'Outsourcing' - What a Non-Crisis That Turned Out to Be, v2.0

I wrote version 1.0 of this article on November 26, 2006.  16 months later, it is time for version 2.0 to provide more historical context on how misplaced the hype over some fashionable issues eventually turns out to be, and why what once appeared to be a harbinger of doom is now all but forgotten. 

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 the bubble of 'outsourcing' fears reached a fevered peak.  Now, what happens whenever a bubble of psychology reaches a peak?

A quick glance at a few economic indicators from the Bureau of Labor Statistics in the 4 years since then reveals the following :

So 7.5 million jobs were created in this short time, the unemployment rate is lower than it has been for 33 of the last 37 years, and wages have risen while real GDP has grown at a 3.2% clip.  There is thus no evidence of job losses, wage erosion, or underemployment over this period.  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, pulling 100 million people out of poverty.  Political ties with the US have strengthened in a manner unlike any previous episode in the last 50 years.  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 quintupled in the last 4 years, and many more people in India have PCs and Broadband connections today than in early 2004.  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.  The Wired article from 2004 stated that the average salary of an Indian programmer was $8000 a year; today, it is closer to $15,000 a year in US dollars.  India itself has started outsourcing to Bangladesh and Eastern Europe, which are much smaller labor pools and will also saturate quickly.  Indeed, the trends favor more job creation in America and India. 

Now that we are in another recession, phony issues like this one emerge again.  Democrats are still speaking in protectionist tones, bashing NAFTA and opposing free-trade agreements with Columbia.  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.  BusinessWeek also had an article from 4/24/07, six months after version 1.0 of this article was post, on how misrepresented the outsourcing issue is.

Thus, the bubble of fashionable pessimism has moved to the next topic, which happens to be the decline of the dollar.  This, too, will turn out to be a passing concern that the economy adjusts to after a brief period of pain.  Among other things, a competitively priced dollar has led to Europe outsourcing jobs to the US, and is also working towards reducing US dependence on oil.  A debunking of the 'weak dollar' fad will be posted on another day. 

Related :

Terrorism, Oil, Globalization, and the Impact of Computing

Why I Want Oil to Hit $120 per Barrel

Outsourced Education - the Latest Flattener

Comments

[Graham Lawlor]

Hello Futurist! I have been reading your blog with great interest for some time. I am particularly intersted in your analysis of long term economic growth patterns (exponential, accelerating). These ideas (and many others you discuss here) are directly aligned with my thinking. In fact I am making use of your sources extentisvely in papers I write. I am an economics graduate student in New York. I would very much like to get in touch with you directly or know something about who you are. I could not find an 'about me' link or anything like it on your site (maybe I missed it?). In any case, if you are intersted could you let me know how to get in touch? Perhaps you can use the email that I provide when submitting this form...

Graham.

[brokerdavelhr]

GK,
I really do think that 'outsourcing' is indeed a dirty word, and is far from accurate. I also agree that it has helped strengthen ties with other countries in some cases (like India for an example).
But there are several things that I have a very hard time thinking of as ‘economical proofs’.
1.- It says that the amount of jobs have increased by 7.5 million. This is all good and dandy, but so has the US population:
http://www.umsl.edu/services/govdocs/wofact2007/geos/us.html
http://www.umsl.edu/services/govdocs/wofact2004/geos/us.html
So the fact the jobs have increased is hardly a valid source of discussion in the 'outsourcing' issue.
2.- Where are they getting those salaries from? I am sure that is what is claimed by companies (which will usually always inflate the numbers for reporting purposes). But what about the labor markets whose salaries have taken massive down turns? What about the average network engineer whose salary has likewise gone down? What about the average company who has to cut their service just to keep up with others? What about the average working Joe trying to get by?
What I see in this article is very unlike many others you have written GK. You have taken one topic, but not included all contributing factors, or the affected ones, into account.
Here is another theory (feel free to critique as I know darn well that I am not the brightest bulb in the socket, and would like as much constructive criticism as possible):
Most modern day US workers no longer work just to put food on the table. They no longer work only for practical purposes with only mild forms of entertainment on the side. The reason why, is that Modern Day US society is geared more toward the entertainment field. Then (Lord forbid), the neighbors bet a bigger TV or sound system. So another one must be purchased. The kids are screaming for the new IPOD, etc, etc. So necessity is no longer the driving factor in the US today, but rather entertainment. Even better, people always want their premium entertainment (that in other countries is not even widely sold due to poverty levels), at discount prices.
I said that to say this- The modern day economy has become a self feeding machine. One that is rapidly depleting its core resources. As you know, if any product takes a price cut, it is either a buyers incentive, outdated product (in relative terms), or a much needed short-term monetary boost for the selling company.
Ergo outsourcing. To save money to offer premium products at a discount, companies had to find a cheaper means of developing, producing, and supporting products. Many Americans complain about these products being so expensive, but then freak out when they hear about jobs in the US being cut, and sent off to a foreign country for a cheaper product to be induced into the market.
People do not go into debt buying food, getting their 5k oil change, property maintained to a reasonable level, etc. People get into debt buying a bigger house, car, stereo system, newest gaming console, etc. So here we are. Lack of responsibility. People want the finest products, but do not want or have the means to properly maintain it. They cannot blame themselves, because then that would go against their ideals that they can do what they want, when the want. So they blame things like war, global warming, outsourcing, illegal immigration, etc., etc.. The truth is that until the average citizen starts becoming more aware of the impact of their actions, and how a poorly planned action leads to a heavy consequence, that this self feeding machine called the US economy will continue in its thirst, until quenched.
What do you think?

[GK]

brokerdave,

It says that the amount of jobs have increased by 7.5 million. This is all good and dandy, but so has the US population:

That is why I also show the unemployment rate, which has had a marked improvement over these 4 years.

The point is, whether in number of jobs, unemp. rate, or wages, there is no evidence that outsourcing has dented the US workforce at all.

Where are they getting those salaries from? I am sure that is what is claimed by companies

These are averages reported by the Bureau of Labor Statistics. Within any average, some do better and some do worse. But the average is what matters.

Most modern day US workers no longer work just to put food on the table.

It is this affluence that is the mark of a society with unprecedented prosperity. When an iPod or Wii becomes a 'necessity', then you know that even the 'poor' are quite well off.

So they blame things like war, global warming, outsourcing, illegal immigration, etc., etc..

This is true - an unwillingness to take personal responsibility is the single biggest threat to growing prosperity in society.

[GK]

Graham,

Thanks for your interest. I would love to help you, particularly on the subject of exponential economic growth. I continue to be surprised with how few people are interested in this subject given how much they have to gain from it, so your interest is refreshing.

But I haven't quite decided on how to address the issue of my identity and real name here. Let me give that some thought. In the meantime, if you have some preliminary questions, you can feel free to post them here, or in the article 'Economic Growth is Exponential and Accelerating', found under 'Core Articles'.

[brokerdavelhr]

GK,
I agree 100%. Now for the next question.
The herd mentality is in high gear in the US now. People follow trends and what they think everyone else is doing instead of doing their own thinking. They attribute this as 'not having enough time to conduct the proper research'. Now if this mentality was only in a small percentage of people, then this would not be a problem. However it is prevalent upon society, and has gotten to a point where every problem in the US is always blamed on someone else. All in the name of maintaining a debt filled status quo. However without this drive for technological advances, there would be less funding outside of NASA and other programs. So how would we maintain our technological growth, and slow the debt accumulation at the same time?

[GK]

brokerdave,

The profligate mentality of many Americans will only be corrected by learning the hard way. They had enough chances to learn the easy way, and I don't think they deserve any more chances.

I don't think that is such a bad thing. The generation of Americans from the Depression learned a lot about frugality and discipline.

Technological innovation, however, is alive and well. America is still a place where people aspire to create something, start companies, build a fortune, etc. If anything, this is more prevalent now than at any other time. This group, however, is not the same group as those that get themselves into debt. The two groups are entirely separate.

Conservatives are much less likely to rack up a big credit card bill than 'liberals' are.

[Graham]

Hi GK. Thanks for the reply. Well if it's anonymity that you are looking to preserve, I promise I would not reveal anything. I would be better able to ask you more direct questions if I knew something about your background. Can you reveal whether or not you are an academic, and if so what are your area(s) of specalization? Do you have any knowledge of New Institutional Economics, Transaction Cost Economics, Public Choice, or Endogenous Growth Theory, for example? I am working on a paper now which has a great deal to do with long term trends. I am always interested in new data that show trends in growth, transaction costs, and trade volumes, particularly very long term trends and things that I can cite. If you happen to be in the New York area in about a month, you can see me present the paper at an economics conference. Let me know what you can tell me about the above.

Graham.

[GK]

Graham,

I am not an academic, and my field of study is not economics, but corporate management, so I am a layperson in relation of professional economists, and don't know much about the specialties you mention.

My expertise is in identifying and explaining accelerating trends, whether in biological evolution, history, technology, psychology, politics, or economics. My second expertise is in predicting the convergence of seemingly non-related accelerating trends. For example, how accelarating economic growth will have many implications for changing geopolitical alliances (Indo-US ties , for example), or how there will be both the technology and market demand for millions of people to pay $1 million each to get 10 years of aging reversed.

My long-term goal is to become a popular science luminary, who brings complex concepts to the masses through blogs, books, and documentaries, much like Carl Sagan, Thomas Friedman, or Ray Kurzweil.

[Saul Wall]

It often seems to be those who are close to, but not directly involved in a field (Kurzweil being another good example) who can bring out the trends and perspectives of a field for more general consumption.

As for outsourcing, with people still unable to admit that NAFTA, as imperfect as it might be, has been a great benefit for each one of the three partners, I suspect that Lou Dobbs will not be admitting any mistakes about outsourcing for a while.

Drew Carey did a piece for Reason.tv that made the point about how even the middle class thinks that everyone else in the middle class except them is suffering due to claims by the media.

If something in economics is not intuitive to people they are unlikely to accept it. The idea that free trade, low taxes and reducing state intervention all damage society and are not "compassionate" makes sense to people based on their world views and so evidence to the contrary (the rise of the economies, wages and profits of both outsourcer nation and recepient) is hard to assimilate. One does not need to be all that far to the left to end up accepting these assumptions.

Fortunately, the whole herd mentality is tempered by the inability of any one herd to predominate. Hopefully that will remain the case until some day when people are taught critical thinking skills as a requirement for a basic education.

[GK]

As for outsourcing, with people still unable to admit that NAFTA, as imperfect as it might be, has been a great benefit for each one of the three partners, I suspect that Lou Dobbs will not be admitting any mistakes about outsourcing for a while.

Yes. That is why I really want the free-trade deal with Columbia to go through. It will transform Central America and South America for the better. It will also destroy Hugo Chavez.

[Brian H]

I have more than a few qualms about the metrics and pronouncements of groups like ECRI. They are looking at their basket of "future indicators", and, in fact, say it is "recessionary". But technical recession is actually contraction of GDP 3 periods running. I don't see any evidence this has happened. Soo ... buckets of crap tomorrow, no crap today. As usual.

[GK]

Brian H,

2 quarters of negative GDP is no longer a suitable definition of a recession.

By that measure, even 2001-02 was not a recession.

[David V.S.]

Hi, GH.

I was reading on BackTalk a few days ago about that "2 Quarters of Negative GDP" definition.

http://engram-backtalk.blogspot.com/2008/05/economy-continues-its-unstoppable.html

I expect you have nothing to contest with this graph that shows dramatic slowing, even if GDP change remains positive.

May I ask what you would consider a "suitable definition of a recession"? A new definition, with factual justification for its appropriateness, would be quite helpful when discussing this topic!

In my experience, the current economic climate is having brand new effects. Old measures of household prosperity are often obsolete. For example, families with multiple televisions and computers are aghast at perceiving themselves as being forced to take the bus to work, compared to a few generations ago when taking the bus was considered typical and owning multiple televisions would have seemed extravagant.

[Gang of One]

Hello GK,

I am not sure if you will see this, as it is being appended to a four-year old entry. Anyway, I have taken the liberty of printing this entry and sharing it with my and another teacher's 9th grade social studies class that is covering a unit on India. Specifically, we are discussing the pros and cons of outsourcing. My colleague(s) are using some material that I find somewhat unsophisticated, one colleague is showing an episode of Morgan Spurlock's "30 Days" wherein an unemployed American programmer goes to Bangalore to work in a call center.
I was wondering if you might have any additional info or commentary on the subject.
Thank you,
EDW

[GK]

Gang of One,

In business, a company is forced to get the same for less cost. Failure to do so means competitors squeeze him out.

Outsourcing of jobs is nothing more than this, and is nothing new, nor is it an option in a competitive marketplace. Outsourcing happens in may industries other than software and tech support, and to many countries other than India. India itself outsources to Bangladesh.

If the US loses jobs to outsourcing, it is not due to a salary difference as much as due to the cost of benefits in the US, on top of over-regulation and other government intrusions (feminist laws, etc.). So outsourcing from the US is mainly the fault of government meddling in business and making their costs uncompetitive.

[Alexis]

Quit raising the mimunim wage, cut taxes, cut regulations. The mimunim wage runs these entry level jobs to other countries. Why pay someone here $8 an hour when someone in India will do it for less. Cutting taxes gives the companies more operating capital to invest in paying employees providing buildings to work in etc. Cutting regulations also makes it cheaper for the company to make a profit, many of the regulations cause the company to spend money meeting the regulations that could be better spent elsewhere in the company. For example, and this is not a good one but it will do, I live in Southern Illinois and my boss is required by law to provide workman's compensation insurance on everyone he hires. Not saying that is a bad thing, but it costs him $19 dollars for every $100 he pays in payroll. So if he pays me $500 dollars a week it costs him almost $600 dollars to have me work that week. That is just an example of how regulations costs companies money.