The Outsourcing Bogeyman

March 24, 2004 3:42 AM

The Outsourcing Bogeyman by economics professor Daniel Drezner describes the myths, facts and economics behind offshore outsourcing. There is also a critique and rebuttal on Drezner's blog. (via kuro5hin).
posted by TheophileEscargot (26 comments total)

Drezner is a professor of political science, not economics.
posted by Quinn at 3:55 AM on March 24, 2004

I am no economist. Most of us are not. But when an assistant prof not in economics but in political science(see his blog)--for me in my experience, usually a conservative department in most colleges, and at the Univ of Chicago, well-know for its conservative faculty and school in general,explains to me that outsourcing is a good thing then I first get suspicious....his dept is not going to be outsourced.

the general idea, so far as I can tell, is that by outsourcing and globalization, we bring up expectations and standards of living in countries that are poor and at the same time lower salaires, expectations etc in the US, but a much greater world-wide market makes greater profits available to the companies and shareholders that are doing the outsourcing...I may be wrong, but I do not see many Americans benefiting by losing jobs...In my immediate area, Bic (the French pen company) just announced bvery big lay offs...Pfiezer, not far from here, has drugs manufactured in Ireland and then tells us we ought not buy drugs from Canada, where they sell them, because buying from foreign countries unsafe! etc etc I may be wrong, but I need more than a beginning prof at a conserantive school to convince me.
posted by Postroad at 5:54 AM on March 24, 2004

Postroad, University of Chicago is conservative only by academic standards. It has a 'great books' curriculum in its English department -- that doesn't mean its professors are conservative robots.

In the United States we've been outsourcing jobs for years -- manufacturing jobs. Now that wealthier, more outspoken software workers are getting outsources, and taking their complaints to the Web instead of their unions, we're hearing a lot about it. But just as industrial outsourcing allowed us to retrain (or supplant) that industrial workfroce with higher-paid, more-highly-skilled workers, so the current outsourcing (often of, say, telephone call center workers) will allow the national economy to become more efficient and each worker to become more valuable.

Blah, blah -- the long and the short of it is that outsourcing is a reality; it won't go away; and it will be dealt with, though not painlessly, for the greater gain of many people in every country. People will lose their jobs, and it's wrong to deny that that's a bad thing -- but people will also be gaining jobs, and I think it's simply hypocritical to not give those two jobs equal weight. Especially when Western workers are armed with all the advantages -- educational institutions, benefits, and so on -- that can help them find work again.

I'd be curious if anyone read The Atlantic's article on outsourcing; I thought it was great, and it covers a lot of this ground and offers practical suggestions that allow for the hardships of outsourcing without repudiating the benefits.
posted by josh at 6:15 AM on March 24, 2004

But when an assistant prof not in economics but in political science(see his blog)

Dude, he does IPE. That is to say, he is trained (and has successfully published through peer review) in exactly what he is talking about.

--for me in my experience, usually a conservative department in most colleges

*\me's brain explodes*

the Univ of Chicago, well-know for its conservative faculty and school in general

There are people on the faculty in that department who took their oral qualifying exams in a torn Sex Pistols t-shirt.

Where people are teaching is no particular guide to their political affiliations; especially at junior levels, you go where the best offer is (moderated somewhat by what parts of the country you like).

explains to me that outsourcing is a good thing then I first get suspicious....his dept is not going to be outsourced

They're not going to have people tele-teaching from Ireland or India, no. But his department can hire someone from a foreign school, or a foreigner graduating from an American program, and bring them in to Chicago at whatever wage is mutually acceptable.

I may be wrong, but I do not see many Americans benefiting by losing jobs

You're not going to see more jobs in making cheap pens, or in minding the machines that make drugs. You're going to see more jobs in making ((the machine tools that make) the machines that make) cheap-pen machines and pill machines.
posted by ROU_Xenophobe at 6:31 AM on March 24, 2004

In my immediate area, Bic (the French pen company)...

That is outsourcing Postroad. A French company is outsourcing jobs TO the US instead of keeping those jobs in France.

When I pointed out above that Drezner was not an economist, I did not mean this a criticism of him. I was just correcting a fact. I believe he is highly qualified to comment on outsourcing. I you don't like his article argue with the points he made instead of attacking his background.
posted by Quinn at 6:47 AM on March 24, 2004

Yes, when you can't attack the data, attack the messenger. Sigh.

This is an excellent article that sums up my views on outsourcing perfectly. Thanks for linking it.
posted by rushmc at 7:25 AM on March 24, 2004

I'll not comment the articles and rebuttal, as the article primarily feeds us the "Hey I've seen some data, according to my interpretation of data everything is A-OK". Obviously no hint about the methodology, algorithms and models used. It's just useless mumbo jumbo unless otherwise proved.

It's as simple as it seems, it's capital looking for ways to maintain profits or increase them , by not paying local taxes AND exploiting comparatively less costly workforce abroad AND exploiting money xchange.

Solution ? One may be the ages old idea of taxing capital movements when capital goes _away_ from *yourcountry* and offer tax reduction for capital coming _into_ *yourcountry*. This way you give both a disincentive to capital export and an incentive for capital import, attempting to force capital into NOT simply exploiting price differentials (arbitrage) but by actually taking the risks of being enterpreneurs.

Oh but of course that smells too much of actual competition and increased risks, capital doesn't like that does it ? Curiously enough when risk and competition hit the worker, it's all fine and perfect and benefit the "markets". Mh yeah ooooh keeey.
posted by elpapacito at 7:39 AM on March 24, 2004

What has tended to temper some of the effects of outsourcing in the past was the existence of the "next thing", so, for instance, as manufacturing jobs have declined, there was an increase in tech jobs (not 1 for 1, but better than nothing). What's missing from the current offshoring phase is that "next thing". Unlike Drezner, I don't think an increase in corporate profits automatically result in a increase in investment in high tech (and subsequent increase in jobs). My own company is putting considerable effort into identifying those high tech jobs that can be offshored, with the goal of lower employment numbers, not opportunities for further investment. I can't believe my company is the only one.
posted by tommasz at 7:43 AM on March 24, 2004

He certainly writes like a political science professor rather than an economist. I'm only an economist in training, but there is a gross oversimplication of the costs and benefits of globalization, even among economists.

Outsourcing, for one thing, is the natural result of the North American obsession with lower prices. If you need to cut prices, you need to cut wages, and if there is a lower-bound for wages (the minimum wage) then you can take advantage of exchange rate differences, or just go to a country without work standards and minimum wages.

Many economists cling dearly to Ricardo and his (mathematically sound) view of the global benefits of free trade, but there are various other, less quantitative issues that tend to be ignored by focusing too hard on the raw numbers. For example, there are environmental issues, and worker lifestyle standards that are ignored.

There is also an obsession with looking at the long run effects; the idea that in the long run, world wages will have to appreciate to account for the increased labour demands on the countries where the outsourcing money goes; similarly, the environmental and worker safety issues will also be eliminated as wages reach a new equilibirium.

But as Keynes said "in the long run, we are all dead."
posted by aubin at 7:47 AM on March 24, 2004

Solution ? One may be the ages old idea of taxing capital movements when capital goes _away_ from *yourcountry* and offer tax reduction for capital coming _into_ *yourcountry*

That'll be real effective. The minute you do that, someone will offer a larger tax incentive than your tax penalty, causing capital flight that might well never have happened absent the controls, so you have to increase your tax penalty to exit and increase your subsidy to entry to get them back, except someone else do the same thing, and so on.
posted by ROU_Xenophobe at 7:58 AM on March 24, 2004

ROU: Entirely possible, but not necessarily true. One *country/location* may not be able to offer a better package, or be politically and socially stable enough to offer consistency , or not offering adequate infrastructures.

All other conditions equal say

Country A : tax out 10% , incentive detax = -20% of Revenue Tax or other packages, financially sustainable by the country, mediocre infrastructures.

Country B: tax out 20% , incetive detax = --50% of Revenute Tax , etc, good infrastructures.

Which is better ? Depends on your business and on many variables. Quite a lot of uncertainity, but that's the very nature of risk taking business, a reasonable bet on the future. We're just scraping the complexity of the problem here.

But , why should I (a government, population) benefit a company that may go away very quickly, leaving only unemployement behind after receiving the benefits ? What could stop company X from moving away IF the company manages to disinvest with tolerable costs (tolerable to the company) ?

In other words, why should I sponsor welfare for capital if the return is jeopardized by capital ultra-mobility ?
posted by elpapacito at 8:27 AM on March 24, 2004

A lot of outsourcing has to do with what management assumes to be the inferiority of the American bottom-tier workforce.

There are few manufacturing operations, and even fewer service operations, which wouldn't be net cheaper, at least when it's an American end-market being served, if they were performed in America by workers earning $5.15 an hour, versus being offshored with all of the inherent costs and difficulties that this entails. It isn't uncommon for companies to report yielding only 25% overall savings when they offshore work to an 80% lower wage.

The experiment, which doesn't seem to be happening that I know of, is what would result after an employer announces that in lieu of offshoring a ton of front-line $12 an hour jobs were being cut to $5.15. If the quality of the workforce deteriorates rapidly as incubments find better-paid work, than the comparative advantage argument would seem proven.
posted by MattD at 8:35 AM on March 24, 2004

But just look at the examples Drezner provides:

Most jobs will remain unaffected altogether: close to 90 percent of jobs in the United States require geographic proximity. Such jobs include everything from retail and restaurants to marketing and personal care.

I count three of those four professions being lousy-paying jobs or relatively lousy paying jobs. I don't know that the likes of Drezner has any real clue about what it takes to try and, say, raise a family on a waitress's salary. But that's what you tend to see out of conservatives who levy this argument: Jobs is jobs.

The United States saw an 11 percent decrease in manufacturing employment over the course of those seven years; meanwhile, China saw a 15 percent decrease and Brazil a 20 percent decrease.

First off, Brazil?

Second, absolutely no context is provided for these numbers. If we are to assume that the U.S.'s decrease in manufacturing employment was indeed related to productivity gains as well as outsourcing, to what can we attribute the Chinese figure? The same? Drezner wants us to assume this, but I don't think you can do that.

In my hometown is a major manufacturer who has been here for more than a century but which, mired in bankruptcy proceedings, is moving a lot of jobs off-site, and many overseas, with one goal only: Saving money on labor costs. And why not - the remaining workers at the plant, in their 50s, are making, on average, close to $19 an hour. That is a salary you can raise a family on. And that seems to be the key question that the likes of Drezner never addresses: Sure, we may be adding jobs. But how many of them pay enough to raise a family?
posted by kgasmart at 10:45 AM on March 24, 2004

Well you mention the response to that in your comment kgasmart: it was either outsource those jobs, or go belly-up, in which case not only would the jobs disappear anyways, but so would the retirement benefits! At least this way, there's a chance that those workers in their 50s making several times the global average for a similar job will have some support from the company once its left.

The real point that Drezner is making, IMO, is this: what's better, instituting protectionist measures to try to force jobs to stay in the states, or trying to stimulate economic growth such that America is powering global economic improvement? And if we gut every company that can't make things work on American soil, won't they just... die and be replaced by new companies incorporated in India anyways?

"If offshore outsourcing is not the cause of sluggish job growth, what is? A study by the Federal Reserve Bank of New York suggests that the economy is undergoing a structural transformation: jobs are disappearing from old sectors (such as manufacturing) and being created in new ones (such as mortgage brokering)"

Mortgage-brokering is certainly a job you can raise a family on, as is advertising work, engineering, and most of the other new jobs I see anecdotally. A friend of mine just started a mortgage-brokering business a couple years ago (Madison First, LLC) and he's expanding to other states now. And let's be realistic - it's not as if you could raise a family in America on the paycheck from a tier-1 tech support position - although you can in India.

If "it doesn't look like his job is getting outsourced!" is an inditement of someone's viewpoint on the issue, why isn't "ho ho, looks like someone's losing his job to Bangladesh!"?
posted by kavasa at 11:18 AM on March 24, 2004

The question is how long you can raise a family on mortgage-brokering, since there has to be people with jobs willing to buy houses. The future may be so bright you gotta wear shades, but the present sucks trucks.

There may indeed be a positive feedback here as a result of sending jobs somewhere else, but the lag isn't something you can ignore.
posted by tommasz at 11:42 AM on March 24, 2004

If we had any sort of real worker-retraining, or universal healthcare, or some sort of unemployment insurance that actually paid the rent and utilities on people's homes, then outsourcing wouldn't be a problem--losing a job at all wouldn't be a problem. We have absolutely nothing right now, and what jobs are available do not at all pay what the old ones did.

Right now, the only response, from this guy and everyone, is "too bad. It's good for the economy on the whole." That's not good enough. Most of us work in fields that can and will be outsourced, as soon as technology gets a little faster and better.

Most advertising and mortgage and engineering can and will be outsourced. For advertising, all you need is the client contact here, and the actual designer. Everything else could be done overseas and will be as soon as more people overseas are proficient in quark and photoshop and illustrator. People in every field can look around them and see positions that will be outsourced eventually. And most of us aren't in the 2 or 3 positions that won't be.
posted by amberglow at 11:50 AM on March 24, 2004

If we had any sort of real worker-retraining, or universal healthcare, or some sort of unemployment insurance that actually paid the rent and utilities on people's homes, then outsourcing wouldn't be a problem--losing a job at all wouldn't be a problem.

Read: "If only this were a socialist country and the government wiped our inept asses for us, we wouldn't even have to work!"

If only people took responsibility for the fact that their job is not a birthright, and saved some money for hard times instead of spending it on dumb shit, and kept themselves employable by always continuing their education and knowing how to do more than one thing, losing their job wouldn't be a problem. America is still for the most part a capitalist economy - it is your responsibility to be useful to someone if you want their money, and it isn't their problem if you aren't.

It's beginning to be a global job market. We're all going to compete, and we're all going to be better off in the end. It will not be a perfectly smooth transition, but it is a hugely important one.
posted by tirade at 12:37 PM on March 24, 2004

You know, kavasa, it's interesting that you should mention mortgage brokering because my wife is a mortgage broker. And the past few years, the market has of course been going great guns, and such individuals can indeed make plenty of money to support a family, and then some.

But in that there is a general perecption - in my community, anyway - that the housing market cannot go on like this forever, that in fact there might be a bubble (I know - don't say it too loudly) makes such a position a more cyclical thing - there's substantial less stability in terms of income than there has been in your typical manufacturing type of job.

I mean, from a pure economic perspective, I can appreciate the logic behind, even the wisdom of, outsourcing. But my problems with statements like this:

Thanks to outsourcing, U.S. firms save money and become more profitable, benefitting shareholders and increasing returns on investment.

... is that it assumes that the rising tide necessarily lifts all boats. Because, you know, if I wait tables or work retail or make pizza for a living, I may not own stock. My boat isn't rising - more likely, I'm drowning while others are watching their boats, and the value of their investments, ride high.
posted by kgasmart at 1:08 PM on March 24, 2004

Amberglow -- the only things that will be offshored are those things which can be done cheaper, or better, overseas. And that's a two way equation. America will likely face a choice between being competitive or being left out all together.

Being competitive will require us to cut costs, cut taxes, and cut regulation, and eliminate the remanents of failed welfare and educational policies which leave our those who should be free to work for low wages unemployable or close to it, and change attitudes which leave people happy (or, at least, willing) to work for $6/hr at Starbucks but believe that they have to earn $18/hr to work on assembly line, or in an advertising agency, for that matter.
posted by MattD at 1:49 PM on March 24, 2004

As a followup, we should note that wage equilibrium will push powerfully to cause price equilibrium. Providers of goods and services can ultimately only charge a fraction of the wages available to their consumers. I expect that rents, food, clothes, basic cars, and other such things will be getting quite a bit cheaper, so standard of living won't necessarily fall.
posted by MattD at 1:53 PM on March 24, 2004

"We're all going to compete, and we're all going to be better off in the end. It will not be a perfectly smooth transition, but it is a hugely important one."

I think by definition, competition means someone will lose. All of us will not be better off. We will compete, some will succeed, and some will be ground into hamburger. Dismissing concern for this as socialism just allows you to avoid feeling any moral responsibility for what happens, or what you help do to your fellow citizens. Read that as a blueprint for unending domestic strife, and internationally, constant war. In terms of global competition, is a country that routinely destroys some of its own better than one that nurtures less mainstream populations? Where would you prefer to live? That said, I found Drezner's article quite interesting. I had similar feelings regarding the steel tariff and sugar subsidies before, but this does provide food for thought. Nice post.
posted by MetalDog at 1:59 PM on March 24, 2004

I expect that rents, food, clothes, basic cars, and other such things will be getting quite a bit cheaper, so standard of living won't necessarily fall.

I'll belive that when I see it, MattD. The last trickle down theory didn't work, so I'm not holding my breath.
posted by jonmc at 2:05 PM on March 24, 2004

We're all going to compete, and we're all going to be better off in the end.
We can't compete--none of us can or are allowed to follow the jobs to those other countries. And some of those other countries actually do provide healthcare and free education, etc to their citizens, China being a gigantic example of that.

Being competitive will require us to cut costs, cut taxes, and cut regulation, and eliminate the remanents of failed welfare and educational policies which leave our those who should be free to work for low wages unemployable or close to it, and change attitudes which leave people happy (or, at least, willing) to work for $6/hr at Starbucks but believe that they have to earn $18/hr to work on assembly line, or in an advertising agency, for that matter.
I would say just the opposite: we have to strengthen health and welfare policies and programs so that losing a job does NOT mean you lose healthcare, etc (which is a major cost for corporations here--with univ. healthcare, they'd save billions, possibly keeping jobs here). We have to strengthen and create lifelong learning institutes so that the millions of unemployed can go somewhere and get new skills so they don't have only walmart or waiting tables as job options. Home foreclosures are already way up, and there's nothing in place when a family loses their home (and the equity they slaved for.) I have to say it: there's no America when it's just walmart workers and upper management. And the list of "those things which can be done cheaper, or better, overseas" is growing every year, as advances in networking and servers keep happening. In a short while (and definitely within our lifetimes), server technology and speed, and networking capability will be almost instantaneous. There will only be a very short list of jobs that have to done here.
posted by amberglow at 2:08 PM on March 24, 2004

Being competitive will require us to cut costs, cut taxes, and cut regulation, and eliminate the remanents of failed welfare and educational policies which leave our those who should be free to work for low wages unemployable or close to it, and change attitudes which leave people happy (or, at least, willing) to work for $6/hr at Starbucks but believe that they have to earn $18/hr to work on assembly line, or in an advertising agency, for that matter.

Ah, you mean other people will have to change their attitutes and be happy with $6 per hour. You, personally, will not have to endure such a thing. Right?

Lemme tell ya, I'm thinking few people are very "happy" at the prospect of trading an $18-an-hour job for a $6-an-hour job, and the insinuation that, well, tough shakes, the country is better off in the long run isn't going to wash. Frankly, this sort of economic elitism is bound to spark a backlash - already has, really, or Drezner never would have felt compelled to write what he did.
posted by kgasmart at 2:49 PM on March 24, 2004

You know what's funny?

During the 1990's many Americans (all you WTO protestors can excuse yourselves) were high on the benefits of globalization. Because it was benefiting the good 'ol USA.
Remember that stock market boom?

Now that the rewards of the global economy are starting to trickle down to places like Brazil and China everyone seems less keen. Hmm . . . where's Pat Buchanan when you need him to run for President?
posted by pooligan at 4:06 PM on March 25, 2004

CNET's Builder.com is -- on an experimental basis -- cutting 40 percent of its freelance budget and using the money to offshore authoring of many of its articles to an editorial firm in India.
posted by amberglow at 8:21 PM on March 26, 2004