Outsource, Outsource, and Outsource Some More

This article appeared in the National Review on May 3, 2004.
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THE ECONOMY

A boon to the American economy

WHEN President Bush's chief economist, Gregory Mankiw, observedin February that foreign outsourcing "is probably a plus for theeconomy in the long run," reaction was swift. In a press releasethe following day, John Kerry thundered: "Unlike the BushAdministration, I want to repeal every tax break and loophole thatrewards any Benedict Arnold CEO or corporation for shippingAmerican jobs overseas." Hillary Rodham Clinton chimed in: "I don'tthink losing American jobs is a good thing. The folks at the otherend of Pennsylvania Avenue apparently do." Even Republican HouseSpeaker Dennis Hastert piled on, saying the ex-Harvard professor's"theory fails a basic test of real economics. An economy sufferswhen jobs disappear." In March, the Republican Senateoverwhelmingly passed an amendment that would deny certain federalcontracts to companies that outsource work abroad.

So is foreign outsourcing "just a new way of doing internationaltrade," as Mankiw and other free-traders argue, or is it a threatto American jobs foisted on us by corporate traitors trolling theglobe for cheap labor?

An examination of one particular sector-theinformation-technology (IT) industry-proves that Mankiw is right:"Foreign outsourcing" is just a buzzword for international trade inservices. Contracting for services abroad has become increasinglycost-effective owing to the personal computer, which has digitizedmuch of our work, and the high-speed and deregulated transmissionof that information through broadband and the Internet. ITcompanies are increasingly outsourcing thankless jobs-routineprogramming, data entry, and system monitoring-abroad.

Foreign outsourcing allows American IT companies to cutdramatically the cost of certain services; as a result, thecompanies become more competitive in what they do best, their "corecompetencies." Better and more affordable services become availablefor consumers and taxpayers. According to a 2003 study by theMcKinsey Global Institute, outsourcing delivers large andmeasurable benefits to the U.S. economy: It reduces costs for ITand other services by as much as 60 percent, keeping U.S. companiescompetitive in global markets, benefiting workers and shareholdersalike. It stokes demand abroad for the export of U.S.-suppliedcomputers, telecommunications hardware, software, and legal,financial, and marketing services. It returns profits to the UnitedStates 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 outsourcingcreates $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 ofhard numbers. Nobody really knows how many jobs have beenoutsourced overseas. Unlike bushels of soybeans or slabs of steel,jobs are not counted at a dock and loaded on a ship for India orChina. The best estimates from the IT industry are that perhaps300,000 to 400,000 jobs previously performed in the U.S. are nowdone overseas through contractors. The much-cited ForresterResearch report of November 2002 projected that 3.3 million jobswould be outsourced from 2000 through 2015, or about 220,000 ayear. (More than half of those would be call-center type jobs, andonly one out of six would be white-collar IT jobs.)

Even if accurate, those numbers are just drops in the hugebucket of an $11 trillion economy that employs 137 million peopleand creates and destroys millions of jobs every month. Even intimes of healthy employment growth, 350,000 people file forunemployment insurance every week. The Labor Department figuresthat, during the past decade, our economy created an average of32.8 million new jobs each year while eliminating 31.0 million, fora net annual gain of 1.8 million. Jobs lost to outsourcing are buta small channel in the torrential "job churn" normal for a dynamicmarket economy.

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

Even IT's job losses since 2000 have not been driven by foreignoutsourcing. Displaced high-tech workers should blame not Indiancomputer programmers but the bursting of the dot-com bubble, themarket plunge, the 9/11 attacks, the corporate scandals, and slowgrowth abroad. A fundamental mistake made by outsourcing's criticshas been to confuse the passing pain of the IT recession with analleged long-term decline in this sector. They compound theirmistake by comparing current output and employment levels withthose at the frenzied peak of the boom in 2000, rather than withmore normal levels from the late 1990s. A more accurate and lessalarming picture of the industry emerges if we compare the state ofthe industry a few years after the bubble burst with its state afew years before.

THE BEST JOBS STAY HERE

Beginning in the early 1990s, with the takeoff of Windows-basedcomputing and the Internet, employment in the IT industry surged.Employment in software and related services grew by one millionbetween 1993 and 2000, before dropping by 166,000 between 2000 and2002. The story has been much the same across other IT sectors:stupendous growth throughout the 1990s, then a pullback inemployment of 10 to 20 percent during the recession. In the ITindustry as a whole, employment levels even after the recession arestill no lower than in 1998. During the past decade, annualemployment in the IT industry has still grown twice as fast asemployment 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 accountedfor a combined $621 billion in 2003, up from $510 billion in 1999.IT services that are moving offshore are more than offset byincreased output at home. Any sluggishness in employment growth hasbeen because of rising productivity, not because of fallingproduction.

The jobs that have been lost in the IT sector tend to belower-skilled and lower-paid jobs. From 1999 through 2002, totalemployment in the IT industry did drop by more than a quarter of amillion, from 6.24 million to 5.95 million. But decliningemployment was concentrated in those occupations requiringrelatively low or moderate levels of training and education. Incontrast, the number of IT jobs that require a relatively highlevel of training and education was actually higher in 2002 than ithad been in 1999. In the year before the bubble burst, the industryemployed 3.43 million workers whose jobs required at least anassociate's degree and work experience. After a surge of hiring in2000, followed by a painful shakeout, the number of such skilledworkers stood at 3.51 million in 2002, up 2.3 percent from 1999.Contrary to the popular fear that "our best jobs" are goingoverseas, the best jobs are staying here.

The recovery and expansion of job creation that has alreadybegun in the IT sector should continue. According to the LaborDepartment's biannual projections, the number of jobs in thecomputer and mathematical sciences is expected to increase from 3million to 4 million in the next decade, a rate of growth twice asfast as employment in the rest of the private economy. Seven of the30 fastest-growing occupations will be in the computer field.Despite the lingering slackness in IT employment, those jobs stillpay an average of $67,000 a year.

A TWO-WAY STREET

Another reality lost in the outsourcing debate is the amount ofoutsourcing the rest of the world sends to the U.S.: We are far andaway the world's top destination of outsourcing ofinformation-technology, financial, communications, and otherbusiness services. In 2002, U.S. companies exported $14.8 billionworth of computer, data-processing, research, development,construction, architectural, engineering, and other IT services.During that same year, Americans imported $3.9 billion of thosesame kinds of services. So for every dollar Americans sent abroadfor IT outsourcing in 2002, the world sent more than three dollarsto the U.S. for "insourcing." If Congress launches a war againstforeign outsourcing, American companies and workers will be amongthe first casualties.

Outsourcing, like trade in general, is reshaping for the betterthe world beyond our borders. In a classic win-win result fromtrade, outsourcing invigorates the U.S. economy at the same time itbuilds a pro-American middle class in India and other developingcountries. The Indian high-tech sector is flourishing because theyare following the U.S. model of zero tariffs on imported softwareand hardware, no restrictions on foreign investment, and anemphasis on postsecondary education. The Indian economy is nowachieving Chinese levels of double-digit growth. So far the growthhas been concentrated in the high-tech sector, but the effect therehas been profound. Hundreds of thousands of young Indian collegegraduates are realizing the fruits of middle-class life that we alltake for granted. Although the $8,000 paid to an Indian programmersounds ridiculously low in American terms, it can buy about fivetimes as much in India, enabling a worker to rent his ownapartment, 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 executivesand touring the main facilities of some of India's largest ITcompanies. Except for the cows at the gate, I could have been inSilicon Valley. All the equipment and facilities arestate-of-the-art. At one call center, I looked out over a sea ofcubicles, phones, PCs, and casually dressed college graduates in anair-conditioned office complex. Except for the Indian flags, Icould have been anywhere in the U.S. If that was a sweatshop, soare 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. Theyconsciously follow U.S. business practices. They have adopted ourpolicies of deregulation and open markets. They buy Americanhardware. They work with and for American investors. They speakfluent English. Many have relatives who live and work in the U.S.In this time of rising anti-American feeling around the world, whenwe are desperately trying to win friends and influence events inSouth Asia and elsewhere, it would be hard to find a more naturallyproAmerican enclave than the Indian high-tech sector. What could bemore short-sighted than to disrupt our growing, mutually beneficialtrade with the world's most populous democracy to save a sliver ofjobs that are probably heading out the door anyway?

So far, the rhetoric against outsourcing has been worse than thelegislative action. The main legislative vehicle againstoutsourcing has been restrictions on government contracts. Earlierthis year, Congress enacted a temporary ban on certain contractswith companies that would outsource the work; about 20 states areconsidering similar language for state contracts. Thoserestrictions on government procurement would come at a high costfor the few jobs that would be saved: Taxpayers will pay more forexisting services, or receive less service for the same price.Furthermore, these measures invite retaliation against the juicytarget of U.S. service exporters-and make a mockery of the U.S.government's calls for more opportunities for American companies tobid competitively for government contracts abroad.

More fundamentally, restrictions on outsourcing would slow thedynamic progress of the U.S. economy and the growth of moreprosperous and pro-American middle classes abroad. Let's hope thedemagoguery against outsourcing wanes before the politicians can doreal mischief.