The Futurist

'Outsourcing' - What a Non-Crisis That Turned Out to Be

(Please see Version 2.0, posted on March 18, 2008).

In the 2001-03 economic downturn, the aftermath of the technology bust resulted in hundreds of thousands of software engineers and assorted high-tech workers losing their jobs.  A jittery public was vulnerable to influence from isolationist politicians, with the likes of Lou Dobbs and Pat Buchanan fanning the flames in the media.  As a result, the simple business practice of moving certain components of daily operations to a lower-cost location, if only to keep up with competitors already doing the same, became a dirty word - 'outsourcing'. 

The cover story of Wired Magazine's February 2004 issue was on the outsourcing of software jobs to India.  Within the article, a core theme was the supposedly tremendous hardships that white-collar Americans were about to experience due to a 'giant sucking sound' of jobs going to India.  In the same month, then Presidential candidate John Kerry screamed about the practicies of "Benedict Arnold CEOs" who outsource American jobs to India, hoping to gain the support of isolationists and the economically ignorant.  Elsewhere, very uncharitable things were said by leftists about brown-skinned Indians, due to their rapid adoption of capitalism and globalization at the expense of the leftist plantation where Indians were required to symbolize Gandhian non-violence, zen spirituality, yoga, curries, and the glorification of poverty. 

Let's call February 2004 as time when fears of 'outsourcing' reached a fevered peak. 

A quick glance at a few economic indicators from the Bureau of Labor Statistics since then reveals the following :

So 5.4 million jobs were created in this short time, the unemployment rate is lower than it has been for 32 of the last 35 years, and wages have risen while real GDP has grown at a 3.5% clip.  That has been the extent of the damage to the US economy.  Take that, Lou Dobbs, Pat Buchanan, John Kerry, Dennis Kucinich, and other assorted demagogues, who have no ability whatsoever to truly grasp the trends that shape our world. 

India, in the meantime, has benefited greatly as well.  GDP growth has averaged 8% a year over this same period, and political ties with the US have strengthened in a manner unlike any previous period in the last 50 years, as evidenced by the groundbreaking US-India nuclear deal, something that seemed unthinkable even as recently as 1998.  The faster these ties broaden, the better the world will become.  A prosperous India is a critical component to the US achieving favorable outcomes in both the War on Terror and with China, as seen from where India resides on this particular map.  Anti-Americans become apoplectic when they learn that India is the most pro-US country in the world. 

What does the future of outsourcing hold?  Is there still a risk of jobs vanishing from the US at a rate faster than they can be produced, as pessimists still maintain?  Unlikely, even though Internet backbone bandwidth has quadrupled in the last 3 years, and many more people in India have PCs and Broadband connections today than in 2003.  This is because aggregate demand growth has saturated even India's vast labor pool.  Salaries in India have been rising at over 12% a year due to labor shortages, causing their cost advantage to erode.  India itself has started outsourcing to Bangladesh and Eastern Europe, which are much smaller labor pools and will also saturate quickly.  If anything, the trends favor more job creation in America and India. 

The next time there is a recession, this could emerge as a phony issue again.  But other than a few pessimists, socialists, and racists, it is unlikely to gain much traction, as Americans have seen that the benefits have outweighed the costs by a handsome margin.

Update (4/24/07) : BusinessWeek also has an article on how misrepresented the outsourcing issue is.

nVidia Graphics Technology Advancement

Check out nVidia's homepage for a sample of the graphics that it's new graphics processors are capable of.  Yes, that face is entirely computer generated, and can be rendered on a PC with nVidia's products available for a grand total of under $2000.  While this demonstration, of course, is constructed on optimal conditions to display pre-selected visuals for maximum 'Ooooh' effect, this will be the level of graphical detail that mainstream games will contain by 2012.  Our prediction of a radical reshaping of consumer entertainment appears to be on track. 

An important accomplishment of this demo is the apparent surmounting of the Uncanny Valley pitfall.  More demos are needed to confirm that this obstacle has been overcome, however.

Related :

The Technological Progress of Video Games

The Next Big Thing in Entertainment

Next Generation Graphics, a Good Intro

New UN Human Development Data Released

The UN has released Human Development Data for 2004 (it usually lags by about 2 years).  The changes per year are not large, but the website has added a new feature by which the Human Development Index (HDI) of a country can be graphed and compared to other regions of the world.

Currently, if the world is divided into three categories of human development (high, medium, and low), the distribution is as follows (from Wikipedia).  The immediate observation is that outside of Africa, extreme poverty is a rare occurance in the modern world. 

 

The older 2003 data is divided into finer segments to provide greater precision :

Upon examination of the data by country, a few other points present themselves :

Only 20 countries had a score greater than 0.800 in 1975, but by 2004, 63 countries had crossed that barrier.  This can be linked entirely to the diffusion of technology, spread of globalization, and the emergence of the United States as the dominant economic model in the world, creating win-win trade arrangements with many other countries.  The progress in HDI across the world thus mirrors a corresponding rise in democracy, which I have argued has led to a drop in warfare. 

Ireland used to be significantly behind Britain, France, and Germany, but has now overtaken them.  Guess what Ireland's tax rates are compared to those of the other three?

For all the media gloom about the US falling behind other countries, it has been ahead of the composite average of OECD countries by about the same margin for the last 30 years.  The US economic growth rate continues to be higher than the average for OECD nations. 

Mexico is considered to be a poor country, with a reputation for having citizens who seek to escape to the United States.  However, it is still better off than most of the countries in the Eastern Hemisphere, including Russia and Saudi Arabia. 

China will soon overtake Russia, which is still at a lower level than it was at in 1990.  The rapid improvements in China have greatly reduced the total number of the world's people living in extreme poverty.  Russia, on the other hand has been overtaken by at least 25 other countries over just the last 15 years. 

Related :

These Are The Best of Times

The Winds of War, the Sands of Time

Why the US Will Still be the Only Superpower in 2030

The Age of Democracy

Economic Growth is Exponential and Accelerating

The Biggest Event of the Last 15 Years : The Stunning Defeat of Socialism

The US Economy Today - Amazing Resilience

Over the last 4 years, the US has averaged 3.5% annual GDP growth, which is exactly at the long-term trendline.  The unemployment rate is lower than it has been for 35 of the last 38 years, with seven million jobs being created in the last 3 years alone.  What is remarkable is that in this period, a number of factors that have caused recessions in the past have occurred, even as new negative forces have simultaneously emerged, and all these in tandem have not derailed economic growth.  But does this mean we could be growing even faster, had these problems not emerged?  Let us look at all the bullets that did not manage to do the damage that they once did, and the new bullets that we have successfully endured. 

1) Terrorism and War : Depending on how one measures it, the Sept. 11, 2001 terrorist attacks cost the US economy anywhere from $200 to $800 billion.  In addition, it worsened the recession on 2001-02, and still slows the productivity of the US economy through longer lines at airports, increased security expenditures, difficulties that law-abiding foreign tourists face in getting visas to enter the US (costing us over $100 billion a year in tourist revenue), etc.  This is effectively a new tax that we will be paying in perpetuity.

While the War on Terror has still cost the US just 3000 troops in 5 years (vs. 50,000+ in VietNam and Korea), the negative media coverage and resultant burden on the mood of the US consumer today may comparable to what it was during the VietNam War.  Add to that the threat that Americans could be killed in the US mainland when they least suspect it, and thus exists a lingering fear that makes consumer confidence lower than it should be. 

2) Oil Spike : When oil reached $90 in today's dollars back in 1980, this caused a very deep recession, even though prices quickly dropped after that.  In 2006, oil reached $78 per barrel before dropping, without causing a recession.  In fact, it appears that sustained prices near $60/barrel are not sufficient to cause a drag on the US economy.  This is partly because of the US economy evolving to a state where a large portion of output is derived from innovation and technological advancement, which are much less tied to oil prices.  An oil spike hurts GM and American Airlines much more so than it hurts Google and Microsoft. 

Read : $70+/barrel oil, the non-crisis.

3) Massive Natural Disaster : Hurricane Katrina was the largest natural disaster the US has been struck with in several decades, with the direct economic costs of a major city being submerged with water compounded by the displacement of hundreds of thousands of people and the economic activity they would otherwise generate.  It cut the GDP growth of Q305 down to 1.8%.  But in the next quarter, GDP bounced back smartly to 5.6%.  The US economy adapted to the shock in a very short time. 

4) Corporate Scandal Tax : While scandals like Enron and Worldcom could happen in any era, the resultant Sarbanes-Oxley (SOX) legistation has proven to be so oppressive to law-abiding corporations that the economic cost exceeds that of the implosion of Enron and Worldcom by a large margin.  Medium-sized public companies have to pay an estimated $3 million per year to comply with SOX, which is money that could otherwise go towards R&D, or be passed onto shareholders.  Estimates of the total opportunity cost of SOX over the last 3 years run as high as $1 trillion.  Hopefully SOX can be scaled back for medium-sized enterprises with under $1 billion in annual revenue. 

5) Trade Deficit : The US trade deficit, or the amount by which imports exceed exports, is not entirely a negative economic force, but it currently is over 5% of GDP, vs. just 2% of GDP in the mind-1990s.  This reduces the total US GDP growth rate by over 1% a year. 

I do not consider 'outsourcing' to be a negative for the US economy.  I consider it to be a positive, for reasons described here.

Despite all these blows, the US economy has continued to grow at 3.5% for the last 3 years.  It almost appears that the forces that would traditionally cause a recession are running out, with only three remaining :

1) A Housing Bust : The effect of this could be similar to the stock-market crash that contributed to the 2001 recession, but as the housing decline is already 1 year on, if a recession does not occur by the end of 2007, the US economy will have successfully digested this correction without a recession.  This is a once-in-a-lifetime occurance, just like the dot-com bubble was. 

2) A terrorist attack larger than September 11, 2001.  Of course, this may happen tomorrow, or may not happen for several years. 

3) A pandemic like bird flu could cause tremendous economic damage, but the US would still be able to cope better than almost any other country in the world. 

Even then, it sounds too good be true that recessions will be increasingly less frequent in the future.  But consider that economic growth is exponential and accelerating, permitting the trendline of economic growth rates to move increasingly higher.  The number of quarters in which the US experiences negative continues to decrease as a percentage of all calendar quarters.  But what if other parts of the world have accelerated even faster?

The trendline for World GDP growth is now at a robust 4.5% a year at PPP, and the world economy has not had a year of negative growth since 1973, with almost no year growing under 1% since 1983.  A year with negative growth is so many standard deviations below the mean 4.5% trendline that the probability of it occuring in the next several years is mathematically small.  In other words, the proportion of years in which world GDP growth is negative continues to decrease, and is asymptotically approaching zero.  A global slowdown would still constitute growth of around 2% a year for a couple of years.  Only a calamity such as a major bird-flu pandemic could cause a genuine recession for the world economy. 

But this also means that while the US economy is growing at a strong rate relative to historical trends, it is actually lagging the world economy for the first time in several decades.  If the US is chugging along at its long-term 3.5% trendline, the world is accelerating faster.  In fact, developing regions by themselves are growing at nearly 7% a year.  This graph shows how the developed world has remained steady (with the US exceeding the growth rate of the rest of the developed world) even as developing regions have broken away. 

So in conclusion, the US economy is performing very well relative to historical norms, and this is even more remarkable given the many blows it has taken in recent years.  But these blows have taken a toll - and the toll is that the US now lags the growth rate of the world economy by a significant margin.