates can not correct for trade imbalances. (in fact, it is common for a country with a trade deficit to have an appreciating currency).

Because of this, the priniciples of comparative advantage trade do not apply. In Blecker's words "Chronically unbalanced trade is not (and can never be) comparative advantige trade"

Instead, other mechanisms of adjustment apply. Usually slower growth or unemployment. Seems about right to me.

Most economists don't agree with him. OK. In 1929, most economists couln't believe that an economy could mismatch supply and demand for a prolonged period of time. But it could, and it took new theories to describe how. I suspect that after 10 years or so of sustained stagnation and underemployment, economists will wonder how we could have been so blind to the dangers of grossly unbalanced trade.

Posted by: marku on April 2, 2004 08:15 AM

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" For we have not, we do not as a country make the investments in retraining and rebuilding needed to transfer some of the gains from the winners to the losers,"

Which is good. Because such attempts done politically only slow the process down. Retraining and rebuilding are best done by the individuals impacted. They're the ones with the knowledge. File this under, Sweet Are the Uses of Adversity.

Posted by: Patrick R. Sullivan on April 2, 2004 08:15 AM

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Nice article. What I'd like to see is for someone to treat both offshoring AND automation in the same analysis. Because they really seem like different sides of the same coin to me, that coin being the relentless war on payrolls by modern corporations. People are troublesome -- they need wages, vacations, health insurance, retirement plans, training, re-training, hiring, firing, etc. Moving the people off the payroll to a local outsourcing/temp arrangement helps, moving them overseas helps even more, but trading people for machinery or microchips helps the most.

I'm not implying any evil motive here, it's simply the efficient way for firms to go. But the cumulative effect on wages, on job stability, on what used to called a "career path" will be devestating. In short, attempting to solve for offshoring will only address part of the overall problem of having enough useful work to go around in the future.

Posted by: eSteve on April 2, 2004 08:33 AM

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"Retraining and rebuilding are best done by the individuals impacted. They're the ones with the knowledge".

Are they? There are two posts above from Boelf and rps saying they don't know what jobs to train for. I haven't seen any responses to their question "where are the stable jobs"?

I'm 50, and have been under-employed as a contract programmer/consultant for three years. I don't have money for retraining, and if I did, I'm not sure where I should look. Is there any point in getting certified in a new technology in this environment? How likely is a firm to hire someone at my age as a developer, regardless of my background? I honestly don't know the answer to that, but I suspect it's not what I want to hear.

"File this under, Sweet Are the Uses of Adversity".

How jolly.

Posted by: Peter on April 2, 2004 08:46 AM

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Brad, the one question I'm yet to hear addressed is what the nature of the new (and presumably better) jobs will be. When you say "we have plenty of time: time to build...the education and retraining programs", my question is education and retraining for what (e.g., what are the academic fields in which this will/should occur)?

Just curious if you have any ideas on this. I'm retired and out of the job market, but my son is just entering it, and it's his generation I'm concerned about.

Posted by: ace on April 2, 2004 08:55 AM

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Good article -- very educational for me (engineer, not economist, but learning!). May I make a grammatical suggestion? This:

"The income gap between Japan in and America in the 1970s was a matter of one-to-two. The income gap between India and America tomorrow will be one-to-ten. "

Would read more clearly if you reverse the order of the countries and the ratios. "One to two" is easily mistaken for "between one and two"; likewise "one to ten".

Posted by: John Stein on April 2, 2004 08:56 AM

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A very nice, analysis, Brad. I have a couple of points:

1. Technical -- you refer to a "swatch of our jobs." You may well mean "swatch" -- a patch or piece -- but I rather think you mean "swath."

2. Like you, I'm a college prof. My experience is that a significant portion of the population, coincidentally those most likely to be made redundant, do not possess the skills to be educated for outsourcing-proof (a chimera, I believe) "symbolic analyst" jobs.

3. As others above have mentioned, I'm sceptical that our society will accept the expenses of a "safety net" that will provide for all.

Posted by: Roger Karraker on April 2, 2004 09:09 AM

____

Some good comments here and some people have hit on what I consider the key point - the profits do not have to generate much demand in the US - they will generate some, of course, but much less than if the jobs were created in the US. As I've noted a number of times, the law of comparative advantage as envisioned by its creator assumed that capital was not all that free to move. In a situation where it is - capital WILL flow to the highest risk adjusted return and if that is not in the US, so be it. The price of goods may go down and that is a benefit - but it does not automatically outweigh the lost jobs and lost intenral demand that outsourcing leads to.

Expanded comments on Capital flows: http://www.la-mancha.net/archives/000066.html

http://www.la-mancha.net/archives/000085.html

Posted by: Ian Welsh on April 2, 2004 09:11 AM

____

Not a good issue for Kerry, who has voted for every free trade bill and is husband to Theresea whose company has moved massivly overseas.

Posted by: Mike Strickland on April 2, 2004 09:16 AM

____

Mercy J -- please re-read Zizka's comment carefully; I think you are attributing to him sentiments he doesn't hold.

Posted by: John Stein on April 2, 2004 09:45 AM

____

Brad wrote:
"Moreover, it is a truth universally acknowledged (except in campaigning seasons) that the level of employment in the United States is not set by levels of imports and exports, but by whether the Federal Reserve's monetary policy manages to tune the level of aggregate demand to that sweet spot where there is neither high unemployment nor accelerating inflation."

Brad writes this constantly. Is he talking about the federal fund rate, which is now at 1%? I don' think you can go lower to stimulate demand. If it is at 1% and there is still no employment growth I think something else is at play.

You could also look at what reagan did and see the result. One of the first things he did was institute an extremely regressive restructuring of the tax code(tilted to the high earners of course). Which of course caused a massive budget deficit. He then instituted a number of extremely regressive tax INCREASES on the middle and lower classes to close this deficit. You would think these two events would have killed demand and therefore job growth, but it didn't. What was different? I have my own ideas, but maybe some people smarter than me can come with some.

Posted by: SteveC on April 2, 2004 09:58 AM

____

One issue I don't see discussed here is the probability of a strenghtening of the safety net. It would seem on a superficial analysis that the new jobs will have less negotiation power than the old ones. They will require less skill, they will be non unionized, they will be in the service sector, etc.
That probably means that this new jobs will pay less, be easier to fill and the workers will be less organized.
It would seem then that the workers side will be less economically and politically powerful than today, which begs the question ¿ If that is the case, where will the political power to impose a dramatically more redistributive policy come from?

Posted by: Carlos on April 2, 2004 10:02 AM

____

Patrick R. Sullivan writes:

Retraining and rebuilding are best done by the individuals impacted. They're the ones with the knowledge.

How, exactly, are layed-off workers to rebuild and retrain? Layed-off workers are not exactly swimming in funds (one of the down-sides of wage-labour is trading private property for earned income). Knowledge is one thing, financial bility is another.

Posted by: padraig on April 2, 2004 10:19 AM

____

Another post (I have no life, you see):

While purchasing power is likely to rise as a result of off-shoring, it's important to ask which prices will be lowered. If the price of food and other essentials is lowered, then we get a real gain in wages for workers which could off-set the loss in wages. If, on the other hand, the prices involved are for luxuries (personal computers, teleconferencing, telemarketing) the addition to real wages will be much lower, and certainly delayed as more aggressively off-shoring companies take advantage of the situation to reap higher profits without lowering prices. The real question comes in the Middle-Class, which is most directly threatened by off-shoring: once their good jobs are replaced by lower-paying ones, demand will fall, and I would think by a lot. That could really be the end of the large US Middle Class, and its associated standard of living. Can a consumer-driven economy exist in a low-wage atmosphere? Extra props to Boelf for mentioning the problems of free trade and reinvestment.

Posted by: padraig on April 2, 2004 10:28 AM

____

I don't have a short answer to what jobs to train for. But one clue is that India and most low-wage third world countries are capital-poor. If we can identify jobs which require high levels of capital equipment per worker, these jobs will be relatively immune to outsourcing.

The U.S. has an enormous capital base; we're still one of the largest manufacturing companies in the world, and of course one of the wealthiest. We can easily afford to purchase equipment which will give our workers capabilities that just can't be reproduced in poor countries like India. These are the jobs where the U.S. will have an ongoing advantage over its low-wage competitors.

So what are the jobs that require this kind of equipment? Well, I'm not an expert in the relevant areas. But many forms of engineering use expensive equipment: biotech, aerospace, maybe supercomputer applications. Of course there will be many others. These may not be huge fields today, but as comparative advantage takes hold and each country begins to specialize in those jobs which it is best suited to do, these are the kinds of businesses where Americans (and the West in general) are going to have a long term advantage.

Posted by: Hal F. on April 2, 2004 10:37 AM

____

The article says that 10M jobs at $26,000 in India boosts their standard of living by 50%. Can some one explain how this is established?

Posted by: Anurag on April 2, 2004 10:40 AM

____

Mercy -- I was guessing what I though a pure economist would ask. My understanding is that there is nothing within economics itself giving any reason to keep propertiless, jobless people alive. The only exception might be skilled workers whose skills are expected to be salable in the futue; you would lend money to them at as high a rate as you could get, in expectation of getting a hefty chunk of their future earnings.

Politics, religion, family sentiment, ethics, and perhaps law give reasons for keeping uneconomic people alive, but economics doesn't.

Posted by: Zizka on April 2, 2004 10:50 AM

____

"2. Like you, I'm a college prof. My experience is that a significant portion of the population, coincidentally those most likely to be made redundant, do not possess the skills to be educated for outsourcing-proof (a chimera, I believe) "symbolic analyst" jobs."

Posted by: Roger Karraker on April 2, 2004 09:09 AM

One of the dismaying discoveries of this recession has been that the vaunted 'symbolic analyst' jobs are vulnerable to offshoring. The only question is 'some or most?'.

Posted by: Barry on April 2, 2004 10:51 AM

____

What jobs will not be sent to India? Well, if
the housing bubble bursts you can cross off
building trades. That leaves nursing and other
hands-on aspects of health care, table waiting,
burger flipping, and I would say teaching, but
that can be outsourced and sent back via TV.

Posted by: Bartolo on April 2, 2004 10:56 AM

____

Brad, excellent(intellectual biest)!Go, go Brad go, u r da man!

Reading "Rethinking International Trade" and quoting from PK:"Yet it has long been clear that comparative advantage-which I will here interpret loosely to mean a view that countries trade in order to take advantage of their differencies-is not the only possible explanation of international specialization and exchange.As Ricardo doubtless knew, and as modern theorists (not terrorists) from Ohlin on have reemphasized, countries may also trade (to act multilaterally, not unilaterally = protectionism,isolationism) because there are inherent advantages in specialization, arising from the existence of economies of scale.(Outsourcing)"

(∏(t0) = px–(α+βx)w;∏(t1)=p1x1–(α1+β1x1)w1;
∏(t1)-∏(t0)=∆∏;∆∏=I(US,t0)+∆I(US,t1))

Posted by: Basset-Hound on April 2, 2004 11:11 AM

____

"The article says that 10M jobs at $26,000 in India boosts their standard of living by 50%. Can some one explain how this is established?"
(Rising productivity = rising wage, empirically proved)

Posted by: Basset-Hound on April 2, 2004 11:23 AM

____

Ziska - sorry I misread you! and thank you John Stein for pointing that out! I am always prepared to hear some shocking anti-welfare, 'pull-yourself by your bootstraps like our great-grand-fathers did' comment, that I didn't read yours slowly enough. I'm as middle-class as they come, and worry for our kids' futures, but I worry even more that we are becoming a society that speaks an entirely different language from the rest of the world - its in Cyborg-ese (or whatever the robots speak): slash and burn, and keep the bottomline alive. The corporations we work, live and (now die in Iraq) for, infuse their mechanical, heartless decisionmaking criteria onto our psyches, until no one will be able to tell us apart from them, our masters!

Posted by: Mercy J on April 2, 2004 11:55 AM

____

HalF: "If we can identify jobs which require high levels of capital equipment per worker, these jobs will be relatively immune to outsourcing."

Haven't you just described manufacturing jobs?

Posted by: djs on April 2, 2004 11:57 AM

____

I think the trick is to produce a product that involves customization with short delivery times since mass produced commodities are manufactured more cheaply overseas.

High levels of required capital might be a good thing since it increases local barriers to entry, but it also increases risk.

Posted by: djs on April 2, 2004 12:09 PM

____

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

India’s Awakening
Stephen Roach (New York)

First impressions are superficial almost by definition. But more often than not, they end up pointing you in the right direction. Quite simply, I was blown away by what I saw on my first trip to India. It’s a land of great contrasts, to be sure -- strength in human capital and technology coexisting with backward infrastructure and heart-wrenching poverty. But there is no doubt in my mind that the balance has shifted. After decades of stop and go, the critical mass of a new approach to Indian economic development now appears to have been attained. If I’m right, not only would that have enormous implications for the world’s second most populous nation, but it could have profound implications for the Asian and broader global economy.

I just spent four days in India at the end of a two-week tour in Asia that also included China, Korea, and Japan. I visited with government officials in New Delhi, software companies in Bangalore, and investors, as well as technology, pharmaceutical, and industrial companies in Mumbai. I also met with several rapidly growing Indian subsidiaries of US multinationals. In addition, I took a long and arduous side-trip to Agra, where I was stunned by the sheer majesty of the Taj Mahal. I asked many questions, gave a few speeches, took copious notes, and recorded hundreds of digitized snapshots that have quickly become boring to my family and friends. There’s a fair amount of sensory overload in trying to sort through all the images, conversations, and insights that get filed away in a trip like this. But this visit to India was the missing piece in my Asian education. Up until now, it’s been a China-centric journey -- some 25 trips since 1997. But I have long suspected that there’s far more to Asia’s remarkable story. India convinced me that my instincts were right.

It’s tempting to make the China-India comparison -- trying to figure out which of these two Asian giants has the better approach to economic development. I see no reason to frame this in such black and white terms. In fact, I am inclined to argue that it’s not China or India but, in fact, China and India. Each of these two nations has a distinctly different recipe for economic development -- recipes that are complements rather than substitutes as they fit into the broad mosaic of globalization. To be sure, China has come first in the sequencing, but this breakthrough has served India well. As the rest of the world has finally come to accept the China miracle, that realization has opened the door for acceptance of the India miracle. As one Indian leader put it to me, “It’s the flying-geese pattern of Asian development.”

As China is to manufacturing, India is to services....

Posted by: anne on April 2, 2004 12:10 PM

____

Brad, on 3/28 you wrote:

"But--holding real GDP constant--a decline in the wages of high-skill workers is a rise in the wages of low-skill workers (and a rise in profits). Isn't there a chance that the yuppies facing competition from Bangalore will be a highly positive development, pushing U.S. wage levels together and raising the real wages of those at the bottom??"

Does this mean you've changed your mind?

Posted by: David Yaseen on April 2, 2004 12:12 PM

____

EDUCATION, EDUCATION, EDUCATION

Baloney!, Baloney!, Baloney!

A few points about education:

1. There are plenty of qualified unemployed software engineers in the Silicon Valley, for example, to do the work being moved to India. The jobs are being moved for the low wages and not because of any "Shortage" of workers in the US.

2. The oil crises of the 1970's taught Americans that there is no such thing as a shortage, it's just a matter of price. If you want more engineers et cetera, you have to pay for them.

3. Lowering the wages of knowledge workers will decrease the supply. The number of students applying to major in Engineering and Computer Science is going DOWN, due to the suppression of wages. Brad -- what are the statistics for this in the University of California as a whole? For Berkeley?

4. Decreasing the number of graduates in economically significant areas (engineering et cetera) will REDUCE US competitiveness, not increase it.

5. If, by jawboning and propaganda, you manage to increase the number of gullible students graduating in Engineering and Computer Science in the US to 4 times the current level, you may get some labor market share from India, but not much. The jobs these people get will still not be very good jobs. More competition at lower wages. As it is, graduates often cannot get jobs in the fields for which they studied.

6. Software engineering may be a special case, as the demand for software is also driven by the availability of computer hardware, which drops dramatically in price (and rises dramatically in quantity) all the time. When the average person has 100 microprocessors, they're going to have to find somebody to write all that software.

7. Education has it's own law of diminishing returns. A software engineer or radiologist trying to learn 3 or 5 times as much as the average graduate will discover that he or she needs to learn science that has not been discovered yet. While the universities have lots of unread books and untaken courses, most of these do not translate to on-the-job productivity. And even if they did, employers are not able to recognize this potential productivity based on new science. Hence, no jobs.

On the general topic:

1. Politicians who implement policies to benefit the world as a whole are not representing their constituencies. The US Congress and the President are not elected to represent the citizens of India. When the Indian politicians boast of raising the standard of living of Americans then we can reciprocate.

2. Policies that benefit US corporations or US investors are not identical to policies that benefit the US citizens as a whole.

3. In a few decades or centuries, when the third world labor market has been saturated, US labor rates may begin to rise again, theoretically. But by then the machines may have taken over entirely, and most of us will no longer be in the labor market, or alive.

4. Why is that the same people who fight against foreign aid, think it's just fine to support foreign economies at the expense of US citizens when it suddenly begins to benefit big corporations?

5. The thing that people don't get is that there is a subjective difference between the loss of manufacturing jobs and the loss of knowledege-worker jobs. When we lost manufacturing jobs, you could retrain, or at least you could make sure your kids got a good education so that there was a future. The loss of knowledge-worker jobs means that more education will produce much less benefit. The jobs being lost are at the sweet spot in the labor market. The market for Ph.d's is smaller than the market for bachelors degrees. How much more educated do you have to be so that you can be 5 or 10 times as productive as a competing Indian worker? What courses do you take if you're a laid off radiologist or software engineer?


Posted by: Warren on April 2, 2004 12:32 PM

____

As others have said: Good insights! When I saw the following I began to ponder our fate.:“The second half of the nineteenth century saw… Now the first half of the twenty-first century is seeing a transformation quite as great. “

I pulled Karl Polyani’s THE GREAT TRANSFORMATION from my shelves and dabbled a bit. I’ve never been able to read it cover to cover, so I dabble. The parallels of the eras are striking – at least to me – and frightening. Great Transformations are not easy things for societies and culture to deal with. There are many forces at work and some are particularly nasty.

It is far too easy to say that “gains” will outweigh “losses” and that we “have plenty of time to build the social safety net.” As Brad is aware but not strident about in this note, many of us are likely to go through Hell as this particular transformation plays out.

Permit me a few Polanyi quotes:

”The stupendous industrial achievements of the market economy had been brought about at the price of great harm to the substance of society.” (p. 186)

“Liberal economists, as usual, saw merely a romantic aberration induced by unsound economic doctrines, where in reality towering political events were awakening even the simplest minds to the irrelevance of economic considerations in the face of the approaching dissolution of the international system.” …

“Free trade which, in 1846, had been fought and won on the Corn Laws, was eighty years later fought over again and this time lost on the same issue. The problem of autarchy haunted market economy from the start. Accordingly economic liberals exorcised the specter of war and naively based their case on the assumption of an indestructible market economy. It went unnoticed that their arguments merely showed how great was the peril of a people which relied for its safety on an institution as frail as the self-regulating market.“ (p. 189)

I believe that we must be very careful to talk about economics in appropriate political and historical context. Otherwise we will downplay the ferocity with which transformations as great as the one we now face work their way through society. Otherwise we will miss linkages between economics, politics, war, and more.


Posted by: dabbler dave on April 2, 2004 12:48 PM

____

Warren

Strong argument, with an exception. A radiologist is a physician and can easily change practice. Cardiology and surgery and the like are not going to be done at any distance. Physicians have all the flexibility they need.

Posted by: lise on April 2, 2004 01:23 PM

____

SteveC wrote, "Brad wrote: 'Moreover, ... the level of employment in the United States is not set by levels of imports and exports, but by whether the Federal Reserve's monetary policy manages to tune the level of aggregate demand to that sweet spot where there is neither high unemployment nor accelerating inflation.' Brad writes this constantly."

I have the same question overall. Brad wrote a couple of months ago that if jobs are lost due to trade, the balance can, by and large, be restored by the fed. I don't see how this follows unless lots of other assumptions on the economy are being made.

Posted by: liberal on April 2, 2004 01:41 PM

____

Brilliant article, Brad, but -

1 - Can you cite any example of a job retraining program actually working?

2 - Isn't it possible that more of these higher end employees who lose their jobs will just do what I did and start their own business and actually do a lot better than they did as mere employees?

3 - Do you know of any economist who's worked on modeling a possible future economy where most higher end workers are actually independent small businessmen selling their services to the highest bidder? Benefits are not a real issue to me because, for example, since the first day I started my own business eleven years ago I've purchased medical, dental, disability and life insurance directly and have always deposited the maximum to my own pension/profit sharing plans. I see this to be no problem for other high end workers.

Adrian

Posted by: Adrian Spidle on April 2, 2004 01:42 PM

____

"Do you know of any economist who's worked on modeling a possible future economy where most higher end workers are actually independent small businesswomen selling their services to the highest bidder?"

Though we have done just this experience, there is little reason to think the possibilites are nearly widespread enough to make a difference for the entire economy.

Posted by: anne on April 2, 2004 01:59 PM

____

"actually independent small businesswomen selling their services to the highest bidder?"

Though we have done just this experience, there is little reason to think the possibilites are nearly widespread enough to make a difference for the entire economy.

Posted by anne"

This sounds like a feminist put down of traditional wives. Did you intend it that way/

Adrian

Posted by: Adrian Spidle on April 2, 2004 02:04 PM

____

Does anybody else here think it passing strange that two economists (including at least one who describes himself as 'Democratic leaning') could ramble on for so many words about one consequence ("outsourcing") of international trade as it is currently organized without even mentioning chronic, excessive, unsustainable U.S. trade deficit(s) and the economically inescapable consequences thereof:

------------

Interim Report: Notes on the U.S. Trade and Balance of Payments Deficits

Wynne Godley

http://www.levy.org/docs/stratan/stratan.html

------------

AND/OR that they managed to do that without mentioning too, the fundamental "structural" reason we (and the world) continue to suffer from the aforementioned chronic trade (and budget) deficits, recurring asset "bubbles", a shrinking middle class AND what is commonly called the race to the bottom:

------------

US dollar hegemony has got to go

By Henry C K Liu

http://www.atimes.com/global-econ/DD11Dj01.html

------------

James K. Galbraith on Global Keynesianism

http://www.jobsletter.org.nz/art/artg0002.htm

------------

Is it just a bad case of professional/ideological "denial"?

Or what?

Posted by: Mike on April 2, 2004 02:20 PM

____

"How, exactly, are layed-off workers to rebuild and retrain? Layed-off workers are not exactly swimming in funds (one of the down-sides of wage-labour is trading private property for earned income). Knowledge is one thing, financial bility is another."

You can't save while working?


Posted by: Patrick R. Sullivan on April 2, 2004 02:36 PM

____

Adrian

Grow up and lose the idiotic chip on that shoulder. Imagine, I even bothered to give a darn what you posted.

Posted by: anne on April 2, 2004 02:37 PM

____

"This sounds like a feminist put down of traditional wives."

Duh!

Posted by: lise on April 2, 2004 02:40 PM

____

Another dose "denial" medicine:

(STRICTLY for those politicaleconomic 'thinkers' who are willing to face the fact that we DO indeed have a problem)

------------

Main Causes of the Great Depression

Paul Alexander Gusmorino (1996)

http://www.gusmorino.com/pag3/greatdepression/

------------

THE END OF CHEAP OIL

by Colin J. Campbell and Jean H. Laherrère,

Scientific American, March 1998

http://dieoff.org/page140.htm

------------

Power to the people

Kevin Danaher

Observer (2001)

http://observer.guardian.co.uk/global/story/0,10786,524245,00.html

------------

The Divine Right Of Capital: Dethroning the Corporate Aristocracy

Marjorie Kelly (2000)

http://www.divinerightofcapital.com/

------------

BUSH'S DEEP REASONS FOR WAR ON IRAQ: OIL, PETRODOLLARS, AND THE OPEC EURO QUESTION

(Updated 5/27/03)

http://ist-socrates.berkeley.edu/~pdscott/iraq.html

------------

The Earth's life-support system is in peril

Margot Wallström, Bert Bolin, Paul Crutzen and Will Steffen

Monday, January 19, 2004

http://www.iht.com/articles/125563.html

------------


Posted by: Mike on April 2, 2004 02:54 PM

____

Where is Sullivan, Mike?

Posted by: Bernadette on April 2, 2004 03:09 PM

____

Sorry. We're all out of pie in the sky and lollipops.

But since you've been SO good about taking your denial medicine, here's a breath of fresh air and a ray of light just for you:

------------

Sustainable Village

National Renewable Energy Laboratory

http://www.thesustainablevillage.com/partners/nrel.html

------------

Posted by: Mike on April 2, 2004 03:15 PM

____

Wynne Godley asks: "Does anybody else here think it passing strange that two economists ... could ramble on for so many words about one consequence ("outsourcing") of international trade as it is currently organized without even mentioning chronic, excessive, unsustainable U.S. trade deficit(s) and the economically inescapable consequences thereof."

I don't find it strange. What I find strange is that anybody seriously listens anymore to economists who plead their cases "out of context," ignoring history, ignoring interrelated social systems, etc.

Brad DeLong is certainly not the worst of these. In fact, he often frames thing much more broadly than most economists. I read a lot of Brad's stuff (mining his site) to see "what else" he knows that isn't in any particular article. You can't put all you know into any one article. Still, I nudge him where and when I can to address context more fully than he often does.

Brad is political too, and therefore forms his words and thoughts carefully I suspect, so as not to be perceived too far out by the "powers that be."

Posted by: Dabbler Dave on April 2, 2004 03:26 PM

____

Who's "Sullivan" and what does he/she/it have to do with:

------------

"Feudalism with a Digital Face?"

http://www.divinerightofcapital.com/newpage15.htm

------------

and/or:

------------

"Deciphering The Hidden Language of Finance: Wall Street as a Colonial Power"

http://www.divinerightofcapital.com/newpage22.htm

------------

Bernadette?

Posted by: Mike on April 2, 2004 03:29 PM

____

Sorry, as I look closer it looks like it was "Mike" (not Wynne Godley) who asked the earlier question to which I responded.. d.

Posted by: Dabbler Dave on April 2, 2004 03:32 PM

____

Dabbler Dave on April 2, 2004 03:26 PM defends "careful" DeLong:

------------

"Brad is political too, and therefore forms his words and thoughts carefully I suspect, so as not to be perceived too far out by the "powers that be."

------------

Reminds me of another economist: A straight-shooting, "far out" economist who wasn't too timid to speak truth to the "powers that be" of his time--before all things politicaleconomic went COMPLETELY to hell...

------------

The Economic Consequences of the Peace

by John Maynard Keynes

1919

http://socserv2.socsci.mcmaster.ca/~econ/ugcm/3ll3/keynes/peace.htm

------------

An Open Letter to President Roosevelt

John Maynard Keynes

http://newdeal.feri.org/misc/keynes2.htm

------------

I wonder, Dave. Do they make economists like him any more?

Posted by: Mike on April 2, 2004 04:11 PM

____

the american economy outside of the deep south has been characterized by relative labor scarcity and thus high labor costs. this has made productivity and innovation essential for economic growth. what the global labor arbitrage does is replace labor scarcity with labor abundance, even at high skill levels (especially at such levels). This is a whole new ball game. It's a profound threat to the american economy as working americans have experienced it. our democracy is not robust enough to handle the coming tidal wave of inequality. that's just the political problem.

the economic problem (of course!) is where are the new jobs, what exactly will they be. can new job categories compensate for the shift from labor scarcity to labor abundance? this is the million dollar question. I am not optimistic.

Posted by: camille roy on April 2, 2004 04:28 PM

____

Beautifully written words, Brad! Too bad you'll have to eat most them in the not too far distant future -- when it becomes apparent that safety nets and retraining don't begin to solve the problem.
But, hey, by then, especially if Paul Samuelson is dead, you should have plenty of company from all your fellow economists who live in ivory towers. I suggest you get together and ask Alice Waters to furnish you with the recipe for a fine vinagrette.

Posted by: Luke Lea on April 2, 2004 05:45 PM

____

Let us consider

"That is 30,000 per month--not a huge amount in an economy of 130,000,000 jobs where we need an average rate of job growth of 150,000 per month in order to hold the unemployment rate steady..... In context, "outsourcing" is not a first-order feature of the U.S. labor market."

So on a per month basis the offshoring rate is 20% of the needed job creation rate and things are going to get worse.

That my friends IS a first-order feature.

Posted by: Eli Rabett on April 2, 2004 08:18 PM

____

The problem with your analysis, as I see it, is that you (seem to) assume that the overall economic system / marketplace is fair and meritorious in the first place. Who is it that gets to make decisions about outsourcing? Is it entrepreneurs, innovators, and savvy business people, or is it bureaucrats, aristocrats, and CEOs who are really just pyramid squatters? I used this example over on Yglesias, but since you mentioned auto manufacturing and the competitive threat from Japan, it will fit here as well. Remember, it was Roger Smith who destroyed General Motors with a maneuver similar to what we see with the outsourcing. He purchased the cheapest parts and components he could find. His Board, meanwhile, was asleep at the wheel, no doubt satisfied with the quarterly profit improvements. Eventually, however, the reduction of quality caused by the cheaper parts manifested into the loss of sales, and consequently, the loss of significant market-share for GM.

If you read HBR or Sloan, or Gartner, most have mentioned at one time or another the risks inherent in outsourcing, including the potential loss of information flow when part of the staff is separated from the core. From my experience, the foreign CSRs are having an extremely difficult time solving the customer problems, let alone providing the valuable and critical feedback to the product development staff, the folks who need the intimate details about how well the product is working, and what its design flaws are.

Which brings me back to my initial point. Are the mega-corporations really competing in a fair and open market? Do they really face competitive threats, or are they cash cows, where outsourcing is a move that improves profit while at the same time reduces quality, but where, because of marketplace sloth, the quality reduction doesn't create any immediate competitive threats? Profit improvement from reduced labor is tangible and immediately measureable, whereas loss of quality is INtangible and NOT immediately measurable, as GM learned. This latency period between cause and effect is problematic. Over a longer time horizon, the move to purchase cheaper inputs for the product might be revealed as nothing more than product debasement, an ancient trick that is still exploited today by CEO despots who fail to perpetuate the business they run, and instead seek to maximize their own short-term gain. Outsouring might be good, but the analysis of it has to be based in reality, not in a theory that our marketplace is de-facto purely competitive.

I think the overriding question is, has our system become so dominated by corporate administrators (who control the market, not by product quality and delivery perfection, but by administrative control) that we have stunted (through mega-mergers, both horizontal and vertical) the true, robust, and fair competition, where the entrance barriers to competing in any given niche are sufficiently low, and market response is quick and immediate, that merit is a measurable determinant as to which business survives. Likewise, does merit determine who gets capital, or is it more of a social question, who is it that wines and dines, or otherwise fraternizes with the Wall Street crowd?

Bill Gates, via market control (monopoly) purchased, stole, co-opted, or otherwise illegally ran out of business the free-market competition that in any way challenged his empire. Without proper restrictions, the market devolves to a giant game of Pac-Man, with the largest of the institutions 'eating' the emerging competition. Pure "free trade" does not exist, and the level of 'administrative control' that corporations exert over the marketplace dominates the economy. This would more appropriately be called aristocracy or bureaucracy or plutocracy rather than free-market.

In fact, take Bill Gates, the monopolist. How much wealth does he extract from the market because of monopoly power? Obviously, the numbers are enormous. Are there any ethical considerations to be made if an American monopolist chooses to increase his already immoral and illegal wealth by outsourcing for cheaper non-American labor, milking his monopoly at the expense of domestic employment? Now slide over from the pure monopolies and consider the same question of the corporate oligarchies that also don't have to compete (due to outrageously high entrance barriers) at a fair level? Same answer. What about the company that makes an inferior product, has difficulty making a profit, but doesn't go out of business because they exploit cheap foreign labor? Would it not be better if our marketplace was more responsive and the inferior product would die, giving way to a new company with a better product?

When you make your analysis based on modeling that supposes the marketplace is fair and competitive, you have made it based upon false assumptions.

Posted by: poputonian on April 3, 2004 05:53 AM

____

A politician would (could?) never argue for outsourcing on the grounds that it helps eliminate poverty around the world--what surprises me is that the mainstream liberal economists don't mention this much either. The authors devote one short but compelling paragraph to this topic:

And, conversely, consider India. Put 10 million people in India to work at $26,000 a year providing white-collar services to the industrial core, and you have boosted India's standard of living by 50%. And you have displaced only 4% of the potential target industries, for there are 240 million service-sector workers in the First World today.

Personally, I don't care about the welfare of an American any more than an Indian. Thus, outsourcing's main appeal for me is that small decreases in American wealth could lift tens of millions of Indians out of wretched poverty. (One of the many things that infuriates me about Michael Moore is that he ignores trade gains that come out of thin air to help people in developing countries and are also beneficial (on net) to people in the U.S. Sure, he's okay with sending jobs overseas as soon as foreign workers have all of the protections that Americans enjoy, as if the equivalents of OSHA and the EPA are going to spring up around the world without some antecedent economic development. Selfish jingoistic protectionism disguised as liberal concern for the world's poor.)

Posted by: Mark on April 3, 2004 08:58 AM

____

A couple of people have asked what they should train for, where the jobs of the future will be.

I'll bite.

I suggest that the first order of business should be

get a passport.

If you qualify for dual citizenship, get both, especially if it's an EU country. An EU passport means you can work anywhere in the union without requiring a visa. Very very handy.

Get used to the idea that, no matter what you train in, your country doesn't want you. It might say it does, but just cos it's talking the talk, that doesn't mean it's walking the walk. So, when the time comes to leave, you won't mind too much.

Education wise, I would be thinking along the lines of

hands on:

medicine
veterinary science

Don't settle for the basics though, either specialise (eg cardiac surgery) or get a higher qualification (PhD in virology, pathology etc).

Not to fond of biologicals?

engineering/science

chemistry and biology by themselves are dead ends, unless you really put in a big effort BUT they look a whole lot better if you combine them with an engineering degree. Come to that, so does physics and mathematics.

The value here is not so much in the degree/s themselves, but proving that you can think in different modes. An engineering/law degree would be a neat combination.

Oh, and did I mention to really really really get that passport?

I've read that something like 1 million Australians are working overseas, and that these are, to a large extent, very highly trained individuals.

That's something like 5% of the population.

Now that's an outsourced economy.


Posted by: polychrome on April 3, 2004 09:22 AM

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Mike,

I believe there are economists living today who are as couragous and forthright as John Maynard Keynes. Although there are far too few of them.

Perchance Brad DeLong is one of these. Perhaps not. Rather than defending Brad I was just making a point that many in government service and many in academia (as Brad used to be, and now is) couch their words to fit into molds, to be part of professional societies, to get published, etc. It's a pretty sad state of affairs, this "politically correct" world of ours. But there are signs that it is loosening up a bit. Witness this forum and other fora.

It's only the radicals who dare to be different enough to go down in history as innovators. Maybe Brad really sees the world in a narrow frame than you or I do. In that case we'd better hope that he never sits on a future Council of Economic Advisors. Or maybe he just sees the world differently, in which case he might well be a good candidate for such a position.

Which brings me to another matter: Who ought to sit on, say, John Kerry's Council of Economic Advisors?

Amartya Sen?
Joseph Stiglitz ?
Herman Daly ? (ecological economist)
Robert Heilbroner ? (philosopher)
Paul Davidson or someone else from the Post-Keynesian bunch?
Someone from the Minsky branch of the Post-Keynesians?
Brian Arthur or another complex systems theory person?
A game theory person?
An asymetric information theory person?
??????????

Not that many of these folks would even be considered. But it would be nice to see a variety of sub-disciplines represented on a Council specifically set up to explore context rather than to agree on answers to the "wicked" economic and social problems faced by societies in this interconnected age...


Posted by: dabbler dave on April 3, 2004 09:29 AM

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Dave, that's a great list. Why don't you put me and you on it too, as long as we're dreaming. And a pony.

Posted by: Zizka on April 3, 2004 11:31 AM

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http://www.morganstanley.com/GEFdata/digests/20040331-wed.html
Offshoring -- Myth and Reality
By Stephen Roach

http://www.wachovia.com/ws/econ/view/0,,1636,00.pdf
So Much Growth Yet So Few Jobs
How Do We Reconcile Such a Wide Discrepancy?
By Mark Vitner

Vitner, by the way, cites a study by the Federal Reserve Bank of Richmond on the job-retraining process that sounds rather interesting:

http://www.rich.frb.org/pubs/regionfocus/winter04/cover.htm
Global Gain, Local Pain
The Globalization of Manufacturing has Produced Cheaper Goods for Everyone, but the Trend has Cost Hundreds of Thousands of Jobs in the Fifth District
By Karl Rhodes

Posted by: DrK on April 3, 2004 12:30 PM

____

"For each Speaker Hastert talking about "Benedict Arnold CEOs" there are two Democratic counterparts (For most Democratic representatives and senators believe that they need to be two steps more protectionist than their Republican counterparts in order to be politically viable.)" -- Brad Delong

-- I think that you mean John Kerry here, not Hastert. If I am wrong, where and when did Hastert say this?

"Cardiology and surgery and the like are not going to be done at any distance." -- Lise

-- Yes, they will(and are). The difference in cost between having major surgery done in the USA and India is more than enough to make up for travel costs to India. I know this was probably not the "distance" which you meant, but see the following story as well:
http://www.globetechnology.com/servlet/story/RTGAM.20030304.gtrobot/GTStory

Posted by: torsor12 on April 3, 2004 09:58 PM

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http://www.eurekalert.org/pub_releases/2004-03/i-osm033104.php
IEEE: Offshoring study misses important issues
WASHINGTON (31 March 2004) – An offshoring study touting benefits to the United States on outsourcing high-wage jobs to lower-cost countries fails to address a number of important issues, according to IEEE-USA.

The Information Technology Association of America (ITAA) sponsored the study, "The Impact of Offshore IT Software and Services Outsourcing on the U.S. Economy and the IT Industry," and Global Insight (USA) prepared it. Relying on econometric models, the report's executive summary predicts that the savings and other benefits realized through offshoring IT software and service jobs will result in the net creation of 317,387 new jobs in the United States by 2008.

"Industry-sponsored reports such as this tend to confirm what we already know – that offshoring helps the corporate bottom line," IEEE-USA President John Steadman said. "But they invariably fail to address the implications of offshoring on the long-term technological competitiveness and security of the United States."

"There is little doubt that U.S. companies are reaping short-term benefits from offshoring," added Ron Hira, chair of IEEE-USA's Career & Workforce Policy Committee. "It's not as clear, however, whether the U.S. economy – especially at a time of little or no job creation – benefits from it. Positive net benefits depend on re-employing displaced workers in equal or better jobs, which is not occurring right now, despite economists' predictions."

The unemployment rate for U.S. computer scientists and systems analysts reached an all-time high of 5.2 percent in 2003. The joblessness rate for electrical and electronics engineers rose by 47.6 percent in 2003 to a record 6.2 percent, compared to 4.2 percent in 2002.

The study's conclusions are based on two significant assumptions that bear close scrutiny. First, it assumes the U.S. economy will benefit through reinvestment of the savings realized by U.S. corporations that offshore their software and IT services. This assumption ignores the likelihood that many companies will invest those savings into their own overseas operations, or divert such savings into windfalls that benefit only corporate executives and stockholders. It is reasonable to believe that a significant percentage of those savings will flow to other countries, and that many of the new jobs will be created overseas.

The study also assumes that the new jobs are essentially equal to those being destroyed, and that replacing offshored, high-tech jobs with other support and service jobs will not impact U.S. ability to maintain a technological edge in an increasingly competitive global economy.

###

IEEE-USA's recently adopted offshoring position is available at http://www.ieeeusa.org/forum/POSITIONS/offshoring.html.

IEEE-USA is an organizational unit of the IEEE created in 1973 to advance the public good, while promoting the careers and public-policy interests of the more than 225,000 technology professionals who are U.S. members of the IEEE. The IEEE is the world's largest technical professional society. For more information, go to http://www.ieeeusa.org.

Posted by: rdb on April 4, 2004 06:12 AM

____

You think outsourcing is bad now; just wait until they invent remotely operated robot avatars for people in third world countries to use for doing the rest of the jobs that require physical presence.

IIRC, people are already experimenting with this type of technology for use in performing long-distance surgery.

Posted by: DanM on April 4, 2004 07:10 PM

____

"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."

Remember: trade balances? A perfectly meaningless phrase when one thinks of the long term implications of trading a Nation's assets for current consumption and the importation of factor
services. It's like economists have an educationally-endowed handicap which doesn't allow them to think beyond the ramifications of Ricardo's Utopia and the price-gold-flow mechanism.

Posted by: Chas Anderson on April 5, 2004 04:54 PM

____

Bravo! Much better than your justly maligned earlier whimsical posting.

In 10 years the boomer die-off begins. How will the shuffling of us boomers into the grave and off the stage alter this dymanic? Will it be a countervailing force?

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Brad,
The theory that "retraining" can have a net positive effect on employment assumes that there exist job categories whose outsourcing will have a time delay factor greater than the cost of retraining, especially when surplus imports of goods and services are paid for not by trade but by deficit sale of capital ownership of improved and raw land, stocks, bonds, and national debt.

Under a balanced trade regime, the economic functions most efficient in the domestic market would outcompete imports in the classical method, but with unlimited deficits long term capital transfers replace the mechanism of comparative advantage with a short term loss of both domestic and foreign markets and long term loss of capital ownership and relative capital investment.

Debasement of the currency has been long claimed as the cure-all for this trend, but in practice has predictably failed as deficits continue to rise.

A purely mathematical economics which ignores the fact that nations compete politically for industries and markets cannot provide an escape from the national ambitions of our competitors any more than disarmament can provide defence against war.

BC

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