Looks like everyone else is still at church, so I have the field to myself!

I'd like to thank you, Dan, for posting some good links and continuing to raise the outsourcing issue. McKinsey's insurance suggestion sounds intriguing, but insufficient on its face. Even if we deal with the loss of jobs in certain segments of the workforce, the question remains: how do we address the disproportionate loss of jobs in specific regions/localities? This seems to me to require creative and timely thinking on the part of state and local, even federal elected officials. I'm not holding my breath. When jobs flow from certain already weakened areas (primarily, the rustbelt) overseas, and the benefits flow back to corporations located elsewhere in the country, this is a recipe for dislocation and despair on a widescale, with political ramifications to be seen soon.

I've got other questions, but we'll see where this takes the discussion.

The McKinsey arguments are no doubt true, just as the case for free trade is mathematically provable. That said, the odds of an insurance product being offered to displaced workers is, well, zero. Congress included some meager trade adjustment in the recently-passed Trade Promotion Authority, but the GOP fought it every step of the way, and is still trying rear-guard actions to cut it.

So the question I would like to have someone answer is: IF there is no assistance to displaced workers, and the impacts of outsourcing are in particular regions and cities of the country (rust belt, rural), CAN these policies be supported. The danger is very real that, while net benefits are real, the discrete and insular damage that trade policies create can create severe political damage. And that political damage -- in essence the wholesale destructions of communities -- can't be quantified in your trade models.

The McKinsey arguments are no doubt true, just as the case for free trade is mathematically provable. That said, the odds of an insurance product being offered to displaced workers is, well, zero. Congress included some meager trade adjustment in the recently-passed Trade Promotion Authority, but the GOP fought it every step of the way, and is still trying rear-guard actions to cut it.

So the question I would like to have someone answer is: IF there is no assistance to displaced workers, and the impacts of outsourcing are in particular regions and cities of the country (rust belt, rural), CAN these policies be supported. The danger is very real that, while net benefits are real, the discrete and insular damage that trade policies create can create severe political damage. And that political damage -- in essence the wholesale destructions of communities -- can't be quantified in your trade models.

I am not clear on if this proposed insurance plan is intended to be government run or private. If private there seem to be huge issues with actually getting it off the ground.

If government run, it seems to go against a very strong trend in policy away from redistribution. The recent tax cuts reward capital (I hate using that word). The benefits of outsourcing are, I am sure, accrued by capital. Not only are we not passing policy that helps those hurt by out-sourcing, we are passing policy that helps those who are already benefiting from out-sourcing.

BTW: I tend to think this facination with out-sourcing is a bit faddish. I tend to think it is only a small element of a broader economic change that is occuring, and which our national policies are not in tune with. But this is not really the place for that discussion.

Having worked in and through the waves of global outsourcing first in the Engineering and Construction industry and most recently in the IT industry, I disagree with the McKinsey Global Institutes (MGI) conclusions on outsourcing’s impact to America. Outside of the single point on revenue distribution which seems logically sound, though unsubstantiated, I find the rest a combination of rationalization and wishful thinking performed too far from the real world.

I do agree that the gains from this trend will benefit American corporations. However the benefit will not extend to the consumer and most certainly not to those displaced US employees suddenly finding a barren market for their career skills and expertise within the US.

Corporations will get the profit of the less costly operating and production costs found off-shore, which wealth will be re-distributed in executive incentive and bonus packages, certainly in no way returned to those US employees no longer employed. And the Administration’s support for reduced corporate taxation further lessen the degree to which the fruits of this labor will be reintegrated in a manner beneficial to the populace at large. The fantasy that US corporations will adopt as SOP and offer released workers “ex-employment” insurance is exactly that – a fantasy.

Even in the ultimate case (yes, the market will stabilize) when reduced production costs are realized in the reduced cost of goods and services formerly produced in the US, this will be of very little benefit to those workers displaced in this shift. They will still be unemployed with a skill without demand in the US market.

Outsourcing and off-shore execution are the logical fall-out of a global economy and the human instinct to follow best interest in a market, evidenced at both the personal and corporate level. Undoubtedly this is little comfort to a 50 year old IT developer or piping engineer who is laid-off and can’t find a job at the zenith of his career. I feel for these people, but that won’t change the reality. Neither will the Administration’s latest leanings and protectionist posturing - won’t do a damn.

Outsourcing is not a Great Evil. But like other market trends it leaves a wake of both opportunities and casualties. Kind of why I’m writing this from off-shore rather than the comfort of my (now-rented) home in the good old USA.

Outsourcing is a reality. It’s going to impact certain markets, and US firms and individuals in these markets need to plan accordingly.

But give me a useful analysis that at admits the issue and its impact, and at least attempts solutions that might lead to assistance as needed. You can keep the MGI’S la-la land regurgitation of a corporate greater good. I don’t need the MGI to piss in the wind and tell me it’s raining.

Dan,

You seem not to get many comments (why IS that?) but at least the ones you get are of high quality.

Everyone,

How's this for a great idea: instead of this bogus "insurance" plan for the unemployed, make the companies that lay them off give 'em stock (depending on its value, 10-100 shares per year might suffice). That way, when Wall St. cheers as pink slips are handed out, the recipients at least have something to look forward to.

I'm still wondering why "Outsourcing" has come as a surprise to people? It has been happening in the communications industry for almost ten years - it was going on throughout the monster expansion.

There were two main "technology" prongs: first, very, very many communications companies outsourced their manufacturing, laid off and shut-down much of their own capabilities in favor of companies such as Solectron, who had the resources to do it cheaply and test the gear properly for you, and who kept up with latest manufacturing developments. Second, brain work was oursourced to other countries where the brainiacs are cheaper. I was one of those, but in my case an american company bought my british company, but paid us less than our american counterparts (but not badly at all for where we were). Other work - particularly the tedious maintenance work - was outsourced to countries such as India, or Russia, or Poland. The benefit to us, prime developers as it were, was that we were able to concentrate on developing new stuff without getting bogged-down by the old (which always needs new features, or more likely "antiquated" features that we don't want to touch with a barge-pole because they are old and horrible and scary).

A secondary benefit to me, as a foreigner, was that I was able to enhance my abilities in a rarified field and use them as my primary qualifications for immigrating to the US - effectively importing those particular skills, earning way more money, but paying commensurate taxes to US Treasuries rather than the UK. And all that time indoctrinating local talent into the mysteries while divining still more. Except I'm doing that here rather than there.

There is no international market for labor as there is for goods. Cars, televisions and bananas may cross borders without too much difficulty, but not labor.

Consequently it is relatively easy for manufacturers to set up factories in a country that offers it a competitive advantage over its competition, but almost impossible for a person to use his or her skills or talents in a foreign land as easily. For example, while America is arguably overrun with lawyers, and Japan has a shortage of them, few Americans have been allowed to learn Japanese law and practice there. An American cannot even enter the country to look for a job; one has to enter on a tourist visa, search for work (illegally), find a job, then leave the country to change the tourist visa into a work visa at a Japanese embassy.

One more thing: The idea that the dollars return home to create more jobs is belied by the large foreign currency reserves in dollars being held by China, India and Japan. The idea of "circularity" is a myth: those dollars spent on that Japanese stereo are not coming back to the USA to buy pharmaceuticals: they are sitting in Japan doing nothing.

Scott Kirwin writes:

those dollars spent on that Japanese stereo are not coming back to the USA to buy pharmaceuticals: they are sitting in Japan doing nothing.

So we get stereos and the Japanese get green pieces of paper? Sounds like a good deal to me!

Jim

Who benefits from outsourcing?

[In a report on Friday, Andy Xie of Morgan Stanley noted the big retail mark-up on goods made in China and estimated that more than $1,000bn of US stock market capitalisation depended on cheap Chinese imports. ... ]

The big [American] retail mark-up on goods made in China? Hmmm.

http://www.prudentbear.com/bearschat/bbs_read.asp?

Currency wars realitycheck
NEW 9/8/2003 8:08:53 AM

Interesting that $1 trillion dollars of market capitalization is dependent on Chinese low-cost goods.
---------------------

LEADER: Currency wars

Financial Times; Sep 08, 2003

Last week's trip to Asia by John Snow, USTreasury secretary, was dominated by narrow domestic concerns, and the US was not the only culprit. Each government stubbornly defended its own patch instead of tackling the global imbalances caused by US deficits and Asia's fast-rising foreign reserves.

On the vexed question of exchange rates, China and Japan made it plain to Mr Snow that they would stop the renminbi and the yen from appreciating much against the dollar in the short term: China by keeping its dollar peg and Japan by intervening on the currency markets. Both countries selfishly wanted to maintain their exports, promote their own economic growth and thereby save their banks from the possibility of collapse. If that meant pain for US manufacturers, so be it.

This was awkward for Mr Snow, for the Bush administration is already thinking about its own domestic priority - next year's US elections.

Mr Snow's unenviable task was to persuade the Chinese to change their currency policy and then tell Americans that he had succeeded in extracting concessions that would help preserve US manufacturing jobs. Hence his reassuring - and incorrect - declaration that finance ministers of the Asia-Pacific Economic Co-operation group had agreed on the need for flexible exchange rates at their meeting in Thailand. In fact, Mr Snow was isolated at Apec and his opinion on the issue was framed as a lone, dissenting view in the final statement.

Mr Snow is right in principle to say that market-determined currencies are essential for the proper functioning of the international financial system. Unfortunately, that noble goal is not the issue for his domestic constituency. American voters are worried about jobs and they are being led to believe that the Chinese are stealing them with the help of a weak currency. As President George W. Bush said in a television interview: "We don't think we're being treated fairly when a currency is controlled by the government."

The reality of US trade with China is more complicated than many US manufacturers and politicians care to admit. For a start, Chinese exports to the US are often produced in low-cost Chinese factories by US companies. In a report on Friday, Andy Xie of Morgan Stanley noted the big retail mark-up on goods made in China and estimated that more than $1,000bn of US stock market capitalisation depended on cheap Chinese imports. There is also plenty of evidence that China is merely replacing other Asian exporters as the point of final assembly for products sent to the US. East Asia's market share in the US is actually falling.

Mr Bush may not be aware of these arguments but Mr Snow surely is. Having been comprehensively rebuffed and outmanoeuvred by China, he may now turn his attention more forcefully towards Japan, starting at the Group of Seven finance ministers' meeting in Dubai this month. The conflict over currencies has only just begun.

Wanta know what needs outsourcing?

Tenured American professors' chairs. Let this latter-day clerisy feel refreshing breeze of international competition.

Goodness. I came across the Alice in Wonderland Blog. Its sounds like typical Academia nonsense, that makes the most tragic of assumptions .. That we are in a PERFECT World.

1. Since when has Corporate America given a dam about its workers ?

2. My guess on all of this "pro-outsourcing" is from a bunch of tenured Professors that have no connection to the real world.

Fact of the matter is, there are oodles of problems with outsourcing. The main problem, is that in a PERFECT World, the Corporations will invest those increased profits. Notice how we haven't seen that yet ?? And guess what .. we won't for some time.

And if you are STUPID enough to think that the US Congress is going to do ANYTHING about this, please let me know what mind expanding drug you are taking. If nothing else, Congress has proved multiple times that it only acts reactively ....

Outsourcing is Capitalism at its worst. McKinsey Global Institutes must be funded by radical right-wing special interest groups to come up with such drivel.

The text of their report reads like it had been written by a group of codgers dressed in three-piece suits, seated around a large cherry wood table, sipping expresso and brainstorming ways to rationalize the Bush administration.

Over 30 million U.S. citizens work for less than $8.70 an hour and another 595,000 jobs have been lost in the last seven months alone. So what's happening? The middle class is eroding away to reveal the true nature of Capitalism: The upper class fueled by their direct role in large corporations, and the lower class who work 70-hour weeks with no health benefits and little time with their families.

Prepare for the eventual peasant revolt. It's only a matter of time before the heat lamps at Taco Bell become too much to bear.

in response to several of the comments on "outsorcing",
it seems that jon and myself are apearently the only ones whi have worked in the outsouce environment. as one who is currently working there, i have seen many changes in the 3 years i have worked for my current employer.
1) does any of the people here responding really have any idea how outsorcing really works ?
2) doesa corporate america really give back to the communities and it's employees ?
3) and on the 78% that the us gets back,
does the aveage employee see that ?
ANSWER- no, the fact that outsourcing is just another way for corporate america to cut cost and strive to lower
the wages of it's employees even more then what they are, and more importantly
lower then what the employee is worth,
And for what reason ?, just to shove more money up to the top in the form of execute bonus's and the employees who are busting their butt's, get to go to work at their second jobs.
don't think that the bush administration and/or congress will lift a finger to help the average american worker, it's not in their adjenda or even in their interests.
like it was said, i don't need some mgi telling me what it's really about.
i'm right there, and i'm seeing what it's really about... maybe the rest of the american workforce needs to be informed as well. then only then will things start to change for the better,
for the worker and not the fat ass sitting at the top.

Just found this blog. I guess there are already too many comments so few people will actually read this, but anyway, here are my two cents.

I guess critics are right when they say Congress will do nothing about the job losses regionally and industry-wise. Normally, we would have to wait a while so that people get retrained and absorbed into new industries. Similarly, farm workers in the third world are waiting around for new jobs to appear after cheap food made their jobs unproductive, and some are dying.

After talking about it for many years, I now have the resources and have started a non-profit that will create a Fannie Mae-type institution for adult re-training loans. Just as we have bankers pitching us to refinance a home or buy one, we should have bankers telling laid off workers they will finance this training program for them or that. My theory is that the competition among a diverse training industry will weed out the bad schools and encourage the good one, and provide liquidity and quality monitoring in the re-training industry.

Maybe short term direct help in the form of tax credits for keeping jobs in the US or whatever is useful, maybe not. In either case, the long term issue has to be solved: if the economy keeps changing faster and faster, we need a better way to retrain the workforce that is diverse enough to allow quick trial and error to weed out stupid ideas and encourage good ones, whatever they might be.

Regards,

Karun.
--
Karun Philip
http://www.k-capital.com

[ My theory is that the competition among a diverse training industry will weed out the bad schools and encourage the good one, and provide liquidity and quality monitoring in the re-training industry. ]

This "diverse" training industry:

(a) Will it have tenured instructors?

(b) Why not locate your re-training academy offshore, maybe in mexico, where costs are lower?

(c) What occupations do you propose to re-train laid-off middle-aged dogs for? Do you plan to train more MicroSoft Certified Computer Engineers? Oh yeah, information technology and dot.coms here in the USA, that's a growing field.

My suggestion? Re-training classes to produce armed private security guards. Now there's an occupational field that's actually growing.

When oh when is Prof. Drezner going to address the issue of pegged currencies?

http://www.prudentbear.com/bearschat/bbs_read.asp?

[...

Recall that every major expansion in the U.S. economy has begun with a current account surplus. This means that the U.S. had not only enough savings to finance its own investment, but was even sending savings overseas by purchasing foreign securities. This allowed the U.S. to finance huge investment booms, first by drawing on those excess savings, and then by quickly moving to a current account deficit and importing savings from foreigners.

Needless to say, withthe U.S. presently running the deepest current account deficit in history, our ability to finance much sustained growth in domestic investment (factories, housing, equipment, capital spending) is sharply limited. Even our present level of economic activity is dependent on the largest inflows of foreign capital in history, largely from China and Japan.

In effect, the factor that allows the U.S. to continue its consumption binge, finance its investment, extend its housing boom, run irresponsibly large government deficits, swap corporate debt payments into ridiculously low short-term interest rates, and maintain unusually high valuations in the equity markets - the quiet
support that keeps this whole house of cards standing - is the willingness of Asian economies to accumulate an endless supply of U.S. dollar assets (largely Treasury and U.S. agency securities). That willingness is driven by one goal - to hold their currencies down in relation to the U.S. dollar. ... ]

This topic reappears every 10 years as a fiery controversy, coinciding with the late (pre-hiring) stages of a recession, and directly proportional in intensity to the PR clout of the industry involved. In the early 1970's, the unemployed were engineers idled by the post-Vietnam demobilization, so little was said. In 1982, Reagan was president, so the media coined phrases like "McJobs" (which did not match reality) to promote the crisis. In 1992, some of those who had to change careers were media and New York advertising types feeling the first waves of the telecommunications and cable "narrowcasting" revolutions, so we heard about nothing else, even though there was, once again, a huge aerospace "peace dividend" high tech unemployment period that ran through the mid-1990's but didn't count once WJC was in office ("hunger" and "the homeless" disappeared right about this time as well).

Jobs are created by new companies, not old ones. Employment will grow again when people invest in new-start companies, which will happen when the dot-com wound-lickers take the money back out of their collective mattress.

Regarding outsourcing, this is an eternal cycle, not a new phenomenon- Japan, ready to take over the world in 1978 has lost its manufacturing jobs to Thailand. Countries that keep progressing economically instead of trying to save every buggy-whip factory remain prosperous. Many firms, post NAFTA, discovered that Jaurez, Mexico production, regardless of labor rates, really WASN'T the lowest total cost of doing business and moved back.

Companies do dumb things for short periods of time (in the expensive money period of the mid-'70's, Sears discouraged their customers from buying stuff from them because of the cost of credit, even though their margins were far higher than the prime rate; such stupidity explains why Walmart took over their customer base), and learn their lessons when the practice screws their customers and the smarter-than-they-thought customers revolt.

Right now, there is a flush of early success with Indian back-office operations, fed by the IT layoffs. After enough Dell customers have had the same experience I did recently with a nice but incoherent and heavily-accented "customer-service" rep, and chosen to go elsewhere for future laptops, they will catch on that you don't screw around with your customer base if you want to keep growing. The key to the near term is that "customer service" VPs need to have a company-wide, 5 year trigger on their cost-reduction bonuses instead of department-only and 6 months.