Sunday, September 19, 2004

The Outsourcing Craze: Showing Why Politics Today Just Doesn't Cut It

Alright, time to give the o-word its face time. In my short time at the business desk in the Baltimore Sun newsroom, I must've heard the journalistic buzzword "outsourcing" 80 billion times from reporters giddy at the smart-sounding word, like they'd just discovered a new sector in modern economics previously unexplored by people with Ph.D.'s in the subject. Yes, reporters have a little too much faith in themselves.

Nothing irritates me more than hearing the word "outsourcing." Nothing. The reason why is because reporters throw it around like it's a new phenomenon, when all they've done is given a basic economic function a new name.

So in true journalistic fashion, their columnists spin 20-inch diatribes on the floundering U.S. economy and why the Chinese are to blame, while their reporters slap the face of a 70-year-old guy who just got fired at the Townsville plant where he's been working for "durn near 30 years" on every business story that has to do with our current economic standing. As if that's supposed to tell us anything. No wonder Americans are fine with invading just about any foreign country. They don't care about WMDs, they want their jobs back!

(Above: Indiana Gov. Joe Kernan shakes hands with the economy's big losers.)

For a nice textbook example of your run-of-the-mill outsourcing news story, the Star-Press in east central Indiana is a good recipe. First, begin with politician decrying the practice and shaking hands with blue-collar workers.

MUNCIE - Democratic Gov. Joe Kernan on Thursday spoke out against outsourcing of American jobs, then campaigned at the plant gates at Borg-Warner Automotive.

"There are those people in Washington telling us outsourcing is a good thing for the American economy," said Kernan. "I don't believe it."

Kernan told members of the United Auto Workers Local 287 executive committee that he recognized the importance of keeping manufacturing jobs in Indiana by pumping more money into job training and tax incentives for new business and industry.

Throw in a couple workers who lost their jobs (which can be found easily in any economic climate):

Lewis Cole, an electrician, recently lost his job at Marion's Thomson plant because of outsourcing and said he felt fortunate to get work at Borg-Warner.

"Kernan is doing what he can," Cole said.

Andrea Ivy, a 10-year production worker, was still undecided about the Kernan-Daniels race. She thought Kernan's stop also would encourage people to go out and vote.

"It shows the governor is concerned about bringing jobs here," she said.

Finally, finish with a weak conclusion that does the bare minimum of that annoying little journalistic rule of "getting both sides of the story." Don't forget the typo!

Marion insurance executive Tim Harris, Republican candidate in the House 31 race, said more tax restructuring and reducing regulations would make Indiana more business friendly.

"Government should create an environment that is business friendly and tax friend and get out of the way," Harris said.

Let sit for a few hours, and boom, you have a story that not only glosses over one side of a deep economic issue, but manages to provide a nice publicity piece for the Governor. Welcome to the mainstream.

But even I will say there is some hope. Much of the outsourcing craze (a journalism fad, not a business fad) has died down as the economy picks up a little, and some newspapers are saying that maybe outsourcing isn't bad for the economy. Where were you guys six months ago?

The Commercial Appeal out of Tennessee reports today that "outsourcing" was "a minimal drag on the job market."

Between 2001 and 2003, increased international outsourcing didn't have much effect on overall jobs or wages, even though individual workers were affected. This suggests that investors shouldn't worry even though the trend of turning to foreign workers may continue.

Well I'll be. Read on.

In the new UBS study, Harris says the U.S. economy adds new jobs in some areas even as it loses them in others. His study estimates that only about 400,000 job cuts annually are due to foreign outsourcing, out of a total of about 21 million unemployment claims each year.

"Outsourcing" is a wealth creator. It is a function of the U.S. economy necessary to create efficiency. It goes on all the time within U.S. borders. Jobs go from California to Michigan. Jobs go from Arizona to New Hampshire. Jobs go from Florida to Iowa. Jobs move in any healthy economy to their most efficient locations. There is not a lump sum of jobs that is "lost."

We have "outsourced" countless jobs to machines. A tractor can do the work of 20 or 30 men in a fraction of the time. That's 20-30 jobs we could have if we just banned tractors. Is technological progress bad for the economy? Did we outsource every last job to machines?

We have just as many jobs now as we did before these advanced machines that free up labor. That's because there isn't a lump sum of jobs. When a person is freed up from one job by technology, he can apply his efforts at something more pressing. If a maid gets a vaccuum cleaner that runs itself, she can go off and clean the bathroom in the time she would have spent vaccuuming. She can now do her job in half the time, freeing her up to make more money throughout the day at other houses. Outsourcing makes it possible for more to be done with less resources.

Also, there is the myth that invisible national boundaries have an impact on economic law. Sure, there are different laws in different countries regarding trade, and in that sense they have an impact, but as Mike Moore (no, not that Mike Moore) of the National Business Review points out:

Essentially, the internet and the communications revolution has abolished time and distance. Therefore any job that is not "shopfront" can be moved anywhere. There's no difference in sending information upstairs or a continent away.

He goes on:

Doctors are sending blood samples and x-rays for diagnostic testing. Legal and accounting firms, researchers and software developers are also migrating offshore for non face-to-face services.

The same old anti-Japan speeches of the 1980s are being dusted off in the US presidential campaign to play on the real fears of workers.

... More than 2.5 million jobs have disappeared under President George W Bush but much of the huge productivity gains have been the result of outsourcing. This is a tricky dilemma and is touching a raw political nerve.

Politicians who normally support free trade are voting for preventive measures. Senator John Kerry, the Democratic presidential candidate, is urging changes on government outsourcing and a right to know law to force call centres to disclose their locations. The US Senate has passed laws, as have a number of states, to control outsourcing of government contracts.

The laws of competitive advantage have not been abolished. IT, biotech, nanotech and pharmaceutical research companies cannot afford to lose their competitive edge. Protectionism can save jobs in the short term but only at the expense of better new jobs; long term, you will end up with neither.

... Consumers gain because of cheaper prices, companies gain due to lower input costs and developing countries gain new jobs and new wealth. Their middle class are our customers of the future. (emphasis added)

But who cares? The government of today has taken the role of economic watchdog, even though it should never have that power. And there are a million reasons why that's going to be bad for America's economy in the long run.

For one thing, those with the time and audience to examine economic realities when it comes to so-called "outsourcing" are those with a strictly white-collar audience -- not your average voter. Ernest Zedillo had an important commentary in Forbes magazine on the WTO's reanimation of the Doha Round of trade liberalization, but economic experts are largely viewed by the public as out of touch with the blue-collar worker. And even if they weren't, the cries from the average worker (not necessarily because they're stupid on the whole but because they're economically ignorant) will drown them out. You won't see any politicians courting the "expert" vote. Zedillo seems to acknowledge this at least in part:

There are two serious problems with (the WTO proposal): First, it's based on false premises; second, it would inflict much more harm than good on the U.S. economy. A recent study by the Federal Reserve Bank of Boston shows that domestic developments associated with higher productivity, not offshoring, explain the anemic growth in employment during the present recovery. While outsourcing does cause some layoffs, it also leads to insourcing to the U.S. In fact, a study by Global Insight (USA) has found that global sourcing contributes significantly to GDP in the U.S., adding $33.6 billion in 2003. The study also provides evidence that while IT offshoring displaces some workers, it ends up increasing total employment in the U.S. as its effects on productivity, demand for other domestically produced goods, lower inflation and lower interest rates flow through the economy. Politicians of all persuasions should know better!

But they don't. And neither does the media. You won't find this snippit on the front page of any business section, or on the inside for the matter. Why? Because it's easier to tell people that Billy Bob lost his job to a Chinaman than explain the economic in's and out's of the business cycle. Obviously, the Kerry camp will take advantage of that, Zedilla added.

They (the Kerry campaign) have found it politically expedient to blame offshoring for the U.S.' weak job creation in recent years and are pledging to restrict it.

Expect the Bush camp to follow suit. I'll admit that Bush has done well trade-wise by resisting tariffs and most inhibitions on free trade. But even he, or should I say he especially, is a slave to political reality. It's not like Republicans, despite their rhetoric, are going to believe that they can give a sound economic argument and win over voter's hearts against the emotional diatribes of the left. Here's what happens when you try to pull something like that off:

"People talk about (outsourcing) a lot," (Labor Secretary Elaine) Chao said in an interview after appearing before Missouri delegates at the Republican convention. "The anxiety belies the numbers."

Vice presidential candidate John Edwards seized on Chao's remarks and called it another example of President Bush's misguided economic policies.

"Today a member of his cabinet said that outsourcing American jobs overseas creates jobs," Edwards said. "Like most Americans, I have no idea how they could say that."

That's right. No economic argument for "outsourcing." Just "did you hear that? They want to ship more jobs overseas!"

Rather than look at economic realities, the American public encourages politicians to encourage private firms to behave like children and start the outsourcing name-call game, as the Commercial Appeal noted:

[T]he battle over who will build a new presidential helicopter has homed in on which competitor has the best U.S. production credentials. Sikorsky Aircraft Corp. has tried to position itself as the all-American candidate, saying rival Lockheed Martin Corp. will be using a helicopter designed by Italian firm AgustaWestland, part of Finmeccanica.

But Lockheed Martin says much of its team's work will take place in Texas. Meanwhile, it notes that Sikorsky and its parent firm, United Technologies Corp., have production facilities in China.

Oh please. To anyone else, this is childish. To the U.S. government, it's responsible economic policy.

This is why the government should not be making decisions when it comes to trade. It's not merely because they themselves don't know what they're doing, which is certainly the case. It's mostly because they are ruled by a group of people who definitely don't know what they're doing: the American public. Most of them don't have degrees in economics. Most of them don't know the first thing of running a business. But they're still making all the decisions when it comes to what trade is OK and what trade isn't. In these days of "the majority is always right," you can expect hard economic times because you can be sure the majority doesn't have a clue what they're doing.

There will never be a real discussion in American politics about the issue, or any other issue for that matter, because politics isn't built that way. Instead, there will only be superficial discussions about things like who did what 35 years ago in a war everyone despises. I even saw a recent article in the Salt Lake Tribune on whether or not Karl Rove dodged the draft. Who cares?

Three groups: The media, elected officials, and the public. The holy trinity that will perpetually be in power in America, rather than the free market. Is it any wonder that we follow a continuing route to greater protectionism?

I'll close with this quote by Mike Moore:

[A]s a politician who knows the language of the street corner meeting, one recent TV grab featuring a South Carolina voter haunts me. A middle-aged man explained how he had lost his textile job to China, had retrained himself in IT only to lose that to India. Now, he said, he was studying real estate because "that's the one job that can't go offshore."

It's a big task trying to explain the theory of creative destruction or how infrastructural inefficiencies are a tax on every other job to an unemployed 50-year-old.

And that's one reason I was New Zealand's shortest-serving prime minister.


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