Arnold Kling

Outsourcing

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Finance and Macroeconomics... Who Should Own Iraq's Oil?...

It's the topic du jour. Here is Dan Pink's story for Wired.


A century ago, 40 percent of Americans worked on farms. Today, the farm sector employs about 3 percent of our workforce. But our agriculture economy still outproduces all but two countries. Fifty years ago, most of the US labor force worked in factories. Today, only about 14 percent is in manufacturing. But we've still got the largest manufacturing economy in the world - worth about $1.9 trillion in 2002. We've seen this movie before - and it's always had a happy ending. The only difference this time is that the protagonists are forging pixels instead of steel. And accountants, financial analysts, and other number crunchers, prepare for your close-up. Your jobs are next.

Clay Risen in The New Republic writes,

there is no statistical evidence pointing to the massive employment drain activists call the "coring out" of America's best jobs. In fact, recent studies show that the opposite is true: While offshoring may displace some workers in the short term, in the medium and long terms it represents a net benefit for both domestic businesses and their workers.

Daniel Drezner is attempting to keep up with the outsourcing literature, even as it burgeons away. Here, he points to a piece by economist Catherine Mann.

Finally, Economic Times of India has construed my recent article as predicting that Indian software programmers will soon be earning American wages.


If Kling is right, then it’s easy to see where the bad news for Indian techies is: without a salary differential, why will anyone want to outsource to India in the first place?

I don't think the Times quite gets the concept of equilibrium. Let's just say that there is some wage, probably higher than what Indians receive now but probably a bit below American wages, at which there will be an equilibrium level of outsourcing. Even adjusting for productivity differentials, the Indian wage will remain below American wages because dealing with programmers overseas is not perfectly costless.

For Discussion. How long will it take for Indian wages in computer programming to reach equilibrium levels?



COMMENTS (59 to date)
Eric Krieg writes:

Yeah, the Indian Times has some circular logic there. If Indian wages rise, then no one will outsource. But that will drive down Indian wages!

I don't know the answer to Arnold's question, but I think that we are going to find out. With all the "me too" plans to outsource floating around in corporate America, the supply of Indian programmers will be strained. They might not reach American wages, but they WILL be more highly paid in the near future.

TeamCanada writes:

5 years.

Eric Krieg writes:

I was thinking about Indian outsourcing while doing my taxes. If W2s and 1099s are ever made available electronically, I bet that a good deal of tax preparation might even move offshore.

Eric Krieg writes:

5 years? Wow, that is optimistic.

I read something the other day that said that, at current growth rates, China will surpass US GDP in 10 to 15 years.

That too seems a little optimistic. We should be wary of taking current growth rates and making linear projections into the future.

TeamCanada writes:

In India the labour market for computer programmers is already becoming saturated. Couple that with the buergeoning tech competetion coming from China, the wages for an Indian programmer will, more likely than not, be forced down. As for the equilibrium levels of wages in India, for a computer programmer, they will nominal fall to their nadir in around 5 years, and large segments of labour will idle. Ironically, the Indian computer programmer will be griping about outsourcing too. Indeed, the projected growth of GDP in China over the next decades will surpass that of the US. Likewise, pressure on labour markets will drive wages down generally. Until a catastrophic event thins labour, wages will be low.

Allow me to tendentiouly quote from an essay by Arnold Klig on Comperative Advantage. It relates to Equilibrium, wherein he states, ambiguously, that:


General equilibrium implies that you can have low wages with low productivity or high wages with high productivity, "but never low wages with high productivity"

How So?

Team Canada writes:

General equilibrium implies that you can have low wages with low productivity or high wages with high productivity, "but never low wages with high productivity

Expand on that point?

Joe Willingham writes:

The wages of workers in a particular industry in a given country depend not only on the productivity of the workers in that industry but also on the average productivity of the labor force in that country.

That will tend to make the Indian programmers' wages lower than the American programmers' even if the former are just as skilled as the latter.

Question: is the above factor large enough to offset the cost of outsourcing?

Xavier writes:

I don't think we're far from equilibrium. The additional costs of hiring an Indian worker depend on the type of IT job being outsourced, and they're probably much higher than people think. Jobs that are strictly are more easily outsourced than jobs that require English communication skills or an understanding of American culture.

Jobs involving design require an intimate knowlege of the target market's culture. I don't think it will ever be cost-effective to outsource those jobs. Call center jobs are already being shifted back to the US because customers are getting frustrated speaking to people for whom English is a second language. Even programming jobs require a fair amount of communication.

Eric Krieg writes:

Xavier, my wife says that she can tell when she is speaking to someone at an Indian call center. She is the least political woman on earth, and could care less about the economic ramifications of outsourcing. She just finds it disingenuous to have someone in India ask her about the weather in Chicago when she just wants to switch phone plans on AT&T, or whatever.

Eric Krieg writes:

I think a lot of foreigners, especially Indians, speak English better than Americans do. They have a better technical understanding of the language, because sentence structure, etc. is no longer taught in US schools.

Barry Ritholtz writes:

Economists . . Don't forget we can outsource economists, also.

Xavier writes:

Eric, that has not been my experience. I recently bought a Dell computer and they left out a peripheral that I had ordered. The call center worker that answered the phone had a very heavy Indian accent, and she had a lot of trouble understanding my problem.

Foreigners who actually come to the US tend to speak English fairly well after a while, but those who have never lived in an English-speaking country do not.

Mathew writes:

I thought that wired article was terrible, and I have been wanting to vent about it, so here goes. Ok so indian programmers are good people deserving of jobs. This seems pretty non-contravercial. So let me introduce you to a few of them, little rhetorical slight, now don't you feel bad for opposing outsourcing. Not quite...

It goes on to talk about all different threats to american jobs in the past, these all worked out fine. So there really isn't any problem it will work out again? That certainly follows.... Furthermore the rhetoric of todays programmers sounds similar to protectionist and ludites of the past, thier arguements must carry the same wieght, mustn't they?

Well first there are important differene between what is happening now and what happened to manufactuing jobs, or to auto companies in the 80s. These difference may or may not matter but they exist. Technological change makes skills irrelevant, but the skills today are still clearly needed. Cheaper labor, which cause the exiting of our manufacturing centers, may have made things cheaper over all, but to assume that it benefits all of us equally you need to assume regional homogenuity. Competition may be inevitable especially when the US was sell substandard products(pinto anyone), but that is not analgous to todays situation. Automanufactuing is low skilled work, thus adjustment cost of retraining are less. Further we are not facing competition from other countries firms, but from their workers. Things may still work out fine the invisible hand may move things in the right direction, but who knows, this slightly different set of circumstances could produce a different outcome.

I argue that what is happening now is exceptional. Knowlege workers are so expensive to train, and are highly subsidized. Not to mention the oppertunity cost of CoSci PHD. These are people who made $200,000 bets with thier lives. We were assured as tech workers that we would be needed. There was very high demand in that field. These are higher losses then a seemstress that has her job exported to indonisia. Retraining to a comparable job would take no time at all.

The entire creativity theme in the article is just bizzare. THere is no creativity gap between the US and India, or china, they are just as creative and still work for less.

There is also the whole theme of American exceptionalism that runs through the article. Becasue our economy has always done well trade it will continue too. The fact that other countries have done really poorily while facing forign competition, that is often in some ways unfair, think african farmers, has nothing to do with us, because we are america, our currency will never spiral out of control, deflation could never happen here.

I am actually fine with outsourcing. I just don't think its an open and shut case. Plus, I am open to slowing down the pace because people change more slowly than markets.

Robert Monical writes:

I'm generally in favor of outsourcing.

This relates to how many "quality" IT professionals India can produce. I'll lean toward 20 years.

PhilR writes:

While I feel sorry for the Compsci PhD who says he's blown 200 grand on a degree, why should I be required to support his business miscalculation by paying higher prices? Please note that I'm a 44 year old Pittsburgh based unix sys-admin who sometimes telecommutes, so I'm ripe for replacement.
I'm not terribly worried though. I'm constantly training and providing good value for my employer. I can be trusted, with classified systems if needed. And lastly I've worked 3 different jobs so far since college, in different fields, following my curiosity, and I've had a good life and have managed to save for retirement. It's not that hard to find something useful to do if you're willing to work, and people will pay you for that trait.
If you're a fast enough study to get a PHD in any field and you stop whinging and start working you'll find you can support yourself pretty well.

Tommy Vercetti writes:

I worked at a small no-name programming job shop in Michigan from 2000-2003 before taking an position with a client for better pay. We had a small staff of 10 total with 5-6 programmers. We bid on various outsourced jobs that averaged 2.5 weeks. 90% of jobs were done entirely off-site and delivered by email. I made $62,000/yr salary plus health benefits. If offshoring worked half as well as it is claimed to, we never would have landed a single contract and would have been shut down quickly. We periodically saw competing bids from an offshore Indian team but we never lost to them. I guarantee you that nobody chose us for patriotic or political reasons; it was strictly business. Clients chose us because they believed we were more likely to get the work done correctly or we promised to have it done faster.

All of my recent employers have experimented with cheaper Indian or Russian labor and in the end they still chose to go with local software talent. I guarantee you, if they could save a buck by hiring overseas workers, they would in a heartbeat. But the fact that they chose to stick with a local development team says something.

This is an extremely competitive industry. If foreign workers were steadily producing equivalent work for 1/5th or less of the salary, economic pressures would rapidly eliminate the inefficiency of the overpriced workers. This hasn't happened at all which indicates that the inefficiency isn't nearly as great as the casual armchair theory would predict.

Eric Krieg writes:

Mathew's post is an example of why I have very little sympathy for programmers.

He resorts to nothing more than sophistry in explaining why he was comfortable with outsourcing autowork, but now that his job is vulnerable, we should all be protectionist.

I would say that most software that I use is equivalent to a Pinto in terms of performance and quality.

Here is another clue: tool and die workers are more skilled than CS PhDs. The apprenticeship process is way longer.

There is more to making an automobile than bolting togehter some parts, and most of the skills involved are just as hard won as learning C++, or whatever the heck you do.

As someone with an engineering degree, and whose natural place is probably in a manufacturing business somewhere, I hope that MORE service jobs are outsourced. Maybe it will make US manufacturing more competitive, and it certainly will provide more markets for US goods.

The Chinese and the Indians have to do something with all those trade dollars that they are earning.

1) They can recycle them into T-Bills, thereby lowering US interest rates and funding our budget deficits cheaply, and making the US more competitive through low taxes and cheap capital.

2) They can just sell back the trade dollars, which lowers the dollar versus their currency, making the US more competitive.

3)They can buy US assets, investing in the US economy, which makes us more competitive.

4) They can buy US goods and services.

Any way you cut it, it is impossible for the most dire predictions of the protectionists to come to pass. There has to be an equilibrium somewhere. I am not done reading the Wired article, but I think that that is their point.

Lawrance George Lux writes:

"How long will it take for Indian wages in computer programming to reach equilibrium levels?"

Functionally forever! Or put in another way: As Programmer Wages rise because of outsourcing, Programming will become a desired occupation in India, with a functionally bottomless labor base. Another way to view it, equilibrium will not even begin to start, until the Cost of educating a Programmer in India equals the Cost of educating a Programmer inside the U.S. There is a differential of transference cost, but negated by lower Real Wages, which are set by exogeneous factors. lgl

Boonton writes:
I argue that what is happening now is exceptional. Knowlege workers are so expensive to train, and are highly subsidized. Not to mention the oppertunity cost of CoSci PHD. These are people who made $200,000 bets with thier lives. We were assured as tech workers that we would be needed. There was very high demand in that field. These are higher losses then a seemstress that has her job exported to indonisia. Retraining to a comparable job would take no time at all.

1. Computer Science Phd's are probably do not cost $200K unless you go after it in the most expensive manner possible.

2. Computer Science Phd's are hardly worthless. Even if you were doing an entire career change just the fact that you have a college degree provides a base of income to build off of.

3. Productivity is what matters. If you're able to produce quality product then there is no problem with outsourcing. America didn't get its manufacturing base because it had cheaper labor than Europe, it has more productive labor than Europe.

Boonton writes:
The Chinese and the Indians have to do something with all those trade dollars that they are earning.

I agree with you Eric regarding equilibrium. One possibility you left out was the Chinese and Indians simply holding US dollars. In that case the US dollar would rise in value as their currencies fell. The effect, though, would be inflation in India and China while US assets would look more attractive (if the US dollar is more valuable, then so is a US bond that spins off US dollars every year).

Dave Sheridan writes:

The equilibrium question is interesting. First, let's not lump all IT professionals together. Call center techs are a far different skill set from programmers, who are not interchangeable with system designers.

A few things developed here have expedited the migration of jobs. Here are just two:
- better system design methodologies, which allow the coding and testing functions to be broken out more completely than in the 'old days.'
- better programmer productivity tools, making relatively ordinary coders more productive.

In short, we have to an extent commoditized the less creative and more routine end of system development. To the extent this is true, I would expect real wage differentials (at the low end of the skill and experience spectrum) to reflect true relative costs pretty quickly. We will retain the majority of system design functions for various reasons, not the least of which is proximity to the customer. One skill set that must be in rising demand is the ability to manage a project with a combination of local and foreign teams contributing to the end product.

Eric Krieg writes:

Dave,

The point of the Wired article was that the Indians are a lot like the Japanese were, focused on quality, but are not neccessarily all that creative. There wasn't a lot of innovation coming out of Japan in the 1980s, and don't expect to see much come out of India.

Ray writes:

Team Canada;

“General equilibrium implies that you can have low wages with low productivity or high wages with high productivity, "but never low wages with high productivity”

“Expand on that point?”

Ok.

Consider the recent story of Cambodian factory workers bribing factory insiders to get a job that pays less than the infamous Costa Rican laborer (see Thomas Sowell’s latest article). They are so willing to work for so little money because of their alternatives.

Move to the hypothetical; that the Cambodian economy is allowed to grow as a free market and those factory workers will soon have more alternatives. Keeping the factory wages where they are currently at will only attract and retain the least productive workers. Quality employees will naturally migrate to higher wages and take their productivity with them.

Keeping in mind that equilibrium does not spontaneously occur. There’s more to it than that but I’m trying to put it in a nutshell.

Ray writes:

Team Canada

See Sowell's article on sweatshops, part one, not his most recent, sorry.

It's nothing complex or drawn out but good for a quick read.

Essentially, higher productivity requires more training per worker and more productive machinery, long story bearable, all of this progress also brings higher wages.

Eric Krieg writes:

>>Essentially, higher productivity requires more training per worker and more productive machinery

Maybe this is just US Manufacturer propaganda, but I have heard stories of Chinese manufacturers buying the latest machine tools with their trade dollars. These tools are so sophisticated that it DOESN'T take a lot of training to use them.

So, essentially, you have peasants right off the farm using the most advanced, most productive tools on earth! The supply of peasants ensures that wages don't rise. The sophistication of the tools ensures that productivity is maintained no matter who is using it.

Wages do not rise.

Of course, that doesn't mean that companies make obscene profits. China is a very competitive market, and all that is happening is that prices keep falling. Maybe, to an economist, this is the equivalent of rising wages.

Boonton writes:
So, essentially, you have peasants right off the farm using the most advanced, most productive tools on earth! The supply of peasants ensures that wages don't rise. The sophistication of the tools ensures that productivity is maintained no matter who is using it.

This is just a drop in the bucket, however. If you examined the productivity of the entire country (say 500M peasants & 1000 peasants in the super productive modern factory), then productivity has barely changed. If capital is imported on a massive scale, however, then the labor supply will feel pressure and wages will rise.

Of course, that doesn't mean that companies make obscene profits. China is a very competitive market, and all that is happening is that prices keep falling.

Efficiency is measured by inputs. If labor is expensive then a labor saving machine makes for a wise investment. If labor is really cheap then the opposite is the case...the expensive machine should be rejected in favor of labor.

Something about your story just doesn't jive, why would a factory in a cheap labor environment find it sensible to buy labor saving equipment?
This leads me to believe that there are elements you maybe missing. Perhaps labor is not as cheap as it may appear. If you have a poor transportation system then anyone who doesn't live very close to your factory will be outside of your available labor supply, for example. There's been quite a few stories about an exploding Middle Class emerging in China. If labor is really so plentiful that wages cannot rise, then how can this be explained?

Eric Krieg writes:

>>the expensive machine should be rejected in favor of labor

Not if you have a lot of trade dollars that you need to do something with. It is quite sensible to take your trade dollars and buy dollar denominated equipment with it, especially when you are in a brutally competitive market, like China is.

Boonton writes:

First you don't have to do anything with 'trade dollars'. You can let them sit as cash in a bank account...and it is better to do that than to purchase something that will cause you to make a loss.

Second how is China 'brutally competitive'? I thought you said that they have an infinite supply of cheap labor? If that's the case then what need is there to make investments in labor saving machines? If that's not the case then the story of flat wages that never rise falls apart.

I suspect it is not the case that China has an infinite supply of peasants willing to do anything for $1 a day. China is a huge market but so is the US, a huge market is nothing more than a lot of small markets put together. China would not be developing a growing middle class if they had a huge supply of cheap AND productive labor.

Eric Krieg writes:

Boonton, go the the library and check out page A2 of today's WSJ. Chinese joint venture automakers are just as capital intensive as their American and European partners. The article says that one reason is that Chinese consumers are sophisticated enough to want the latest automobile models from around the world, and you can only make these models with the latest tools. The Chinese government has limited the entry of new businesses into the auto market to ensure that there is enough profits to justify the capital.

I personally think the article is a little behind the times. I don't think the Chinese auto market is as limited entry as it used to be even last year.

Eric Krieg writes:

>>China would not be developing a growing middle class if they had a huge supply of cheap AND productive labor.

Why not. It's all relative, right? I mean, the wages that the protectionists like Steve complain about seem low by our standards. But by Chinese standards, they are middle class.

And middle class means something different in China and India. You are middle class when you can afford to have a servant or two. Because labor is so cheap, all those $11,000 programmers in India CAN have a servant or two. Ditto $5000 per year Engineers in China.

Just because the supply of labor is large doesn't mean that factory workers are making peasant wages. It may just mean that their wages aren't rising, as economists say they should be.

Boonton writes:
Just because the supply of labor is large doesn't mean that factory workers are making peasant wages. It may just mean that their wages aren't rising, as economists say they should be.

But if your 'story' is correct; that there is a huge supply of unskilled peasants who could be plucked from the farm and put behind idiot-proof machines then there should be no middle class. Why would anyone make higher wages if skilled labor was not needed? The Indian programmers are clearly much more skilled than most other Indians. If you put up a sign in India saying 'laborers wanted' you'd have lots of applicants, if you added a '*must be good in Java, C++ & Visual Basic' your labor supply would be much more limited.

Team Canada writes:

Boonton says:

But if your 'story' is correct; that there is a huge supply of unskilled peasants who could be plucked from the farm and put behind idiot-proof machines then there should be no middle class

Why not? You seem to confuse the point at every turn. Your argument assumes that there aren't any other market segmentations that stratify skill set. Your argument also assumes that prices aren't falling because there is too much cheap labour. I'm sure you'll agree that these statements are egregiously counterintuitive.

Boonton says:
Why would anyone make higher wages if skilled labor was not needed

Again, let's not forget market segmentation and varied skill set. China is not a homogenized labour market; everyone doesn't have the same job.

Boonton says:

Second how is China 'brutally competitive'? I thought you said that they have an infinite supply of cheap labor? If that's the case then what need is there to make investments in labor saving machines? If that's not the case then the story of flat wages that never rise falls apart.

Again, Repeat with me: MARKET SEGMENTATION AND VARIED SKILL SETS. Cheap Labour exists in many countries with an emerging middle class, and this is because vocational skill sets vary. Labour Markets that demand higher skill sets offer higher remuneration if that labour market is competitive. This doesn't preclude the existence of a labour market segmentation, demanding lower skill sets, awash with cheap labour in the same country. These things aren't mutually exclusive.

Ironically, Booton resolves his confusion, anachronistically nevertheless, in a prior post.

China is a huge market but so is the US, a huge market is nothing more than a lot of small markets put together.

Team Canada writes:

Preface: Eric claims:

The Chinese and the Indians have to do something with all those trade dollars that they are earning

Yes they do.

Eric says:

1) They can recycle them into T-Bills, thereby lowering US interest rates and funding our budget deficits cheaply, and making the US more competitive through low taxes and cheap capital.

First, exploding budget deficits will make them more cautious, not more eager to place these funds in T's. Additionally these funds aren't necessarily in US denominations. Further, insofar that they dump the dollar and question our balance of accounts—mixed with their willingness to invest in the US--- interest rates will be on the rise. How long will the Bank of Japan keep propping up the greenback, until they finally lose confidence? Surely a low dollar will make US exports more competitive; however, since the US is the world largest consumer of imports, a weak dollar will hurt more than benefit the US economy overall.

Eric goes on:

2) They can just sell back the trade dollars, which lowers the dollar versus their currency, making the US more competitive.

This is simply a fallacy of composition. Indeed, certain sectors of the US economy will become slightly more competitive. But a low dollar will hurt importers; scare international and institutional investors; and, in the long run, stunt US economy growth.

Eric says:
3)They can buy US assets, investing in the US economy, which makes us more competitive.

A seemingly good point, although there are a number of historical analogies that would suggest otherwise. Pre-1987 market crash, Japan was buying US assets and an assload of US real estate with abandon. We all know how that turned out.

Eric:

4) They can buy US goods and services.

They will. And let's hope they continue doing so, because we don't subsidize areas of our market for nothing.

Again, this is all assuming they decide to hold on to the Greenback. The Euro looks appealing, and what about that Canadian Dollar, eh? Let's hope the Bank of Japan doesn't lose its taste for the Greenback. The world is depending on the US Economy.

Lawrance George Lux writes:

Eric and Boonton,
China is currently awash with foreign investment cash and Trade dollars. They buy the most technologically advanced capital because they plan Sales to foreign markets, and do not care about expansion of employment in the Chinese labor sector. The ability to quickly hire and fire, with equipment allowing quick understudy, gains them the additional benefit of suppressing Wages for higher Profits. Chinese leadership realizes Chinese cannot adopt American lifestyles as general mode, because of heavy polution and energy costs. The stylized growing Middle Class in China remains only the children and grandchildren of the leadership of the ruling Party.

Team Canada,
The Chinese use those Trade Dollars to finance their purchases of Oil and needed Capital Goods, along with toys for the leadership. It is indicative most of these Dollars are spent outside the United States, with the T bills kept as Reserve for future purchases, both inside and outside the U.S. lgl

Team Canada writes:

Are you the Lawrance George Lux of Inflation: Roots of Evil? And if so, can I get a free copy of your next book?

Eric Krieg writes:

>>and what about that Canadian Dollar, eh?

TC, there is a lot of things that I like about Canada. The 19 year old drinking age rocks. Pure Platinum in Niagara Falls is the best strip club I have ever been to. Labatts is a great beer, one of the best.

But nobody, I repeat NOBODY likes the Canadian Dollar. Even Canadians.

If it wasn't for all the socialists and nationalists in Canada, you all would smarten up and just use the Greenback.

And all the US manufacturers that are wishing for the dollar to fall further should look to Canadian manufacturers to see what happens when your currency falls too far. Canadian productivity is a bad joke.

James Woolley writes:

Team Canada makes a number of outstanding points - well done!

Some obvious points are being ignored here: the offshoring of US jobs has been growing apace for over 30 years, while the last 4 years have shown exponential growth (remember, we only know about those companies which have either publicized their offshoring or an employee has leaked info).

When the US has offshored almost 1/3 of its economy - catastrophic economic results occur. The US economy is highly interrelated - as real estate associations and small manufacturing associations have finally realized (they've been recently questioning all this ITAA pap about why offshoring is so great when the vacancy rates have skyrocketed and the small mfr.'s main customers have been offshored, etc.).

When someone mentioned China buying US goods and services, be advised: they may buy one or two printing presses just so they can make copies of them over in the PRC and then wipe out the US (or other countries') printing/publishing industries - as an example of their prior recent history.

Also, the companies offshoring are fundamentally deconstructing the US economy - while they further employ foreigners to the detriment of the American worker (or European or Japanese worker). These companies move their operations to China, the Chinese workforce copies their tech and processes, then government-supported Chinese companies arise to compete against those foreign corporations while not allowing them entrance into the Chinese market (I wish we had similar practices here!!!). Cases in point: Stanley Tools and Volvo - who, having laid off their prime demographic purchasing groups to offshore those jobs - are unable to sell to their principal markets - namely the US and Scandinavia as those consumers are no longer employed workers and no longer can afford their products.

Please keep in mind that the number one export of America today is financial paper (i.e., the deficit) and the number two export is American jobs (short-term trade of jobs for capital - destined to lead to further economic meltdown...)

If the fewmets don't hit the fan in 2005, I'll be very surprised. Also, please always verify those numbers put out by "objective" organizations - most of them are wrong - even by US government sites.

Team Canada writes:

Eric Krieg, check how much the Canadian dollar has risen relative to the Greenback--- Nearly 20% in the past year. I, myself, like that math; but our export sector (Trade Primarily to the US), which accounts for 48.9% of our GDP, doesn't. Therefore, we need the Greenback to gain strength, because our depreciated dollar looks more toothsome to the American consumer. As tragic as this appears, this is how we were living from 1993-2000--- Oh! “The Good ol' Days”. Just imagine how many more lap dances you can get at Pure Platinum, in Niagara falls, with a weaker Canadian dollar. Isn't it unconscionable that a lap dance now, compared to a year ago, costs more in US dollars? Let us stand together against this injustice

Eric Krieg writes:

TC, in the mid 1970's, the Loonie was worth MORE than the US dollar. And less the two years ago, the Loonie was like 69 US cents.

So what if you're up 20% this year. Have you ever heard of a dead cat bounce?

It makes little difference to me if the Loonie is 69 cents or 76 cents. PP is still the best, and the exchange rate doesn't effect my tendency towards a lap dance or not!

What I have noticed with my Canadian subcontractors is that they don't have the latest equipment. The can compete on price because of the cheap Loonie, but can't afford the latest US or Euro machine tools.

In that respect, cheapening your currency can be a double edged sword. Productivity will suffer.

Team Canada writes:

I would generally agree with the dead cat bounce analysis, however I think, as well as many Canadian Bears no less, that this cat still has lives. Some projections call for an 85 cent Loonie within the next year. I couldn't care less, because I'm going to Dayton for our University Spring break. I'll concede the productivity point, for the simple fact that our market penetration (in the US) and favorable currency make that point less persuasive.

Eric Krieg writes:

>>I'll concede the productivity point, for the simple fact that our market penetration (in the US) and favorable currency make that point less persuasive.

TC, I think that you are making a mistake that many pro-devaluation people make.

What is the point of a cheap currency, or a high market penetration, if it doesn't lead to higher living standards?

The key to higher living standards is higher productivity. Every real economist on this web site will tell you that. So, to the extent that the heavily devalued Loonie led to lower Candaian productivity, it led to lower Canadian living standards.

I know a lot of people in Buffalo who will be very happy if the Loonie hits 85 cents. I was living there in the early 90's when the Loonie was stronger, and the Galleria was filled with Ontarians. It was a good time for retailers there, and they will be happy to get the Ontarians back.

Team Canada writes:

Eric:

What is the point of a cheap currency, or a high market penetration, if it doesn't lead to higher living standards?

I understand what you're trying to get at, but "living standards" is a relative term; however, I'll put some empirical teeth on the term for the sake of argument. If you have any interest in proclamations from the United Nations (UN), I think you'll be surprised to see Canada was best country to live in from 1994-2000. As I said earlier: The Good ol' Days! We dropped to third in 2001, the US was six; and we placed third again in 2002. The US has had a tendency, as of late, to disregard the UN, but I think on this score the UN's word should be heeded.

Eric:
The key to higher living standards is higher productivity. Every real economist on this web site will tell you that.

Really? Seven consecutive years as the Best Country in the world to live, and a real economist is going to tell me that higher productivity matters, or mattered then--- or is at least essential? Norway which was first the last two years is hardly a bastion of high productivity. I guess I should tell all my friends in Econ to switch their majors. So it turns out that, though we may have lower productivity than the US, we do have a higher standard of living after all.

And Eric, I don't think that every real economists on this website would be comfortable with you speaking on their behalf; maybe the fake economists, but probably not the real ones.

Eric Krieg writes:

TC, how about a link?

Look, I am not saying that the US is perfect. In contrast to Norway, the US is a multicultural society. To me, you can't even compare the two.

Canada is a better comparison, because Canada IS a multicultural society. The Quebecois and the 15% or so non-nativeborn population ensures that.

I think that the bottom line is probably that the UN is biased towards things like socialized medicine and away from things like productivity. I would have to look at what they were actually measuring to comment.

And I probably would question some of those statistics anyway. Canada is supposed to have very low crime, but the only two occasions that I have ever seen people assaulted on the street in broad daylight has been in Toronto. Guys just got out of their cars and started beating the crap out of the drivers in front of them. I would chalk up one incident as just random, but to have to occur twice (when I don't even go to Toronto all that often!) seems to me to be a worrisome trend.

I would chalk the assaults up to gun control. In many areas of the US, if you tried to do that to your fellow motorist, you would most likely end up shot. Don't try that in Texas, for example!

Team Canada writes:

I can understand why you wouldn't agree with the findings of the reports, because they generally skew in favour of socially progressive countries--hardly a bad thing. But when you're measuring standard of living, it's hardly a controversial measure. As for your anecdotal evidence of the worrisome trend gripping Toronto, maybe you should report this to StatsCan(Statistic Canada),they'll appreciate the effort.

Here is the Link http://hdr.undp.org/ (UN Human development Report) or you can google: Best Country in the World

Eric Krieg writes:

>>because they generally skew in favour of socially progressive countries--hardly a bad thing.

It all depends on where you are coming from. If you are a 50 something factory worker, or even better, government worker, yeah, it's a good thing.

If you are a recent college grad looking for your first job, well, it's tough out there. Youth unemployment in some of those "socially progressive" countries is like 25%. That's frightening.

As nice as Canada is (and I genuinely enjoy myself when I visit), best country on earth or not, you have more emigrants to the US than immigrants from here. That has to mean something.

Eric Krieg writes:

>>maybe you should report this to StatsCan(Statistic Canada)

I've got a lot to report. Besided assault, the only time I ever intervened in a domestic violence dispute was in resteraunt in a suburb or Toronto. Some guy was just berating his spouse (or whatever she was, girlfriend maybe). Not mild stuff either, calling her f-ing worhtless, and going on about how he should slap her. I couldn't believe that people (Canadians) would just sit there and try to eat. I couldn't. And I physically threw the guy out of the restarant. The waiters thanked me for doing it.

Now, these are just anectdotes. God knows why I have such trouble when I go to Canada. I don't have that kind of trouble when I go to Texas, or anywhere else. Maybe dirtbags have more disposable income in Canada, and can afford to go out to eat.

I don't think Canadians are much different from Europeans, or American Democrats for that matter. "Progressives", while being very into government intervention to help people, don't seem to me very interested in doing things personally to help people. For instance, I think that is why the foreign minster (or whatever) of Sweden could be stabbed in broad daylight in a crowded deparment store, and her killer could simply walk away.

That's not as easy to caputre in a statistic. It seems to me studies like the UN made are kind of artificial.

Eric Krieg writes:

>>This Human Development Report is first and foremost about the idea that politics is as important to successful development as economics. Sustained poverty reduction requires equitable growth-but it also requires that poor people have political power. And the best way to achieve that in a manner consistent with human development objectives is by building strong and deep forms of democratic governance at all levels of society.

That's is the first paragraph of the report to which you linked, TC.

Now, come on. You're just trolling with that link! That's like me linking to something by Ann Coulter!

Team Canada writes:

Eric:

You haven't substantially, or even minimally, refuted any of my points. You've conceded virtually every one of your points. You've characterized and generalized from you're own experience the attitudes and trends of Canadians en masse. You've done this all the while proving nothing, and conceding everything. You don't have to believe or agree with the UN report, but your critique would be worthwhile if you actually read it.

I find it somewhat funny that you've written so much, yet said so little. But I guess it's my fault because I kept on responding. It seems I was expecting too much from you.

Eric:
That's not as easy to caputre in a statistic. It seems to me studies like the UN made are kind of artificial.[sic]

Now is this an objective reason for disagreeing with it, or are you just disappointed the Report doesn't express your opinions. We're left with an irresolvable speculative disagreement; end of story.

Eric Krieg writes:

Sorry, eh?

I couldn't get past the first paragraph, like I said. Look, I'm being honest. The report seemed to me, from the get go, to be political. I didn't agree with that politics (I roll my eyes at the term "alternate economics"), and it WOULD be a waste of time to try to refute it.

I agree with you! By "progressive" standards, Canada is the best place in the world to live. I just don't agree that for normal people it is the best place in the world to live.

For example, I find it quite frightening that the top marginal income tax rate in Ontario is like 45% or so, and kicks in at $75,000 CDN. What's the sales tax at in Ontario when you add PST and GST? 10%? I know it dropped recently, but that is still very high.

Anyway, check out this executive summary. In particular, see how Canadian income is over 10% less than US income, and not suprisingly, so is productivity. Also see the discussion about how the Canadian government is trying to raise productivity. No discussion of exchange rates!

http://www.oecd.org/dataoecd/2/44/9226246.pdf

I like the OECD. It's an excellent website.

Anyway, I think that report understates the gap between Canadian and US wages. GDP per capita in the US is like $36K USD or so, and from what I have read elsewhere, it was like $23K USD in Canada in 2002. It is probably a lot better now that the Loonie is stronger, but the gap is still there, a gap that is due to lower productivity.

Again, productivity is key. You scoffed when I said that any real economist would agree, but don't take my word for it. E-mail Arnold Kling (a real economist) and ask him. Also, look at the OECD report again, and look how closely income correlates with productivity. For example, somehow the Norwegians have higher incomes than Americans. But look across the graph and you will see that the Norwegians are also more producitve than the US.

Eric Krieg writes:

This is the kind of thing you would never see written by any US agency. Keep in mind that, just like in the US, the 1990s was an economic joyride for Canadians.

From Statistics Canada:

Brain drain and brain gain: The migration of knowledge workers from and to Canada
Article highlights
During the 1990s Canada suffered a net loss of skilled workers to the United States in several economically important occupations, although the numbers involved have remained small in an historical sense and small relative to the supply of workers in these occupations.
Compared with the general population, emigrants are over-represented among better-educated, higher-income earners and individuals of prime working age. Further, there was an upward trend during the 1990s in the number of people leaving Canada for the United States and other countries.
While losses of highly skilled workers to the United States accelerated during the 1990s, so too did the influx of highly skilled workers into Canada from the rest of the world. This is particularly true of high-technology industries where immigrant workers entering Canada outnumber the outflow to the United States by a wide margin.
Emigrants to the United States are more than twice as likely to hold a university degree than are immigrants to Canada. However, because of the overall greater number of immigrants, there are four times as many university graduates entering Canada from the rest of the world as there are university degree holders of all levels leaving Canada for the United States.
The number of master's and doctoral graduates alone entering Canada from the rest of the world is equal to the number of university graduates at all levels leaving Canada for the United States.

Team Canada writes:

Good points Eric. But....

The people in the in Denmark, Austria, Japan, and France have a lower GDP per capita compared with the US, but somehow seem to be more productive than the US. Further, while where not as productive as these countries, our GDP per capita is relatively higher. This obviously has a lot to do with redistributive entitlement programs in those countries, and the tax regime. This is where our speculative differences arise: The only way to increase our productivity is to decrease our obligation to government entitlement programs(As the OECD suggests). We don't necessarily want to do that, to the extent that the US has.

The paradox of Norway having a marginally higher GDP per capita to the US, when its higher productivity, in contrast to the US, would suggest it have a much higher per capita GDP than the US, has to do with the incredible social entitlement programs in Norway. Therefore, apart from this being an aesthetic difference, it’s a cultural difference. These countries, Canada included, provide a social safety net that the US doesn't have the political will to implement.

Standard of living is, admittedly, an amorphously relative term. But you seem to agree with me that Norway is a good standard: high productivity and marginally high GDP per capita, compared to the US. The UN and OECD both recognize this as well. Norway has a far more extensive entitlement programs as opposed to the US. I'll keep my low productivity any day, if it means a good social safety net and a better standard of living. Productivity, again, isn't as persuasive as you claim. Thus, our speculative disagreement revolves around how we think economies should be structured. I’m for the socially mixed-economy. How about you?

Eric Krieg writes:

There could be all kinds of reasons for the "Norwegian paradox". I don't think that there is much there for Canadians or Americans to learn because Norway is such a homogenous society. The US would look pretty good from a statistical standpoint if you only included white anglo-saxon protestants. Canada would look pretty good if you only included people with "Mackenzie" as their surname.

And you also can't cherry pick the numbers like you do. So a few countries fall on the low side of the regressive mean. That's statistics, that's the way they work. It's just a few countries, and one year of data. The point is to see the overall trend, and that income is pretty strongly correlated to productivity.

I don't think that a socially mixed economy is going to work in the future. The competition from rapidly industrializing countries like China and India is just too great. If our goods and services are going to be competitive in international markets, our businesses can't be saddled with the costs of a large welfare state.

Unless, of course, you cheapen your currency! That is what's happening with the dollar right this minute. But I think that Canada is a good example of how this can backfire on a country.

Team Canada writes:

Thus, our speculative disagreement revolves around how we think economies should be structured

We're left with an irresolvable speculative disagreement; end of story.

I'd like to continue this interesting exchange, but we're just repeating ourselves. I've got some midterms to write, so I have to get studying.

Therefore, apart from this being an aesthetic difference, it’s a cultural difference. These countries, Canada included, provide a social safety net that the US doesn't have the political will to implement.

Eric Krieg writes:

>>Thus, our speculative disagreement revolves around how we think economies should be structured

Not necessarily speculative. I don't think that there is any social-democrat country around the world that is doing all that great economically. The US is dragging the world economy along, including (and especially) Canada. If it were not for the US and China, the world economy would be in a severe recession, maybe a depression. Social-democrats don't have any answer to the question of how to increase economic growth to pay for all the welfare that they want to spend.

Eric Krieg writes:

>>I've got some midterms to write, so I have to get studying.

What major? What school?

If you don't mind my asking. Just curious.

Eric Krieg writes:

>>Canada included, provide a social safety net that the US doesn't have the political will to implement.

It is not a question of political will. It is a question of efficacy. Are the poor made better off by welfare?

The US has pretty spectacularly reformed its welfare system, to the point where one can question the entire basis of government funded welfare benefits.

John Cass writes:

I think the goal posts will move before we get to that point. Programming has been all about reducing the amount of effort that it takes to make new code. Developers are attempting to avoid remaking code by moving towards a time when we no longer code but use an application framework to write new applications for us.

An analyst to build a new application in such a framework will have to have in company and therefore in-country expertise. You will not be able to outsource the that expertise.

Tony Sziklai writes:

Why are we debating Canadian and Norwegian social welfare programs when India and China are creating the next economic powerbase. This is an unprecedented economic sea change fueled by contract manufacturing and foreign investment. Tech wages of the Indian middle class are but a small footnote in this drama. Asian Outsourcing is not only here to stay, it will utterly redefine our world over the next ten years.

chaitanya writes:

As an Indian, I am experiencing a transitional change in my city and in my country. New shopping malls are coming up everyday. Spending power increased signifacantly. People even in smaller towns are burning money on branded goods and services. Our roads,railways, telephones, airports becoming better. Our economy is becoming more competitive and open. Our companies are turning into MNCs and joining Fortune 500 companies club. We are regaining our confindence
and creativity which we have lost after 400 years of foreign rule.
India will move up the value chain in the software industry and become a popular destination for software creation just like how Japan became destination for cars, etc.
Even though our wages are low by western standards, our purchasing power is high in our country and hence good standard of living can be expected. We can get a decent and complete lunch for as little as $1. Our education costs are dead cheap but of good quality. Putting aside economics and dollor rupee conversion, we live a happy and satisfied lives with wages we earn.
We were creative before British rule,
but lost the track due to lack of opportunity. Now free and independent India is back into action to face the new world.We have one billion brains to think. 20% of silicon valley startups belong to Indians.
It is very interesting for economists and business men to watch at the progress of India and China in particular and Asia in general.

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