Outsourcing Lies and Fear
Comprehensive analysis by Greg Mankiw himself, which unfortunately I did not discover until after writing my article.
This article was published in the Daily Illini on March 6, 2006.
Around the time of the last election, President Bush's Chief Economist, Gregory Mankiw, said outsourcing "is probably a plus for the economy in the long run." John Kerry indignantly responded the next day, "Unlike the Bush Administration, I want to repeal every tax break and loophole that rewards any Benedict Arnold CEO or corporation for shipping American jobs overseas."
Protectionist sentiments from the left and the right are the true threat to American prosperity and dominance, not globalization itself. Lou Dobbs, Pat Buchanan, many traditionalists and politicians use outsourcing as a scare tactic to sell books or win votes.
But, let us look at basic economics and the data behind outsourcing.
Nobel economist Joseph Stiglitz wrote a best-selling book entitled, "Globalization and its Discontents." He describes the various groups of the world that are unhappy and bewildered in the globalization game.
But, in 2003, the Pew Research Center conducted a survey of 38,000 people in 44 major countries entitled, "Globalization with few Discontents?" Majorities averaging 80 percent in every country, and 78 percent of Americans, describe increased globalization as either "very" or "somewhat" good for their country. What explains these surprising findings?
The most widely cited statistics on outsourcing come from a 2002 Forrester Research study. It projected that a scary 3.3 million jobs would be outsourced from America between 2000 and 2015, averaging about 220,000 per year. That sounds like an insurmountable figure. Imagine 3.3 million decent and hard-working Americans bumming the streets due to the ruthlessness of evil corporate profit-seekers. The study also showed that one-sixth of those jobs would be white collar IT jobs.
We need a more complete picture and perspective of American labor economics to understand the impact of 3.3 million lost jobs. The entire U.S. economy employs 137 million people. One essential part of the labor markets is the constant cycle of creation and destruction. According to the McKinsey Global Institute (MGI), it is startling to note that between 1993 and 2002 a total of 310 million jobs were destroyed. But do not fear, 327.7 million were also created for a net increase of 17.7 million.
Compared to the robust U.S. economy, 3.3 million lost jobs spread over 15 years is paltry. In fact, 3.3 million is just 1 percent of the total losses from 1993 to 2002. The Bureau of Labor Statistics has estimated that even with increased outsourcing the economy will still show a net creation of 22 million new jobs between 2000 and 2010. Current unemployment is at a historically low level of 4.7 percent.
The accounting of outsourcing shows a net benefit to America, "MGI estimates that as much as $1.46 in new economic value is created for every dollar spent by American companies offshore ... America, meanwhile, achieves a benefit of at least $1.13 for every dollar spent." Even so, MGI estimates that 90% of U.S. jobs are of a nature that they cannot be done elsewhere.
MGI estimates that U.S. firms save 58 cents for every dollar they spend offshore. Just 5 percent of the wealth created by outsourcing would be needed to re-tool displaced workers for new jobs.
Every U.S. consumer also benefits from lower prices and the ability of companies like Wal-Mart to thrive. When consumers save it gives them greater disposable income to foster demand of even more goods and services, which leads to U.S. firms hiring more workers.
It is logical to assume that globalization is leading to a diminished U.S. presence in the world. But in 1978 American gross domestic product was 25.6 percent of the world's total GDP. Today, American GDP is 30.7 percent of the world total. Every time a trade occurs it creates more wealth for both countries - it is a positive-sum, not a zero-sum game.
The ability of the common American worker to evolve, learn and compete is unmatched. When competition looms we should not fear it but embrace it with the confidence that American workers have always been world's best.
Billy Joe Mills is a senior in LAS. He ate U.S. grown SpongeBob baby carrots while writing this column. His columns appear on Mondays. He can be contacted at opinions@dailyillini.com.
This article was published in the Daily Illini on March 6, 2006.
Around the time of the last election, President Bush's Chief Economist, Gregory Mankiw, said outsourcing "is probably a plus for the economy in the long run." John Kerry indignantly responded the next day, "Unlike the Bush Administration, I want to repeal every tax break and loophole that rewards any Benedict Arnold CEO or corporation for shipping American jobs overseas."
Protectionist sentiments from the left and the right are the true threat to American prosperity and dominance, not globalization itself. Lou Dobbs, Pat Buchanan, many traditionalists and politicians use outsourcing as a scare tactic to sell books or win votes.
But, let us look at basic economics and the data behind outsourcing.
Nobel economist Joseph Stiglitz wrote a best-selling book entitled, "Globalization and its Discontents." He describes the various groups of the world that are unhappy and bewildered in the globalization game.
But, in 2003, the Pew Research Center conducted a survey of 38,000 people in 44 major countries entitled, "Globalization with few Discontents?" Majorities averaging 80 percent in every country, and 78 percent of Americans, describe increased globalization as either "very" or "somewhat" good for their country. What explains these surprising findings?
The most widely cited statistics on outsourcing come from a 2002 Forrester Research study. It projected that a scary 3.3 million jobs would be outsourced from America between 2000 and 2015, averaging about 220,000 per year. That sounds like an insurmountable figure. Imagine 3.3 million decent and hard-working Americans bumming the streets due to the ruthlessness of evil corporate profit-seekers. The study also showed that one-sixth of those jobs would be white collar IT jobs.
We need a more complete picture and perspective of American labor economics to understand the impact of 3.3 million lost jobs. The entire U.S. economy employs 137 million people. One essential part of the labor markets is the constant cycle of creation and destruction. According to the McKinsey Global Institute (MGI), it is startling to note that between 1993 and 2002 a total of 310 million jobs were destroyed. But do not fear, 327.7 million were also created for a net increase of 17.7 million.
Compared to the robust U.S. economy, 3.3 million lost jobs spread over 15 years is paltry. In fact, 3.3 million is just 1 percent of the total losses from 1993 to 2002. The Bureau of Labor Statistics has estimated that even with increased outsourcing the economy will still show a net creation of 22 million new jobs between 2000 and 2010. Current unemployment is at a historically low level of 4.7 percent.
The accounting of outsourcing shows a net benefit to America, "MGI estimates that as much as $1.46 in new economic value is created for every dollar spent by American companies offshore ... America, meanwhile, achieves a benefit of at least $1.13 for every dollar spent." Even so, MGI estimates that 90% of U.S. jobs are of a nature that they cannot be done elsewhere.
MGI estimates that U.S. firms save 58 cents for every dollar they spend offshore. Just 5 percent of the wealth created by outsourcing would be needed to re-tool displaced workers for new jobs.
Every U.S. consumer also benefits from lower prices and the ability of companies like Wal-Mart to thrive. When consumers save it gives them greater disposable income to foster demand of even more goods and services, which leads to U.S. firms hiring more workers.
It is logical to assume that globalization is leading to a diminished U.S. presence in the world. But in 1978 American gross domestic product was 25.6 percent of the world's total GDP. Today, American GDP is 30.7 percent of the world total. Every time a trade occurs it creates more wealth for both countries - it is a positive-sum, not a zero-sum game.
The ability of the common American worker to evolve, learn and compete is unmatched. When competition looms we should not fear it but embrace it with the confidence that American workers have always been world's best.
Billy Joe Mills is a senior in LAS. He ate U.S. grown SpongeBob baby carrots while writing this column. His columns appear on Mondays. He can be contacted at opinions@dailyillini.com.
posted by Billy Joe Mills at 11:58 PM
7 Comments:
This letter to the editor was published in the Daily Illini on March 7.
Billy Joe Mills makes some indisputable points in his article "Outsourcing fear and lies." No one can deny that outsourcing provides lower costs for both U.S. firms and consumers. But at the same time, Mills makes some curious remarks in his closing paragraph which he does not fully understand and appreciate the legitimate concerns many people, including distinguished economists such as Joseph Stiglitz, have regarding outsourcing. Mills claims that "American workers have always been the best." Perhaps this is true, as one of the reasons America is so dominant. Historically, we have been at the cutting edge of technology and research. The phenomenon of outsourcing provides a significant threat to this domination.
Jobs in low-skill areas such as textiles have always been moving overseas, but what is significant about this wave of outsourcing is that high skill jobs in fields such as computer programming and information technology are moving overseas to place such as China, India and Eastern Europe, where cost structures are much lower. For example, in India, a programmer's hourly wage is typically 1/4 that of a Midwestern programmer. As these cutting-edge industries move abroad to save costs, so will the centers of innovation.
Naturally, Americans are smart and are reacting to the shortages of jobs in these sectors in their country. About 17 percent of American college students major in science and engineering, compared to a world average of 27 percent and a whopping 52 percent in China. This, coupled with higher cost structures in America due to the country's standard of living, make me skeptical as to whether or not American workers will be the best (considering their high wages) in 10 or 20 years if the current trends in outsourcing continue. I suggest "Outsourcing America" by Ron and Anil Hira to anyone interested in the phenomenon, which also contains a wealth of statistics on the matter.
Constantine Yannelis
junior in LAS
I hate to burst Constantine's bubble, but computer programming and information technology are not as highly skilled jobs as people like to think. We are just exiting the infancy of computer use for the average American. When computers were brand new and no one had a clue what was going on, those that caught on fastest were smart enough to take advantage of the situation and create a nitche field for themselves.
Now that so many people are familiar with computers and their inner-workings, these fields have become less skilled, and therefore have been outsourced. The most skilled engineering jobs still remain for US workers, and will continue to do so for some time.
It is foolish to say that because a field that has only existed for 15 years has gone overseas that the US is losing its stronghold on technical jobs.
I read Joseph Stiglitz's book. I don't think he said outsourcing was bad per se. His main points seemed to stress that you can't shock markets. Markets need time to adjust.
All in all, good job billy.
Billy,
I think you have the standard economic view of the effects of outsourcing correctly stated. I have two reactions:
1. There have been questions raised, by serious economic thinkers, not just Stiglitz, about the correctness of this view. If you push this view to extremes it does not look so pretty. For example, India and its engineers seem ready to perform many of the design and innovative technological tasks now done in the US, and for lower salaries. I see some young Americans are now going to India to work.
2. The political side of this is how politicians try to protect those specific individuals or groups who are hurt by this outsourcing. Perhaps it is good for the US on average (and I believe it is), but some persons will lose jobs and income. If politicians enact subsidies to protect these persons, it works against the ideal equilibrium outcome that the theory prescribes. Politicians must serve their constituents!
I enjoy your writing.
Professor Lynge
Constantine,
You wrote, "Historically, we have been at the cutting edge of technology and research. The phenomenon of outsourcing provides a significant threat to this domination."
This logically does not make sense. This is a subtle point, but outsourcing itself is not a threat to our dominance in terms of innovation. Outsourcing might steal jobs from the U.S., but it does not threaten our ability to be the technology and innovation leaders of the world.
I do acknowledge in my article that high-skilled IT jobs are moving overseas, about 1/6 of outsourced jobs in the next 10 years are so are supposed to be IT. But, the point of the article is to show the RELATIVE insignificance of outsourcing when it is COMPARED to the U.S. labor market. It definitely sounds scary when people talk about 3.3 million jobs being outsourced, but that number is comparatively small when held up against our robust economy. In other words, we can swallow it without much problem.
Further, I believe that the outsourcing issue has been used by politicians as a scare issue to win votes, much like the Dubai ports deal.
Thanks for writing in and reading, that is always appreciated.
Billy said, "...outsourcing itself is not a threat to our dominance in terms of innovation. Outsourcing might steal jobs from the U.S., but it does not threaten our ability to be the technology and innovation leaders of the world."
Why would American students continue to go into the fields of science and engineering with the threat of outsourcing looming? At some point, we will run out of Americans to run the corporations that outsource. Then again, I guess the MBA types can head engineering firms even though they have no idea of how engineering works? That sounds like a recipe for disaster.
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