Missed Target

by Clay Risen | February 2, 2004

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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