Alms for the poor. Alms for the poor.

Hmm.

"What's interesting is that I haven't heard much discussion about either the manufacturing part of the story or the business processes part of the story. Does this mean people are willing to acknowledge that these are sectors where standard trade theory apply? "

The only reason I haven't blasted you on those parts is that I've found you so seriously wrong about the IT that I've largely discounted anything you've written about manufacturing.

On the article in general, I agree with the economic argument, though I'm in no position to judge the validity of the empirical stuff. That's why I found this passage important:

It is also worth remembering that many predictions come from management consultants who are eager to push the latest business fad. Many of these consulting firms are themselves reaping commissions from outsourcing contracts.

But you cite several studies from consulting firms in the course of the article. It seems rather odd to me that you disparage the credibility of the sources you rely on to make your case.

Did anyone catch the "Our Complex World" skit on Colin Quinn's "Tough Crowd" show on Comedy central? It was pretty funny. The premise is that a (rather hot) female legal secretary whose job has been off-shored is being sweet talked to by a "protectionist" love interest. Then Colin storms in on the scene in a Naval Captain's uniform and proceeds to warn her about the guys "protectionist lies". He thunders: "Study after study by the Institute for the Study of International Economics has proven that outsourcing benefits the domestic economy".

There is a bit where Colin repeatedly slaps the legal secretary when she answers wrongly to a question about the effect of outsourcing on the domestic economy. She keeps on toggling between "it destroys jobs" and "it creates jobs" till she gets the right answer: "it destroys jobs in one sector which leads to the creation of new jobs in other sectors".

Saurabh

Just a guess: the IT critics may be too close to the story (and may be short-term victims themselves) to see a larger picture.

Ed:

Hmmm.... after reading your tautological theory for why wages are low in India, it's going to be hard for me to take anything you say on this subject seriously.

Shrug.

“Does this mean people are willing to acknowledge that these are sectors where standard trade theory apply?”

Oh gosh, Dan Drezner is forcing me to once again assume the role of an amateur psychoanalyst. The people he is talking about don’t give a fat damn about manufacturing and other blue collar jobs. They also probably scorn the entrepreneurial business side as well. These are the spoiled college educated yuppies who have grown up with the idea that the world revolves around them. How dare anyone tell them that they must compete in the rear world.

I'm guessing that you have a lot more IT types reading your blog than manufacturing types. As a software developer, I talk about the IT part because a) It affects me, and b) I know something about it.

Oh yeah, I'm a selfish yuppie too!

This is a contrarian view, but I suspect that the manufacturing sector will be *less* affected by offshoring than will some service sectors.

(1)Shipping physical goods over long distances costs money and takes time. It's not like shipping bits at the speed of light.

(2)Manufacturing is more capital-intensive than many service sectors. (The capital required to support the typical programmer-analyst is very low, compared with the cost of, say, a stamping press). This means that wages represent a lower portion of the overall cost picture.

Not to say that offshoring won't continue to impact manufacturing, but we're not headed for the day when absolutely nothing is made in the U.S.

The most significant upturn right now in Wisconsin's manufacturing sector is product for export, specifically heavy mining equipment for China which companies here know how to produce.

My job, nominally in IT, cannot be outsourced because it is location related. The one person I know who works at a computer and whose job has been outsourced id a CAD designer working for a German firm which outsourced the entire department to Chicago because Germany's "job-protection" laws discourage new hires.

Hmmm.

"Ed:

Hmmm.... after reading your tautological theory for why wages are low in India, it's going to be hard for me to take anything you say on this subject seriously.

Shrug. "

ROFLMAO!

Here's another one. How can you tell when an Economist is bullsh*tting you?

His lips move.

:)

Hmm.

"But you cite several studies from consulting firms in the course of the article. It seems rather odd to me that you disparage the credibility of the sources you rely on to make your case."

He doesn't. He disparages those sources that he doesn't agree with.

Hmmm.

"Hmmm.... after reading your tautological theory for why wages are low in India, it's going to be hard for me to take anything you say on this subject seriously. "

Sorry Dan. But it's that simple and productivity has nothing to do with it. You can dress it up any way you like and take it out on a date. It still doesn't change basic logic.

ed's first post:
"Wages are low in India because:

1. Costs are lower.
2. An enormous pool of low wage labor."

ed's later post:
"Again. Wages are determined by the demand and the supply, not productivity. The demand for labor is dependent upon the investment of capital, not productivity. Japan has high wages because of demand, due to investment of capital. Vietnam doesn't have high wages because the demand is low, due to a lack of investment capital.

It ain't simpler than that."

What do you mean "again"? You've completely changed your story! First you say that wages are lower in India because they have more low wage workers. After that position has been thoroughly mocked, you claim that India is suffering from a lack of capital. You're acting like you're just reiterating your previous point, but that's not at all true. You're saying something completely different this time.

Actually, your new version is pretty close to what I said. Why would India's lack of capital be relevant? India has less capital and capital makes labor more productive. Nowadays, capital flows far more freely across international borders. That helps to narrow the productivity gap between wealthy and poor nations.

You're not restating your original position. If anything, you're restating my criticism of your original position.

david foster writes: "Manufacturing is more capital-intensive than many service sectors. (The capital required to support the typical programmer-analyst is very low, compared with the cost of, say, a stamping press)"

And also, the capital required to support a programmer-analyst can support financial analysts or accountants or technical writers with little more effort than reinstalling the OS and different software, and changing the nameplate on the cubicle.

The amount of "retooling" required to repurpose a facility is much smaller than that required for manufacturing.

In fact, desks and computers used by programmers in one shift could be used by financial analysts in a second shift, and technical writers in a third.

And each shift could, theoretically, be workers serving a different outsourcing client.

“Oh yeah, I'm a selfish yuppie too!”

I’m sure you are. The yuppies grew up in a pampered environment. The world revolved around their every wish and petty complaint. This is why the majority of them tend to vote Democrat. That political party encourages feelings of victimhood and scapegoating. I’ll make it real simple for you---the Republicans are essentially adults and Democrats are immature children. How’s that for bluntness?

Daniel,

Here is an article by the Dallas Federal Reserve that supports your position on Outsourcing.

http://www.dallasfed.org/research/ei/ei9801.html

It mainly talks of trade of goods and the value of labor.

Money Quote:

"To get at the root of this problem, one need only remind oneself that human labor is not an end, but a means. It never remains unemployed. If it removes one obstacle, it turns to another; and mankind is rid of two obstacles by the same amount of labor that used to be needed to remove only one....to maintain that a time will ever come when human labor will lack employment, it would be necessary to prove that mankind will cease to encounter obstacles. But in that case, labor would not be simply impossible; it would be superfluous. We should no longer have anything to do, for we would be omnipotent...."* (Bastiat's emphasis)
The story of a Western engineer observing the construction of a railroad line in China provides a modern example of this same fallacious thinking: "You ought to use explosives to clear the way instead of all those men with shovels," the engineer informed the Chinese manager.

"If we did that," the Chinese manager responded, "many would be thrown out of work."

"Ah," replied the Westerner, "I thought you were building a railroad but, given your goals, you should take away their shovels and give these men spoons!"

Second Money Quote:
"Allow me to emphasize this point, at the risk of repeating myself. There is a fundamental antagonism between the seller and the buyer. The former wants the goods on the market to be scarce, in short supply, and expensive. The latter wants them abundant, in plentiful supply and cheap. Our laws, which should at least be neutral, take the side of the seller against the buyer, the producer against the consumer, of high prices against low prices, of scarcity against abundance.

They operate, if not intentionally, then logically on the assumption that a nation is rich when it is lacking in everything."[3] (Bastiat's emphasis)

Regards,

David Thompson writes: "That political party encourages feelings of victimhood and scapegoating."

I thought that was the GOP, since their candidate is running on a platform of "it's not my fault", and instead of accepting responsibility for its mistakes, treats every valid criticism as a baseless partisan attack.

ie, Bush does little but scapegoat and claim victimhood.

"will ever come when human labor will lack employment, it would be necessary to prove that mankind will cease to encounter obstacles."

Such stupid economic philosophizing is more applicable to an ant farm, than to real people. (This is the kind of idiot economics that makes people think Communism works, the kind that ignores what people actually do.)

Yes, considered as theoretical entities, people will never lack "employment", because they won't lack "obstacles".

But when considering the real world, the trick is to provide employment that is legal and sufficiently remunerative, lest the "obstacles" in question turn out to be the locks on your doors and windows, because no other source of income is available than theft of your property.

There are significant differences between the offshoring of low-grade manufacturing in the 1970s and 1980s, and the offshoring of high-wage, high-skill IT work in the 1990s and 2000s.

First of all, I want to point out that it was shameful that the Democrats did not push for more to be done for the displaced manufacturing workers as a condition of free trade agreements. Why should a handful of blue-collar workers have been sacrificial lambs for the first round of free trade? The Democrats should have pushed through legislation to make sure that they were adequately compensated for their losses, with a combination of accelerated pensions, direct financial compensation, and retraining for the younger workers (all paid for by the companies that benefited). That they did not do so is to their eternal shame.

That being said, whatever rationale there was for pushing these relatively simple jobs aside cannot apply to *advanced* manufacturing, much less IT. The traditional answer then was that the workers would be able to be retrained in high technology fields which would be America's future bulwark. Now that the jobs being shipped overseas are not those of high-school dropouts but of graduates with advanced degrees, what next? Where do you go from there?

Theory-drunk morons like Thomson fall back on overly simplistic lumpen-libertarian mantras like 'no one owes you a job' or 'you'll have to get used to job hopping'. What they fail to understand, in their focus on Econ 101, is that this is not acceptable to the American people. The average middle-class American with a wife and kids can't drop it all and go back to be re-educated every three years when they decide to ship his newest job overseas. Furthermore, he can't afford the financial hit of being dropped back to the bottom of the wage ladder that often. Most Americans are willing to give up a slight (and it is slight) theoretical advantage in productivity and GDP in exchange for greater security for themselves and their families. Sorry if that offends your simplistic economic nostrums, but that's the way politics works. You people had better get cracking on creating new jobs - not new theories about how we'll all be better off when Indians and Chinese slaves are doing all the work that used to be done by well-paid Americans - or you'll see a wave of protectionism like nothing this country has ever seen before. Remember, it's the middle class that makes revolutions when their position feels threatened. And right now from my threatened position, the mental vision of Drezner and Thomson hanging from lampposts sounds pretty damn good.

Yes, I'm very angry about this. Reflecting on the situation, given that the U.S. is a democratic republic (modulo Diebold) it is more likely that the upcoming revolution will be at the ballot box rather than in the streets. The point I was making is that if you want economists to have *ANY* part in the upcoming order, you had better get your heads out of the clouds and down to the concerns of real Americans here in the real world.

My previous posting was overly vehement - please don't take it literally. Sorry it's late at night and I haven't had much sleep recently.

For one thing, because perhaps some of us have (a) lives (b) jobs (c) get tired of always having to fight to make headway on the smallest formal points of arguments. I see my original criticism, and some very good follow up ones, on number discrepencies still go unaddressed.

If you want to talk manufacturing, we can talk manufacturing. Honestly though, it get's exhausting having to try to focus people's attention on specific points. For instance in the previous thread, Stan get's all the way through an argument where he argues based on authority - a textbook he patronizingly offers and his status as an economist - that lower wages increase comparative advantage. Now, I'm not an economist but I directly quote two economist - Delong and through econlib - one of which says that only a quack believes that low wages creates comparative advantage. Stan just ignores this, as if by a wave of his hand he can dismiss arguments that other economists have in writing equated with being illiterate in economics.

Furthermore, I go exhaustively through a detailed argument based on formal definitions why this can't be so. This is just ignored. Likewise the good numerical discrepency criticisms are ignored,
and instead people decide to change the focus by (i) picking on ed's admittedly silly argument - low wages are low because workers are paid less and (ii) changing the subject to manufacturing.

This was similar to the argument with Bithead, where he practically gloated about how he was 'just waiting' to ambush me on a point about job growth - and then made the tyro mistake of failing to take into account population growth. He actually whined about how that wasn't in the original discussion, as if job growth over time could be considered independent of population size. Well 21,000 jobs a month would be considered great - in the Solomon Islands.

Or how Dave Thomson asked me if I was a 'liar or a fool' and to 'put up or shut up' - only once I produced facts and numbers he let the topic go quickly enough.

So frankly, it's just so much easier to make unsubstantiated BS up then it is to painstakingly analyze arguments and source facts. So there will always be a backlog of dumb arguments to falsify.

If you Dan Drezner feel like hiring me to fact check your arguments from now on, I would be happy to devote more time to analyzing all the flaws in your arguments and explaining why for instance comparing job growth numbers bridging both sides of a cyclical recession is not such a great argument. However, until then I will be content to contributing what small pieces of analysis I can do in my free time to your otherwise very interesting blog.

I think most people were assuming it was already agreed that manufactuing jobs were headed overseas, not in the sense that all manufacturing in the United States was going overseas, but in the sense that a net loss of manufacturing jobs as a percentage of our economy had been observed, but people had been told not to worry about it because manufacturing jobs would be replaced by better paying IT jobs.

Drezner writes:

"I haven't heard much discussion about either the manufacturing part of the story or the business processes part of the story. Does this mean people are willing to acknowledge that these are sectors where standard trade theory apply?"

I haven't seen any discussion of lesbian basketweavers part of the story. I'm sure it means that the standard trade theory totally applies to lesbian basketweaving manufacturing.

Or may be (formerly) manufacturing workers are too busy working 3 jobs at $7/hour at WalMart and such and have no time for elitist views of an arrogant professor.

Dan, check out the FT.com website today. Interesting article by Glenn Hubbard, former member of Bush's economic advisory team. Sober, well-argued and squashes the kind of objections voiced by Ed, who seems in need to be reminded of basic good manners when leaving comments on someone else's blog.

http://news.ft.com/comment

"Interesting article by Glenn Hubbard, former member of Bush's economic advisory team"

And, gosh, he has lots of credibility these days.

Firebug said:

"Democrats should have pushed through legislation to make sure that they were adequately compensated for their losses, with a combination of accelerated pensions, direct financial compensation, and retraining for the younger workers (all paid for by the companies that benefited). "

Why should a company have to pay? If I start shopping at a new store because its cheaper than the one I went to previously am I supposed to compensate the old store for the loss of business? If not then why should a job be handled any differently?

Oldman: In my discussion with ed, I cited the very same econlib post you had previously cited. I wasn't directing my post at you, but I think my comments are also a good response to what you said.

Low wages don't create a comparative advantage. Low wages are a symptom of low overall productivity. If there is an industry (like IT) where the disparity in productivity between India and the US is less severe, that creates a comparative advantage. The underlying cause of India's comparative advantage in IT is that Indians are closer to American levels of productivity in IT than in other sectors. That's not quite the same thing as low wages creating the comparative advantage.

Does that respond to your argument?

In response to Dan's question:
The example of manufacturing is exactly what people worried about IT offshoring will point to as what they are worried about: skilled, productive, society-contributing employees lost their jobs, the capital equipment needed for those jobs was shipped overseas, the local infrasructure paid for out of their labor, investments and taxes was left derelict and entire local economies have failed. What is left to discuss about it? I live in the rust-belt midwest and as I drive or fly around towns and cities, the result of this is in evidence everywhere -- there is widespread blight and underutilization, punctuated by pockets of prosperity.
It is a matter of capital: capital held by wage earners is small and temporally and spatially fixed. Efficient and productive local jobs allow us leverage our personal capital (skills) into greater net wealth for a large number of local people. When jobs are moved offshore, our personal capital is devalued far more than is made up for by some theoretical net decrease in the price of goods. However, the capital that created the jobs has not disappeared, it was just reinvested offshore and because of lower wages, that same captial is producing a higher rate of return for the capital owner. The capital increase for that owner has come out of the wealth of the wage earners and accrues to that owner alone -- it is a transfer, not a net gain.
In short, offshoring transfers and concentrates wealth in the capital-owner classes directly at the expense of the wage-earning classes. Constant personal repositioning/retraining/re-sectoring is akin to churn in my investment accounts -- it depletes or damages my personal wealth and rate of return and benefits the person/entity that is causing the turnover not because of sales charges, but because it allows them to externalize the cost of change. Maybe employees should be treated like an asset instead of an expense.

sigh.

1. "You're not restating your original position. If anything, you're restating my criticism of your original position."

What part isn't clear?

Wages are derived from the available supply and desired demand.

The demand is derived from the available capital.

The supply is derived from the labor pool.

If the demand exceeds supply, wages go up. If the supply exceeds the demand, wages go down.

I frankly don't understand your point. The principle when applied to India is as simple as it gets. There's a huge supply of low cost labor in India, which greatly exceeds the demand. This keeps the wages down.

2. "Actually, your new version is pretty close to what I said. Why would India's lack of capital be relevant? India has less capital and capital makes labor more productive. "

Again. Wages have nothing to do with productivity. Capital creates a demand for labor which, when compared to the supply, results in increased or decreased wages.

3. "In fact, desks and computers used by programmers in one shift could be used by financial analysts in a second shift, and technical writers in a third."

Or they could simply arrange their offices like many do in Asia. Give each workers 18" of desk space along an enormous communal desk.

4. "ie, Bush does little but scapegoat and claim victimhood."

I don't want to get drawn into these little political scrapes but let's face a few facts.

a. Bush was in office for 8 months before 9/11.
b. It takes 6 months to get an administration operating due to Senate confirmation procedures.
c. Clinton was in office for 8 years prior to 9/11.
d. There were numerous attacks by AQ during those 8 years.
e. Clinton had three opportunties to kill Bin Laden and two opportunities to have him handed over on a silver platter by Sudan.
f. The most aggressive thing Clinton did was bomb an aspirin factory because Bin Laden was supposedly an investor.

Those are facts. Like them, don't like them. I couldn't care less. But if you're going to debate with no regard to facts, then take it to email. I don't care to wade through pages of nonsense.

5. "Remember, it's the middle class that makes revolutions when their position feels threatened."

Very good points. It's strange that, after decades of emphasis on higher education as a means of empowerment, it now turns out that we should all have been automechanics. Due to pending retirements and the increased complexity of automobiles there seems to be a pending shortage of master automechanics.

My highschool shop teacher was right all along. Go figure. :/

6. "My previous posting was overly vehement - please don't take it literally. Sorry it's late at night and I haven't had much sleep recently."

I don't think you have anything to apologize for. Frankly my opinion of economists is even worse than yours.

Every time I read that some group of economists are "puzzled" by the lack of job creation in the economy. I grit my teeth.

7. "Dan, check out the FT.com website today. Interesting article by Glenn Hubbard, former member of Bush's economic advisory team. Sober, well-argued and squashes the kind of objections voiced by Ed, who seems in need to be reminded of basic good manners when leaving comments on someone else's blog."

LOL. So I'm rude? Well. Perhaps I am. Then again, having become intimately aquainted with my mortality, I've found that I'm far less likely to observe the forms of polite society. If I think something is ridiculous, I say so. Maybe that endears me only to the elderly or small children, but that's ok with me. :) LOL.

Well, as I have no intention of registering with FT, I can't view the article. But I can easily refute the article with one paragraph and make the author look like a schmekel.

Here we go:

China has refused to unpeg the Yuan to the dollar. Even as the dollar falls, the Yuan falls farther as it is dramatically undervalued. Recent attempts to convince China to unpeg the currency has failed and even the stop-gap measure of requesting a reduced gap between the real value and the pegged value came to nothing. As long as the Yuan remains drastically below the dollar in value, there will be absolutely no incentive for any company to relocated operations back to America from China. Even so the lure of cheaper wages and reduced costs of operating in China will continue to drain away jobs for the future.

There you go. Have fun.

8. "Oldman: In my discussion with ed, I cited the very same econlib post you had previously cited. I wasn't directing my post at you, but I think my comments are also a good response to what you said."

Well. If nothing else that argument certainly is versatile.

9. "The underlying cause of India's comparative advantage in IT is that Indians are closer to American levels of productivity in IT than in other sectors."

Not true at all. There's an enormous supply of highly experienced IT people in America. And productivity in IT can be almost directly attributed to experience. In fact it takes 3-5 years of professional work before a programmer can even be considered to be a veteran.

The simple analysis is that, currently, an American development team would be far more productive on an individual or team basis when compared with an Indian team of the same size and composition.

The reason why there is a push for Indian IT work is to reduce the cost of development, not necessarily to make that development faster or better.

In addendum, it is both logical and efficient for wage-earners to protect their wealth by opposing the offshoring of their jobs throught whatever means necessary -- concentrated benfits, diffuse costs, just what capital holders are trying for. Admonitions to workers threatened with outsourcing to "suck it up and retrain, you'll make us all wealthier" is illogical and marks you as someone that doesn't understand the economics you claim to believe in.

Hoof:
Yes, that's what trade unions are about (and why heavily unionised countries and industries suffer from high levels of unemployment): protect those who are in, and screw those who are out.

Ed:
China's pegging the yuan to the dollar and building enormous $ reserves effectively means a lot of Chinese people are working *for free* to provide Americans with clothes and consumer electronics. Complaining about this seems a little churlish.

And American IT workers *are* more productive than Indian IT workers; this isn't the point that was being made. Indian IT workers are *closer to American levels of productivity* than people elsewhere in the Indian economy.

This is what comparative advantage is all about: India is rubbish at everything (economically speaking) compared to America, but this still means it has an advantage in doing the things that it's relatively least rubbish at.

A final point that many people don't seem to get on the India outsourcing issue: Indians in outsourcing jobs enjoy *the same standard of living* as the Westerners who did the jobs before, because prices for most basic goods and services are 10X lower (a meal in a 5* restaurant in India costs $7.50; a one-hour cab ride costs $1.50. The starting salary for these jobs is around $4000 pa...)

Unions have been a vital part of the cyclical interplay between capital and labor. When unions are too powerful they seek to increase wages without corresponding efficiencies or productivity increases. When capital is too powerful it tends to concentrate itself in fewer and fewer hands, externalize costs (failure to train, rent-seeking, tax-shifting, abandonment) and rewards management far more than is appropriate to their level of productivity.

Indian employees do *NOT* enjoy the same lifestyle in India that we (or they, as H1 visa holders) do here. They do enjoy a middle class lifestyle, but middle class there entails an apartment (no possibility of a house before 40), 15 hour workday, no benefits, 0.4 cars per couple, no bottom ladder rung for the non-wealthy or politically connected.

Hmmm.

1. "China's pegging the yuan to the dollar and building enormous $ reserves effectively means a lot of Chinese people are working *for free* to provide Americans with clothes and consumer electronics. Complaining about this seems a little churlish."

The purpose is easily discerned. China is looking to vacuum up as much industry as it can from America. On the one hand the Yuan is undervalued so it draws investment. On the other hand China buys T-Bills in billion dollar lots to prop up the dollar.

It's called "the long view". China is maneuvering to win permanently. Minor issues such as near term losses mean nothing. The point is to destroy your enemy's industries and thereby cripple him economically and militarily.

*shrug* China's senior PLA general has already gone on record prediciting a war "to the death" between China and America within two decades.

Make sense now?

2. "And American IT workers *are* more productive than Indian IT workers; this isn't the point that was being made. Indian IT workers are *closer to American levels of productivity* than people elsewhere in the Indian economy."

And when I throw a rock into the air it's closer to the moon than I am. Still the difference is massive. The biggest cause for development failure is the lack of practical experience by the developers themselves. Either in the technology, the industry or the execution/implementation.

So again the primary reason for outsourcing is cost. The primary reason to fear outsourcing is that the Indian developers will gain experience and that gap in ability will shrink, evaporate and eventually run the other way.

Henry Ford almost single handedly turned labor into the middle class by doubling their salaries to $5 a day. His reasoning was that it by doing so they could afford his products, making him exponentially more wealthy through even greater production scales. Was this economically rational? If not, why not and should we be grateful to him for his largesse or should we be angry at him for spending his money inefficiently?

It was the opposite of trickle down economics.

Ford's workers were apparently efficient enough to justify the increase, but he effectively distributed a large amount of their capital to his workers. Wouldn't he have been better off moving a auto plant in Mexico and shipping cars back at a reduced price? Based on offshoring economics, Ford was apparently grossly negligent in his obligations to shareholders -- yet somehow we all came out ahead. How is that?

"Wages are derived from the available supply and desired demand. The demand is derived from the available capital."

This is somewhat garbled, but I think you're saying that more capital increases the marginal product of labor and therefore boosts demand for it. With labor supply fixed, wages go up.

True enough: other things being equal, more capital means higher wages. But this does not mean that the difference in wages between China and India is due solely to different levels of capital endowment. I just did a back-of-the-envelope calculation for a comment elsewhere that I might as well recycle here, thus doubling my productivity.

Real output per worker in the U.S. is 10.4 times the level in India, according to the Penn World Tables for 2000. If this difference was due solely to different levels of capital endowment, exactly how much more capital must the U.S. have and how much cheaper it must be compared to Indian capital? Using a Cobb-Douglas production function with a labor share of 0.7, the answer is that U.S. capital per worker must be about 2400 times the Indian level, while Indian capital must yield a real return about 240 times the U.S. level.

I don't doubt that there are wonderful investment opportunities in India, but I don't think real return on capital there is 240 times higher than in the U.S. Vast differences in the return to labour due to differential factor endowments imply even vaster differences (in the opposite direction) in the return to capital, which is counterfactual. Other factors must be at work: differences in the quality of labor and in production technology, for example.

Daniel: I made a similar point suggesting that the relevance of India's lack of capital is that it diminishes India's labor productivity. Ed didn't agree with that at all.

As far as I can tell, this is ed's point. Building capital consumes labor, which increases the demand for labor, which increses wages. That's crazy. If ed is right, the economic benefit of education isn't that it produces educated workers; it's that education employees teachers thereby increasing demand for labor.

It's unfortunately very common for people to view employment as the sole (or at least primary) barometer or economic health. I don't think I've ever seen it taken to this extreme though. This is even worse than refusing to buy machinery to replace workers for the sake of protecting jobs.

Ed, I apologize if I'm misconstruing your argument, but this is the only interpretation I can think of. You've explicitly said that you're not looking at the effect of capital improvements on labor productivity, but you keep harping on the fact that capital investment raises the demand for labor. What else could that mean?

Xavier: "It's unfortunately very common for people to view employment as the sole (or at least primary) barometer or economic health."

The reason for this is obvious: most Americans derive a majority of their income from employment. If the ownership of productive assets was more evenly distributed, then the average American would care more about the minutae of the stock market.

Hoof: fair enough, I only spent three days this week in meetings with an Indian outsourcing firm, and have only spent two of the last four weeks in India, so I don't have any idea what conditions are like.

Incidentally, the reason Henry Ford was successful was because he cheaply manufactured a product for which demand was booming - not because he paid Ford employees so well they could all afford Fords. I hope I don't need to explain why a company can't survive primarily on revenues obtained from its own employees' wages...

ed said:

"The purpose is easily discerned. China is looking to vacuum up as much industry as it can from America. On the one hand the Yuan is undervalued so it draws investment. On the other hand China buys T-Bills in billion dollar lots to prop up the dollar.

It's called "the long view". China is maneuvering to win permanently. Minor issues such as near term losses mean nothing. The point is to destroy your enemy's industries and thereby cripple him economically and militarily."

I seem to remember almost exactly the same argument put forward except with respect to Japan rather than China about 20 years ago. It never seemed to materialize in that case and I am highly skeptical of it working now.

john b: I think everyone would agree that Ford was successful because he was able to build a product that was in demand. Ford was anticipating a multiplier from distributing some of his capital to his employees as salary. He was not minimizing costs/maximizing returns. The question is: was this rational or efficient? I think history shows that this was both, as Ford and society became wealthier as a result of his actions, yet this effect is not captured by textbook theory and is actively destroyed by current methods of offshoring, which make a few much wealthier and many less wealthy.

Yuppers!

I can now see that outsourcing jobs to other countries is absolutely GREAT for America! You guys won the battle! I'm convinced! I'm converted! I can SEE the LIGHT!

Really!

lol!

-----
http://story.news.yahoo.com/news?tmpl=story&ncid=&e=3&u=/ap/20040325/ap_on_bi_go_ec_fi/economy_7

*Economy Grows at Solid 4.1 Percent Pace *

"The economy added just 21,000 jobs in February — all of them in government — a Labor Department survey of payrolls showed. Job growth has been painfully slow despite better economic activity. "
-----
http://story.news.yahoo.com/news?tmpl=story&ncid=1203&e=1&u=/ap/20040325/ap_on_bi_ge/snow_china&sid=95609868

*U.S. Making Progress on China Currency *

"American manufacturers have contended that China's policy of tightly linking its currency to the U.S. dollar has made the yuan undervalued by as much as 40 percent, giving Chinese producers a huge competitive advantage against American companies."
-----
http://story.news.yahoo.com/news?tmpl=story&ncid=1203&e=3&u=/afp/20040325/bs_afp/us_economy_farm_greenspan&sid=96001027

*Greenspan defends free trade, productivity, despite shifting jobs*

"Greenspan drew on the history of rural American development to rebut protectionism amid deepening concern over the loss of US jobs to countries with cheaper labor such as India and China."
-----
http://story.news.yahoo.com/news?tmpl=story&ncid=1203&e=5&u=/afp/20040325/bs_afp/us_economy_unemployment&sid=96001027

*Weekly US jobless claims rise slightly to 339,000*

"WASHINGTON (AFP) - The number of US unemployment claims rose by 1,000 in the week ended March 20, to 339,000, the Labor Department "
-----

I must admit. You guys have a very convincing argument .....

"It destroys jobs in one sector which leads to the creation of new jobs in other sectors."

Of course it does.

And so far, those other sectors have been India, China, and Ireland.

"I suspect that the manufacturing sector will be *less* affected by offshoring."

Don't forget, the manufacturing sector was already gutted by offshoring two decades ago. America today is not known for its physical manufacturing industry. I wonder what industry the leading economists think the US is known for now.

"The demand for labor is dependent upon the investment of capital, not productivity. Japan has high wages because of demand, due to investment of capital."

OK, but now you can invest wads of capital into American companies, but they can still take that money and in turn, invest it (labor-wise) somewhere else instead of America.

So investment of capital into a nation no longer can be assumed to lead to an increase in that nation's employment prospects.

"'you'll have to get used to job hopping'. What they fail to understand, in their focus on Econ 101, is that this is not acceptable to the American people."

Nor is job-hopping acceptable to the American employer, despite its increased simple involuntary necessity.

"people had been told not to worry about it because manufacturing jobs would be replaced by better paying IT jobs."

I've heard this often enough and find it strange that although pro-offshoring economists will insist that shipping labor overseas will create domestic jobs, they can't even guess at where that will be.

In the 80s manufacturing case, unskilled labor losing work was offered skilled training. Now we have skilled labor losing work being offered... nothing but happy thoughts. It's completely reasonable then to have serious doubts about the viability of a trend, when it's proponents can't predict its future beyond vague terms like "it'll get better". You would think there would be *one* economist who could look at the sector trends and say, 'the next wave in domestic (labor) industry growth will probably be here.' Aside from an isolated anecdote about an Indian film studio hiring an American screenwriter, my radar's picked up no such prediction.

Plenty of Americans would dump their savings (and increase their already growing debt, if they could) into training for that next big thing (assuring a good flow of qualified workers in it, BTW) -- if anyone could show that it existed.

But the problem is, instead of one industry, sector, or job function being offshored, it's quite a lot of them. (Economist apparently is still a secure one, at least until corporations decide that European economists are cheaper and have more experience.)

"The reason why there is a push for Indian IT work is to reduce the cost of development, not necessarily to make that development faster or better."

So even with offshoring, how long can you endure lost sales due to lost quality? Eventually (especially as target offshored country's labor demand and therefore [as we've heard] wages increase), doesn't the gap close? Do you just keep hoping new countries invest in educating skilled labor at low prices forever? I suppose that means, in half a century or so, if the sector still exists, and after a huge economic crash as every non-executive (and some executives) in America goes bankrupt, ... the skilled labor jobs will come back to the US, because our mainstream economy will have become so drastically depressed by then as to be the lowest in the world.

"Indians in outsourcing jobs enjoy *the same standard of living* as the Westerners who did the jobs before"

I've pointed that out, perhaps not here. Proportionally within that economy, right now things are similar as to the average during the past decade in the US. (I don't believe that this is true at the current instant, though. I believe the US standard of living, considering incomes vs. expenses, is creeping downward.)

Likewise, those workers are increasingly apprehensive about their jobs being offshored to even cheaper countries. In fact, improvement of their economy will worsen that situation as their supply shrinks.

Ain't globalization great? It makes corporations the labor locusts of the entire planet. As executives seek cheapest possible resources on a global scale, they leave trashed economies in their wake.

If I were free to move to India, I'd probably do it. But international C&I restrictions, legal attachments and collusions, and other barriers (some that are specific to America) make it a terribly slanted playing field between the offshoring company and the laid-off worker.

"It was the opposite of trickle down economics."

Ford is, after all, one of the most famous and celebrated of American companies throughout history.

Are there any examples where a company became great and endured by hiring lots of really cheap labor?

Seems like those companies which don't skimp on labor are the ones that succeed. Once Ford started skimping on labor, it lost its strength.

See, when you're not skimping on labor, you have to do things like... improve the quality of your product, or... make more products that appeal / are affordable to a greater number of people, or... make your products more useful, etc. And in order to make those things happen, you have to, that's right, hire more labor.

Isn't there an old adage about having to spend money to make money?

"If ed is right, the economic benefit of education isn't that it produces educated workers"

I don't entirely think that there really is an economic benefit of education. I don't think it's economic at all, unless it manages to continually improve at an unmaintainable rate.

After all, there was once an adage that if you were disappointed in how the economy was treating you, you "should have gone to college". Now we have college graduates losing their employability. And presumably between these periods, education improved (at least in amount of knowledge to transfer) within levels of education. Eventually even Ph.D.'s will be offshored somewhere, and then who knows what education you'll need then in order to be viable in this country.

There's an underlying theme here: if this continues unheeded, its logical conclusion will lead to a point where all new directions are exhausted, and nothing is viable.

"then the average American would care more about the minutae of the stock market."

I start to wonder if the only way to stay economically viable as an American under a culture of offshoring will be to own stock. No workers or employees, just stockholders.

Hmmm.

1. "I wonder what industry the leading economists think the US is known for now."

My guess is video and internet porn. It doesn't seem like anything else is really growing at the rate those two are. Movies are being filmed overseas due to cost considerations. Video games are now being offshored to reduce costs as well. Manufacturing is moving offshore, IT is moving offshore. I fully expect that clerical staff work will also move offshore. After all why bother paying some schmuck minimum wage when you can get the same work done for $0.50/hour?

2. "OK, but now you can invest wads of capital into American companies, but they can still take that money and in turn, invest it (labor-wise) somewhere else instead of America."

Yes. But my point was about the destination of capital. So if investment is made into an American company that then in turn moves the money to Bombay, the destination is in Bombay and the jobs created will be in Bombay. That's really what's going on now with the stock market.

The reduce value of the dollar has made many stocks very affordable and the high profit margins, due to outsourcing, have made American companies very attractive to investors. The money then doesn't necessarily stay in America. It can be assumed to be moved offshore with some rapidity.

3. "So investment of capital into a nation no longer can be assumed to lead to an increase in that nation's employment prospects."

It can *if* the capital stays there. The problem America is having is that the capital is moving "under the radar" so to speak. Whiel capital is being invested very publically into America, that same capital is being shifted overseas without the attendent recognition.

4. "Nor is job-hopping acceptable to the American employer, despite its increased simple involuntary necessity."

I've never really understood why companies go through periods of hiring and firing. Frankly the only reason that comes to mind is that it has positive effects on stock prices, which due to executive compensation, means much more than the actual value of such actions. I know I've never heard of a company that was able to sustain positive growth without expanding it's workforce.

5. "I've heard this often enough and find it strange that although pro-offshoring economists will insist that shipping labor overseas will create domestic jobs, they can't even guess at where that will be. "

What I find incredible are statements by economists that they are "puzzled" by the lack of job creation. On the one hand I'm expected to accept their viewpoint and arguments without question, and on the other it seems that they couldn't find their ass with both hands glued to it. If economists have the knowledge and theories to account for everything, then how on earth is it that they don't have answers to very basic questions?

*shrug* It's all a load of crap.

6. "You would think there would be *one* economist who could look at the sector trends and say, 'the next wave in domestic (labor) industry growth will probably be here.'"

Call it sloth, indifference, stupidity, ideology, politics or just plain old ass covering. *shrug* I figure in a couple years, when all this is completely and utterly apparent, even to the most brain damaged economist, we'll see a wave of new theories to cover this.

Frankly I think I should have gone into the profession. I've never seen one with more nonsense and less success associated with it. Evidently you can be a respected and revered economist without ever having been right even once in your life.

Hell look at Karl Marx. He was mostly a philosopher but he had a number of economic theories. All of which are completely bullshit. And yet there are still people who revere that twit.

7. "Aside from an isolated anecdote about an Indian film studio hiring an American screenwriter, my radar's picked up no such prediction."

Actually IBM & HP just got a contract to inshore services to a major Indian city here in America. Frankly this episode is rather suspect. The amount is trivial, $120 million, and can be considered little more than a political ploy. The Indian government is very much concerned about a backlash by the American people and I think this is just a way of giving ammunition to pro-trade proponents.

The basic fact is that anything inshored to America right now is trivial and transient. Those jobs might be here for a bit, but they will be moving on soon enough.

8. "So even with offshoring, how long can you endure lost sales due to lost quality? Eventually (especially as target offshored country's labor demand and therefore [as we've heard] wages increase), doesn't the gap close? Do you just keep hoping new countries invest in educating skilled labor at low prices forever?"

The loss in quality is relatively low and is mitigated by transitioning the outsourcing over time. For example American companies hired foreign workers using H1B visas to give them knowledge and training to do the work that was eventually outsourced to them. These companies will continue that winning formula. As each group of workers gets trained up sufficiently to take over operations, those operations are moved to a base with lower costs.

When the wage gap closes the jobs then move on to another country. An example are the call center jobs that are *leaving* India and moving to the Phillipines. The number of English speakers in the Phillipines is very high and the wages are even lower than in India.

Actually a very good long-term business could be built solely on teaching English to foreign workers.

The number of countries actively courting outsourced work is very very high. The amounts of money are significant enough for any country that they are all willing to go to extraordinary lengths to secure them. Spending money on training and education is not a problem at all. If nothing else there are international donor programs to do just that. So it's not like these countries really have to spend a lot of domestic funds to do the education. We're sending them the money to do that anyways.

9. "America goes bankrupt, ... the skilled labor jobs will come back to the US, "

The only way any offshored jobs will return to America is by the imposition of a 100% import duty on all imports beyond raw unprocessed/unprepared foods. Anything else will be utterly insignificant.

10. "Indians in outsourcing jobs enjoy *the same standard of living* as the Westerners who did the jobs before"

Actually, in relation to their domestic econoomy, Indian's associated with outsourcing actually tend to live much better than their American counterparts. The cost of living is very much lower in India. Consider that a four year degree costs less than $2,000, which wouldn't buy you a semester in a state school. Also a personal live-in servant costs about $35 a month. A two bedroom apartment costs about $300-$500 a month, depending on location and circumstances.

How many programmers do you know have a live-in maid/cook?

11. "Ain't globalization great? It makes corporations the labor locusts of the entire planet. As executives seek cheapest possible resources on a global scale, they leave trashed economies in their wake."

This is an **exceptionally** good point. If you look back through history you can see parallels in the 19th century. Particularly in Russia. If you want an incredible reading experience read about the labor struggles of mine workers here in America. Then read about unbridled capitalism and how it worked in 19th century Russia. Another good book is Sinclair's 'The Jungle', a book about the slaugherhouses of America.

Personally I'm a capitalist, but I was appalled by what I read. And I can easily see the parallels that are going on today.

Read them. You'll never regret it.

12. "I don't entirely think that there really is an economic benefit of education."

The only benefit is someone else thinks your education is worth a job. Since 1/3rd of all American programmers have, at best, a high school education this puts a perspective on things.

Personally I didn't graduate highschool either. I started programming professionally when I was 13. I wrote a POS (Point of Sale system, though I suppose an argument could be made that it was a piece-of-s**t. :) ) for some local businesses.

The question really becomes "is taking on a $40,000 debt worth not getting a job?".

13. "I start to wonder if the only way to stay economically viable as an American under a culture of offshoring will be to own stock. No workers or employees, just stockholders."

Frankly I don't know. But all things considered such a situation would be disasterous and could only end in tragedy.

Hmmm.

"I seem to remember almost exactly the same argument put forward except with respect to Japan rather than China about 20 years ago. It never seemed to materialize in that case and I am highly skeptical of it working now. "

*shrug* I don't know about Japan. But we've already fought two wars with China, Korea and Vietnam.

Here's two dissenting viewpoints using the same quote.

http://www.tfp.org/TFPForum/TFPCommentary/military.htm

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2001/07/15/IN233232.DTL

Frankly The Middle Kingdom has always sought preeminence and viewed any rival with distaste. While China was weak until the mid 1970's or so, it's gotten very strong since then.