In the News
Recently, the president's chief economic adviser, Gregory Mankiw, sparked a firestorm of controversy when he stated that outsourcing jobs to other countries was "just a new way of doing international trade" and "a plus for the economy in the long run."
Mr Mankiw's proposition, in essence, is the law of comparative advantage, first postulated by David Ricardo two centuries ago and demonstrated to astonishing effect since. Yet the Republican speaker of the House of Representatives, Dennis Hastert, joined Democrats in their rebuke of Mr. Mankiw for approving of jobs going overseas; another Republican called for his resignation. The White House gave Mr. Mankiw only lukewarm support—unsurprisingly, since Mr Bush recently signed a bill forbidding the outsourcing of federal contracts overseas. And the Democratic presidential contenders? Mr Mankiw had just written their attack ads. (Ed. "The Great Hollowing Out Myth")
And the attack was instantaneous:
"If this is the administration's position, I think they owe an apology to every worker in America," said Senator Tom Daschle of South Dakota, the Senate Democratic leader. "There is absolutely no justification for arguing that we could support jobs going overseas,… "
"The Bush administration said that sending American jobs overseas is a good thing for America and good for the economy," Senator John Kerry of Massachusetts, the front-runner for the Democratic presidential nomination, said in a statement released by his campaign.
"They've delivered a double blow to America's workers—three million jobs destroyed on their watch, and now they want to export more of our jobs overseas. What in the world were they thinking?" (Andrews)
What, indeed? Well, certainly the thinking is neither revolutionary nor radical. The law of comparative advantage has been the accepted postulate of economic thought on trade since Ricardo. It asserts that companies should specialize in the good or service they can produce at least opportunity cost, and should trade for everything else. Mankiw was simply restating this conventional wisdom that if something can be made more cheaply by someone else, we're better off to buy it from them than to make it ourselves. If "we" and "they" live in New York and Chicago, the statement tends to draw yawns. Ho-hum. So what? But the least-cost producers Mankiw referred to live in India, and that, in this election year, seems to be an entirely different matter.
Directions
The excerpts below come from widely read and respected news sources, among them The Economist, The New York Times, and The Wall Street Journal. Read the excerpts and discuss the questions in small groups.
What's All the Noise About?
"Outsourcing" and "offshoring" are used to describe the practice of American firms lowering costs by contracting with workers or companies in other countries for the labor to produce a good or service, and/or by building capital—factories or research facilities—in other countries. The practice is not new; many U.S. apparel and manufacturing firms have outsourced production for years—much to the dismay of significant numbers of low-skilled American workers. In recent years outsourcing has spread to research and development (R&D), information technology (IT), computer programming, and medical and financial services. Forrester Research consultancy estimates that 3.3million American service-industry jobs will have gone overseas by 2015. The new wave of outsourcing is affecting American workers in high skill/high salary jobs, and they aren't taking it quietly.
The question under debate is whether outsourcing, or trading in resources like labor and capital, are "just a new way of doing international trade," as Mankiw put it to Congress. Or, is outsourcing something to fear as fundamentally damaging to the U.S. economy? The Economist provides the historical context.
Outsourcing has been going on for centuries, but still accounts for a tiny proportion of the jobs constantly being created and destroyed within America's economy. Even at the best of times, the American economy has a tremendous rate of "churn"—million jobs a month. In all, the process creates many more jobs than it destroys: 24 million more during the 1990s. The process allocates resources—money and people—to where they can be most productive, helped by competition, including from outsourcing that lowers prices....
…[T]hree notable economists, William Baumol, Alan Blinder and Edward Wolff, point out in a recent book [that churning]…has been going on in the American jobs market for years, and 'the creation of new jobs always overwhelms the destruction of old jobs by a huge margin.' [Emphasis added.] Between 1980 and 2002, America's population grew by 23.9%. The number of employed Americans, on the other hand, grew by 37.4%. Today, 138.6 million Americans are in work, a near record, both in absolute terms and as a proportion of the population.
Of course some firms wither—Reynolds Tobacco's workforce shrank by nine-tenths between 1980 and 2002—but others grow: Wal-Mart's by 4,700%. During the 1990s, about a quarter of all American businesses shed jobs in a typical three-month period, equivalent to 8 million jobs. Yet jobs created greatly outnumbered these, to the tune of 24 million over the decade…. (Ed. "The Great Hollowing Out Myth")
For the American middle class, attention and concern focus on India, where an educated, English-speaking population has clamored for jobs that allow them to live comfortably in their country—at wages well below those demanded by their American counterparts.
Plenty of Americans know of India's inexpensive software writers and have figured out that the nice clerk who booked their air ticket is in Delhi. But these are just superficial signs of India's capabilities. Quietly but with breathtaking speed, India and its millions of world-class engineering, business, and medical graduates are becoming enmeshed in America's New Economy in ways most of us barely imagine. "India has always had brilliant, educated people," says tech-trend forecaster Paul Saffo of the Institute for the Future in Menlo Park, Calif. "Now Indians are taking the lead in colonizing cyberspace."
This techno take-off is wonderful for India—but terrifying for many Americans. In fact, India's emergence is fast turning into the latest Rorschach test on globalization. Many see India's digital workers as bearers of new prosperity to a deserving nation and vital partners of Corporate America. Others see them as shock troops in the final assault on good-paying jobs. Howard Rubin, executive vice-president of Meta Group Inc., a Stamford (Conn.) information-technology consultant, notes that big U.S. companies are shedding 500 to 2,000 IT staffers at a time. "These people won't get reabsorbed into the workforce until they get the right skills," he says.
No wonder India is at the center of a brewing storm in America, where politicians are starting to view offshore outsourcing as the root of the jobless recovery in tech and services. An outcry in Indiana recently prompted the state to cancel a $15 million IT contract with India's Tata Consulting. The telecom workers' union is up in arms, and Congress is probing whether the security of financial and medical records is at risk. As hiring explodes in India, the jobless rate among U.S. software engineers has more than doubled, to 4.6%, in three years. The rate is 6.7% for electrical engineers and 7.7% for network administrators. In all, the Bureau of Labor Statistics reports that 234,000 IT professionals are unemployed.
. . . . By some estimates, there are more IT engineers in Bangalore (150,000) than in Silicon Valley (120,000). Meta figures at least one-third of new IT development work for big U.S. companies is done overseas, with India the biggest site. And India could start grabbing jobs from other sectors. A.T. Kearney Inc. predicts that 400,000 financial-services jobs will go offshore by 2008. (Kripalani)
Outsourcing, whether to India, China, Mexico, or even Ireland, is one of the components of the increasing integration of the world markets, a process that has come to be known as "globalization." It's not just American politicians who are interested in the repercussions of this trend; the question of jobs has captured attention throughout the developed world.
Many of the business, government and academic leaders who came . . . [to Davos, Switzerland]. . . for the annual meeting of the World Economic Forum, traditionally a gathering of advocates of globalization, have voiced doubts over the past few days about one of the central tenets of global economic integration.
They question whether the increasingly global economy will produce as many high-wage jobs in rich countries as once was expected.
Their concern stems from the free-trade axiom that when a rich country sends blue-collar jobs overseas, it creates opportunities back home for workers to move up the skill ladder. The more recent corollary was that sending service jobs overseas would do the same for white-collar workers back home.
But the rising number of skilled, white-collar jobs migrating from rich nations to developing countries is raising fears that, in fact, well-paid workers in developed countries will have trouble finding equally well-paid computer, design and medical jobs at home. . . .
Many economists at Davos said the fears over outsourcing were overblown. If Indian programmers, for instance, produce software at lower prices than Americans can, that would reduce costs for the many users of information technology. As that lower-price software permeates U.S. and European companies, those companies would become more productive and more able to hire new workers. At the same time, as India and China develop economically, they would become more lucrative markets for U.S. exports.
While the number of U.S. service workers whose jobs have been outsourced is small - estimates range from 250,000 to 500,000 during the past three years - the potential for further job loss is immense, all sides at Davos agreed. Brendan Barber, secretary-general of Trade Union Congress, a British labor confederation, estimated that two million service jobs could be outsourced from wealthy nations in the next five years. . . . .
Catherine Mann, an analyst at the Institute of International Economics
in Washington, has estimated that U.S. companies were able to reduce
the cost of computers and communications equipment by about 10% to 30%
by making the equipment in factories around the world. That lifted U.S.
economic growth by about 0.3 percentage point a year between 1995 and
2002, as more companies made use of information technology. She expects
similar economic gains if computer software is produced in an internationally
efficient fashion. (Davis)
What Goes Around Comes Around
The gains from trading resources and capital are both clear and dramatic: higher rates of productivity and economic growth, and increased innovation that lead to lower production costs and lower prices for consumers. Additionally, as noted by the management and consulting firm, McKinsey & Co., the lower costs enjoyed by U.S. based businesses help boost profts back at home. And those profits, in turn, lift the wages of American workers or are passed on to investors, encouraging them to continue investing.
A number of studies by Deloitte Research, Garner, Booz, Allen and other
consultants confirm that companies shifting work to India have cut costs
by 40% to 60%. Additionally, and importantly, the outsourcing that cuts
costs doesn't make companies smaller. General Electric sees its John F.
Welch Technology Center in Bangalore, India, as being important to the
future of the company, one of America's biggest and most profitable. "The
game here really isn't about saving costs, but to speed innovation and
generate growth for the company," explains Bolivian-born Managing
Director Guillermo Wolle. Growing companies from GE Medical Systems to
Cummins to Microsoft may be hiring in India, but many say they also are
not laying off any U.S. engineers. Instead, they are augmenting their
U.S. R&D teams. (Kripalani)
Overseas production also typically leads to more overseas sales, helping
fatten a company's top line. New York Times columnist, Thomas Friedman,
discovered one aspect of that reality first hand:
. . . [W]hen I came to the 24/7 Customer call center in Bangalore to
observe hundreds of Indian young people doing service jobs via long
distance - answering the phones for U.S. firms, providing technical
support for U.S. computer giants or selling credit cards for global
banks - I was prepared to denounce the whole thing. "How can it
be good for America to have all these Indians doing our white-collar
jobs?" I asked 24/7's founder, S. Nagarajan.
Well, he answered patiently, "look around this office." All
the computers are from Compaq. The basic software is from Microsoft.
The phones are from Lucent. The air-conditioning is by Carrier, and
even the bottled water is by Coke, because when it comes to drinking
water in India, people want a trusted brand. On top of all this, says
Mr. Nagarajan, 90 percent of the shares in 24/7 are owned by U.S. investors.
This explains why, although the U.S. has lost some service jobs to India,
total exports from U.S. companies to India have grown from $2.5 billion
in 1990 to $4.1 billion in 2002." (Friedman)
The latest study to hit the wires, commissioned by The Information Technology Association of America, confirms that outsourcing actually results in a net gain in U. S. jobs.
The in-depth Study found that global sourcing of computer software
and services, while displacing some IT workers, actually benefits the
U.S. economy and increases the number of U.S. jobs. According to Study
findings, the U.S. economy has much to gain from global sourcing and
an environment of free trade, open markets and robust competition. Benefits
include job creation, higher real wages, higher real GDP growth, contained
inflation and expanded exports resulting in increased economic activity.
According to the Study, U.S. spending for offshore outsourcing of computer
software and services is expected to grow at a compound annual rate
of almost 26%, increasing from approximately $10 billion in 2003 to
$31 billion in 2008. During the same period, total savings from the
use of offshore resources will grow from $6.7 billion to $20.9 billion.
Using offshore resources lowers costs and boosts productivity. As a
result, inflation is lower, interest rates are lower, and economic activity
is higher. The increased economic activity creates a wide range of new
jobs, both in IT and other industries. While there are some dislocations
that affect both industries and regions, the overall economy adjusts
so that offshore IT outsourcing actually creates new jobs. Over 90,000
net new jobs were created in the U.S. through 2003. The number of net
new jobs is projected to grow by 317,000 in 2008. The impact on U.S.
jobs does vary by industry sector, with the major beneficiaries for
the next five years being construction, transportation and utilities,
education and health services, wholesale trade, and financial services.
(Ed. "ITAA/Global Insight Study Finds IT Outsourcing Results in
Net U.S. Job Growth,"
No Free Lunch
The gains from increasing trade and economic growth do not come free; there is job loss and worker displacement in affected industries. Even in conditions of overall job growth, displaced U.S. workers are often unable to move into higher skilled and higher paying jobs. A study by McKinsey Global Institute notes that only 36% of Americans displaced in the previous two decades found jobs at the same or higher pay. The incomes of a quarter of them dropped 30% or more. (Kripalani) The gains of economic growth, increased innovation and worker productivity, spread over literally millions of people, are easy to overlook. Concentrated on specific individuals and industries, the pain of job loss draws our attention - as it should.
Will jobs be lost to the U.S. economy? The answer is a resounding yes. For the people receiving pink slips, the cost is very real and very immediate. The argument that, overall, the economy will benefit provides little comfort. It isn't hard to understand how those who have lost jobs or fear that they will lose them see the growth of global trade in labor and capital - outsourcing - as a threat to their way of life. As the fears of job loss take front and center in the super-charged atmosphere of the upcoming presidential election, there is a renewal of a call for laws and policies to insulate us from the effects of increasing globalization. History, however, tells us, unequivocally, that protectionism isn't the answer. Not only is protectionist legislation likely to spark retaliatory trade wars, it is highly unlikely to stem the tide of disappearing jobs. When costs are high, labor is at risk not only from cheaper workers, but also from automation. In competitive markets, companies will continue to strive to lower production costs, if not by moving jobs then by eliminating them altogether with machines and technology.
Recently weighing in on the discussion was Alan Greenspan, Chairman of the Federal Reserve. Greenspan told the House committee on education of the work force that in response to anxiety over the migration of jobs to Latin America and Asia and outsourcing of jobs to India and China, "a new round of protectionist steps is being proposed. These alleged cures would make matters worse rather than better. They would do little to create jobs; and if foreigners were to retaliate we would surely lose jobs." Instead, Mr. Greenspan said, the right response to anxieties over job loss is to improve education. (Ip)
It seems then that Mr. Mankiw has plenty of data and support for his
feeling that outsourcing will be good in the long run. However, he had
better hope the President doesn't outsource to an Indian economist.
Small Group Discussion Questions
- List three or four facts from the article that support Mr. Mankiw's
claim that outsourcing is "a plus for the economy in the long run."
- Is trading the resources of labor and capital the same as trading
goods and services? Explain.
- Are there people or industries that end up being worse off due to
the trading of labor and capital? Can you cite examples of this?
- When you add up the benefits of economic growth, innovation, lower
production costs and job creation will they always be greater than the
costs of trade?
- How can we best assure good jobs for American citizens in the future?
Sources
Andrews, Edmund L. "Democrats Criticize Bush Over Job Exports," The New York Times, February 11, 2004. pg. A 26
Davis, Bob. "The Migration of Skilled Jobs Abroad unsettles Global Economy Fans," The Wall Street Journal, January 12, 2004. pg. A 1
Ed. "The Great Hollowing Out Myth," The Economist, vol. 370. No. 8363. February 21, 2004, p. 48.
Ed. "ITAA/Global Insight Study Finds IT Outsourcing Results in Net U.S. Job Growth," Silicon Valley Business Ink, March 30,2004, p 2
Flanigan, James. "Offshoring Can Create Jobs, Too," The Los Angeles Times, February 29, 2004. pg. C.1
Friedman, Thomas. "What Goes Around . . . ," The New York Times, February 26, 2004. pg. A 27
Ip, Greg. "Greenspan Warns Trade Standards Will Harm U.S.," The Wall Street Journal, March 12, 2004. pg. A 6
Kripalani, Manjeet and Pete Engardio. "The Rise of India," Business Week, December 8, 2003. pg. 66+
Teacher Guide to Discussion Questions
-
List three or four facts from the article that support Mr. Mankiw's claim that outsourcing is "a plus for the economy in the long run."
Facts supporting Mr. Mankiw's statement include:- The number of jobs in the U.S. has increased to the point that 138.6 million Americans are at work. (The Economist)
- The Mann study showed that the 10% drop in the cost of communications equipment lifted U.S. economic growth by 0.3 percentage points a year between 1995 and 2002.
- The ITAA study showed a net growth of 90,000 jobs through 2003.
- U.S. exports to India had grown from $2.5 billion in 1990 to $4.1 billion in 2002. (The New York Times)
-
Is trading resources (labor and capital) the same as trading goods and services? Explain.
The results of trade are the same when trading goods or resources: lower costs, increased productivity, and economic growth. Both types of trade result in job dislocation and job growth. The labor effects of trade in goods is often not as obvious. For example, a U.S. firm competing with foreign imports may cut production or go out of business, both of which eliminate jobs. Labor outsourcing that results in the distribution of pink slips in an effort to reduce costs is a much more visible job loss process. -
Are there people or industries that end up being worse off due to the trading of labor and capital? Can you cite example of this?
As the article points out the answer to this question is a "resounding yes." There will be job loss in some sectors of the economy and some regions of the country. Examples from the articles include:
- The U.S. is shedding 500 to 2000 IT jobs at a time.
- There are more IT engineers in Bangalore than in Silicon Valley.
- The McKinsey study showed that only 36% of those losing jobs find new jobs at the same or higher wage, and that the incomes of one-fourth of job losers drop by 30% or more.
-
When you add up the benefits of economic growth, innovation, lower production costs and job creation will they always be greater than the costs of trade?
Most of the articles quoted make a clear and compelling case that this is indeed the result of trade - whether in goods or in capital and labor resources. However, this is the very question that lit the firestorm around Mr. Mankiw and will fuel the debates in the up-coming presidential campaigning.
The impact of job losses on individuals, industries and regions is usually very measurable and easy to see. We feel for people who lose their jobs; their loss is both visible and devastating. The gains from trade on the other hand, are widely diffused and often virtually invisible - lower prices for computers; increased construction demand because of increased income; increases in higher skill/higher wage positions in the U.S. etc. The gains from trade can look very small when any given gain is compared to the loss of a $100,000/yr. income to a single family. However, when the gains are added together, they well out weigh the individual losses. For instance the 0.3% gain in economic growth caused by lower prices of communications equipment noted by Mann would amount to millions of dollars in benefit to the U.S.
-
How can we best assure good jobs for American citizens in the future?
Students should pick up on Alan Greenspan's suggestion that "the right response to anxieties over job loss is to improve education." Improved education, resulting in the higher skills and higher productivity necessary to move into the jobs being created, is the clear path to keeping American workers on the job.