August 19, 2003
Outsourcing Our Future?
Dan Gillmor and others are worried that we are outsourcing our future.
Let's begin by clearing away some underbrush.
First of all, the number of jobs in the United States is not set by what happens on the sea lanes--on what exports and imports the container ships carry from port to port. The number of jobs is set in the Eccles Building, by the Federal Reserve, which tries to hit the sweet spot: high enough demand to produce effective full employment, without so much demand that vacancies become so abundant as to lead inflation to run away. Sometimes the Federal Reserve does a good job and is lucky, and we have full employment with price stability. Other times the Federal Reserve is unskillful or unlucky, and we have accelerating inflation or high unemployment. It is certainly true that what happens in international trade affects employment in America. But the Federal Reserve can and does offset and neutralize impacts of trade that push employment away from where the Federal Reserve thinks the sweet spot of full employment is.
So what, then, is the impact on the American economy when Singapore educates its people to become competent network developers, or India educates its people to become competent help-center technicians? It's not that jobs leak away. Remember: trade balances. Indians want rupees, not dollars: they will only sell us as much as we can pay for in rupees, and the only way we get rupees is by selling things to Indians. The things we sell to Indians are either goods and services exports, or capital exports--Indians buying financial assets or real property in America, the sale of which is used to finance domestic investment spending. Either way (if the Federal Reserve does its job) Americans' demand for imports made in other countries is recycled into foreign demand that employs Americans in industries that export goods, export services, make producers equipment, or build structures. This is a consequence of Say's law--an economic principle which is usually true, sometimes false, but which it is the Federal Reserve's business to make as true as possible as much of the time as possible. This means that nightmare scenarios--3.3 million high-tech jobs moving overseas--are beyond the bounds of short-run probability. The current account plus the capital account must balance: if the work that used to be done here by 3.3 million people is to be done there, that means that our export industries here must employ an extra 3.3 million people as well.
When foreign countries acquire the capability to make stuff, there are two impacts on the American economy. First, we can no longer sell the stuff we make abroad for such high prices as we did before: our exporters face more competition as they try to sell abroad. Second, our consumers and domestic businesses can buy things made abroad more cheaply: producers of import-competing goods and services find that they face more competition and must lower their prices, but other businesses find that their costs fall, and households find that their incomes buy more good stuff.
Which effect dominates? Theoretically, either one can. The opening of the Suez Canal and the coming of large-scale cotton production to India and Egypt after the U.S. Civil War was surely not good for the gross economic product of America's cotton south, and contributed (along with the boll weevil, the neglect of education and other public services, and the corruption of the herrenvolk democracy that set up Jim Crow) to the south's economic retardation toward the end of the nineteenth century (how big a role Egyptian and Indian competition played in this is not something I am confident that I can judge). But in the post-World War II world, it seems clear that the U.S. has gained much more than it has lost from the economic development of its trading partners. The U.S. as a whole benefits enormously from the fact that Japan is a rich industrial economy rather than something like Indonesia. The producer and consumer surplus the U.S. gains from trade with rich western Europe far exceeds what it gains from trade with poor eastern Europe. The way to bet seems to be that examples like the growth of other producers to compete with the cotton south are the exception, and win-win benefits are the rule.
If this is not to be the case in the future, there needs to be an argument made as to why the normal post-World War II pattern will be broken. And I haven't heard anybody make such an argument yet.
Moreover, it is important to distinguish between situations in which foreign countries do not acquire the capabilities to produce goods traditionally made in the U.S., and situations in which the U.S. imposes tariffs and quotas to protect domestic industries. The first may leave America better off: we sell them good stuff at expensive near-monopoly prices. The second does not: we can't make them buy our (now overpriced) exports, and trade barriers simply cut off the benefits from mutual specialization in areas of comparative advantage that David Ricardo identified long ago.
This leaves the question of what is the appropriate public policy response to successful high-tech "outsourcing": Imposing tariffs and quotas to protect domestic demand is surely a bad idea, for standard Ricardian reasons. Attempting to slow the rate at which modern technologies are transferred to other countries is surely a bad idea too: there is no surer way to store up huge amounts of economic and political trouble for the future than for the United States to embark on a policy of trying to slow economic growth in India, China, and elsewhere.
I think that the correct policy response is the one outlined by Robert Reich in his Work of Nations of a decade and a half ago: First, get our people out of industry segments where we are about to lose comparative advantage and where wages are about to take a big dive--this is the reason we Democrats like various forms of Trade Adjustment Assistance, for those who work in such industries are about to get shafted and have done nothing to deserve it (and have the ability to impose enormous costs on the rest of us through trade barriers if the political dice roll their way). Second, make sure the public investments in basic research are there to spark applied research and development to create new industries and new forms of high-tech in which our labor and our capital can be very productive (NIH, NSF, DARPA anyone?). Third, remember that the principal determinants of our prosperity and our productivity come from within: get public investment in infrastructure right, private savings and investment high, and investment in education high as well.
Remember: few would be worried about "outsourcing" if the U.S. unemployment rate were still close to four percent, rather than at the above six percent level that it is. To the extent that a structural cure is being proposed for what is really a macroeconomic problem, do not expect it to end well. And remember: a network-design job artificially kept in Sacramento when it could be done more cheaply in Singapore produces extra income for a network engineer in Sacramento, but has costs as well: in a diminished capital inflow that reduces construction and the earnings of construction workers, in higher costs for businesses installing their networks that shows up in lower salaries they pay their workers, in lower earnings and stock prices for HP. Given the all-thumbs hand the U.S. government has to try to guide industrial development through tools other than maintaining the infrastructure of a market society and the provision of basic research and other public goods, it is hard to imagine that the costs to the country as a whole will not greatly outweigh the benefits.
Dan Gillmore: outsourcing our future: Will America lose 3.3 million high-paid, value-added technology jobs in coming years? That's one estimate that John Chen, CEO of Sybase , has heard -- and it's not at all impossible, he told the Progress & Freedom Foundation's Aspen Summit this morning. This strikes me as one of the sleeper issues for the coming campaign, especially in places where technology has fueled the economy such as Silicon Valley. Companies are sending their work overseas at an accelerating rate.
The reason is simple: money. When they can hire qualified engineers at a third to a tenth of what it costs in California or Boston, for example, the urge is irresistable. But they should be honest about why they're moving jobs offshore. That's what was so offensive about a Hewlett-Packard executive's statements when the company recently announced it was setting up a networking R&D center in Singapore, according to the Straits Times (Google cache). The Times reported:
The technology information giant already has a facility to develop these products in Roseville, just outside of Sacramento in California. But last year HP found it difficult to find suitable manpower for the centre, said the company's vice-president and general manager for networking, Mr John McHugh.
No suitable people right next door in the San Francisco Bay Area, in Silicon Valley, where the unemployment rate -- especially engineers -- exceeds the national rate? Baloney. We need a national debate about the next wave of American job losses, the same kind of debate we've had over the manufacturing move overseas. It was painful but it left us stronger in the end.
Chen correctly calls for a deep study of this trend. We need facts and context, and so far we have mostly anecdotal evidence. But the United States seems woefully unprepared to deal with what's coming this time. We are systematically wrecking our schools (except our universities, which remain the world's best), destroying our government's fiscal base, encouraging inequality of opportunity and generally encouraging our international competitors to take advantage of our self-induced weakness. America's emerging plutocracy cares about profits, and doesn't care where they come from.
For the rest of America, it's not going to be so easy this time.