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  • Outsourcing:

    Answers on Outsourcing

    March 12, 2004: 8:18 AM EST

    The following is a guest column by Rory L. Terry, an associate professor of finance at Fort Hays State University.

    NEW YORK (CNN) -- A great deal of effort is being expended to convince us all that the outsourcing of jobs under the rubric of free trade is a good thing. I would like to discuss some of these arguments.

    Our labor force is not better trained, harder working, or more innovative than our foreign competitors. The argument that we will create new jobs in highly paying fields simply is not true. We have no comparative advantage or superiority in innovation. To assume that we are inherently more creative than our foreign competitors is both arrogant and naive. We are currently empowering our competition with the resources to innovate equally as well as we. Consider the number of new non-native Ph.D.s that leave our universities each year; consider our low rank in the education of mathematics and the sciences; and consider the large number of international students enrolled in our most difficult technical degree programs at our most prestigious universities.

    Most of our best, high-paying jobs can be exported.

    1. doctors (even surgeons)

    2. mathematicians

    3. accountants

    4. financial analysts

    5. engineers

    6. computer programmers

    7. architects

    8. physicists

    9. chemists

    10. biologists

    11. researchers of all types

    Our trading problem is an externality

    An externality exists in economics any time there is a separation of costs and benefits, and the decision maker does not have to incur the full cost but receives the full benefits of the decision. The fact is, there is no economic force, no supply and demand equilibrium, no rational decision process of either business or consumer, that will make an externality go away. Classic examples of externalities are when a business dumps toxic waste into a nearby river and the downstream residents incur the costs of cancer. The business is able to lower its costs and pass those lower costs on to its customers, and never pay for the treatment of the cancer patients. We have laws in this country against dumping and pollution because they are externalities -- they require a legislative solution.

    Cost reductions and other benefits provide a strong incentive to outsource jobs. A company that decides to move its production overseas cuts its costs in many ways, including the following:

    1. Extremely low wage rates

    2. The circumvention or avoidance of organized labor

    3. No Social Security or Medicare benefit payments

    4. No federal or state unemployment tax

    5. No health benefits for workers

    6. No child labor laws

    7. No OSHA or EPA costs or restrictions

    8. No worker retirement benefits or pension costs

    Besides cutting costs, there are other benefits to exporting jobs, including the following:

    1. Tax incentives provided by our government

    2. Incentives from foreign governments

    3. The creation of new international markets for the company's products (which ultimately empowers the company to turn a deaf ear to this country's problems and influence)

    4. The continued benefits of our legal system and the freedoms that we provide

    The net effect of all of this is lower costs, higher revenue, higher profits, higher stock prices, bonuses for management, and the creation of wealth for a subclass that benefits from low taxes at the expense of the rest of us.

    The costs of the decision to outsource are not borne by the decision maker. As a society and as a country, we experience many costs from outsourcing, including the loss of jobs, social costs, higher costs of raw materials and loss of national sovereignty. Loss of jobs reduces the tax base, creates high unemployment benefit costs, and raises the cost of government retraining programs. Displaced, unemployed workers have higher rates of child and spousal abuse, alcoholism, bankruptcy, divorce, etc. As China and India and other large populations grow, they demand huge quantities of oil, gas, steel and other basic raw materials. These costs are born by all of us -- every time we fill our gas tanks, for example. And as a nation, we lose our ability to make independent decisions that are in our best interest when we are dependent on foreign debt and foreign manufacturing. This is a classic externality.
    Norman Chad, syndicated columnist: “Sports radio, reflecting our sinking culture, spends entire days advising managers and coaches, berating managers and coaches, firing managers and coaches and searching the countryside for better middle relievers. If they just redirected their energy toward, say, crosswalk-signal maintenance, America would be 2 percent more livable.”

    "The best argument against democracy," someone (Churchill?) said, "is a five minute conversation with the average voter."

  • #2
    So what are his suggestions?


    and what are YOUR suggestions?

    han solo

    Comment


    • #3
      Originally posted by hansolo@Mar 16 2004, 09:32 AM
      So what are his suggestions?


      and what are YOUR suggestions?

      han solo
      I think he's saying it's a natural occurance and there is nothing anybody can do about it.
      Asked what he would do differently in Iraq, Kerry said, "Right now, what I would do differently is, I mean, look, I'm not the president, and I didn't create this mess so I don't want to acknowledge a mistake that I haven't made."

      Comment


      • #4
        Another take on it.

        The new protectionism

        The great hollowing-out myth

        Feb 19th 2004 | CHICAGO AND WASHINGTON, DC
        From The Economist print edition




        Contrary to what John Edwards, John Kerry and George Bush seem to think, outsourcing actually sustains American jobs




        EARLIER this month the president's chief economic adviser, Gregory Mankiw, once Harvard's youngest tenured professor, attracted a storm of abuse. He told Congress that if a thing or a service could be produced more cheaply abroad, then Americans were better off importing it than producing it at home. As an example, Mr Mankiw uses the case of radiologists in India analysing the X-rays, sent via the internet, of American patients.

        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 George 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.


        As if to underline the point, this week's Wisconsin primary was dominated by the subject of jobs, and the failure of the Bush administration to do enough to protect them from going off to India. In John Edwards, who wants to rewrite the North American Free-Trade Agreement, the American left may have found its cuddliest protectionist yet; support for the southerner surged after he spent much of a debate drawing implicit comparisons between his own skills as a jobs-defender and those of John Kerry, who has stuck to free trade only a little more loyally. The Democratic front-runner defends NAFTA, but rants about “Benedict Arnold” bosses betraying American workers by moving jobs overseas (presumably to boost returns for fat-cat investors, like, er, Mr Kerry's family).

        As for what might be called the business lobby, this is in disarray. “Tech jobs are fleeing to India faster than ever,” moans the cover of Wired. Watch “Lou Dobbs Tonight”, America's main business show, and every factory-closing is hailed as proof of America's relentless “hollowing-out” at the hands of dark forces in China, India and indeed the White House. Strangely, no mention is made of the fact that a pretty tiny proportion of all jobs lost actually go overseas.

        So what is really happening? Three themes emerge:

        •Although America's economy has, overall, lost jobs since the start of the decade, the vast majority of these job losses are cyclical in nature, not structural. Now that the economy is recovering after the recession of 2001, so will the job picture, perhaps dramatically, over the next year.

        •Outsourcing (or “offshoring”) 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”—over 2m jobs a month. In all, the process creates many more jobs than it destroys: 24m 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. In the long run, higher productivity is the only way to create higher standards of living across an economy.

        •Even though service-sector outsourcing is still modest, the growing globalisation of information-technology (IT) services should indeed have a big effect on service-sector productivity. During the 1990s, American factories became much more efficient by using IT; now shops, banks, hospitals and so on may learn the same lesson. This will have a beneficial effect that stretches beyond the IT firms. Even though some IT tasks will be done abroad, many more jobs will be created in America, and higher-paying ones to boot.



        Just you wait
        The “jobless recovery” first, then. Despite strong productivity growth and an accelerating recovery from the recession of 2001 (the economy grew by an annual 4% in the fourth quarter of last year), jobs are being created at a feeble rate of 100,000 or so a month. The jeremiahs point out that a net total of 2.3m jobs have been lost since Mr Bush came to office.

        Although this date is often used as the starting-point from which to make a comparison, it is a silly one. In early 2001 the hangover effects from the investment boom of the late 1990s were only starting to be felt. Unemployment, at 4.2%, was unsustainably below the “natural” unemployment rate, consistent with stable inflation, that most economists put at around 5%. In other words, perhaps two-thirds of those 2.3m jobs were unsustainable “bubble” ones. Given the scale of job losses—along with the shocks of a stockmarket bust, corporate-governance scandals and terrorist attacks—it is a wonder that the recession was so mild. By the same token, a mild recession is now being followed by a commensurately mild recovery.

        This week, the White House retreated from a claim that 2.6m new jobs would be created this year. But there are reasons to think that job growth will be more robust. In particular, the remarkably strong productivity growth, running at twice its long-run average of 2.1%, must slow down eventually. In the face of rising order books, businesses will have to hire more workers.

        This may already be happening in some parts of the country. William Testa, director of regional research at the Federal Reserve Bank of Chicago, points out that the downturn began in the mid-west (because of its relative emphasis on manufacturing, notably business equipment, the mid-west was hit first by the slump in business investment) and then spread to the coasts. Now a recovery is spreading in the reverse direction—starting on the coasts and ending up, alas for Mr Bush, in the key electoral states of the industrial heartland.

        In the absence of an obvious jobs recovery, it is perhaps not surprising that the myth arose that the American economy was being buffeted by structural, not cyclical, forces. Yet it nevertheless is a myth—as three notable economists, William Baumol, Alan Blinder and Edward Wolff, point out in a recent book.*






        Churning, they point out, has being 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.” 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, 138.6m Americans are in work, a near-record, both in absolute terms and as a proportion of the population (see chart).

        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 8m jobs. Yet jobs created greatly outnumbered these, to the tune of 24m over the decade.

        The process leads to incremental shifts that can have profound cumulative consequences for some sectors of the economy. In 1960 only one in 25 workers was employed in the business-services and health-care industries. Today, one in six is. In terms of output, manufacturing has risen, but, thanks to that productivity spurt, these goods are produced by fewer people—12% of the workforce, less than half the proportion of three decades ago.

        And what of China? Still piffling. Certainly, China competes with some labour-intensive American industries that have long been in decline, such as textiles and stuffed toys. In the mid-west, metal-furniture makers and small tool-and-die foundries face growing competition. Yet most Chinese imports are of consumer goods, competing with imports from other poor countries, whereas America's manufactures are chiefly capital goods. Even at their peak in 2001, the number of all “trade-related” layoffs represented a mere 0.6% of American unemployment.

        As for the Indian threat, “offshoring” is certainly having an effect on some white-collar jobs that have hitherto been safe from foreign competition. But how big is it, really? The best-known report, by Forrester Research, a consultancy, guesses that 3.3m American service-industry jobs will have gone overseas by 2015—barely noticeable when you think about the 7m-8m lost every quarter through job-churning. And the bulk of these exports will not be the high-flying jobs of IT consultants, but the mind-numbing functions of code-writing.


        Meanwhile, there is another side to the ledger. Instead of focusing on jobs lost to the globalisation of information technology, Catherine Mann of the Institute for International Economics in Washington looks at globalisation's power to reduce prices and so help spread new technology, new practices and job-creating investment through the economy.

        She uses the example of cheaper IT hardware, one of the main aspects of globalisation in the 1990s. Most of the drop in prices for PCs, mainframes and so on was caused by the relentless advance of technology; but she still thinks that trade and globalised production—all those Dell Computer factories in China, for instance—was responsible for 10-30% of the fall in hardware prices. These lower prices led to higher American productivity growth and added $230 billion of extra GDP between 1995 and 2002, equivalent to an extra 0.3 percentage points of growth a year.

        These days, software spending is increasing at twice the rate of hardware spending, as businesses struggle to make their new computers work better. The manufacturing sector is where such integration has gone furthest. In many other parts of the American economy, the process has barely begun—particularly among smaller- and medium-sized businesses. Mr Mankiw's example of the Indian radiologist shows how the internet could help lower costs and raise productivity in health care. Who would object to that?

        Ms Mann concludes that, if IT software sees falls in prices, thanks to globalisation, similar to those that IT hardware has seen, then the second wave of productivity gains—notably in the service sector—could be greater than the first, which was based mainly on manufacturing. Some service sectors, such as construction and health care, are ripe for gains, because their efficient use of IT is low.

        Will the trend lead to jobs going overseas? You bet, but that is not a disaster. For a start, America runs a large and growing surplus in services with the rest of the world. The jobs lost will be low-paying ones, such as bank tellers and switchboard operators. Trade protection will not save such jobs: if they do not go overseas, they are still at risk from automation.

        By contrast, jobs will be created that demand skills to handle the deeper incorporation of information technology, and the pay for these jobs will be high. The demand for computer-support specialists and software engineers, to take two examples, is expected by the Bureau of Labour Statistics (BLS) to double between 2000 and 2010. Demand for database administrators is expected to rise by three-fifths. Among the top score of occupations that the BLS reckons will see the highest growth, half will need IT skills. As it is, between 1999 and 2003 (that is, including during the recession) jobs were created, not lost, in a whole host of white-collar occupations said to be particularly susceptible to outsourcing.

        Yes, individuals will be hurt in the process, and the focus of public policy should be directed towards providing a safety net for them, as well as ensuring that Americans have education to match the new jobs being created. By contrast, regarding globalisation as the enemy, as Mr Edwards does often and Messrs Kerry and Bush both do by default, is a much greater threat to America's economic health than any Indian software programmer.
        Un-Official Sponsor of Randy Choate and Kevin Siegrist

        Comment


        • #5
          and what are YOUR suggestions?
          I am simply posting the article to present the fact that IMO there are hidden costs in outsourcing-- that beneath the surface out-sourcing does not necessarily present the slam-dunk, win-win scenario of global economy bliss as articulated by Greenspan and the present administration! To me, it was refreshing to read a somewhat detailed account of the pros and cons of out-sourcing; the costs and risks involved to each of the players, especially society and the taxpayer!

          Personally, I am concerned with both the short-term and longer-term effects on the US economy, specifically by the accelerated outsourcing of high-tech jobs! To me, it's an issue that shouldn't be ignored, and sooner or later must be addressed seriously.

          To the benefit of business, the US is playing a dangerous zero-sum game. The article does a good job of pointing out who the winners and losers are.

          My suggestion, at this point, is simply to become as educated as possible on this issue, before the real debate begins, and heats up during the campaign!
          Norman Chad, syndicated columnist: “Sports radio, reflecting our sinking culture, spends entire days advising managers and coaches, berating managers and coaches, firing managers and coaches and searching the countryside for better middle relievers. If they just redirected their energy toward, say, crosswalk-signal maintenance, America would be 2 percent more livable.”

          "The best argument against democracy," someone (Churchill?) said, "is a five minute conversation with the average voter."

          Comment


          • #6
            Originally posted by nick2@Mar 16 2004, 10:15 AM
            and what are YOUR suggestions?
            I am simply posting the article to present the fact that IMO there are hidden costs in outsourcing-- that beneath the surface out-sourcing does not necessarily present the slam-dunk, win-win scenario of global economy bliss as articulated by Greenspan and the present administration! To me, it was refreshing to read a somewhat detailed account of the pros and cons of out-sourcing; the costs and risks involved to each of the players, especially society and the taxpayer!

            Personally, I am concerned with both the short-term and longer-term effects on the US economy, specifically by the accelerated outsourcing of high-tech jobs! To me, it's an issue that shouldn't be ignored, and sooner or later must be addressed seriously.

            To the benefit of business, the US is playing a dangerous zero-sum game. The article does a good job of pointing out who the winners and losers are.

            My suggestion, at this point, is simply to become as educated as possible on this issue, before the real debate begins, and heats up during the campaign!
            We are going to be losers in the long term. Realistically, we've had it too good for too long. As China becomes more and more powerful in the global economy, this will become more and more apparent.
            Asked what he would do differently in Iraq, Kerry said, "Right now, what I would do differently is, I mean, look, I'm not the president, and I didn't create this mess so I don't want to acknowledge a mistake that I haven't made."

            Comment


            • #7
              Originally posted by BurnKU@Mar 16 2004, 10:20 AM
              We are going to be losers in the long term.
              I don't think we have to accept that.
              Go Cards ...12 in 13.


              Comment


              • #8
                Originally posted by TTB+Mar 16 2004, 11:27 AM-->
                QUOTE (TTB @ Mar 16 2004, 11:27 AM)

              • #9
                We are going to be losers in the long term.

                I don't think we have to accept that.
                I don't either, and our government certainly shouldn't be financing it! The article states:
                ================================================== ======
                Besides cutting costs, there are other benefits to exporting jobs, including the following:

                1. Tax incentives provided by our government

                2. Incentives from foreign governments

                3. The creation of new international markets for the company's products (which ultimately empowers the company to turn a deaf ear to this country's problems and influence)

                4. The continued benefits of our legal system and the freedoms that we provide
                ================================================== ======

                There issues might warrant some adjustments in order to level the playing field a bit.
                Norman Chad, syndicated columnist: “Sports radio, reflecting our sinking culture, spends entire days advising managers and coaches, berating managers and coaches, firing managers and coaches and searching the countryside for better middle relievers. If they just redirected their energy toward, say, crosswalk-signal maintenance, America would be 2 percent more livable.”

                "The best argument against democracy," someone (Churchill?) said, "is a five minute conversation with the average voter."

                Comment


                • #10
                  Originally posted by BurnKU+Mar 16 2004, 11:32 AM-->
                  QUOTE (BurnKU @ Mar 16 2004, 11:32 AM)
                  Originally posted by [email protected] 16 2004, 11:27 AM

                • #11
                  Originally posted by TTB+Mar 16 2004, 11:44 AM-->
                  QUOTE (TTB @ Mar 16 2004, 11:44 AM)
                  Originally posted by [email protected] 16 2004, 11:32 AM
                  Originally posted by [email protected] 16 2004, 11:27 AM

                • #12
                  Originally posted by nick2@Mar 16 2004, 11:41 AM
                  4. The continued benefits of our legal system and the freedoms that we provide
                  I think that's a bigger negative than positive. Companies are moving because they don't have freedom here to pay the wages they choose, they are overtaxed, and overregulated. I think they are moving because they are finding more freedom in other places than here.
                  Asked what he would do differently in Iraq, Kerry said, "Right now, what I would do differently is, I mean, look, I'm not the president, and I didn't create this mess so I don't want to acknowledge a mistake that I haven't made."

                  Comment


                  • #13
                    Editorial from today's WSJ on the current job market


                    REVIEW & OUTLOOK








                    advertisement



                    The Jobs Muddle

                    Optimists think the protectionist rhetoric flying this election year will blow over without harming the economy. But two recent pieces of legislation show why there's reason to worry.

                    First is an amendment that Democratic Senator Chris Dodd attached to a trade bill this month with the help of 25 Republicans, including Majority Leader Bill Frist. It would not only prohibit the federal government from awarding contracts to companies that outsource part of the work overseas, it would impose the same restriction on federal funds spent by the states. Similar "Buy American" initiatives are making their way through state legislatures.

                    As trade policy, this is like treating a hangnail with amputation. The bill is unlikely to reduce outsourcing, but the harmful effects could be substantial.

                    Remember when the inability of U.S. companies to get a fair shake in the bidding for foreign government contracts was a big issue? New data from the Commerce Department show that the U.S. actually runs a large trade surplus in services, and this surplus continues to grow. The value of American exports in banking, computer programming, legal services, engineering, telecommunications, management consulting and other services rose to $131.01 billion last year, up $8.42 billion from 2002.

                    JOBS AND PRESIDENTS



                    Comparing Bush and Clinton after four years

                    1996 2004
                    Unemployment Rate 5.5% 5.6%
                    U-6 Unemployment Rate * 10.0% 9.6%
                    Initial Claims
                    (4-week moving avg.) 377,000 352,500
                    Continuing Claims
                    (4-week moving avg.) 2.7 million 3.1 million

                    *includes marginally attached workers (discouraged workers plus others) and those working part-time for economic reasons.

                    Source: U.S. Bureau of Labor Statistics



                    If Washington won't let the market decide where the work goes, other countries will follow suit. U.S. companies could have less access to foreign markets, thereby costing jobs at home.

                    Then there is the Tom Daschle-Ted Kennedy Jobs for America Act, introduced to capitalize on White House economic adviser Greg Mankiw's recent defense of free trade. Co-sponsored by John Kerry, it makes employers jump through more hoops before they can lay off employees. Instead of having to notify workers and the government before firing 500 or more workers, the threshold would be just 50. In the case of outsourcing jobs abroad, the number could be as low as 15. And the notification period would be extended to 90 days from the present 60.

                    That would make the U.S. even more restrictive in this regard than France (two months) and Germany (one month). Both of those countries have plenty of other regulations and taxes intended to "protect jobs" but which do the opposite in practice. Both countries have unemployment rates of more than 9%, compared with the American rate of 5.6%. This differential persists regardless of the business cycle, showing that, even when they come with the best of intentions, measures that increase labor market rigidity translate into lost jobs.

                    That's because companies hesitate to hire when the hidden costs of employing each worker goes up. These costs are no doubt already a reason the U.S. economy hasn't added as many jobs as anticipated during the current expansion (though as the nearby chart shows, the Bush-era jobless rate compares favorably to Bill Clinton's after four years). Profit margins and productivity are rising, but there is much more to a decision to hire a worker than simply his wage level. The rising cost of health care is one of the more obvious culprits, with employer premiums having risen 38% in the past three years.

                    The political climate is just as important. If CEOs calculate that they will be penalized for hiring an American worker today and then sending his job abroad later, they are unlikely to hire in the first place. Thus we see companies investing in labor-saving technology rather than hiring. And when they do need to increase their labor force, they seem to be more inclined to use temporary workers.

                    In many cases big firms contract out work to "consultants," often their own former employees who have set up small businesses. This may explain why the two most widely used measures of employment calculated by the Bureau of Labor Statistics have markedly diverged. The data collected from corporations (the so-called employer survey) shows that since March 2001 the U.S. economy lost 2.4 million jobs. But the poll of households over the same period reveals a net gain of 208,000 jobs. If this split is due to difficulties in polling smaller companies and the self-employed, then the jobs situation is not as bad as many think.

                    But the bad news may be that it reflects a reluctance on the part of established firms to hire in an environment where CNN anchors and politicians are looking for corporate villains. That atmosphere fosters legislation like the Dodd amendment and the Daschle-Kennedy bill that would take the U.S. down the road toward the French model. And when that happens, it's no wonder that the engine of job creation starts to sputter.

                    Updated March 16, 2004


                    Comment


                    • #14
                      Originally posted by BurnKU+Mar 16 2004, 11:46 AM-->
                      QUOTE (BurnKU @ Mar 16 2004, 11:46 AM)
                      Originally posted by [email protected] 16 2004, 11:44 AM
                      Originally posted by [email protected] 16 2004, 11:32 AM
                      Originally posted by [email protected] 16 2004, 11:27 AM

                    • #15
                      Originally posted by TTB@Mar 16 2004, 11:52 AM
                      We need to change those test scores too. We need greater accountability from schools, teachers, students and parents to achieve that. That we have had to so good for so long has made us take certain things for granted and we are not hungry enough.

                      Glen doesn't have much use for me either but I don't care. The guy is an idiot.
                      I don't expect much accountability from anything the government has it's hands on.

                      You are exactly right, we are not hungry enough. That's because life here is so good we take it for granted. It's not a disaster here like some people like to try to make it seem.
                      Asked what he would do differently in Iraq, Kerry said, "Right now, what I would do differently is, I mean, look, I'm not the president, and I didn't create this mess so I don't want to acknowledge a mistake that I haven't made."

                      Comment

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