The last week has seen the ‘great US ousourcing debate’ hit both new highs, and new lows. On the plus side would be the declarations of the oft maligned Greg Mankiw to the effect that the “outsourcing” of jobs is beneficial to the United States economy (even with the qualification ‘perhaps’ this has merit – since despite the fact that the suggestion may not be as well-founded as Mankiw imagines, it is at least courageous in a situation where the President he is advising doesn’t appear any too clear on the question himself). Among the more evident examples of the low points would be the statement from the Democratic Presidential aspirant John Kerry to the effect that company leaders who promote business process outsourcing are ‘Benedict Arnold CEO’s’.
Benedict Arnold, for those of us not steeped in US folklore was, well, a very different kind of American military leader:
” a military hero for both sides in the same war………..Arnold served the Patriot side with distinction in one battle after another, including a dangerous assault against the center of the British line at Saratoga, where he was again wounded in the leg. No general was more imaginative than Arnold, no field officer more daring, no soldier more courageous………… Yet Arnold has gone down in history not as a hero but as a villain, a military traitor who, as commander of the American fort at West Point, New York, in 1780, schemed to hand it over to the British.
Of his role in this conspiracy there is no doubt………….Why did Arnold desert the cause for which he had fought so gallantly and twice been wounded? Was there any justification for his conduct? “
Now of course the target Kerry has been keeping his powder dry for here is a very specific one: the US Multinational Corporation. The MNC is itself an entity which like Arnold, may be thought through its tenacity and imagination to have ably served its country of origin in one moment, only to be seen as conniving treacherously to bring about its demise in another.
Now this judgement of Arnold may be merited or otherwise, and I for one would not deign to offer an opinion. What may be more to the point would be whether his purported modern equivalent, the corporate CEO, is deserving of such comparison.
Clearly Jagdish Bhagwati thinks he (or she) isn’t, and it might be that this rather more considered opinion offers a better starting point for approaching the problem. According to Bhagwati:
“Senator Kerry is wrong on two counts. First, his economics is faulty: the practice only adds to the overall economic pie and improves the competitiveness of American companies. In a world economy, firms that forgo cheaper supplies of services are doomed to lose markets, and hence production. And companies that die out, of course, do not employ people.”
Now as an economist who knows more or less what he is talking about, Bhagwati is obviously right over Kerry. But we might like to note that the point that he is making is interesting in its choice of wording: the practice of outsourcing jobs is beneficial to American companies, and those firms who in a world economy don’t avail themselves of the cheapest sources of supply and most efficient systems are doomed to die out. But maybe this wasn’t Kerry’s point, maybe Kerry’s point is that for once, US corporations, acting in the interests of their own survival, may make for a globally more efficient and equitable market, but the impact of this activity on the US economy itself may not be quite the one which was anticipated.
In other words as economist qua economist what Bhagwati is saying makes perfect sense, this will produce a better global product, and a more efficient distribution of resources (after all putting all those third world brains to better use can hardly be described as a bad thing economically).
To understand where the problem might lie in all this reasoning, let’s try and think about an internal US distribution question, a drift of IT jobs say, out of Silicon Valley and into Washington and New York (An IEE paper by Jack Kiekegaard talks about precisely this process). This job drift may well be good for the US as a whole, it is certainly good for Washington and New York: but is it good for Silicon Valley? Well it depends, it depends of the quality of the response. It is an open, empirical question.
Big dislocations are evident between states, and big changes are occurring within states. While Ohio lost 20,000 jobs in sales and related occupations between 2000 and 2002, Texas gained 41,000. On the other hand, Texas lost 55,000 jobs in management occupations, while other states gained a limited number of managerial positions. California was the largest job loser in computer and mathematical occupations and legal occupations but the largest job gainer in business and financial operations occupations and arts, design, entertainment, sports, and media occupations. Are computer and mathematical occupations going offshore? Not so in New Jersey, which added nearly 10,000 such jobs in 2000?02, but definitely so, if you?re from California, which lost 44,000 of these positions.
Now transfer this point from jobs moving out of state to jobs migrating out of the US and into the global arena: the answer again will be: it depends. It depends on the nature of the internal response inside the US, and on the technological constraints on the possibilities of job creation. It depends, in other words, on what technological innovations lie waiting just round the corner. The ones we can’t quite see right now.
Are there grounds for thinking the US economy will find a solution, of course there are. But are there also grounds for thinking that this time things are different, well this too. We have never had such globally equal competition up towards the top end of the value chain.
The second, newer type of outsourcing involves American companies that do highly skilled research and development work abroad. Craig Barrett, chief executive of Intel, has said that American workers face the prospect of 300 million well-educated people in India, China and Russia who can “do effectively any job that can be done in the United States.” But such concerns seem exaggerated. There is little evidence of a major push by American companies to set up research operations in the developing world. I have taught hundreds of fine foreign students in the last few years, but only a small fraction are at the level of proficiency that Intel looks for in its research programs. And a cursory look at American immigration shows that the best students in high-tech fields come from just a handful of world-class institutions in those countries.
Here we move from the realm of analysis to that of opinion. The opinion of Craig Barrett appears exaggerated: perhaps. But Bhagwati himself hardly seems convincing. Those near to the cutting edge seem to be taking a different view. Nandan Nilekani, chief executive of Infosys Technologies, an Indian outsourcing company, declared, for example, at the World Economic Forum last month that “Everything you can send down a wire is up for grabs.” That everything seems to include quite a lot.
What we are talking about here is not a small number of elite scientists, but large numbers of highly educated people. Put it this way, it may be that the US education system still produces a top 1% which is above and beyond what any other country can produce, but if we back downstream to the next 20% the situation doesn’t seem to be so unequal, and it is here that the competition for work may be most intense.
There is another side detail here worthy of comment. Bhagwati has himself in the past drawn attention to the way the research levels of the US university, and the research departments of the top US global companies have benefited from a steady supply of the best brains on the planet. This supply may well now reduce significantly, as the prospects of lucrative work nearer home make the migration appear to be less attractive.
The fact is, when jobs disappear in America it is usually because technical change has destroyed them, not because they have gone anywhere. In the end, Americans’ increasing dependence on an ever-widening array of technology will create a flood of high-paying jobs requiring hands-on technicians, not disembodied voices from the other side of the world
I think this is an oversimplification. Jobs do in fact migrate: they migrate economically. I think denying this is silly. What is technologically redundant is itself an economic question. Cheap able labour pools in some parts of the world may well alter the global pace of technological change for a significant time. A job which is now economically difficult to justify in a comparatively prosperous Spain, may well relocate to Morocco. I don’t see the problem.
To say jobs don’t move just flies in the face of history and reality. Just look at the Uk and its history for a moment. Pre WWI something over 80% of the world’s ships were built there, after 1918 the percentage and the numbers employed simply went down and down. But this didn’t mean that ships had become technologically redundant, just that the UK could no longer compete, and certainly not with the rising young star: the United States.
The rise of the US changed many things for the UK, and arguably the UK economy spent from 1920 to 1990 adjusting to the change. But does anyone really want to seriously argue that the world as a whole isn’t better off despite the UK’s ‘relative’ demise.
So the bottom line in all this is that we are moving to a better global optimum, in terms of the use of resources and the distribution of the global product. Economic theory should tell us this. What economic theory won’t tell us is whether any particular region or nation will find itself worse or better off in the process, this is a purely contingent historical question.
I mean if nuclear fushion were just around the corner, or the fuel cell car, this would certainly ease energy constraints and make growth easier (just look at the rumpus the OPEC output reduction is causing this week). It may also provide a rationale for all that extra education which is being recommended as the global solution.
One key question here would be: are there ‘waves of innovation’? If there are, then whether we have another spurt or a contraction in growth rates may in part depend on whether we have another wave just over the horizon. Is the ICT/web browser fusion simply a one off from which most of the benefit has already been extracted, or at we only at the begining?This is what I mean by a contingent question, and this is something which it is difficult to know in advance whatever reading the stock markets may give.
The pharmaceutical industry is a case in point here. The last decade has been pretty much a failure in terms of path-breaking innovation, a lot of high cost research, but little to show in the way of really high cash-in value intellectual property. But maybe there is a big ‘breakthrough’ just looming out there. If there were this would change a lot of things.
Of course the big, big question would still be whether the ‘breakthrough’ comes from a core US or European team, or a group of researchers outsourced in China or India or, why not, elsewhere.
So our job as economists is not to deny the possibility of any given eventuality, but to explain why dramatic changes can and at times will happen, why believing in competition and market solutions isn’t simply a matter of convenience (when your part of the globe seems to be winning out), and why there is no ‘god given’ right to be up at the top: if you want to stay there then you need to earn by your own creativity and initiative the right to do so.