Arnold Kling  

Outsourcing

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Bruce Bartlett surveys recent cost-benefit analysis.


In July, economist Martin N. Baily, chairman of the Council of Economic Advisers under President Clinton, looked at who benefits from outsourcing. He found that... on balance, the U.S. economy gains $1.12 to $1.14 for every $1 invested in outsourcing.

In August, economist Charles Schultze, chairman of the CEA under President Carter, looked at the number of jobs lost to outsourcing. He found that between the end of 2000 and the end of 2003, at most 215,000 jobs service sector jobs were lost.

... U.S. imports of computing services -- the most controversial area of outsourcing -- came to just 0.4 percent of the gross domestic product in 2003. China and India, the two countries most blamed for outsourcing, actually outsourced more than we do -- 0.6 percent of GDP for the former and 2.4 percent of GDP for the latter.


For Discussion. Would the U.S. economy gain or lose jobs if outsourcing were curtailed?



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Jason Ligon writes:

There are two camps of people who believe the job loss numbers are largely attributable to outsourcing:

1) Manufacturers, because their union stewards tell them that such is the case. Replacement by technology is not something the union can effectively fight, so it is in the union's interest to find a culprit that can be fought.

2) The computer set, because outsourcing was never supposed to happen to THEM. Because there is outsourcing happening at all, the fear of having wasted money on a skill set that is really someone else's comparative advantage sets in and amplifies the volume of noise.

The internet and the union shop are the places most abuzz with protectionist rhetoric.

If a US company was paying $1,000,000 for computing services before outsourcing and winds up paying $500,000 for identical computing services after outsourcing, that savings isn't going into the CEO's mattress. It will be invested or spent on something, either a product that needs to be manufactured or a service that needs to be delivered. It is not clear that the raw number of jobs produced by increased demand in one area offsets the initial number of programming jobs lost. It is clear that the new jobs produced will be better for the economy as a whole, as they are the result of a 50% increase in efficiency. It seems to me that this is important, because we could, after all, put everyone who is unemployed to work counting grains of sand on the beach, but that doesn't really get at what a job is, does it?

Mark Horn writes:
Would the U.S. economy gain or lose jobs if outsourcing were curtailed?
Depends on the reason. If it were curtailed through legislation, that would result in a net loss of jobs. If it were curtailed because the businesses who engaged in it made a business decision that it wasn't cost effective, that would result in a net gain of jobs.

Put in economics terms: it depends on whether we think we have a comparative advantage in the things we're outsourcing. If we don't have a comparative advantage, then we outsourcing is probably beneficial. If we do have a comparative advantage, then we should reel them back in and exploit the advantage. Both would result in a net gain in jobs.

However, if the trade arrangement that is outsourcing is curtailed as a result of imposed rules (i.e. legislation or additional taxation), then we will be arbitrarily forced to employ people for something that is not comparatively advantageous to us. This result in a net loss of jobs because we're wasting time on things that aren't to our advantage.

Economists: please correct any errors.

Sam Jew writes:

Obviously outsourcing makes financial sense for the people doing the outsourcing. Otherwise they wouldn't do it.

The problem with outsourcing, however, is that such a miniscule fraction of the total amount of money spent (not just the money saved) ends up going to the people who actually do the work.

The lion's share goes to middlemen and corporate profits and pushing paper around to make the rich richer.

The chief problem with outsourcing is the massive and structural increase in inequality it engenders, not so much in inequality of outcome but of opportunity.

No one, no matter how educated, driven, or creative they are, has the opportunity to make it on the basis of their talents in this day and age.

Making money hinges on the basis of having money and nothing else.

Mark Horn writes:

Sam, wow! What a post.


The problem with outsourcing, however, is that such a miniscule fraction of the total amount of money spent (not just the money saved) ends up going to the people who actually do the work.

This sounds like make-work bias, but it could be anti-market bias.

The lion's share goes to middlemen and corporate profits and pushing paper around to make the rich richer.

Anti-market bias

The chief problem with outsourcing is the massive and structural increase in inequality it engenders, not so much in inequality of outcome but of opportunity.

Hmmm... "inequality... of oppurtunity" sounds like make-work bias

Finally...


No one, no matter how educated, driven, or creative they are, has the opportunity to make it on the basis of their talents in this day and age.


Making money hinges on the basis of having money and nothing else.


...pessimistic bias.

You almost hit all of them! So close. Now, just include a anti-foreign bias - which should be easy given the topic - and you'll have hit them them all.

So close!

Lawrance George Lux writes:

Outsoucing is a Comparative Disadvantage, if it decreases total GDP, or if it raises the Production Cost of producing the Product. This is coupled with the need to domestically employ more than the highly Educated, plus a Servant Class. The Economic case for the Above lies with maintenance of Consumer Demand.

I estimate that the Price increases in Consumer Products--reflecting cheaper Production by only twenty percent of the Cost reduction, the higher prices in the Metals and Oil industry, and the reduced Consumer Demand--Real, or not generated by Debt increase both Consumer and Public--far exceed the Profits made by nominal cheaper Production.

The real issue with Outsourcing is not the elimination or gain of Jobs, but the elimination of domestic production. The case can be made for keeping those smokey mills. lgl

Bob writes:

I think Arnold really means "offshoring" rather than "outsourcing." So, Mark, Sam really did hit all four.

Ann writes:

"if outsourcing were curtailed" - I'm assuming that means if the government stepped in and somehow prevented companies from hiring the people that they thought were best (best considering all costs and benefits, not just benefits). What will happen if the government starts interfering to distort the markets, in order to shelter our country from competition? Easy - we get lazy and inefficient. It's the perfect "make America weak" program.

Jason Ligon writes:

"Outsoucing is a Comparative Disadvantage, if it decreases total GDP, or if it raises the Production Cost of producing the Product."

Why would anyone outsource if it raised their costs of production or decreased their output? Why would consumer demand decrease in the face of lower prices?

Lawrance George Lux writes:

Jason,
You have hit on the primary question of why they are offshoring and outsourcing? GDP does not decline in Dollar terms, but very much so in terms of actual Product produced domestically. What is the difference? Inflation--which Greenspan says is very low; wait until the Dollar has to devalue by 30%. Oil, Metals, and Materials are all estimated to have gone up drastically since the onset of offshoring. I would estimate at about four times the nominal Inflation rate, if not more. So back to: Why the Offshoring?

The answer is Corporate Management decision. Reasons: Corporations were positioned to lose half their Profits in compliance with Federal Environmental standards. Federal Tax law could be lobbyied to the position where Tax law did not recognize any difference between domestic and foreign investment. Federal Trade policy allowed entrance into foreign Production as well as Markets, and Federal policy allowed to easy rules of importation of Product. Cheaper Labor is only Icing on the Cake. Corporations said: "Dah, We can maintain 8% Profits with domestic production, and 20% Profits with offshoring and outsourcing. What should We do? lgl

Sam Jew writes:

Bias? I think more like Attribution Error on the part of you, Mark. You can't fallaciously pound the round peg of my brilliant and infalliable argument hammered into the square hole of Arnold's strawman.

The make work bias is on the part of governments in low labor cost countries. The low labor unit costs make otherwise inefficient tasks cost-effective. And this is because they want full employment of billions of people to prevent social unrest.

The anti-market bias is on the part of Bush who distorts markets to reward his political supporters, such as steel and especially the petit bourgeoise. It does not make economic sense to promote trickle-down economics when productive capacity already exceeds demand.

Pessimisstic bias? More like optimistic bias (yes, there is such a thing) on the part of right-wing apologists for the status quo. I only call things how I see them and as they are. If anyone doubts the veracity of my claims, they should address them instead of mischaracterizing and slandering them.

Anti-foreign bias? Please. I am a citizen of the world. If there's any country I hate, it's the U.S. of A.

Mark Horn writes:

Sam,

I disagree with most of your comment, but this part deserves a response:

The make work bias is on the part of governments in low labor cost countries. The low labor unit costs make otherwise inefficient tasks cost-effective. And this is because they want full employment of billions of people to prevent social unrest.

Let's pretend for a minute that I agree with what you just said; that foreign governments are employing their own make-work bias in order to produce full employment. Our response to that should not be to appease our own make-work bias! Instead we should take advantage of the gift that they're giving us, until they figure out that making work simply for the sake of making work isn't a good idea.

Let me put it another way: If you stab yourself, what should my response be? Probably to call an ambulance for you and then maybe a psychiatrist. The last thing I should do is stab myself.

If India or China or whoever is harming themselves by engaging in protectionist practices, the last thing we should do is copy them.

That being said, I simply don't agree that those countries making work for themselves. I believe that they're exploiting a comparative advantage and selling it - to their and our profit.

Kevin Carson writes:

Depends on what you mean by "curtail." If you mean coercively prohibit, then there'd obviously be a net harm to the economy.

On the other hand, if you just want to eliminate the various subsidies to the export of capital, and let corporations fully internalize all the costs and risks of overseas investment, along with the benefits, then there's clearly a net gain.

Any coercive intervention in the market to benefit one at the expense of another creates a net loss.

Sam Jew writes:

Mark, all of my points deserve a response.

Concerning the policies of China, they reduce the cost of labor to clear the market. And yes, that benefits corporations who do business here. With lower wages, the much higher shipping costs can be made up along with more left over for corporate profits.

But they have not resulted in lower prices (at least on name-brand goods) or increased capital spending because the demand in the marketplace is not there.

What it has engendered is obscene amounts of money for a very few and that is all. Once everyone starts to look at reality rather than their wishful-thinking misinterpretation of what economics textbooks say it should be, we can start to move forward.

CK writes:

I have a Australian company, and I find it very hard to find programmers for my company - firstly because
Australian software workforce is not as extensive as in America, secondly because its hard for us to compete for Indian and Chinese programmers due to the American companies who are willing to pay much more than what we can afford.

I am sure there are lots of other up and coming software businesses out there in Australia and other developed countries who are facing the same situation.

Now, what is the best thing that can happen to us?
American companies cutting down on outsourcing -
either because it is not cost-effective or even better, because the govt. curtailed the outsourcing.

It would be a perfect boon for us, because there would then be a huge set of programmers in these countries who are not just well trained, but out of job ! And who is there is pick them up at pieces - WE !!

If you think this would not hurt American economy in long term you must be dreaming. Think of this in this way - you have millions of highly trained robots which can be very effective in cutting costs for American companies and your govt. suddenly decides to give this up to us, for free
so that americans dont lose jobs - hey wait it actually happened - That was called communism.

Sam Jew writes:

If you can't offer the wages American companies are offering Chinese and Indian programmers, you don't have a real company. *I* can afford to outbid foreign companies in China.

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