You are not an economist? But you've been blustering on and on about why outsourcing is a good thing? Does being a polisci guy give you some expertise on outsourcing? I'm asking that as a serious question, because you have been bloviating about outsourcing for a long time, and I assumed you were an economist as a result. Who else but an economist would have the b!$ls to speak so confidently on the advantages of outsourcing?

timshel: I have an M.A. in economics, but not a Ph.D.

To answer Dan's questions:

'1) Just how many well-educated workers are there in China and India?'

A lot. I was in India recently and I was amazed at the number of computer and MBA schools that seem to have sprung up. In India, education is probably even more vital to business success than the US (unless you're from a wealthy family in India, of course).

'2) Will U.S. firms have an incentive to offshore sophisticated value-added work in areas where the United States has a comparative advantage?'

No, but this work will shrink. Yes, the highest value work will remain in the US, but not all else. India and CHina are develpong expertise in manufacturing, computers, biotech and the like.

'3) Will the United States continue to be a locus for value-added innovations?'
Absolutely. Our top Universities and research labs will keep it so. Yet, how much employment is generated based purely on this most innovative work ? Its probably only a small % of the total work.

'4) To what extent are wages and employment in the affected industries declining because of outsourcing as compared to technological innovation standardizing and commodifying what used to be highly complex 9and highly paid) tasks?'

They are both factors. I think the shrnking of the employment pool may be more of a sign than wage decline.

Personally, I think globalization benefits India and China immensely. I've seen first hand the benefits in India. I think the US is hurt by it, on the balance, but I think its also inevitable. There's no real way of stopping it. The best the US can do is to minimize the inevitable disruption.

Timshel- That is SO in your face.

"2) Will U.S. firms have an incentive to offshore sophisticated value-added work in areas where the United States has a comparative advantage?"

Why would a firm have an incentive to offshore if the US has a comparative advantage?

Samuelson isn't the only Nobel winning economist questioning outsourcing.

MAY 10, 2004
As jobs go global, govts can't afford to sit still
By JOSEPH E. STIGLITZ
Singapore Strait Times

THE latest buzzword in the globalisation debate is outsourcing. Suddenly Americans - long champions of globalisation - seem concerned about its adverse effects on their economy. Its ardent defenders are, of course, untroubled by the loss of jobs. They stress that outsourcing cuts costs - just as technological change improves productivity, thus increasing profits. And what is good for profits must be good for the American economy.

The laws of economics, they assert, ensure that in the long run there will be a job for everyone who wants one, as long as government does not interfere in market processes by setting minimum wages or ensuring job security, or as long as unions don't drive up wages excessively. In competitive markets, the law of demand and supply ensures that eventually, in the long run, the demand for labour will equal supply - there will be no unemployment. But as economist John Keynes put it so poignantly: In the long run, we are all dead.

Those who summarily dismiss the loss of jobs miss a key point: The United States economy has not been performing well. In addition to the trade and budget deficits, there is a jobs deficit. Over the past three-and-a-half years, the economy should have created some four to six million jobs to provide employment for new entrants into the labour force. In fact, more than two million jobs have been destroyed - the first time since Herbert Hoover's presidency at the beginning of the Great Depression that there has been a net job loss in the US economy over the term of an entire presidential administration.

At the very least, this shows that markets by themselves do not quickly work to ensure there is a job for everyone who wishes to work. There is an important role for government in ensuring full employment - a role that the Bush administration has badly mismanaged. Were unemployment lower, the worries about outsourcing would be reduced.

But there is, I think, an even deeper reason for concerns about outsourcing of, say, high-tech jobs to India: It destroys the myth - which has been a central tenet of the globalisation debate in the US and other advanced industrial countries - that workers should not be afraid of globalisation.

Yes, apologists of outsourcing say, low-skilled jobs will be lost in areas like textiles to low-wage labour in China and elsewhere. But this is supposedly a good thing, not a bad thing, because the US should be specialising in its areas of comparative advantage, involving skilled labour and advanced technology. What is required is 'upskilling': improving the quality of education, especially in science and technology.

But this argument no longer seems convincing. The US is producing fewer engineers than China and India, and, even if engineers from those developing countries are at some disadvantage, either because of training or location, that disadvantage is more than offset by wage differentials. Engineers and computer specialists in the US and other developed countries will either have to accept a wage cut and/or they will be forced into unemployment and/or to seek other employment - surely at lower wages.

If America's highly-trained personnel are unable to withstand the onslaught of outsourcing, what about those who are even less trained? Yes, the US may be able to maintain a competitive advantage at the very top, the breakthrough research, the invention of the next laser. But a majority of even highly-trained engineers and scientists are involved in what is called 'ordinary science', the important, day-to-day improvements in technology that are the basis of long-term increases in productivity - and it is not clear the US has a long-term competitive advantage here.

Two lessons emerge from the outsourcing debate. First, as the US grapples with the challenges of adjusting to globalisation, it should be more sensitive to the plight of developing countries, which have far fewer resources to cope. After all, if the US, with its relatively low level of unemployment and social safety net, finds it must take action to protect its workers and firms against competition from abroad - whether in software or steel - such action by developing countries is all the more justified.

Second, the time for the US to worry is now. Many of globalisation's advocates continue to claim that the number of jobs outsourced is relatively small. There is controversy, of course, about the eventual size, with some claiming that as many as one job in two might eventually be outsourced, others contending that the potential is much more limited. Haircuts, like a host of other activities requiring detailed local knowledge, cannot be outsourced.

But even if the eventual numbers are limited, there can be dramatic effects on workers and income distribution. Growth will be enhanced, but workers may be worse off - and not just those who lose their jobs. This has already happened in some developed countries: In the 10 years that have passed since the signing of the North American Free Trade Agreement, average real wages in the US have actually declined.

Putting one's head in the sand and pretending everyone will benefit from globalisation is foolish. The problem with globalisation today is precisely that a few may benefit and a majority may be worse off, unless government takes an active role in managing and shaping it. This is the most important lesson of the debate over outsourcing.

The writer, winner of the 2001 Nobel Prize for economics, is Professor of Economics at Columbia University.

People with little or no technical expertise have been telling us that "low-level programming jobs" will disappear while "high-level software engineering or architect jobs" will remain and increase in number.

First observation: many of those high-level software engineering and architecture jobs IN THE US are already held by Indian immigrants. It is silly to suggest that there aren't enough highly qualified people in India to do these jobs. If anything, there aren't enough highly qualified people in the US to do them.

Second observation: nobody gets hired into an architect job out of college. Software engineers gain experience over several years and then may (or may not) become "architects". If the entry-level work is all done in India, there will be even fewer architect-level people in the US than there are now.

Third observation: US companies have started advertising software manager/team lead jobs to remotely manage offshore teams in India. I wouldn't be surprised if this became a new hot job skill to have on one's resume. Once the architectural work also moves to India, the software managers remaining in the US would not need all that much technical knowledge and could be cross-hired from other disciplines.

Conclusion: In the long run a handful of non- or semi-technical software managers will replace whole departments of software engineers. Over time the skills required of these managers will decrease rather than increase and consequently their salaries will also decrease, quite possibly to below that of a senior software engineer today.

It appears that whether outsourcing will benefit the US economy is becoming increasingly contraversial. Stephen Roach also comes to mind, as another respectable analyst, who is worried about out-sourcing and the structural changes taking place in the US economy. I'm not an econonmist, but I don't think its going to help int he long term, however, I also don't think there is much we can really do about it.

Dan, you don't need to neccessarily have policy prescriptions in place to debate whether outsourcing will benefit the US or not. In terms of policy specifics, it appears you can even disagree on the fundamental question, but still agree on policy

The policy implications, he added, include increased investment in science, research and education. And Mr. Samuelson and Mr. Bhagwati agree that the way to buffer the adjustment for the workers who lose in the global competition is with wage insurance programs.

I look forward to your posts on wage insurance programs in the future! .

This is the money quote for me is,

The global spread of lower-cost computing and Internet communications breaks down the old geographic boundaries between labor markets, he noted, and could accelerate the pressure on wages across large swaths of the service economy. "If you don't believe that changes the average wages in America, then you believe in the tooth fairy," Mr. Samuelson said.

Slashdot is also discussing this article, if you want to get tech opinions.

Let me add, I also look forward to your posts on tooth fairies, dan.

From the Times: "In an interview, Mr. Bhagwati said, "You have a lot of people, but that doesn't mean they are qualified. That sort of thinking is really generalizing based on the kind of Indian and Chinese people who manage to make it to Silicon Valley.""

Uh, no, it isn't. Bhagwati needs to start considering the typical American IT worker.

True, the kind of Indian and Chinese people who manage to make it to Silicon Valley are likely at the tops of their professions. But the same is true of Americans who manage to make it to comparable jobs in Silicon Valley.

But the typical American IT worker, the typical American engineering or CS student, is a level quite attainable by students in India or China.

Those people fill most of the tech jobs in the US, and those tech jobs are precisely the ones at risk.

praktike writes: "Why would a firm have an incentive to offshore if the US has a comparative advantage?"

The comparative advantage could end pretty quickly if students stop studying in the required fields, due to a perception that no jobs will exist for them.

The Indian Institute of Technology is very big, very competitive, and apparently outstanding in the education of its students.

the wesson

This is going to be a real blow to Lou Dobbs, think he will ever mention it?

By focusing on whether certain US sectors will lose out, one forgets that if there are really wage differentials that can survive the long term, then the conclusion is that certain American workers are currently overpaid and ripe for labor arbitrage. Not correcting this quickly will do a lot more long-term damage to the (US) economy.

boo writes; "if there are really wage differentials that can survive the long term, "

Much of the difference is due to cost of living differences. American workers could work for Indian wages, if our cost of living was as low.

*All* American workers are overpaid, compared to Indian wages.

Briefly for now.
Agree with what Stiglitz stated.

Ruth H and others who so blindly believe in your fallacious theories and out of teach non- reality theories:

In my view and that of others, good jobs are about second to military defense to this nation.

Just read Maytag is to be the lastest closing and moving to Mexico.

I am totally disgusted with the staff of archaic university model, the number of paper professionals, the funny moneys, and the manure they produced,etc. of the last few decades.
All of which have ruined this country. So much so that those who sit and watch this occur with such smug arrogance can be called traitors and ____ ___ at minimum. This is a war upon us--on several fronts.

Jon H writes: "*All* American workers are overpaid, compared to Indian wages."

Not true. You get what you pay for in terms of overall productivity and quality. I know because I outsource a lot of work.
Where there are genuine labor arbitrage opportunities, they tend to equalize themselves after a couple of years.

We have to remember that there's a *reason* US workers are generally highly paid. I don't think it's just blind luck, it has to do with US business being very efficient and producing generally high quality at low prices. So if someone claims to be able to do better, best to find a reason and learn to beat it honestly, not by legislative fiat.

But protectionist arguments seem to carry the implicit assumption that US workers have some kind of eternal right to highly paid work, irrespective of the comparative value situation.

I disagree with him because appears that he assumes (from what you say in your presentation Dan) the dimension of the market stay the same. Being the India and China potential bigger markets than USA, if USA has firms that are competitive in some item (be it quality of service, innovation or other)it will be better for them.

I would say the reason why Americans are highly paid is primarily due to the currency strength. The question is why the currency differential is so high to begin with. There are plenty of potential reasons, including the currency manipulation by other nations with a mercantilist mindset, the desirability of the few products that we can export and sell on international markets and the resultant pricing power, and the perception that equities and other nonperishable assets in the US are safe investments that are likely to give a good return which leads to other countries selling us merchandise in order to gain these assets.

I would suggest that the latest poverty figures indicate that people are being laid off and are unable to find jobs that pay well.

Your fourth statement is fallacious in proving your point. The question should be phrased, to what extent have the wages and salaries of the people formerly employed in the industry declined since the jobs were outsource? Wages may remain high in the industry for the remaining people working in it, but that does not measure the impact on the people who have lost their jobs due to outsourcing.

I would suggest that one of the problems with outsourcing is that no economist has really looked at a pile of sand. If you dig a hole out of the middle of the sand and remove what you dug out, eventually the entire pile of sand will sink lower. I think there's a parallel there in what happens with wages. The wages in India and China may actually increase, but in this country they are more likely to decrease until there is a level playing field. And in higher cost countries, this can be devastating for the economies. It was the conservative Henry Ford who felt he had to pay his workers enough that they could buy the cars they built.

Ford wasn't a conservative, not really. He was some weird 30s mix; bits and pieces of libertarianism, socialism and (lots of) anti-Semitism. In an alternate reality, he'd have been the first National Socialist president of America and National Socialism wouldn't have the reputation it does today.

One point to keep in mind: the models usually assume free markets for capital and labor. In actuality, there is considerable government intervention in the market in China; less but still significant in India.

Ford changed over time (or circs. changed and he didn't). He started out as a relatively generous employer, but he turned into a fairly big bastard - strike busting goons were there stick with which he kept employees (including management) in line. By the end, he was pretty much crazy. Or so I recall from Halberstam's "The Reckoning." (IIRC, the book also references the work of a Japanese academic from whom Thomas Friedman cadged a good bit of the framework of his last book).

I've been in software R&D for a while and work on programmer productivity tools. The threat to US IT jobs, and a much bigger threat to India and China, is that software tools will eliminate many low-level tech jobs. But there's actually a lot more IT work available than most people grasp.

Today, software is painstakingly hand-crafted for a specific problem at a huge cost. Tomorrow, flexible software components developed in the US will be customized by cheaper labor in India/China for a specific problem. Many of the IT folks in the US will move into industries where their skills are desperately needed: health care, manufacturing, insurance, finance, etc. I've visited many companies in these other areas and their systems are antiquated and broken. By building better software cheaper, those industries will see a tremendous productivity boom.

In fact, India is losing some of their low-level tech work to cheaper countries like Romania and Russia. But they've got much more to gain from the scenario I've described because their infrastructure sucks so bad.

And has anyone considered the long-term effects of outsourcing with the demographic shifts in Western economies? If Japan's and Europe's population falls, they can use outsourcing rather than immigration to keep their economies going. Everyone wins! :-)

Am I mistaken or are most of the goods we use today manufactured in other countries? Is this a good thing for the future of the United States? Is China a Communist country, and do we want our country to follow this path? Are we not indirectly strenghening this totalitarian regime? Is it all about the money? Yes, I guess it is. Is there a historical precedent for the free trade doctrine, or is it mostly unproven academic theory? The future of this country hangs in the balance, and we are almost at the mercy of our enemies, or am I mistaken?

'We have to remember that there's a *reason* US workers are generally highly paid. I don't think it's just blind luck, it has to do with US business being very efficient and producing generally high quality at low prices'

The reason is largely historical. India didn't start liberalizing its economy till the early 90s. China went through spurts of liberalization. As someone who immigrated to the US from India, I can say that in the mid-80s, there wasn't really the critical mass of technical people, technical managers and the like in India needed for a lot of outsourcing projects (most companies did on-site work instead). A lot of good engineers went to the US. Also, there was a shortage of capital for starting businesses.

Now the situation has changed. There is capital, there is a deep bench of expertise in technology and management in India. SOme of it done by Indians who trained in the US and went back. At this point, Americans who are paid better than Indiands are paid so for
a) historical reasons: people with expertise in some old programs may not be available at all in India.
b) SOme work, especially if it involves a lot of customer of business contact is hard to do in India.
c) In some cases, the best experts in the world are present in the US. When it comes to the core components of Oracle 9i or Windows, the greatest experts are in the uS
d) There are as yet very few of the truly top quality research labs and institutions that spin off ideas for startups in India.

b) and d) will still persist as reasons. c) will become less of an issue, as more and more development is done in India. In my company, some of the greatest expertise in some program releases is now in India, so c) will work in reverse.

a) will crease to happen at some point too.

Bottom line: There is nothign magic about the high wages for American Engineers. They can and will fade away

pS: Dan, thank you for being probably yhe only blog that has not spend tons of time about the CBS memos and typewriter fonts.

I smell partisan hackery here. One can be a brilliant scholar - and I have no reason to doubt that Samuelson is a brilliant scholar, and no basis to question his work - and still be acting as a partisan hack if one produces work that only marginally advances the terms of the debate but then releases it in the heat of a presidential election season when the subject is a hot political issue and hypes its conclusions to a reporter for a newspaper friendly to the candidates who would wish to promote its conclusions. Again, I can't comment on the substance here, but if Samuelson is willing to let the Times oversell his conclusions for the greater good of Kerry-Edwards, that's not scholarship, it's partisanship.

noone writes: " Many of the IT folks in the US will move into industries where their skills are desperately needed: health care, manufacturing, insurance, finance, etc. I've visited many companies in these other areas and their systems are antiquated and broken. By building better software cheaper, those industries will see a tremendous productivity boom."

You have a flawed understanding of IT if you think most IT people aren't already working in such companies.

(I've only worked at one 'software company'. Among the places I've worked: a Swiss investment bank, an American bank with investment banking and retail operations, and a company that made nail guns.

I wasn't doing Cobol or antiquated mainframe work, I was doing Objective-C on NeXT workstations. Investment banks especially do lots of cutting-edge high-tech stuff.)

The problem with your theory is that those companies are *precisely* the ones most eager to offshore. They're a bank/HMO/insurance company, they don't want to be writing software, and if they have to, they'll try to do it for as little as possible.

Hartford's insurance companies have been sending lots of tech jobs offshore.

So, no. You're mistaken.

Which do you think contributes more towards getting rid of US jobs, outsourcing to manuf/services to foreign countries or automating locally?

Of course there is also the double whammy... Outsourcing our automation jobs and manuf/services jobs.

On just a service based level. Should we be mad at the US for outsourcing up to 15% of our US jobs overseas or should we be mad at ourselves for automating 60% employment reductions because of the efficiencies that we have created even in our own country?

The political question should be what will we do with our workers who are automated? Not outsourcing.

Which do you think contributes more towards getting rid of US jobs, outsourcing to manuf/services to foreign countries or automating locally?

Of course there is also the double whammy... Outsourcing our automation jobs and manuf/services jobs.

On just a service based level. Should we be mad at the US for outsourcing up to 15% of our US jobs overseas or should we be mad at ourselves for automating 60% employment reductions because of the efficiencies that we have created even in our own country?

The political question should be what will we do with our workers who are automated? Not outsourcing.

What nobel prize idiot would think that outsourcing would actually bring back higher paying jobs? As of yet it doesnt look like its going to stop. What idiot would think outsourcing would actually bring returns in the long run? Does free trade actually allow the $1.00 a day outsource worker to buy that US $35,000 product or that US minimum wage worker to buy it? How can policy makers allow such tremendous damage and chaos to happen and what will they do about it? Corporations should wake up and be held responsible.

I am a software engineer, originally from the U.K, currently working as a Team Leader in a sub-saharan african country. Although my client is from the country itself (rather than an industrialized country), the debate about offshore outsourcing has reached massive proportions in the U.K. at about the same time in the U.S.

The debate above has been interesting, I would only like to add a few points:
1) It is not enough to consider only the 'net effect' of outsourcing on jobs, because the costs and benefits do not go to the same individuals. Typically those who lose out are reasonably well advanced in their careers, or even close to retiral, while the new jobs created (such as remotely managing outsourced customer care services for a major healthcare provider) are taken disproportionately by newer entrants to the labour market.

2) This has always happened in mixed state-market econonomies like the US and UK - look at the terrible job losses in manufacturing since the 1960s - those blue-collar workers often did NOT find other jobs in new sectors, but the national economy as a whole did well. The apparent outcry now is because it is more vocal and articulate white-collar workers who are suffering - in terms of share of the labour force the numbers are not so big as in the 70s and 80s.

3) The trade policy of the US, UK and other advanced industrial economies has always been brutally realpolitik. It has never been concerned either for the rights and livelihoods of either its own workforce (especially blue collar), nor the workforce in the developing countries whose markets it prises open prematurely. Now China, India etc are only playing us at our own game. Well, that's tough - you can't have your cake and eat it.

As someone who started his career when these trends were already becoming apparent, I have followed these 'rules of thumb' when thinking about 'job security'.
a) there is no such thing as job security, no modern employer, however much they would like, can guarantee a job for life
b) always respect your customer and learn how to make their working life easier - that way, whatever your official job title, you will always have a useful service to offer

Reuters Headline 10/18/2004 10:47 am

"Job Cuts in Tech Sector Soar, Report Finds"

A couple of observations.....

These are real people we are talking about, not widgets. Creative destruction is not such a neat concept when the sheriff auctions your house.

Those real people vote.

The 2004 election does not give anyone much of a choice on the trade issue, but 2008 could see a populist rebellion.

Another four years of steady job loses in Ohio (for example) may make a major change in the political landscape (many of the manufacturing job loses here can be traced directly to Mexico and China).