ARC's 1st Law: As a "progressive" online discussion grows longer, the probability of a nefarious reference to Karl Rove approaches one

Tuesday, November 08, 2005

Dr. Strangelove or: How I Learned to Stop Worrying and Love Outsourcing

Economic Protectionism (and isolationism in foreign policy) find audiences on both the Right and the Left. However, both have been proven to be unfounded not only in theory, but in practice. Hitler and the Japanese proved that the US could not remain isolated from the conflicts in the world and Osama Bin Laden proved that the spread of democracy and freedom is in the best interest of the United States (and is crucial to our very survival in the long term). Well, economic protectionism has become the last refuge of the scoundrels on the Left and Right (take your pick) and it too should be recognized for the fallacy that it is.

Remember all the bleating about the outsourcing of America (from the likes of John Kerry, Lou Dobbs, etc, etc)? Well, as professor Gregory Mankiw pointed out in 2004, outsourcing is good for America. Agence France Press points out that conventional wisdom is (once again) wrong:

Outsourcing assumptions turned upside down by report
Agence France Press
1 November 2005
[...]
The outsourcing of technology jobs to low-wage countries will provide a $68.7-billion (U.S.) benefit to the U.S. economy in 2005, said a study released yesterday, challenging key assumptions about shifting work offshore.
[...]
The report concluded that despite the loss of some jobs to low-wage countries such as India, that worldwide sourcing of IT services and software generated 257,042 new U.S. jobs in 2005.

“No one is denying that there are job losses, but the net effect is that you create more jobs than you lose” in the overall economy, said Nariman Behravesh, chief economist at Global Insight and lead author of the report.

The benefits come from lower inflation, higher productivity and lower interest rates that boost economic activity, the report concludes.

The researchers calculated this provided a net benefit to real U.S. gross domestic product of $68.7-billion in 2005, and that this would rise by 2010 to $147.4-billion compared with a situation without any offshore outsourcing.

“The main thing is cost savings which radiate out in the form of lower prices for high-tech goods, and higher profit margins for the companies,” Mr. Behravesh said.

So you have lower inflation, which means higher real income; you have higher profits. Companies use higher profits to invest more; consumers use higher incomes to purchase more . . . all these produce a much stronger economy and produce more jobs than the offshoring destroys.

In terms of jobs, the report concluded that offshore outsourcing led to the creation of more than 419,000 jobs, more than offsetting the 162,000 technology jobs displaced by the shift.

The report flies in the face of criticism that the U.S. economy and workers are being hurt by sourcing of computer-related jobs to low-wage countries, an issue intensely debated in the 2004 presidential election campaign.

“Global sourcing continues to be a net positive for American workers and the U.S. economy,” said ITAA president Harris Miller.

“By driving down the costs associated with computer software and services and by opening more overseas markets to U.S. competition, global sourcing sharpens our country's competitive edge at home and abroad. The result is more American jobs, higher wages and a faster growing economy overall.

Mr. Miller said that the IT industry is still growing and the United States faces possible shortages of science and engineering graduates.
Now, outsourcing certainly can be difficult at the micro level... individual helpdesk jockeys in the US certainly are hurt by such economic activity. However, those resource could (and are) better utilized for higher value tasks. Similarly with programming that gets sent overseas... All this means is that today's Computer Science grads aren't cranking out meaningless code - rather, they're working on the cutting edge of technology and/or interfacing with customers instead of being stuck in a cubicle for a few years. In some cases, they're managing the very people in India who are now doing the grunt work. The skills that these workers obtain doing these higher level tasks result in higher productivity for the economy and higher compensation for them as individuals.

Now, there is a dark and painful side to this phenomenon - the worker that will not retrain or pursue work that is of a higher value. Like the buggy-whip maker in 1905 hoping that the dreaded horseless carriage will prove to be a failure, these workers hope and pray that someone will stop this mindless outsourcing. Howevwer, it's impossible to turn back the clock on free markets. Doing so would only put the US in greater economic peril...

What's the best way to insure that we're able to compete in this global economy? It's not protectionism that the cure - it's education. And our education system in the US is woefully inadequate - in every aspect. From teacher compensation to student incentives to curriculum, we are doing a disservice not only to our students, but also to our country. And education should be seen as not only an activity for the young, but also for every adult in this economy. But that's a post for another day.

Your Co-Conspirator,
ARC: St Wendeler

Comments (2)
Intellectual Insurgent said...

You should read The World Is Flat by Tom Friedman. It's an excellent book about outsourcing.

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