Commentary

Outsource, Outsource, and Outsource Some More

By Daniel Griswold
This article appeared in the National Review on May 3, 2004.

THE ECONOMY

A boon to the American economy

WHEN President Bush’s chief economist, Gregory Mankiw, observed in February that foreign outsourcing “is probably a plus for the economy in the long run,” reaction was swift. In a press release the following day, John Kerry thundered: “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.” Hillary Rodham Clinton chimed in: “I don’t think losing American jobs is a good thing. The folks at the other end of Pennsylvania Avenue apparently do.” Even Republican House Speaker Dennis Hastert piled on, saying the ex-Harvard professor’s “theory fails a basic test of real economics. An economy suffers when jobs disappear.” In March, the Republican Senate overwhelmingly passed an amendment that would deny certain federal contracts to companies that outsource work abroad.

So is foreign outsourcing “just a new way of doing international trade,” as Mankiw and other free-traders argue, or is it a threat to American jobs foisted on us by corporate traitors trolling the globe for cheap labor?

An examination of one particular sector-the information-technology (IT) industry-proves that Mankiw is right: “Foreign outsourcing” is just a buzzword for international trade in services. Contracting for services abroad has become increasingly cost-effective owing to the personal computer, which has digitized much of our work, and the high-speed and deregulated transmission of that information through broadband and the Internet. IT companies are increasingly outsourcing thankless jobs-routine programming, data entry, and system monitoring-abroad.

Foreign outsourcing allows American IT companies to cut dramatically the cost of certain services; as a result, the companies become more competitive in what they do best, their “core competencies.” Better and more affordable services become available for consumers and taxpayers. According to a 2003 study by the McKinsey Global Institute, outsourcing delivers large and measurable benefits to the U.S. economy: It reduces costs for IT and other services by as much as 60 percent, keeping U.S. companies competitive in global markets, benefiting workers and shareholders alike. It stokes demand abroad for the export of U.S.-supplied computers, telecommunications hardware, software, and legal, financial, and marketing services. It returns profits to the United States from U.S.-owned affiliates abroad, and it allows U.S. companies to redeploy workers in more productive jobs here at home. McKinsey calculates that every dollar spent on foreign outsourcing creates $1.12 to $1.14 of additional economic activity in the U.S. economy.

HOW MANY LOST JOBS

One of the frustrations of the outsourcing debate is the lack of hard numbers. Nobody really knows how many jobs have been outsourced overseas. Unlike bushels of soybeans or slabs of steel, jobs are not counted at a dock and loaded on a ship for India or China. The best estimates from the IT industry are that perhaps 300,000 to 400,000 jobs previously performed in the U.S. are now done overseas through contractors. The much-cited Forrester Research report of November 2002 projected that 3.3 million jobs would be outsourced from 2000 through 2015, or about 220,000 a year. (More than half of those would be call-center type jobs, and only one out of six would be white-collar IT jobs.)

Even if accurate, those numbers are just drops in the huge bucket of an $11 trillion economy that employs 137 million people and creates and destroys millions of jobs every month. Even in times of healthy employment growth, 350,000 people file for unemployment insurance every week. The Labor Department figures that, during the past decade, our economy created an average of 32.8 million new jobs each year while eliminating 31.0 million, for a net annual gain of 1.8 million. Jobs lost to outsourcing are but a small channel in the torrential “job churn” normal for a dynamic market economy.

Indeed, far more Americans lose their jobs to technology or domestic competition than to foreign outsourcing or other forms of international competition. Think of all the former typists, telephone operators, and bank tellers whose work has been replaced by computers and other machines. Kodak announced earlier this year that it would lay off 15,000 workers, not because of foreign competition but because digital cameras have depressed the sale of film. Between 1988 and 2000, a net half-million jobs for typists and word processors were eliminated, not because they were outsourced but because they were made redundant by computers. Apparently job losses become news only if they can be blamed on a foreign bogeyman.

Even IT’s job losses since 2000 have not been driven by foreign outsourcing. Displaced high-tech workers should blame not Indian computer programmers but the bursting of the dot-com bubble, the market plunge, the 9/11 attacks, the corporate scandals, and slow growth abroad. A fundamental mistake made by outsourcing’s critics has been to confuse the passing pain of the IT recession with an alleged long-term decline in this sector. They compound their mistake by comparing current output and employment levels with those at the frenzied peak of the boom in 2000, rather than with more normal levels from the late 1990s. A more accurate and less alarming picture of the industry emerges if we compare the state of the industry a few years after the bubble burst with its state a few years before.

THE BEST JOBS STAY HERE

Beginning in the early 1990s, with the takeoff of Windows-based computing and the Internet, employment in the IT industry surged. Employment in software and related services grew by one million between 1993 and 2000, before dropping by 166,000 between 2000 and 2002. The story has been much the same across other IT sectors: stupendous growth throughout the 1990s, then a pullback in employment of 10 to 20 percent during the recession. In the IT industry as a whole, employment levels even after the recession are still no lower than in 1998. During the past decade, annual employment in the IT industry has still grown twice as fast as employment in private industry in general.

Despite the turbulence of the past four years, the U.S. IT-scrvices sector remains a major force in the U.S. economy. Domestic software, computer, and communications services accounted for a combined $621 billion in 2003, up from $510 billion in 1999. IT services that are moving offshore are more than offset by increased output at home. Any sluggishness in employment growth has been because of rising productivity, not because of falling production.

The jobs that have been lost in the IT sector tend to be lower-skilled and lower-paid jobs. From 1999 through 2002, total employment in the IT industry did drop by more than a quarter of a million, from 6.24 million to 5.95 million. But declining employment was concentrated in those occupations requiring relatively low or moderate levels of training and education. In contrast, the number of IT jobs that require a relatively high level of training and education was actually higher in 2002 than it had been in 1999. In the year before the bubble burst, the industry employed 3.43 million workers whose jobs required at least an associate’s degree and work experience. After a surge of hiring in 2000, followed by a painful shakeout, the number of such skilled workers stood at 3.51 million in 2002, up 2.3 percent from 1999. Contrary to the popular fear that “our best jobs” are going overseas, the best jobs are staying here.

The recovery and expansion of job creation that has already begun in the IT sector should continue. According to the Labor Department’s biannual projections, the number of jobs in the computer and mathematical sciences is expected to increase from 3 million to 4 million in the next decade, a rate of growth twice as fast as employment in the rest of the private economy. Seven of the 30 fastest-growing occupations will be in the computer field. Despite the lingering slackness in IT employment, those jobs still pay an average of $67,000 a year.

A TWO-WAY STREET

Another reality lost in the outsourcing debate is the amount of outsourcing the rest of the world sends to the U.S.: We are far and away the world’s top destination of outsourcing of information-technology, financial, communications, and other business services. In 2002, U.S. companies exported $14.8 billion worth of computer, data-processing, research, development, construction, architectural, engineering, and other IT services. During that same year, Americans imported $3.9 billion of those same kinds of services. So for every dollar Americans sent abroad for IT outsourcing in 2002, the world sent more than three dollars to the U.S. for “insourcing.” If Congress launches a war against foreign outsourcing, American companies and workers will be among the first casualties.

Outsourcing, like trade in general, is reshaping for the better the world beyond our borders. In a classic win-win result from trade, outsourcing invigorates the U.S. economy at the same time it builds a pro-American middle class in India and other developing countries. The Indian high-tech sector is flourishing because they are following the U.S. model of zero tariffs on imported software and hardware, no restrictions on foreign investment, and an emphasis on postsecondary education. The Indian economy is now achieving Chinese levels of double-digit growth. So far the growth has been concentrated in the high-tech sector, but the effect there has been profound. Hundreds of thousands of young Indian college graduates are realizing the fruits of middle-class life that we all take for granted. Although the $8,000 paid to an Indian programmer sounds ridiculously low in American terms, it can buy about five times as much in India, enabling a worker to rent his own apartment, own a cell phone, make car payments, and travel abroad. A call center in India (no sweatshop)

In February I spent a week in India talking with IT executives and touring the main facilities of some of India’s largest IT companies. Except for the cows at the gate, I could have been in Silicon Valley. All the equipment and facilities are state-of-the-art. At one call center, I looked out over a sea of cubicles, phones, PCs, and casually dressed college graduates in an air-conditioned office complex. Except for the Indian flags, I could have been anywhere in the U.S. If that was a sweatshop, so are most offices in America.

The Indian high-tech companies and workers who service the U.S. market have an obvious affinity for the American model. They consciously follow U.S. business practices. They have adopted our policies of deregulation and open markets. They buy American hardware. They work with and for American investors. They speak fluent English. Many have relatives who live and work in the U.S. In this time of rising anti-American feeling around the world, when we are desperately trying to win friends and influence events in South Asia and elsewhere, it would be hard to find a more naturally proAmerican enclave than the Indian high-tech sector. What could be more short-sighted than to disrupt our growing, mutually beneficial trade with the world’s most populous democracy to save a sliver of jobs that are probably heading out the door anyway?

So far, the rhetoric against outsourcing has been worse than the legislative action. The main legislative vehicle against outsourcing has been restrictions on government contracts. Earlier this year, Congress enacted a temporary ban on certain contracts with companies that would outsource the work; about 20 states are considering similar language for state contracts. Those restrictions on government procurement would come at a high cost for the few jobs that would be saved: Taxpayers will pay more for existing services, or receive less service for the same price. Furthermore, these measures invite retaliation against the juicy target of U.S. service exporters-and make a mockery of the U.S. government’s calls for more opportunities for American companies to bid competitively for government contracts abroad.

More fundamentally, restrictions on outsourcing would slow the dynamic progress of the U.S. economy and the growth of more prosperous and pro-American middle classes abroad. Let’s hope the demagoguery against outsourcing wanes before the politicians can do real mischief.

Daniel Griswold is the director of the Center for Trade Policy Studies at the Cato Institute.