Missed Target

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Ask folks in Silicon Valley these days about their biggest fear, and
you likely won't hear about Osama bin Laden, global warming, or
failing schools. These days, everyone's afraid of offshore
outsourcing--the movement of white- collar jobs, especially in the
high-tech sector, from the United States to foreign countries,
where the labor is cheap, plentiful, and, increasingly, well-
educated. "There's an increased level of anxiety about what the
economy's going to be like," says Marcus Courtney, president of the
Washington Alliance of Technology Workers. "People who entered this
field thought it was going to be a career for twenty years, and now
their jobs are gone." And they may not be coming back. "America is
short of jobs as never before, and the major candidates for our
offshore outsourcing are ramping up employment as never before,"
Stephen Roach, chief economist at Morgan Stanley, recently told The
New York Times. "[T]hese jobs are, by [and] large, lost forever."Predictably, politicians and the media have been quick to pick up on
these fears. "tech workers struggle to answer overseas threat,"
noted a New York Times headline in November. And United Press
International claimed recently that the financial benefits of
offshoring would "come with a hefty price tag, with significant
economic as well as social consequences." In turn, a growing number
in Congress have called for a raft of anti-offshoring measures, from
tax incentives to keep jobs offshore to bans on using foreign labor
for government projects; Senators George Voinovich and Craig
Thomas, for example, added an amendment to the 2004 Transportation
and Treasury appropriations bill that would prevent contractors
from using overseas labor to complete some federal contracts. And,
on the op-ed page of The New York Times, Senator Charles Schumer
recently asked "whether the case for free trade ... is undermined
by the changes now evident in the modern global economy,"
particularly offshore outsourcing. His answer? A resounding "yes."
Offshore outsourcing, especially to developing powerhouses like
China and India, has become this decade's "giant sucking sound."

But, like the fears that surrounded nafta, those around offshoring
are mostly baseless. While offshoring is definitely an economic
trend, there is no statistical evidence pointing to the massive
employment drain activists call the "coring out" of America's best
jobs. In fact, recent studies show that the opposite is true: While
offshoring may displace some workers in the short term, in the
medium and long terms it represents a net benefit for both domestic
businesses and their workers. In fact, the greatest threat from
outsourcing is that its opponents will use it to force a new wave
of protectionism.

The frenzy over offshoring got going in late 2002, when Forrester
Research released a startling study showing that 3.3 million
white-collar jobs would move overseas by 2015. Then, in July of
last year, the research firm Gartner trotted out its own study
saying that as many as 5 percent of all information technology
(I.T.) jobs could move abroad between mid-2003 and the end of 2004.
And a 2003 report from Deloitte Research said that the top 100
financial- services firms plan to move $356 billion in operations
and two million jobs overseas in the next five years.

But those numbers aren't as scary as they sound. For one thing,
while offshore outsourcing is definitely occurring, it's difficult
to say just how large a trend it is at present. The Forrester
research is based primarily on surveys of business leaders who are
merely speculating about future offshoring decisions they might
make: "There is no objective data to prove all these jobs are going
overseas," says Michaela Platzer of the AeA (formerly the American
Electronics Association). "There's just a lot of anecdotal
evidence." Some point to the jobless recovery as evidence of
offshoring's impact, but the lack of jobs is just as likely the
result of booming productivity and the economy's (until recently)
anemic pace. "I think people are confusing the business cycle with
long-term trends," says Daniel Griswold, an economist at the Cato
Institute. "People are looking for someone to blame. They say, 'Aha,
it's because our jobs are moving to India.' If you look at the late
1990s, though, all these globalizing phenomena were going on." In
other words, it wasn't that offshoring practices changed; it was
that the economy slowed.

What's more, economists don't even agree on how such data could be
collected- -for example, many offshoring moves represent not a
direct shift of a given job overseas but rather its restructuring,
which in turn might create a new job overseas as well as a new job,
with a new job description, in the United States. Such
restructuring is particularly prevalent in high-tech fields like
software and data management--for example, an American employee
might be tasked with the design, implementation, and testing of a
software program; under restructuring, his employer might hire an
Indian, at one-tenth the cost, to do the implementation and testing
and then hire an American to do the design work. IBM, for example,
plans to offshore 3,000 programming jobs this year. But, at the
same time, it will also create 5,000 jobs in the United States. Does
that count as jobs lost, jobs gained, or both? "[Offshoring is]
going to lead to individual job loss," says Gary Burtless, an
economist at Brookings, "but that does not mean it will lead to
aggregate loss of employment in the United States. "

Even if there were a short-term loss of jobs, the losses would
likely have a more muted effect on the economy than the factory
flight of the 1980s and '90s, when most factory workers had to
undergo intensive retraining in order to find new jobs.
White-collar workers tend to be, both in terms of skills and career
perspective, more capable of moving on to other jobs. Another
mitigating factor is the wide dispersal of high-tech jobs
throughout the country; unlike manufacturing, which tends to clump
hundreds or thousands of jobs in the same factory or town,
high-tech work can be done anywhere. For example, one of the job
sectors frequently cited as "offshoring prone" is medical
transcription. Although it's a $15 billion industry,
medical-transcription work is almost always farmed out to small
firms around the country; even if all of them closed, the impact on
any one community would be small.

And, while Forrester's 3.3 million jobs estimate may sound like a
lot, keep in mind that it's a loss spread out over 15 years
(2000-2015)--just 220,000 jobs annually. Furthermore, Forrester
isn't talking about net job loss, but rather gross loss. In fact,
even during periods of fast job growth, the U.S. economy sheds
hundreds of thousands of jobs each year; it's simply robust enough
to make up for the loss. In 1999, a year the economy produced a net
1.13 million jobs, it shed 2.5 million. But few argued that those
job cuts were bad for the economy; in fact, most economists would
argue they were beneficial, because they allowed companies to
structure their operations more efficiently.

Offshoring is no different. In a sense, offshoring is simply the
radical extension of the "creative destruction" processes that many
credit as a driving force behind the '90s boom. Under the mantra
"focus on what you do best," companies have been outsourcing
non-core operations (such as human resources and call centers) for
years; it is only with the emergence of high-quality
telecommunications links that those operations have begun to move
offshore. Unburdened by such ancillary concerns, companies are free
to focus on--and innovate within--their core businesses, in turn
creating new jobs, even new industries. "The standard arguments for
free trade exist in this case," says Josh Bivens, an economist at
the Economy Policy Institute. "I think the United States could see
a productivity gain through this kind of trade." Meanwhile, the
bulk of jobs that the Forrester survey claims will be outsourced are
hardly the sorts of jobs on which the U.S. economy depends. "The
lower-level jobs, the programming jobs, a lot of them will not be
done in this country," says Stephanie Moore, an outsourcing expert
at Giga, an economic research firm. In their place, she says, "New
jobs are going to be created. Citibank will never let an Indian
vendor manage its retail-banking operations."

Indeed, recent studies delving beyond the Forrester and Gartner
numbers indicate that, despite the impact of short-term job loss,
offshore outsourcing represents a net economic benefit for the
United States. According to the McKinsey Global Institute, for
every dollar a U.S. company spends on offshoring to India, the U.S.
economy gains $1.14, thanks to a number of factors: savings from
the increased operational efficiency, equipment sales to Indian
outsourcers, the value of American labor reemployed to higher-wage
jobs, and repatriated earnings by U.S. companies that own Indian
outsourcing firms. "The recent changes driving offshoring are not
that different or radical from the changes that dynamic,
competitive, technologically evolving economies have experienced
for the last few decades," the report concludes.

None of this, of course, has stopped anti-offshoring critics from
calling for restrictions. In 2002, after Shirley Turner, a New
Jersey state representative, learned that calls to the state's
welfare and food-stamps programs were being routed to a call center
in Mumbai, she introduced a bill that would block foreign firms
from working on state-funded projects. The bill created a firestorm
in the I.T. community, with most workers supporting Turner. "I've
been in the legislature now for ten years, and I have never received
as much correspondence from people as I have with this bill," she
told USA Today. Similar legislation has popped up in six other
states. And, though none of those bills have been approved,
observers say they'll likely pick up steam as the November
elections approach. "I would expect that those bills will reemerge,
" says Information Technology Association of America President
Harris Miller. "And, given it's an election year in most states,
the likelihood of passage will be much higher." Anti-outsourcing
fever is also growing in Congress, where a raft of bills has been
introduced to limit the number of visas available for skilled
laborers. The USA Jobs Protection Act, introduced by Senator Chris
Dodd and Representative Nancy Johnson, would prevent U.S. companies
from hiring foreign workers when American workers are available for
the same job.

But there's little reason to believe these sorts of plans could
stanch job contractions, even if they did manage to prevent jobs
from going offshore. Particularly during rough economic times, the
need to cut costs is an absolute priority, and, if offshoring
weren't a possibility, domestic jobs would still likely be cut.
"The choice isn't outsourcing or keeping jobs here," says Griswold.
"It's outsourcing or going out of business. Which isn't good for
jobs. This is an absolute necessity for many companies." If
companies were somehow prevented from shipping jobs offshore, they
would likely turn to other methods of reducing labor costs, such as
technological upgrades--a process that has resulted in job loss
since the birth of capitalism. "It's striking that people have less
sympathy if those people are replaced by machines than if they are
replaced by foreign workers," says Burtless. "It's all part of the
same phenomenon of trying to squeeze value out of the same
resources."

But, while offshoring-related protectionism may stifle economic
development and unnecessarily force business closures, its biggest
impact may be longer term. That's because, as the baby-boomers move
into retirement, the size of the working population will decline
precipitously, by 5 percent by 2015, according to the McKinsey
report. Without a readily available source of high-quality, young
labor--i.e., the sort provided by offshore outsourcing--the country
could find itself in a sort of economic sclerosis. Growth could be
permanently hamstrung by the high labor costs and booming social
spending that have turned Germany, where it's extraordinarily
difficult for companies to lay off employees, from an economic
engine into a plodding giant. As Carl Steidtmann, chief economist
for Deloitte Research, wrote recently, "Restrictive employment laws
in Europe go a long way toward explaining why Europe consistently
runs a higher rate of unemployment when contrasted with the U.S. or
Britain."

Nevertheless, the fact that there are benefits to offshore
outsourcing doesn't mean we should sit back and let it ride. At the
individual level, job loss is a painful process, and there is no
guarantee that even a relatively mobile white-collar worker whose
job is outsourced will be able to find a new one, let alone at the
same wage. The response, however, isn't to fight against offshoring
but to find ways to alleviate its negative effects. One approach--
advocated by Lori Kletzer, a senior fellow at the Institute for
International Economics, and Robert Litan of the Brookings
Institution--is to require companies to purchase "outsourcing
insurance," which would cover a portion of displaced employees'
salaries for a fixed period of time in the event their jobs are
outsourced. Not only would this help alleviate the pain of layoffs,
but it would force companies to internalize the economic cost of
their outsourcing decisions. The McKinsey report, which also favors
this approach, argues that, "as offshoring volumes rise, the
insurance premiums will increase, cutting into the gains from
offshoring and, thereby, making offshoring less attractive to
companies in periods of high unemployment."

The most obvious and, in the global economy, most necessary
solution, however, is worker training. The Trade Adjustment
Assistance program already provides assistance to workers displaced
by nafta-related factory closings; a similar program could easily
be crafted to respond to offshore outsourcing. Indeed, requiring
companies that outsource to contribute a portion of their savings
to training programs would both internalize the costs and provide
the necessary funds. And job training would not only alleviate
periods of protracted unemployment; by making workers more agile,
it would also make the U. S. economy more efficient and productive.
Indeed, thanks to its combination of high job mobility and a highly
educated work force, one of the U.S. economy's greatest strengths
is its ability to redeploy workers quickly without dramatic cuts in
their wages. And, thanks to that flexibility, notes the McKinsey
report, "Over the past 10 years, the U.S. economy has created a
total of 35 million new private sector jobs." It would be ironic
if, in an effort to protect jobs, we closed off one of the most
powerful means by which they are created.

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