The New York Times' Anand Giridharads loooks at how India's outsourcing sector is maturing. He finds that -- gasp! -- Indian firms are outsourcing their outsourcing to other countries.... including, among others, the United States:

Thousands of Indians report to Infosys Technologies’ campus here to learn the finer points of programming. Lately, though, packs of foreigners have been roaming the manicured lawns, too.

Many of them are recent American college graduates, and some have even turned down job offers from coveted employers like Google. Instead, they accepted a novel assignment from Infosys, the Indian technology giant: fly here for six months of training, then return home to work in the company’s American back offices.

India is outsourcing outsourcing.

One of the constants of the global economy has been companies moving their tasks — and jobs — to India. But rising wages and a stronger currency here, demands for workers who speak languages other than English, and competition from countries looking to emulate India’s success as a back office — including China, Morocco and Mexico — are challenging that model....

In May, Tata Consultancy Service, Infosys’s Indian rival, announced a new back office in Guadalajara, Mexico; Tata already has 5,000 workers in Brazil, Chile and Uruguay. Cognizant Technology Solutions, with most of its operations in India, has now opened back offices in Phoenix and Shanghai.

Wipro, another Indian technology services company, has outsourcing offices in Canada, China, Portugal, Romania and Saudi Arabia, among other locations.

And last month, Wipro said it was opening a software development center in Atlanta that would hire 500 programmers in three years.

In a poetic reflection of outsourcing’s new face, Wipro’s chairman, Azim Premji, told Wall Street analysts this year that he was considering hubs in Idaho and Virginia, in addition to Georgia, to take advantage of American “states which are less developed.” (India’s per capita income is less than $1,000 a year.)

Three years ago, I argued in Foreign Affairs that the growth projections about offshore outsourcing were wildly overstated. Others have suggested that growth projections about offshore outsourcing are wildly understated.

This Economist story provides a point for me and against the Blinder-Friedman hypothesis:

The latest quarterly report on the state of global outsourcing from TPI, a consultancy, was published earlier this month. It showed that both the number and value of contracts awarded during the first half of this year had declined in comparison with the same period in 2006. In 2007 the total value of contracts awarded in the first six months was the lowest since 2001....

As growth slows it is clear that making money is becoming more difficult for outsourcing firms. Competing on price is getting ever harder. Established vendors are hiring workers in the same low-cost locations as their offshore rivals—the likes of Accenture and IBM have been furiously ramping up their operations in India, for example. One response is to keep searching for ever-cheaper locations, both within India and outside it, but a race to the bottom on price threatens both the quality of service and profit margins. For the top-tier providers, the way to stand apart from the crowd is to deliver more valuable services....

Outsourcing firms are moving into more countries in order to deliver the right mix of cost, risk and quality. As Western providers concentrate on beefing up their presence in low-wage centres, Indian vendors are focusing on the markets where the buying decisions are made. Physical and cultural proximity is important for building closer client relationships, for delivering certain types of services (such as unscripted selling) and for soothing concerns about data security and confidentiality. Hiring locals also has the effect of cutting down on visa hassles.

Wipro, one of the big three Indian providers (along with Infosys and Tata Consultancy Services), is close to reaching an agreement with the authorities in Atlanta, Georgia, to set up its first software-development centre in America. The three other cities shortlisted during the selection process—Austin, Texas; Raleigh, North Carolina; and Richmond, Virginia—stand a good chance of hosting other centres. Azim Premji, Wipro's chairman, says that the proportion of local employees (as opposed to visiting Indians) in the company's overseas locations will rise from 10% to one-third over the next three years.

Few providers expect the topic of offshoring to lose its political sting—despite plenty of evidence, including a recent OECD report on the subject, showing that it is not a big cause of job losses and has an overall positive effect. But the maturing of the outsourcing industry ought to mean that scaremongering about jobs flowing from rich countries to poor ones will sound less and less convincing.

Your humble blogger has been unusually consistent in his position on offshore outsourcing:

1) The initial offshoring of tasks will slow as a) mistakes are made and as b) labor markets begin to equilibrate;

2) Offshoring will be limited to tasks that can be segmented into simpler jobs.

The Influence Peddler reports that some Silicon Valley firms are now engaged in "reverse offshoring":

No Joke:

The rising cost of paying engineers in Bangalore has prompted at least one Silicon Valley start-up to save money by closing its Indian engineering centre and moving the jobs back to California.

While this “reverse offshoring” remains unusual, it points to a broader belief in the US technology industry that the savings that drove software engineering jobs to India’s technology capital are quickly eroding.

Like.com, a search engine company that uses image recognition software to find pictures on the web, took the step of closing in India after seeing the wages of top-level engineers in some cases rise close to US levels.

“Bangalore wages have just been growing like crazy,” Munjal Shah, chief executive, complained in a blog post. In the next few months, Like.com would have had to lift the salary of one of its Bangalore engineers to 75 per cent of the US level, even though the same engineer earned only 20 per cent as much as an equivalent US-based worker two years ago, Mr Shah said.

It's almost as if there's this crazy... international labor market -- and higher value skills and greater value added lead to higher wages. And then when companies no longer save money by locating jobs abroad, the potential actually exists for them to return to the US.

The other problem is local knowledge, as this New York Times story by Steve Lohr suggests:

“Once you start moving up the occupational chains, the work is not as rules-based,” said Frank Levy, a labor economist at the Massachusetts Institute of Technology. “People are doing more custom work that varies case by case.”

In the field of technology services, Mr. Levy said, the essential skill is “often a lot more about business knowledge than it is about software technology — and it’s a lot harder to ship that kind of work overseas.”

The offshore specialists in India are learning that lesson. As they increasingly compete for higher-end work, the Indian companies are hiring thousands of workers this year in the United States, adding an odd twist to the offshoring trend. Tata alone plans to recruit 1,000 workers in America, said Surya Kant, president of the company’s American unit, for “the near-shore work that requires regular contact with clients in person.”

Lohr demonstrates the need for hands-on workers by profiling an IBM project for a Texas utility. IBM is using both domestic and international units to complete the assignment. For the domestic employees, the skill set required would be difficult, at best, to outsource offshore: The utility project I.B.M. is doing in Texas offers a glimpse of the global formula. The far-flung work team includes research scientists in Yorktown Heights, N.Y., and Austin, Tex.; software developers in Pune and Bangalore, India; engineering equipment and quality-control specialists in Miami and New York; and utility experts and software designers like Mr. Taft that have come from Philadelphia, San Francisco, Los Angeles, Chicago, Raleigh, N.C., and elsewhere.

I.B.M. plans to use the skills learned and software written for the smart-grid project in work with utility clients around the world. In the services field, these are deemed “reusable assets,” reducing costs in the future.

Ron Ambrosio, a senior I.B.M. researcher, has been down to Houston a few times, attaching sensors to power lines and collecting gigabytes of data on electricity flows. He and others at I.B.M. are studying how to predict and prevent power failures, optimize performance, reduce costs and conserve energy. “We’re looking at this as part of a worldwide opportunity,” he said.

Dennis Hendon, an account executive, and Rob Calvo, a senior services consultant, lead the I.B.M. team in Houston. Mr. Hendon is an engineer by training, while Mr. Calvo has a business degree, but their real skills lie in years of on-the-job training — what labor experts call “passive knowledge” and “complex communications,” observing, listening, coordinating, negotiating and persuading. The two men say they think of themselves as orchestra conductors, getting all the human parts working smoothly together, inside and outside I.B.M. “We aren’t mounting the poles, but our subcontractors are,” Mr. Hendon said.

One of the difficulties with the Blinder-Friedman hypothesis is that it can't really be tested right now (though perhaps this is where Blinder and Friedman disagree. Friedman already thinks the world is flat, whereas Blinder just thinks it will be much, much flatter over the next few decades).

Nevertheless, one would expect the industrial organization of call centers to closely resemble the future according to Blinder and Friedman. These were the jobs that everyone was yammering about disappearing a half-decade ago. Does this sector look flat?

Thanks to Cornell University's Industrial and Labor Relations school, we now have some data... and most of it does not support the Blinder-Friedman hypothesis. From the press release:

Contrary to what many people think, most call centers serving U.S. customers -- service centers in remote locations that handle telephone and Web-based inquiries -- are operated in the United States, not in India or other overseas locations.

So said Rosemary Batt, the Alice H. Cook Professor of Women and Work and professor of human resource studies at Cornell's ILR School (industrial and labor relations) and a lead author of a report on the largest-scale study to examine call center management and employment practices in Asia, Africa, South America, North America and Europe, covering almost 2,500 centers in 17 countries.

The study, "The Global Call Center Report: International Perspectives on Management and Employment," was a collaborative effort involving more than 40 scholars from 20 countries....

The large majority of centers around the world -- except India -- serve their own domestic markets and consumers. There is no common global face to call centers, since they tend to take on the character of their respective countries and regions based on that country's or region's laws, customs and norms....

Two-thirds of all call centers are in-house operations, serving a firm's own customers. Subcontractors operate the remaining one-third of centers. In-house centers across all countries have lower turnover rates and higher quality jobs than subcontracted ones.

The mobility of call center operations has led many to view this sector as a paradigmatic case of the globalization of service work. And we find that the call center sector looks quite similar across countries in terms of its markets, service offerings, and organizational features. But beyond these similarities, we find that call center workplaces take on the character of their own countries and regions, based on distinct laws, customs, institutions, and norms. The ‘globalization’ of call center activities has a remarkably national face....

Call centers typically serve national rather than international markets. Eighty-six percent serve their local, regional, or national market.

Let it be noted that Anand Giridharadas had a story in yesterday's New York Times that offers some support for the Alan Blinder-Thomas Friedman view of offshore outsourcing:

Outsourcing is breaking out of the back office.

For years, most service industry jobs that were moved to countries like India were considered relatively low-skill tasks like answering customer inquiries. But that has been changing in recent years, and increasingly the jobs of Western white-collar elites in fields as diverse as investment banking, aircraft engineering and pharmaceutical research have begun flowing to India and a few other developing countries.

In the view of most specialists on the phenomenon, the kinds of jobs that cannot be outsourced are slowly evaporating.

Boeing and Airbus now employ hundreds of Indians in challenging tasks like writing software for next-generation cockpits and building systems to prevent airborne collisions. Investment banks like Morgan Stanley are hiring Indians to analyze American stocks, jobs that commonly pay six-figure salaries on Wall Street.

The drug maker Eli Lilly recently handed over a molecule it discovered to an Indian company, which will be paid $500,000 to $1.5 million a year per scientist to ready the drug for commercial use — work that would be significantly more costly if carried out by Americans.

With multinationals employing tens of thousands of Indians, some are beginning to treat the country like a second headquarters, sending senior executives with global responsibilities to work there. For example, Cisco Systems, the leading maker of communications equipment, has decided that 20 percent of its top talent should be in India within five years; it recently moved one of its highest-ranking executives, Wim Elfrink, to Bangalore, the center of the Indian industry, as chief globalization officer.

Accenture, the global consulting giant, has its worldwide head of business-process outsourcing in Bangalore; by December it expects to have more employees in India than in the United States.

This is not a zero-sum game, in which every job added in India comes at the expense of an American or European one.

In many ways, the shift reflects a changing view at multinational companies as they find it easier to meet growing demand by taking advantage of the improved skills of newly educated people in the developing world. And some companies are returning certain jobs to the United States, finding that the work in India and elsewhere is not up to snuff.

But there are trade-offs as well. As Indian back offices become more sophisticated, Western companies are finding that large parts of their work, even high-end tasks, can also be done from India. From the consumer perspective, India has emerged as a pool of 1.1 billion potential customers for companies seeking faster growth. And so many companies are shifting their energy to where they see their futures being written.

“India is at the epicenter of the flat world,” said Michael J. Cannon-Brookes, vice president for business development in India and China at I.B.M., which has reduced its American work force by 31,000 since 1992 even as its Indian staff mushroomed to 52,000 from zero....

Still, specialists warned that a continued flow of work to India required drastic improvements in its educational system and basic facilities. Water and power shortages are endemic, and industry experts predict that India could lack 500,000 engineers by 2010. Yet the country has already tapped a deep well of English-speaking engineers, attracting more outsourced work than any other country.

UPDATE: Friedman's column prompts a bizarre comment from Matthew Yglesias:

The reason KenCall works is that its wages are so low. Its wages, in turn, are low because in Kenya at the moment the IT infrastructure necessary to operate a call center is very scarce relative to the level of English competency necessary to work in one. If an undersea cable makes it significantly easier to start up call centers, that may change. It all depends on how large Kenya's "large pool of educated, English-speaking talent" really is.

What would be more accurate to say is that if the education picture remained constant, the returns to being an offshoring magnet are a) limited to the upper tier of the popilation, and b) decline over time as wages would go up for (relatively) skilled labor.

On the latter point -- so what? Offshoring flows would decline as wages rise -- and rising wages are a good thing. On the former point, here's the question you have to ask -- what's better, a society that has a relatively even distribution of income or a society where the poorest are not made worse off but the educated earn much higher returns for their education?

I suspect Matt would say the latter but not be happy about it. Over the long haul, however, market signals about the increasing returns to education would encourage an expansion of educated individuals -- which counters the effect that concerns Yglesias, and happens to be a good thing in and of itself.

UPDATE: Yglesias clarifies his position here:

Friedman is portraying the issue as one in which Kenya needs to build better broadband access, and then the IT jobs would come. The counterpoint I meant to make was that the real chokepoint here seemed to me to be the Kenyan education system. Only a very small proportion of Kenyans are qualified for KenCall-style jobs. At the moment, only a small proportion of the qualified people can get KenCall-style jobs precisely because the physical infrastructure to easily set up competing firms isn't there, which makes wages low by world standards which makes Kenya an attractive outsourcing destination. Build more infrastructure, you'll get more firms, the labor market will tighten, wages will go up, and then growth will slow down as future outsourcers look to other, cheaper countries.

That's all fine as far as it goes. My only observation was that insofar as only a very small proportion of Kenyans are qualified for these sort of jobs, it won't actually go very far. Kenya not only needs more infrastructure, it needs more workers qualified for these sort of jobs. Dan Drezner writes that "market signals about the increasing returns to education would encourage an expansion of educated individuals."

This, to me, seems slightly backwards. As I see it, improving school systems is hard and education levels often don't improve even when market incentives to do so exist. Increasing internet connectivity is, by contrast, relatively easy to accomplish and relatively more responsive to market signals. I have no doubt that countries that produce large pools of workers well-suited to IT work that market signals will cause companies to invest in expanding the IT infrastructure necessary to employ those workers profitably. I'm not by any means certain that the mere existence of remunerative labor market opportunities for well-educated Kenyans will cause the number of such Kenyans to spontaneously increase.

Robert Weisman reports today in the Boston Globe on how the local IT job market is doing three years after offshore outsourcing devastated the tech sector:

Five years after the dot-com bust ravaged the technology industry, erasing tens of thousands of jobs in Massachusetts, the "Help Wanted" signs have been pulled out of storage. State figures released Thursday show several high-tech job categories growing at more than triple the rate of overall employment over the past 13 months.

The job market hasn't returned to the feverish state of the 1990s, and fields such as telecommunications have been slower to recover. But multiple job offers are no longer rare for managers and consultants, software developers, researchers, website designers, marketing and sales professionals -- even newly minted college graduates -- knocking on the doors of resurgent high-tech companies. Especially hot are Internet businesses riding the new wave of digital commerce.

And, on the flip side, employers are struggling for the first time in years to hire technology talent. Many are paying signing bonuses ranging from $15,000 to $40,000, often structured as tuition forgiveness, to lure masters in business administration graduates from top schools.

More junior employees are finding themselves in demand, too. Internet consulting firm Molecular Inc. offered a job to a woman who interviewed at its offices in the Arsenal on the Charles River last month. She is a software engineer relocating to Boston from Alabama.

"She flew up for a few days, interviewed with three companies, all referrals from friends, and had job offers from all three the next week," Molecular managing director Patrick Heath reported in an e-mail last month to Ralph Folz , chief executive officer of the Watertown company. Heath concluded the e-mail, which Folz shared with the Globe, by observing, "The market is crazy right now." (Late last week, the coveted software engineer accepted Molecular's offer.)

New data from the Massachusetts Department of Workforce Development show the number of non-farm jobs in the state increased 1.2 percent since the start of 2006. At the same time, employment grew 3.7 percent in computer systems design, 4.5 percent in technology management and consulting, and 4.9 percent in research and development, fields encompassing many of the employees being snapped up by Internet companies. "The hiring market is tougher than it's been since 1999 or 2000," said Folz, recalling the last boom.

Via Greg Mankiw, I find this Andrew Cassel column in the Philadelphia Inquirer pointing out that, around or about three years ago, everyone was freaking out about offshore outsourcing. Yeah, what happened there?

[T]his month marks the third year since the Great Offshoring Scare of 2004.

Remember? It was this month three years ago that Americans woke up to the shocking realization that many of the voices on the other end of the tech-support help line were in India, or Ukraine, or the Philippines. The news hit like a rock, and life was never the same again.

OK, I'm exaggerating. A lot of us actually knew about offshoring before then. And as for life never being the same... well, you decide.

That month, Wired magazine, which keeps its finger on the pulse of the information-technology community, published a cover article about the spreading revolt of American tech workers against firms that filled programming and other jobs overseas.

One of Wired's key interviews was with Scott Kirwin of Wilmington, who had lost his job doing back-office tech work for a bank in Delaware. The experience had shaken Kirwin's faith in American business and prompted him to start a grassroots activist group to lobby for protection against offshoring....

And what happened next? Nothing.

Nothing, that is, like the massive outflow of jobs that many feared. Employment growth, which had been notably slow after the 2001 recession, picked up in the United States. (We've gained more than five million jobs since early 2004.) Recruiters who specialize in information-technology workers say they have more openings than they can fill.

And as a hot-button headline issue, offshoring appears to have gone the way of Y2K and the Red Menace. File it under N, for Not as Big a Deal as We Thought.

Yes, some still see offshoring as a threat, sort of. A Brookings Institution report last week said some metropolitan regions with lots of high-tech employment could see as many as 4.3 percent of their jobs go overseas. (Philadelphia isn't so vulnerable - the Brookings report estimates our potential losses at 2.5 percent at the most.)

But most economists who've looked at the issue rate the long-run economic impact of offshoring as either (1) minimal, or (2) positive. Using overseas workers to save money or boost productivity generally results in better or cheaper services, which in turn leads to more competition, more innovation, and growth.

But you don't have to take my word for it. Listen to Scott Kirwin, who made a return appearance in December to Wired magazine. Things have changed. He shut down his anti-offshoring Web site in 2006 and has since found himself a better job in the software business. "I don't view outsourcing as the big threat it was," he told the magazine. "In the end, America may be stronger for it." (emphasis added)

UPDATE: Whoops!! The original title to this post read "anti-offhoring" rather than "anti-offshoring," which takes the conversation to places I do not want to go.

Fixed now.

The demand for trained IT workers is having some interesting effects in both India and Massachusetts.

India first -- Somini Sengupta reports in the New York Times that skills shortages could act as a bottleneck for the Indian service sector:

As its technology companies soar to the outsourcing skies, India is bumping up against an improbable challenge. In a country once regarded as a bottomless well of low-cost, ready-to-work, English-speaking engineers, a shortage looms.

India still produces plenty of engineers, nearly 400,000 a year at last count. But their competence has become the issue.

A study commissioned by a trade group, the National Association of Software and Service Companies, or Nasscom, found only one in four engineering graduates to be employable. The rest were deficient in the required technical skills, fluency in English or ability to work in a team or deliver basic oral presentations.

The skills gap reflects the narrow availability of high-quality college education in India and the galloping pace of the country’s service-driven economy, which is growing faster than nearly all but China’s. The software and service companies provide technology services to foreign companies, many of them based in the United States. Software exports alone expanded by 33 percent in the last year.

The university systems of few countries would be able to keep up with such demand, and India is certainly having trouble. The best and most selective universities generate too few graduates, and new private colleges are producing graduates of uneven quality.

Many fear that the labor pinch may signal bottlenecks in other parts of the economy. It is already being felt in the information technology sector....

Demand is beginning to be felt on the bottom line. Entry-level salaries in the software industry have risen by an average of 10 to 15 percent in recent years. And Nasscom, which helps companies wanting to outsource find workers, forecasts a shortage of 500,000 professional employees in the technology sector by 2010....

Higher education is still available only to a tiny slice of India’s young. No more than 10 percent of Indians ages 18 to 25 are enrolled in college, according to official figures. Nearly 40 percent of Indians over the age of 15 are illiterate.

The industry is lobbying hard to allow private investment in Indian higher education. Right now the government allows only nonprofit ventures, and often they are of varying quality or are the brainchildren of politically connected entrepreneurs.

The Commerce Ministry has recently floated the idea of private foreign investment in higher education. Indians account for among the largest groups of foreign students in the United States, and India increasingly sends students to other countries, like Australia and Canada.

Massachusetts' economic recovery has gathered momentum in recent months, and there's a good reason: The technology sector is back....

Employment in professional and business services, comprising a variety of tech firms, has grown a healthy 2 percent in the last year, twice the rate of overall employment growth in Massachusetts, according to the state Department of Workforce Development. Makers of technology products are bucking the trend of job losses in manufacturing and adding jobs -- more than 3,000 in the last year. Massachusetts tech exports are surging; foreign sales of semiconductor manufacturing and testing equipment nearly doubled in the past year.

Technology has long driven the state's economy. The two technology-dominated employment sectors, professional and business services and manufacturing, account for about one-fourth of state employment, but they capture only a small part of the industry's impact because it increasingly reaches into areas from pharmaceuticals to financial services. High-tech machinery, instruments, components, and similar products account for nearly 60 percent of the state's exports.

Demand for technology workers, meanwhile, is growing. The state's most recent survey of job vacancies, at the end of 2005, showed openings for information technology occupations jumping 13 percent from a year earlier. Monster Worldwide Inc. , which operates the job-matching web site Monster.com, reported last month that on line job postings for IT workers grew 10 percent in Greater Boston over the year.

The Federal Reserve found in a recent survey of businesses that the supply of technical workers in the Boston region is shrinking to the point of companies boosting wages as much as 15 percent.

"It's not 2000, but it's also not 2001," said Larissa Duzhansky, regional economist at Global Insight of Waltham, referring to the tech boom and bust years. ``The sector has grown at a healthy pace and it's continuing to recover well."

Certainly, the state's technology sector faces a long road to recovery. Professional and business services so far have regained only about half the nearly 70,000 jobs the sector lost in the last recession. Tech manufacturing, which also shed about 70,000 jobs, has recovered only about 5 percent.

But analysts and industry officials add that today's technology industry is different from that of the dot-com craze, when it seemed any company with an Internet domain could attract millions of dollars from investors, regardless of whether they had profits or even products. Today's sector is more diverse and better grounded financially, reaching across an array of markets and technologies....

Global demand for technology products, from cell phones to MP3 players, also is boosting Massachusetts tech firms, which make the equipment for manufacturing such products. Booming electronics companies in China, for example, need the advanced manufacturing and testing equipment designed and made in Massachusetts. Those equipment sales have helped make China the state's sixth largest foreign market, as well as one of its fastest growing.

Sales to China and other Asian nations account for at least 70 percent of sales for Axcelis Technologies Inc., of Beverly, a maker of semiconductor manufacturing equipment, according to Mark Namaroff, senior vice president of strategic marketing. The company, which employs about 1,000 in Massachusetts, has reported double-digit revenue growth this year, while adding about 50 manufacturing jobs.

"Asia, particularly China, is hot," said Namaroff. ``Their growth has meant opportunities for us."

The tech rebound also means more opportunities for tech workers....

Greg Netland, chief executive of Sapphire's parent, Vedior North America of Wakefield, expects the market for tech workers to only get tighter. "The war for talent is back," he said.

The Financial Times' Francesco Guerrera and Alan Beattie report on a new trend in offshoring:

Multinational companies are favouring Europe over Asia when expanding abroad – a sign that they want to be close to customers and suppliers rather than simply tap into cheap labour and plants, according to a new study of outward investment.

The surprising findings of the survey by IBM’s consulting arm, to be released on Monday, suggest that the recent boom in outsourcing of manufacturing and services to emerging markets such as China and India may be abating.

At the same time, western Europe, led by the UK and France, is regaining an edge in high-value areas such as research and development, putting pressure on developing economies to raise the skills and education levels of their workforce.

“The recent recovery in the global economy has made companies more interested in being close to their markets, suppliers and decision-makers rather than just looking for a low-cost base,” said Roel Spee, Europe’s leader for IBM’s global location unit.

The survey – the only study that looks at all announced foreign direct investment (FDI) by companies around the world – found that Europe attracted 39 per cent of all new plants and projects in 2005, with Asia-Pacific receiving 31 per cent and North America 18 per cent. In 2004, Europe and Asia were tied at 35 per cent each.

The results show that globalisation and the increase in capital and trade flows are enabling companies to exploit the competition between regions to reap the biggest rewards for their investments....

The UK was Europe’s biggest recipient of inward investment, especially in the research and development field, where it accounted for more than a quarter of all projects launched in the region last year, followed by France with 19 per cent.

I've debated a lot of people on the whole offshore outsourcing issue, and regardless of the position one takes, there has been unanimity on one subject: if the Labor Department provides Trade Adjustment Assistance to manufacturing workers displaced by trade, the program should be extended to include service-sector workers affected by offshore outsourcing.

According to this Paul McDougall story in Information Week, it appears that the Department of Labor has finally recognized this fact as well:

The federal government appears to have reversed a long standing policy that prevented thousands of "outsourced" computer programmers from collecting the same employment benefits routinely extended to factory workers who've seen their jobs disappear amid a flood of cheap, manufactured imports.

In a turnabout from earlier decisions, the Department of Labor—in a note published this month in the Federal Register—said that four employees of IT services vendor Computer Sciences Corp. that were laid off in 2003 from a facility in East Hartford, Conn., are eligible to apply for benefits under the Trade Adjustment Act. The act provides a number of relief measures for workers who've lost their jobs to cut-rate foreign competition, including extended unemployment payments, federally funded retraining, and relocation allowances.

The department has long held that programmers who've lost jobs to cheaper, foreign workers aren't eligible for the TAA program because their employers, or employer's customers, are not importing a physical good in the same way as, say, steel manufacturers. A number of federal and state lawmakers have introduced bills that would automatically grant eligibility under the act to IT workers and other white collar professionals, but none has become law.

The labor department initially said that although CSC moved production of its Vantage-One insurance software from East Hartford to CSC India, the software was not an imported "article" as defined by the act. In a lawsuit, the workers asked the U.S. Court of International Trade to overturn the department's ruling. In January, trade court judge Nicholas Tsoucalas ordered the department to revisit the case, noting that, "Labor's interpretation of the law, that software code must be embodied on a physical medium to be an article under the Trade Act, is arbitrary and capricious."

In a Federal Register note published April 11, the Labor Department conceded the point and ruled that the four CSC workers would be eligible to apply for TAA assistance. In ruling, the department said it would henceforth look upon software, whether shipped into the U.S. on a disc or transmitted into the country via telecommunications networks, as a physical product.

"Software and similar intangible goods that would have been considered articles for the purposes of the Trade Act if embodied in a physical medium will now be considered articles regardless of their method of transfer," the department wrote.

The Department stresses that it will continue to implement the
longstanding precedent that firms must produce an article to be certified under the Act. This determination is not altered by the fact the provision of a service may result in the incidental creation of an article. For example, accountants provide services for the purposes of the Act even though, in the course of providing those services, they may generate audit reports or similar financial documents that might be articles on the Harmonized Tariff Schedule of the United States. Because the new policy may have ramifications beyond this case of which the Department is not fully cognizant, the new policy will be further developed in rulemaking.

As part of its cover package on India, Newsweek's Keith Naughton writes about the interesting fact that offshore outsourcing to India is not the political hot potato it used to be:

Not long ago, what seemed most possible was that India would steal the jobs of American workers. But as George W. Bush visits there this week, he'll find a maturing economy that is no longer all about call centers and basic tech support. Now big American investment banks and drugmakers are joining tech firms on the passage to India. R&D centers are springing up so fast that there's now a shortage of Indian engineers. And the stigma of outsourcing jobs to India is disappearing. American companies once afraid to put their names on the doors of their Indian offices now issue press releases touting their latest investments there. "American firms have gotten over their anxiety about India," says financial-services consultant Harrell Smith of Celent Communications. "Now the new anxiety is if you're not in India."

What happened to the outsourcing backlash? It has been muted by the fact that India didn't suck Silicon Valley dry after all. Actually, U.S. tech employment is growing. There are 17 percent more tech workers in the United States today than back in the bubble days of 1999, says a new study by the Association for Computing Machinery. And the Bureau of Labor Statistics predicts that the U.S. economy will add 1 million tech jobs over the next decade, a 30 percent increase. "Everyone was worried about the offshoring bogeyman," says Moshe Vardi, an author of the ACM study. "But the big whoosh of jobs to India never happened.'' Indeed, that gush slowed to a steady stream once American companies realized it's tough to set up shop in a country with bad roads and a patchy power grid. Lately, American consulting firms that once predicted runaway growth in outsourcing to India have been slashing their estimates by half or more. Now American companies are hanging on to the high-skilled work that requires face-to-face interaction, while everything that can be done "over the wire" gets shipped offshore.

Last year there was a lot of hysteria among the business press over the fact that China and India were allegedly graduating hundreds of thousands of engineers a year, while the U.S. could only muster around 70,000 or so.

I blogged last October about how even outsourcing critics were skeptical of these numbers. Now, courtesy of Duke University's Engineering Management Program, there are some harder numbers on this subject -- and it turns out there's not much reason to panic (link via the Wall Street Journal's Carl Bialik). Here's the report abstract:

The effect of the dynamics of engineering outsourcing on the global economy is a discussion of keen interest in both business and public circles. Varying, inconsistent reporting of problematic engineering graduation data has been used to fuel fears that America is losing its technological edge. Typical articles have stated that in 2004 the United States graduated roughly 70,000 undergraduate engineers, while China graduated 600,000 and India 350,000. Our study has determined that these are inappropriate comparisons. These massive numbers of Indian and Chinese engineering graduates include not only four-year degrees, but also three-year training programs and diploma holders. These numbers have been compared against the annual production of accredited four-year engineering degrees in the United States. In addition to the lack of nuanced analysis around the type of graduates (transactional or dynamic) and quality of degrees being awarded, these articles also tend not to ground the numbers in the larger demographics of each country. A comparison of like-to-like data suggests that the U.S. produces a highly significant number of engineers, computer scientists and information technology specialists, and remains competitive in global markets.

The outsourcing debate has been complicated due to conflicting definitions of the engineering profession....

Through our research, we have identified two main groups of engineering graduates: dynamic engineers and transactional engineers. Dynamic engineers are individuals capable of abstract thinking and high-level problem solving using scientific knowledge. These engineers thrive in teams, work well across international borders, have strong interpersonal skills, and are capable of translating technical engineering jargon into common diction. Dynamic engineers lead innovation. The majority of dynamic engineers have a minimum of a four year engineering degree from nationally accredited or highly regarded institutions.

Transactional engineers may possess engineering fundamentals, but not the experience or expertise to apply this knowledge to larger problems. These individuals are typically responsible for rote and repetitive tasks in the workforce. Transactional engineers often receive associate, technician or diploma awards rather than a bachelor’s degree....

Graph 2 depicts the annual production of bachelor’s and subbaccalaureate degrees in Engineering, CS and IT awarded per million citizens. These data imply that per every one million citizens, the United States is producing roughly 750 technology specialists, compared with 500 in China and 200 in India....

Outsourcing creates a clear threat to certain professions and it is likely that this trend will continue. It seems that the jobs of transactional engineers are easily outsourced and are routinely being taken by relatively low paid engineers in countries like India and China. However, the outsourcing of high-level engineering and IT professions is another story. These jobs often require specialized dynamic engineers: individuals with strong interpersonal skills, technical knowledge and the ability to communicate across borders....

The great majority of engineers involved in outsourced professions hold a minimum of a four-year degree. As a result, one could argue that approximately half of China’s and India’s annual engineering and IT graduates are capable of competing in the global outsourcing environment. However, a recent McKinsey global labor market study
argues that this estimate is far too generous. McKinsey concluded that only 10% of Chinese engineers and 25% of Indian engineers can compete in the global outsourcing arena.

Damn, that sounds familiar.

David Barboza of the New York Times wins my Outsourcing Outrage of the Year award with, "Ogre to Slay? Outsource It to Chinese" :

One of China's newest factories operates here in the basement of an old warehouse. Posters of World of Warcraft and Magic Land hang above a corps of young people glued to their computer screens, pounding away at their keyboards in the latest hustle for money.

The people working at this clandestine locale are "gold farmers." Every day, in 12-hour shifts, they "play" computer games by killing onscreen monsters and winning battles, harvesting artificial gold coins and other virtual goods as rewards that, as it turns out, can be transformed into real cash.

That is because, from Seoul to San Francisco, affluent online gamers who lack the time and patience to work their way up to the higher levels of gamedom are willing to pay the young Chinese here to play the early rounds for them.

1) The story highlights the apparent sloth and excessive affluence of Americans that inflames the passiuons of the puritanical left and right;

2) The transaction -- Chinese gamers taking care of drudge levels of computer games -- has that whiff of cheating that will spark the ire of social conservatives (not to mention hard-core gamers);

3) The idea that sums of money are being paid for what appears to be an unproductive economic activity will cheese off traditionalists who believe that unless a job is located in an industrial factory, it serves no good purpose;

4) The Chinese benefit, which will annoy the realists;

5) In the process of the transaction, the U.S. is outsourcing its decadent Western culture to the Orient, which will annoy those uncomfortable with American power.

Writing about offshore outsourcing for a public audience carries many, many perks. One of them is getting e-mails like this one:

Since you seem to be a proponent of outsourcing, perhaps you would care to explain the national deficit and the fact that the United States in now the single biggest debtor nation in history. Your facts or lack of same simply do not wash.

OK, I'm confused -- are my facts wrong, or is it that I don't have any of them? Really, it's very hard to keep track.

Seriously, I also get more interesting anecdotes about those who experience outsourcing first hand. Consider this e-mail from a colleage who is in the middle of getting a book published:

I'm doing a book with Palgrave, and it turns out they've moved their entire production back-office operation to India. What I found interesting about this is that we generally think of the U.S. as high-tech and professional, and poor developing countries as more cottage-industry-ish. The opposite is true in this case. Copyediting here tends (in my experience) to be done in cottage-industry fashion, with the manuscript sent out to an individual who works for the publisher on a piecework basis. The Indian copyediting operation is high-tech (our interaction involves no paper, and they've taught me about all sorts of things that I had no idea one could do with Microsoft Word), corporate (there were no fewer that six people working on my manuscript, with a clear division of labour - an endnote person, a bibliography person, a grammar person, a 'sense and meaning' person, and one person whose sole job seemed to be to take out extra spaces after periods [I have a habit of double-spacing after periods]), and highly professional (they're really a pleasure to work with). Also, their English appears to be better than that of the average American copyeditor. So, in this case, not only has offshoring resulted (presumably) in lower costs for Palgrave, it's also likely to result (and I'm typing this with crossed fingers, because the process isn't finished yet) in a better book.

This is pretty interesting, in that the process that's described is not only about offshore outsourcing -- it's also about the fact that what used to be considered a complex task (the cottage industry of copyediting) has been segmented into a lot of very simple tasks (the person whose sole job it is to shorten the spaces after a sentence, for example). It's both high-tech AND low-tech.

This reminds me of something.... oh, yes, Karl Marx's Wage Labour and Capital (1849):

The greater division of labor enables one laborer to accomplish the work of five, 10, or 20 laborers; it therefore increases competition among the laborers fivefold, tenfold, or twentyfold. The laborers compete not only by selling themselves one cheaper than the other, but also by one doing the work of five, 10, or 20; and they are forced to compete in this manner by the division of labor, which is introduced and steadily improved by capital.

Furthermore, to the same degree in which the division of labor increases, is the labor simplified. The special skill of the laborer becomes worthless. He becomes transformed into a simple monotonous force of production, with neither physical nor mental elasticity. His work becomes accessible to all; therefore competitors press upon him from all sides. Moreover, it must be remembered that the more simple, the more easily learned the work is, so much the less is its cost to production, the expense of its acquisition, and so much the lower must the wages sink — for, like the price of any other commodity, they are determined by the cost of production. Therefore, in the same manner in which labor becomes more unsatisfactory, more repulsive, do competition increase and wages decrease....

The economists tell us, to be sure, that those laborers who have been rendered superfluous by machinery find new venues of employment. They dare not assert directly that the same laborers that have been discharged find situations in new branches of labor. Facts cry out too loudly against this lie. Strictly speaking, they only maintain that new means of employment will be found for other sections of the working class; for example, for that portion of the young generation of laborers who were about to enter upon that branch of industry which had just been abolished. Of course, this is a great satisfaction to the disabled laborers. There will be no lack of fresh exploitable blood and muscle for the Messrs. Capitalists — the dead may bury their dead. This consolation seems to be intended more for the comfort of the capitalists themselves than their laborers. If the whole class of the wage-laborer were to be annihilated by machinery, how terrible that would be for capital, which, without wage-labor, ceases to be capital!

But even if we assume that all who are directly forced out of employment by machinery, as well as all of the rising generation who were waiting for a chance of employment in the same branch of industry, do actually find some new employment — are we to believe that this new employment will pay as high wages as did the one they have lost? If it did, it would be in contradiction to the laws of political economy. We have seen how modern industry always tends to the substitution of the simpler and more subordinate employments for the higher and more complex ones. How, then, could a mass of workers thrown out of one branch of industry by machinery find refuge in another branch, unless they were to be paid more poorly?

Sounds very dire.... except that Marx, for all of his understanding of the forces behind technological innovation, never really got the idea that such innovation also creates entirely new categories of complex, high-skill jobs. It took Schumpeter to figure that one out.

[Er.... what about the demise of copyediting jobs? Doesn't that mean that offshoring leads to a net loss of employment?--ed.] Not according to AFP:

The outsourcing of technology jobs to low-wage countries will provide a $68.7-billion (U.S.) benefit to the U.S. economy in 2005, said a study released yesterday, challenging key assumptions about shifting work offshore.

The study, updating a report released in 2004 drawing the same conclusion, was commissioned by the Information Technology Association of America, a high-tech industry group, and conducted by research firm Global Insight.

The report concluded that despite the loss of some jobs to low-wage countries such as India, that worldwide sourcing of IT services and software generated 257,042 new U.S. jobs in 2005.

"No one is denying that there are job losses, but the net effect is that you create more jobs than you lose" in the overall economy, said Nariman Behravesh, chief economist at Global Insight and lead author of the report.

The benefits come from lower inflation, higher productivity and lower interest rates that boost economic activity, the report concludes.

The researchers calculated this provided a net benefit to real U.S. gross domestic product of $68.7-billion in 2005, and that this would rise by 2010 to $147.4-billion compared with a situation without any offshore outsourcing.

"The main thing is cost savings which radiate out in the form of lower prices for high-tech goods, and higher profit margins for the companies," Mr. Behravesh said.

"So you have lower inflation, which means higher real income; you have higher profits. Companies use higher profits to invest more; consumers use higher incomes to purchase more . . . all these produce a much stronger economy and produce more jobs than the offshoring destroys."

In terms of jobs, the report concluded that offshore outsourcing led to the creation of more than 419,000 jobs, more than offsetting the 162,000 technology jobs displaced by the shift.

[That's the number of jobs; what about wages?--ed.] The Global Insight page offers this tidbit on wages:

Workers enjoy higher real wages. Global sourcing adds to the take-home pay of the average U.S. worker. With inflation kept low and productivity high, worldwide sourcing will increase real hourly wages in the U.S. by $0.06 in 2005, climbing to $0.12 in 2010.

Click here to read the executive summary of the Global Insight report -- and click here to read my take on the 2004 version of the report.

A common lament among those who like to prognosticate about America's future is that China and India are churning out more and better engineering students than the U.S., which presages their rise to superpowerdom.

For example, Geoffrey Colvin wrote the following in Fortune earlier this year:

China will produce about 3.3 million college graduates this year, India 3.1 million (all of them English-speaking), the U.S. just 1.3 million. In engineering, China’s graduates will number over 600,000, India’s 350,000, America’s only about 70,000.

Sounds ominous -- those figures were cited in a National Academy of Sciences study warning that, "In a world where advanced knowledge is widespread and low-cost labor is readily available, U.S. advantages in the marketplace and in science and technology have begun to erode." (link via Glenn Reynolds)

The thing is, those numbers don't hold up. Back in August, Carl Bialik of the Wall Street Journal's "Numbers Guy" column deconstructed Colvin's claim in Fortune and found some problems:

[T]his is one of those cases where big numbers take on a life of their own through repetition. The lofty estimates have been repeated for years, often without evidence to back them up, and it turns out they vary considerably from figures reported by official sources.

Bialik follows up in a WSJ column today (link again via Glenn Reynolds):

Ron Hira, professor of public policy at the Rochester Institute of Technology and a reviewer of a draft version of the report that didn't contain the figures, brought them to my attention when he spotted them in the press release. "The fact that the Academies has perpetuated the stats is very significant because [they are] viewed as a purveyor of truth," Dr. Hira wrote me in an email. He added, "[The stats] will be perpetuated by every science and technology lobbyist in D.C. from now until who knows when."

The statistics' repetition prompted me to dig deeper into the original source of Fortune's numbers. For my initial column, the author of the Fortune piece, Geoff Colvin, told me he was traveling and couldn't review his notes to find his sources in time for my deadline. Last week, he told me the numbers came from the Chinese government's China Statistical Yearbook 2004, which reported more than 644,000 graduates in engineering from the country's institutions of higher education in 2003.

"This includes graduates of the regular college program as well as graduates of a three-year program focused on engineering, which would appear to be somewhat more advanced than a U.S. engineering technician program while not quite the full bachelor's degree," Mr. Colvin wrote in an email. "Comparability is of course a large issue not just here but in general when comparing degrees across countries." (The India numbers, as I wrote earlier, are also questionable; Mr. Colvin said Monday that he is still looking for his source for those figures and will get back to me.)

But others told me that the 600,000 figure for China in 2003 included engineering graduates who had received less training than their U.S. counterparts. Richard Freeman, a professor of economics at Harvard University who has studied the issue, told me in an email that the Chinese numbers include graduates of two-to-three-year programs who would be comparable to engineering technicians in the U.S. (recipients of an associate's degree). "The number getting full course degrees is around 350,000, which is what we would compare to U.S. graduates in a year," Dr. Freeman said.

Kudos to Hira and Freeman for their intellectual honesty -- both of them are generally concerned about the effects in the U.S. of widening the global supply of educated labor.

[OK, so the number isn't as big as previously thought. It's still pretty big, right?--ed. This gets to the question of quality. Diana Farrell and Andrew J. Grant write in the latest McKinsey Quarterly that the quality problem could lead to a talent shortage in China:

[F]ew of China's vast number of university graduates are capable of working successfully in the services export sector, and the fast-growing domestic economy absorbs most of those who could. Indeed, far from presaging a thriving offshore services sector, our research points to a looming shortage of homegrown talent, with serious implications for the multinationals now in China and for the growing number of Chinese companies with global ambitions....

China's pool of potential talent is enormous. In 2003 China had roughly 8.5 million young professional graduates with up to seven years' work experience and an additional 97 million people that would qualify for support-staff positions.

Despite this apparently vast supply, multinational companies are finding that few graduates have the necessary skills for service occupations. According to interviews with 83 human-resources professionals involved with hiring local graduates in low-wage countries, fewer than 10 percent of Chinese job candidates, on average, would be suitable for work in a foreign company in the nine occupations we studied: engineers, finance workers, accountants, quantitative analysts, generalists, life science researchers, doctors, nurses, and support staff.

Consider engineers. China has 1.6 million young ones, more than any other country we examined. Indeed, 33 percent of the university students in China study engineering, compared with 20 percent in Germany and just 4 percent in India. But the main drawback of Chinese applicants for engineering jobs, our interviewees said, is the educational system's bias toward theory. Compared with engineering graduates in Europe and North America, who work in teams to achieve practical solutions, Chinese students get little practical experience in projects or teamwork. The result of these differences is that China's pool of young engineers considered suitable for work in multinationals is just 160,000—no larger than the United Kingdom's. Hence the paradox of shortages amid plenty.]

UPDATE: Howard French has a nicely balanced account in the New York Times of China's effort to upgrade its top universities in order to attract top-drawer talent. The highlights:

China is focusing on science and technology, areas that reflect the country's development needs but also reflect the preferences of an authoritarian system that restricts speech. The liberal arts often involve critical thinking about politics, economics and history, and China's government, which strictly limits public debate, has placed relatively little emphasis on achieving international status in those subjects.

In fact, Chinese say - most often euphemistically and indirectly - that those very restrictions on academic debate could hamper efforts to create world-class universities.

"Right now, I don't think any university in China has an atmosphere comparable to the older Western universities - Harvard or Oxford - in terms of freedom of expression," said Lin Jianhua, Beijing University's executive vice president. "We are trying to give the students a better environment, but in order to do these things we need time. Not 10 years, but maybe one or two generations."

French also provides his own engineering numbers: "In engineering alone, China is producing 442,000 new undergraduates a year, along with 48,000 graduates with masters' degrees and 8,000 Ph.D's."

LAST UPDATE: More on the overhyping of India and China from Pranab Bardhan and Brad DeLong.

The following is excerpted from Erica L. Groshen, Bart Hobijn, and Margaret M. McConnell, "U.S. Jobs Gained and Lost through Trade: A Net Measure" in the August 2005 edition of the Federal Reserve Bank of New York’s Current Issues in Economics and Finance:

In the aftermath of the 2001 recession, the perception has grown that vast numbers of U.S. services jobs are being relocated to India, China, and other developing countries. Anecdotes abound of companies using overseas call centers, computer programmers, help desk workers, and accountants while closing down whole departments here. The alleged surge in relocations after 2001 coincided for some years with a sluggish job recovery, prompting many to conclude that the “offshoring” of jobs accounted for much of the persistent weakness in the U.S. labor market. While concerns about job relocations were fueled by the slow job growth during the recovery, the belief that U.S. workers are losing jobs to foreign competition has a much longer history: Indeed, the current concerns echo those voiced in many earlier periods about the impact of international trade on domestic workers.

In this edition of Current Issues, we explore the relationship between trade and job creation in the United States....

[W]e find no evidence to support the claims that a surge in offshoring played a large role in the jobless recovery. Jobs embodied in net imports did not grow at an accelerated pace after the 2001 recession. In fact, the increase in U.S. jobs sent abroad has averaged about 30,000 per month since 2001—a deceleration from the monthly average increase of 45,000 jobs during the period from 1997 to 2001.

More broadly, our results show no clear or necessary relationship between a pickup in jobs lost to trade and weakness in the U.S. labor market. A case in point is the 1997-2001 acceleration in offshoring, which occurred when U.S. payrolls were expanding steadily.

This is the part I found of particular interest:

[One common] assumption is that sectors that are heavily or increasingly exposed to trade suffered disproportionate job losses during the recession and recovery. To test this assumption, we examine job growth rates in this period relative to growth rates during the 1990s expansion for both trade-sensitive and trade-insensitive industries. Starting with goods-producing industries, we find that manufacturing—one of the sectors most exposed to trade—did indeed lose a disproportionate share of jobs during the downturn and subsequent recovery. However, mining and natural resources, another heavily traded industry, performed better in this period than in the preceding expansion, while the nontraded construction industry experienced disproportionate job losses.

Turning to services, we find that the results are even more mixed. Business services—an industry in which outsourcing is believed to have taken a large toll on domestic jobs—saw above-average job losses during the recession and recovery. However, finance, insurance, wholesale trade, and management and engineering jobs did relatively well, despite often-voiced concerns about outsourcing. Moreover, a number of services industries that are not exposed to trade incurred above-average employment losses; the leisure and hospitality trades, for example, do not transfer jobs to overseas workers but still experienced heavy payroll shortfalls relative to the preceding period.

The absence of any consistent pattern in the fortunes of individual industries suggests that while trade-related competition may have driven job losses in some sectors, layoffs in many other sectors occurred for reasons unrelated to trade. Indeed, in a number of industries, forces such as technological change, investment overhangs, and changing consumption behavior are much more likely to have caused job losses.

On of the common laments about offshore outsourcing is that it is causing a decline of interest in computer science and related engineering tasks.

Via Slashdot, I see that Steve Lohr had an interesting piece in the New York Times earlier this week that provides some support for this lament -- but the market is doing interesting things to the study of computers:

Jamika Burge is heading back to Virginia Tech this fall to pursue a Ph.D. in computer science, but her research is spiced with anthropology, sociology, psychology, psycholinguistics - as well as observing cranky couples trade barbs in computer instant messages.

"It's so not programming," Ms. Burge said. "If I had to sit down and code all day, I never would have continued. This is not traditional computer science."

For students like Ms. Burge, expanding their expertise beyond computer programming is crucial to future job security as advances in the Internet and low-cost computers make it easier to shift some technology jobs to nations with well-educated engineers and lower wages, like India and China.

"If you have only technical knowledge, you are vulnerable," said Thomas W. Malone, a professor at the Sloan School of Management at Massachusetts Institute of Technology and the author of "The Future of Work" (Harvard Business School Press, 2004). "But if you can combine business or scientific knowledge with technical savvy, there are a lot of opportunities. And it's a lot harder to move that kind of work offshore."

Read the whole thing.

Meanwhile, in India, the returns to offshoring are declining because of rising wages, according to CNN's Parija Bhatnagar:

A new report from market research firm Gartner, Inc. warns that a labor crunch and rising wages could erode as much as 45 percent of India's market share by 2007.

Indian industry watchers acknowledge that the country's outsourcing industry -- its golden goose of the moment -- is indeed facing a "serious" problem.

In an interview with CNN/Money from New Delhi, Kiran Karnick, president of the National Association of Software and Service companies (NASSCOM), said he's concerned that these challenges could stymie India's strong double-digit growth in outsourcing services....

India can't afford to rest on its laurels, said Sujay Chohan, one of the authors of the Gartner report and vice president and research director of offshore business process outsourcing with Gartner in New Delhi.

Unless India devises a long-term roadmap to improve infrastructure and consistently grow its skilled labor force, he said India will see some of its offshore BPO clients shift business elsewhere.

"Although India's infrastructure is improving, it is not keeping pace with the rapid growth of the industry," the report said.

See Ed Frauenheim's reaction on CNET's Workplace Blog

Six months ago I posted on how the IT sector seemed to be thriving as of late despite the rise of offshore outsourcing.

Here's some more evidence from Thomas Hoffman at ComputerWorld:

A strengthening U.S. economy that's fueling increased IT spending and creating a tighter labor market has led to moderate pay gains for technical workers such as application developers and database administrators, according to new research and interviews with IT executives last week.

"There is a noticeable wage increase" for technical skills, said David Myers, director of project management at Solo Cup Co. in Highland Park, Ill.

Myers said he believes that the pay gains are the result of a general rise in IT capital spending, which has resulted in more projects being launched and a decreasing supply of available domestic IT labor....

A report released last week by Foote Partners LLC, a New Canaan, Conn.-based market research firm, found that pay for noncertified and certified technical skills has risen 3.8% and 1.3%, respectively, through the first six months of this year.

Pay raises this year have been particularly strong for people with skills in operating systems (up 8.2%), networking and internetworking (up 5.1%), and databases (up 4.3%), the report said.

The results, which are based on a survey of 1,800 North American and European organizations from April to July 1, suggest that the notion that lower-cost offshore outsourcing led to wage deflation for IT workers may have been overblown, said David Foote, president of Foote Partners.

Here's a link to the Foote Partners press release that's discussed above.

It's also worth noting that beyond offshore outsourcing, there was an excellent reason for the drop in wages that did take place among IT services between 2000-2003: reduced demand. According to the WTO's report on offshore outsourcing, the annual percentage change in the U.S. IT market in the early part of this decade was as follows:

2001: -4.5%
2002: -6.3%
2003: 0.4%

So it's a funny thing -- as demand has picked up in the US, the number of IT jobs and the level of IT wages has increased.

Oh, and for those IT readers of danieldrezner.com who complain about no jobs, I'll close with some anecdotal want-ads from the ComputerWorld story:

A tighter job market is making it particularly tough for Harrah's Entertainment Inc. to find experienced IT project managers, business systems analysts, data warehousing managers and other specialists, said Tim Stanley, senior vice president and CIO at the Las Vegas-based gaming and hospitality company. Harrah's is looking to fill 25 to 35 IT positions, he said.

Allan McLaughlin, senior vice president and chief technology officer at LexisNexis Group, a research provider in Dayton, Ohio, said hiring requests for IT workers are getting more specific -- another factor contributing to competition for technical skills.

LexisNexis has an increased need for networking specialists and plans to expand its five-person IT security team to nine or 10 people over the next six months, said McLaughlin.

Bo Cowgill was kind enough to e-mail me a link to this Computerworld story by Patrick Thibodeau about an entirely novel outsourcing venture:

What San Diego-based start-up SeaCode Inc. plans to do is nothing if not novel: anchor a cruise ship three miles off the coast of Los Angeles, fill it with up to 600 programmers from around the world, eliminate visa restrictions and make it easy for customers to visit the site via water taxi. The two men behind the venture -- Roger Green, who describes himself as an IT and outsourcing veteran, and IT consultant David Cook, whose job history includes a stint as a ship captain -- recently discussed their plan in an interview with Computerworld.

What is the business model? Green: The promise of the benefits of outsourcing in distant lands doesn't come free. Most of the gotchas are related to the geography and to the cultural difference....

Green: The model is based on making a platform, if you will, to house these engineers, this workforce, which is very close to the U.S. but which is in fact not in the U.S. We can pull programmers and engineers from anywhere in the world. A fact of life is there are different skills that are stronger in one country versus another....

Does U.S. labor law apply? Cook: U.S. labor law does not apply except on a U.S. flagship. The flag of the ship will provide the labor law -- more than likely [the ship will be registered in] Vanuatu, the Bahamas or Marshall Islands. Their intellectual property laws, as well as the laws governing seamen, are very similar to the United States'.

What will life be like for your employees? Cook: The pay is about three times what they earn in India today....

What is the salary? Cook: Approximately $1,800 a month.

What is your pricing going to be relative to India? Green: We will be approximately the same price as the distant-shore companies. We will take a little less margin than they do.

Do you expect U.S. residents to apply? Cook: Absolutely. Approximately 50% of the resumes that we've received are from U.S. residents.

There are a lot of things that don't make sense to me about this business model:

1) How can they pay three times the Indian wage but maintain similar pricing levels?

2) How are cultural differences eliminated by moving developing country programmers from their country of origin to a ship three miles off the U.S.?

3) Is evading U.S. regulatory strictures (payroll taxes, health insurance, labor standards) the only thing that makes this venture even close to profitable? If so, what does that say about U.S. regulations?

Suketu Mehta has an op-ed in the New York Times on the rise of offshoring to India. Mehtu comes at this from an interesting angle, as he and his family "came to America in 1977 not for its political freedoms or its way of life, but for the hope of a better economic future." While acknowledging the anxiety caused in the tech sector by offshoring, Mehta's conclusions are straightforward:

The rich countries can't have it both ways. They can't provide huge subsidies for their agricultural conglomerates and complain when Indians who can't make a living on their farms then go to the cities and study computers and take away their jobs. Why are Indians willing to write code for a tenth of what Americans make for the same work? It's not by choice; it's because they're still struggling to stand on their feet after 200 years of colonial rule. The day will soon come when Indian companies will find that it's cheaper to hire computer programmers in Sri Lanka, and then it's there that the Indian jobs will go.

Of course, it's heart-wrenching to see American programmers - many of whom are of Indian origin - lose their jobs and have to worry about how they'll pay the mortgage. But they are ill served by politicians who promise to bring their jobs back by the facile tactic of banning them from leaving. This strategy will ensure only that our schools stay terrible; it'll be an entire country run like the dairy industry, feasible only because of price controls and subsidies.

Indeed.

Peter Marsh writes in the Financial Times about what the global market for service jobs will look like with the rise in offshore outsourcing:

Growth in outsourcing of service jobs from rich countries is likely to be constrained because only one in seven workers in low-wage nations has the skills needed to work for multinationals, according to a McKinsey study published on Thursday.

“Offshore employment [in services] will grow gradually, making no sudden impact on labour markets overall in developed countries,” says the report by the McKinsey Global Institute, a research arm of the strategy consultancy.

It says the trend will have “little effect” on wages in rich countries, scotching the idea that offshoring could help hold down inflation in those nations....

One reason for [the slow pace of offshoring] is multinationals' attitudes to recruitment, McKinsey says. The consultancy conducted 83 interviews with human resources managers working for multinationals and found that, presented with workers from emerging economies with appropriate academic qualifications, they were likely to reject 87 per cent on other grounds.

The main reasons for the low likely take-up were poor language skills, “the low quality of significant portions of the educational system [in developing nations]” and cultural differences. Diana Farrell, director of the institute, said multinationals often failed to take up offshoring because of initial costs and other hurdles.

Marsh has another story about the MGI report here. One interesting bit:

Even though the supply of young people in low-wage economies with good educational qualifications is likely to increase substantially in the next decade, demand for employing them in their own nations in jobs transferred from rich countries is likely to be muted, the report says.

On top of this, many young professionals in the 28 low-wage countries studied by the institute even though they may have university degrees lack the work-related experience and aptitude that foreign companies are looking for.

“A lot of developing countries are churning out new graduates but not giving enough thought to the practical skills they will need if they are to work for multinational companies,” says Diana Farrell, director of the institute.

The report indicates that even though many manufacturing jobs have migrated from rich countries to emerging economies over the past 10 years, due to cost-cutting pressure, the service sector is unlikely to see the same trend.

This last point is stressed in the executive summary of the McKinsey report:

At a country level, our observation is that labor markets in developed economies are experiencing and will continue to experience the trend toward offshoring as a slow, evolutionary change. It will have less impact on patterns of employment than the decline in manufacturing employment developed economies have experienced recently. In the United States, for example, the share of manufacturing jobs in overall employment fell by 11 percentage points to 21 percent in the 30 years to 2002. By contrast, the total number of service jobs in the United States that could in theory be filled remotely represents 9 percent of total current employment.

The moderate impact and generally slow pace of offshoring will not soften the blow for those individuals in developed countries who do lose their jobs as a result. However, most are college graduates, and therefore likely to be more amenable to retraining than manufacturing workers. And in the United States, growth rates in both wages and jobs in the computer and data processing services sector, where offshoring is prevalent, are higher than in the economy as a whole.

This jibes with data and analysis of the U.S. economy in recent years. In terms of employment, a glance at Bureau of Labor Statistics data shows that manufacturing has suffered far more than services (though in both cases the extent to which offshore outsourcing has been blamed has been much greater than its actual causal effect). Similarly, the figures for which service sector jobs are theoretically likely to be outsourced match up with Ashok Bardham and Cynthia Kroll's study from 2003.

Click here to access McKinsery's three-part series of reports on the issue.

Thanks to George Adair for the link.

Ted Balaker and Adrian Moore have written a lengthy report for the Reason Foundation entitled "Offshoring and Public Fear: Assessing the Real Threat to Jobs." Click here or a more concise summary of the report. Nut sentence: "Outsourcing is not a newly created threat to jobs. It is merely a version of trade, and like previous versions of trade it brings some pain—but it brings even more promise."

One anecdote that's given as an example of how offshoring saves and even creates jobs:

Offshore outsouring also helped Donaldson Co. Inc., a Minnestota-based technology components company. Facing competition from overseas manufacturers with much lower prices, Donaldson shifted production to China. The design work stayed with its American team of engineers, chemists, and designers. Offshoring production helped increase Donaldson’s U.S.-based employment by 400 employees since 1990. What if the company had refused to go offshore? “We’d be out of business,” says an executive.

[Sure, but what about the jobs that will be destroyed in, say, the financial sector?--ed. Hmmm.... let's check out this Silicon.com report by Andy McCue:

Two-thirds of financial services firms still have no plans to outsource any operations to low-cost overseas countries such as India, according to a new report.

But the worldwide study of 400 IT directors by analyst Datamonitor found those banking firms which have already used offshore outsourcing are planning to increase the scope of it and extend it to more complex and core financial services processes.

Anders Maehre, financial services technology analyst at Datamonitor and author of the study, told silicon.com there is an increasing polarisation in the banking industry between firms which choose to offshore and those that don't.

"The vast majority of companies will not consider offshore for anything. But two-thirds to three-quarters of those who already do offshore plan to increase it, so the logical conclusion is that some of the fears these firms have don't materialise and they do experience benefits," he said.

Only about a fifth of financial services firms are currently using offshore outsourcing and another 15 per cent said they are likely to go down that route in the near future, while the rest said they are "completely unlikely" to use overseas resources, according to Datamonitor's figures.

But the figures can be slightly misleading if not put into context: most of the big global financial institutions make up that small number of firms which are offshoring.

So there's a complex trend going on -- some big firms are increasing activity, but almost all small firms are not. My hunch is that the overall effect on employment is a wash.]

Meanwhile, a new book coming out suggests that estimates of jobs lost from offshoring are both exaggerated and reversible:

Douglas Brown and Scott Wilson, authors of "The Black Book of Outsourcing," say many executives they've interviewed are reconsidering offshoring because of the high price of fuel and airfare, management challenges, customer complaints and the increasing cost of labor in foreign technology hubs such as Bangalore, India, and a simultaneous lowering of some white-collar salaries in the United States.

By 2015, Brown and Wilson say, the United States will likely rank as the No. 3 destination for outsourced work, behind only China and India.

"Offshoring undoubtedly offers significant financial benefits for companies across a wide range of fields and sizes," Wilson said. "Undertaking such a venture, however, requires a cost-benefit analysis that includes downsides such as political instability, language and cultural barriers and time-zone differences."

Instead of farming out work to countries a dozen time zones away, Wilson said, many U.S. companies are looking for relatively low-cost destinations closer to home, including Canada, Mexico and South America. He terms it "nearshoring."

Click on this paper by Scott Noble to see some reasons why offshoring fails.

I'll be at Boston University today as part of "The Great Debate" series at Boston University's College of Communications:

The Great Debate: Does Overseas Outsourcing Hurt the U.S. Economy? 6:30 p.m. Tsai Performance Center Paneilsts include Thea Lee, Chief International Economist, Public Policy Department, AFL-CIO; Jerry Jasinowski, President, Manufacturing Institute, National Associational of Manufacturers; Lori Wallach, Director, Public Citizen's Global Trade Watch; and Daniel Drezner, University of Chicago. Students panelists are Nick Barber, COM Broadcast Journalism, COM'06; and Ida Ziniti, COM Journalism, COM'06. Admission: free. Open to the public. Info: 617-353-5015.

They'll also be webcasting the event -- click here to see.

One of my favorite economics articles of all time is by Nathan Rosenberg, "Economic Experiments." Industrial and Corporate Change , volume 1 (1992). In that essay, Rosenberg pointed out that any dynamic economy had to let firms engage in experimentation to find out new ways to innovate and generate profits. Many of these experiments would fail, of course, but the successes would lead to massive economic gains. It was crucial that these experiments be permitted to fail, otherwise no useful information could be gleaned.

I bring this up because looking at economic enterprises as a rolling series of experiments is a great analytical lens to think about offshore outsourcing. Specifically, a lot of firms outsourced offshore as an experiment to boost profits. And, not surprisingly, a lot of experiments fail: Gartner recently predicted that 80% of customer service outsourcing projects aimed to cut costs will fail. That cannot and should not stop other firms from trying -- like MacDonald's outsourcing its drive-thru windows to remote call centers (if you click on the story, note that they're thinking of outsourcing to Norh Dakota and not Bangalore).

The great thing about experimentation is that the people conducting the experiments learn more from failure as success. As firms gain more experience from offshoring, they are starting to recalibrate what is outsourced and what is kept in-house. Kelly Shermach makes this point in CRM Buyer:

By farming out only bits of business, U.S. organizations can more easily grasp the risks they take as well as the efficiencies they gain. "It's easier to see you're getting a better price, easier to get a benchmark when you're selective for better process manageability," said Robert McNeill of Forrester Research.

Even when companies outsource some functions, they often keep control over far more than their core competencies. Unless outsourcing will deliver a cost savings with equal or better service quality, they keep it in-house....

And by farming out only bits of business , U.S. organizations can more easily grasp the risks they take as well as the efficiencies they gain. "It's easier to see you're getting a better price, easier to get a benchmark when you're selective for better process manageability," McNeill said.

U.S. firms are also starting shifting the location of offshoring activities. Some firms are relocating their offshoring activities to the Philippines because of increasing costs of Indian offshoring. Cultural familiarity is also causing firms to switch some of their activities to nearshoring -- i.e., farming out operations to Canada (or, for western European firms, to eastern Europe).

These trends worry some Indian analysts. Sonia Chopra frets in India Daily:

In recent days the escalating cost of employment in India, lack of qualified work force and deflation service prices have made outsourcing a tough business. The Western companies in India are running around to save even one cent. The escalating cost of living and shortage of qualified workforce is putting a solid pressure on wage increase. On top of that the companies have to keep 20% excess work force to accommodate turn over and other issues. The clients in the West are always threatening to stop business, not pay etc. based on quality and delivery of services on schedule. All these have made outsourcing a painful business. On top of those countries like Poland, Philippines, South Africa and so on are competing heavily lowering the prices and providing additional incentive to the clients....

Some Indian companies have tried to branch out into premium pricing environments – the vertical markets in IT. That is where India is failing. It was a easy honey moon for Indian companies to offer cheap services with less than par alary in the country and Indian rupees trading at a lower value than then the fair market values. But when these factors are taken out, Indian companies find they are nowhere.

It's with this kind of experimetation in mind that one should read Pete Engardio and Bruce Einhorn's excellent article in Business Week about the offshore outsourcing of R&D activities. The outsourcing of R&D is often considered the "line of death" for economic analysts. If that happens, the thinking goes, so does American technological leadership. Parts of the article sound ominous:

When Western corporations began selling their factories and farming out manufacturing in the '80s and '90s to boost efficiency and focus their energies, most insisted all the important research and development would remain in-house.

But that pledge is now passé. Today, the likes of Dell, Motorola, and Philips are buying complete designs of some digital devices from Asian developers, tweaking them to their own specifications, and slapping on their own brand names. It's not just cell phones. Asian contract manufacturers and independent design houses have become forces in nearly every tech device, from laptops and high-definition TVs to MP3 music players and digital cameras. "Customers used to participate in design two or three years back," says Jack Hsieh, vice-president for finance at Taiwan's Premier Imaging Technology Corp., a major supplier of digital cameras to leading U.S. and Japanese brands. "But starting last year, many just take our product. Because of price competition, they have to."

While the electronics sector is furthest down this road, the search for offshore help with innovation is spreading to nearly every corner of the economy....

However, a closer read reveals that what's going on is experimentation:

[There is] a rethinking of the structure of the modern corporation. What, specifically, has to be done in-house anymore? At a minimum, most leading Western companies are turning toward a new model of innovation, one that employs global networks of partners. These can include U.S. chipmakers, Taiwanese engineers, Indian software developers, and Chinese factories. IBM is even offering the smarts of its famed research labs and a new global team of 1,200 engineers to help customers develop future products using next-generation technologies. When the whole chain works in sync, there can be a dramatic leap in the speed and efficiency of product development....

[D]ifferent companies are adopting widely varying approaches to this new paradigm. Dell, for example, does little of its own design for notebook PCs, digital TVs, or other products. Hewlett-Packard Co. says it contributes key technology and at least some design input to all its products but relies on outside partners to co-develop everything from servers to printers. Motorola buys complete designs for its cheapest phones but controls all of the development of high-end handsets like its hot-selling Razr. The key, execs say, is to guard some sustainable competitive advantage, whether it's control over the latest technologies, the look and feel of new products, or the customer relationship. "You have to draw a line," says Motorola CEO Edward J. Zander. At Motorola, "core intellectual property is above it, and commodity technology is below."

Wherever companies draw the line, there's no question that the demarcation between mission-critical R&D and commodity work is sliding year by year. The implications for the global economy are immense. Countries such as India and China, where wages remain low and new engineering graduates are abundant, likely will continue to be the biggest gainers in tech employment and become increasingly important suppliers of intellectual property. Some analysts even see a new global division of labor emerging: The rich West will focus on the highest levels of product creation, and all the jobs of turning concepts into actual products or services can be shipped out. Consultant Daniel H. Pink, author of the new book A Whole New Mind, argues that the "left brain" intellectual tasks that "are routine, computer-like, and can be boiled down to a spec sheet are migrating to where it is cheaper, thanks to Asia's rising economies and the miracle of cyberspace." The U.S. will remain strong in "right brain" work that entails "artistry, creativity, and empathy with the customer that requires being physically close to the market."

....Still, most companies insist they will continue to do most of the critical design work -- and have no plans to take a meat ax to R&D. A Motorola spokesman says it plans to keep R&D spending at around 10% for the long term. Lucent says its R&D staff should remain at about 9,000, after several years of deep cuts. And while many Western companies are downsizing at home, they are boosting hiring at their own labs in India, China, and Eastern Europe. "Companies realize if they want a sustainable competitive advantage, they will not get it from outsourcing," says President Frank M. Armbrecht of the Industrial Research Institute, which tracks corporate R&D spending.

Companies also worry about the message they send investors. Outsourcing manufacturing, tech support, and back-office work makes clear financial sense. But ownership of design strikes close to the heart of a corporation's intrinsic value. If a company depends on outsiders for design, investors might ask, how much intellectual property does it really own, and how much of the profit from a hit product flows back into its own coffers, rather than being paid out in licensing fees? That's one reason Apple Computer lets the world know it develops its hit products in-house, to the point of etching "Designed by Apple in California" on the back of each iPod....

Companies are still figuring out exactly what to outsource.

Let the experimentation continue....

UPDATE: The EU, on the other hand, seems to disapprove of both outsourcing as experimentation and any report that signals that these experiments can be successful:

Outsourcing isn't as bad for European jobs as some have feared, says an unpublished European Union study. On the contrary, the study suggests it can help create high-skilled jobs and boost Europe's flagging economy.

But the study was pulled from the agenda of European finance ministers meeting here yesterday to be rewritten, EU diplomats said. It was too inflammatory for countries such as Germany and France, which fear deindustrialization and falling investment from companies exporting jobs to lower-cost countries, they said. "The report says there's nothing wrong with outsourcing, and that's absolutely not politically sensitive," an EU diplomat said. "That's why it could not be discussed."

The 16-page report, commissioned by the EU's economic affairs department and reviewed by Dow Jones Newswires, said "there is no evidence that a deindustrialization process is underway." Developed economies consistently see increases in manufacturing output, the report found. Though some manufacturing jobs are lost, "One should not lose sight of the overall positive developments of net job creation throughout the EU," the report concluded, "especially for the high skilled."

A year ago I was in the middle of writing "The Outsourcing Bogeyman" for Foreign Affairs. When it came out, I received a fair amount of static from tech workers explaining that I didn't understand the situation they faced. Since offshore outsourcing is an ever-increasing phenomenon, perhaps we should examine how offshoring devastated the tech sector over the course of the past year.

Let's see, Ed Frauenheim has some interesting reporting on this topic for CNET News:

Large-scale layoffs, prevalent in the technology industry since the dot-com implosion, are scaling back.

So indicates a fourth-quarter U.S. Department of Labor report released Wednesday. The study also suggests that offshore outsourcing--widely blamed for tech-related layoffs and other potential economic problems in recent months--accounted for just a small fraction of major, extended layoffs in the United States last year.

In the three months ended Dec. 31 of last year, 7,857 workers in the IT industry lost their jobs as part of "extended mass layoffs," down significantly from 15,318 a year earlier. That compares with 236,637 such layoffs in all sectors, down from 325,333 in the fourth quarter of 2003.

Hmmm.... well, just just means fewer tech people are losing their jobs. Surely it doesn't mean that these firms are hiring again, right? Let's check out this Kathie O'Donnell story for CBS MarketWatch:

For the first time, Yahoo Inc. is recruiting MBAs on campus at Massachusetts Institute of Technology, which is welcome news to Jeffery Sean Davis, who expects to graduate this spring owing $120,000 in student loans.

Davis, 35, worked in tech research and development for the U.S. government before enrolling in the two-year program at MIT's Sloan School of Management. The Los Angeles native said he's glad to be graduating this year rather than 2004, given the increase in recruiting he's seen.

Many technology firms that slashed jobs in leaner times are finding they must hire to position themselves for growth, Davis said. In 2004, he found recruiters sought to fill specific needs, while this year, there's more general, overall hiring.

"The war for talent really is back on," said John Challenger, chief executive of Chicago-based outplacement firm Challenger, Gray & Christmas....

The jobless rate for master's degree holders in computer and mathematical fields was 3.3 percent last year, down from 5.5 percent in 2003 and 5.3 percent in 2002, according to the U.S Bureau of Labor Statistics. While that's still nowhere near the 1.1 percent rate in 2000, it's still a marked improvement.

"After somewhat sluggish labor-market conditions following the 2001 recession, the job market for individuals in computer and mathematical occupations with master's degrees has improved recently," Bureau economist Steve Hipple said....

MIT statistics show prospects for its MBA grads are improving. In 2004, 96 percent had job offers three months after graduation and 91 percent had accepted. Tech positions accounted for 19 percent of accepted jobs. In 2003, 91 percent had job offers in that timeframe and 88 percent accepted. Tech jobs accounted for 20 percent of jobs accepted.

Well, I'm sure this doesn't translate into increased demand for white collar workers across the board or anything.

Besides, as the smarter critics point out, what matters less than the number of jobs lost or gained is the downward effect that offshoring has on wages. Surely, offshore outsourcing would have put a damper on wages in the high-tech sector, right? Let's check out this Frauenheim story for CNET:

Computer professionals of different stripes saw their wallets get fatter last year, according to government data.

From 2003 to 2004, the average weekly earnings of employed, full-time software engineers rose 8.8 percent to $1,418, according to statistics from the U.S. Labor Department. Average weekly earnings climbed 6.8 percent to $1,205 for computer scientists and systems analysts, and increased 7.7 percent to $1,194 for network systems and data communications analysts....

Electrical and electronics engineers saw their average weekly earnings increase by a more modest 3.3 percent, to $1,402. That rise amounted to treading water in the overall economy, given that the consumer price index also rose 3.3 percent for the year.

The data on rising earnings comes amid conflicting signals about the job situation for technology professionals in the United States. Reports have documented fewer layoffs for IT workers, and the average number of unemployed workers in nine high-tech categories--including computer programmers, database administrators and computer hardware engineers--fell from 210,000 in 2003 to 146,000 in 2004, according to Labor Department statistics.

To be fair, there is contradictory information on the wage issue. This Dice survey suggests that wages fell overall in the computer sector in 2004. But even this report observes that:

Salaries have improved in Washington D.C. (up 3.6 percent), Atlanta (up 2.6 percent) and Southern California (up 1.1 percent) from 2003.... These metro areas have also seen significant growth in job postings on the Dice site, up 93 percent, 140 percent and 74 percent respectively between December of 2003 and December of 2004.

This would be consistent with the homeshoring phenomenon of tech sectors doing well in lower-wage areas outside of Silicon Valley. The fact that the Dice survey does not appear to cover new tech hotspots like Oklahoma leads me to trust the Labor Department figures more.

[So things are better in 2004 than in 2003 -- but the labor market in IT has sucked for a couple of years. Why are you so giddy about one year of positive data?--ed. The downturn in the IT labor market was real, but there were a lot of reasons for that -- the end of Y2K, the dot-com crash, the recession, and, yes, offshore outsourcing. However, offshoring critics has insisted that the problem is only getting worse and will lead to devastating employment and wage effects on the IT sector. Clearly, offshoring is not going away in the IT sector -- but the 2004 data suggests that the götterdammerung assumption was, at the very least, a gross exaggeration.]

One of the mantras of critics of offshore outsourcing is that countries like China and India have such large pools of low-cost, high-skilled labor that their wages will never rise enough to stop the flow of outsourced activity to those locales.

Siddharth Srivastava files a story that suggests otherwise:

India has shown the highest average salary increase in the Asia-Pacific region during 2004, beating China, Korea and Japan, according to a survey by global human resources firm Hewitt Associates. Analysts are worried, however, that such high increases in wage costs may result in the exit of business that is sought in this country for the very same reason — low overheads. What is particularly worrying is that the highest rise in wages has occurred in the Information Technology sector where India bids to be the number one player in the world due to a combined advantage of low cost and high quality manpower at its disposal. Combined with the news that the rupee has appreciated in the face of a depreciating dollar, IT firms that rely heavily on export revenue fear a resource crunch.

According to the report, India showed the highest average salary increase in Asia followed by China, Philippines and Korea. While India reported an 11.6 percent overall pay hike, in China salaries grew by 6.4-8.4 percent, 7.4-7.7 percent in Philippines and 6.4-6.8 percent in Korea for the year 2004, the survey said....

What is worrying analysts in India is that the IT industry in India witnessed the highest average salary increase at 14.5 percent though as many as 89 percent of participating companies linked salary hike to performance ratings. The rising wages coupled with an appreciating rupee in the face of high U.S. fiscal deficit and the no-tax promise by President George Bush to plug it, will end up eroding the basic comparative advantage that India enjoys vis-à-vis other low cost centers of the world such a Vietnam, China and the Philippines, which are beginning to focus on the software sector. In an interview, Vivek Paul, vice-chairman and president at Wipro’s global IT arm, has warned of an end to the low-wage culture that has been at the heart of India’s software boom.

Following the "homeshoring" meme, there are lots of reports this month about American firms souring on offshore outsourcing and reverting to onshore outsourcing instead. CNET's Ed Frauenheim has one story about tech companies outsourcing to a firm with operations in Oklahoma City. Another story takes a longer look at one homeshoring firm, Decisions Design:

Decision Design knows first-hand about the potential pitfalls of shipping tasks to India. The company launched Indian operations in 2001 but closed them down two years later. "Our offshore experience wasn't what we anticipated," Davis said in a statement. "The quality of work was lower than required, which caused rework and actually created higher costs than if we had done the work here."

The botched experiment led the company to the notion of "homeshoring centers" in the United States that nonetheless offer low costs to customers. In part by locating offices on the fringe of Silicon Valley and Chicago, the company claims that it can deliver savings of 30 percent to 60 percent below typical onshore development costs.

Decision Design, whose clients include Lehman Brothers and JPMorgan Chase, was brought in several times last year when a customer's offshore project wasn't panning out properly, O'Neill said. Offshore operations face problems, including low quality and slow project completion times, she said.

Here's a link to a press release from Housteau, third homeshoring firm, opening up a new development center in Columbus.

With rising wages in India and other offshoring magnets, expect to see more stories about this trend.

[Hold on a sec; how can you simultaneously defend the practice of offshore outsourcing but still celebrate homeshoring?--ed. Ah, but remember what I actually wrote in "The Outsourcing Bogeyman":

It is also worth remembering that many predictions [about the growth of offshore outsourcing] 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. Much of the perceived boom in outsourcing stems from companies' eagerness to latch onto the latest management trends; like Dell and Lehman, many will partially reverse course once the hidden costs of offshore outsourcing become apparent.

I still think that offshoring, when done correctly, benefits the U.S. economy. But what we're seeing in the links above is the reversing of course.]

If 2004 was the Year of Offshoring, 2005 might be the Year of Homeshoring. CNET's indefatigable Ed Frauenheim reports that, "a number of companies are turning to a new method to meet call center challenges: getting workers to handle calls from their homes." That story was based on an IDC report, An Alternative to Offshore Outsourcing: The Emergence of the Home-Based Agent -- a bargain at $3500.00 for just seven pages!! Or, you could look at the summary in this press release. Key paragraph:

[A] number of companies are turning to a new sourcing model called "home-shoring" or "home-sourcing" to address call center challenges that sometimes arise, such as the need for superior agent quality, frequent turnover, and the seasonal nature of the business. IDC believes that in certain situations, by moving some work stations into agents' residences, companies can boost productivity and efficiency while continuing to reduce costs.

Similarly, Kamil Z. Skawinski reports for CCN Magazine that "several companies have recently sprung up in rural areas of the U.S. offering a variety of onshore outsourcing services." Click here for one example, Rural Sourcing.

Finally, Adam Kolawa offers advice to IT professionals about whether their jobs could be outsourced offshore in Information Week. Apparently, "although outsourcing may seem widespread, the jobs of many IT professionals are difficult to outsource and essentially immune to it."

Great, just great. Bruce Bartlett says in the Washington Times that yours truly is "an indispensable blogger" on matters of international trade, "especially outstanding on the so-called outsourcing issue and excels in staying on top of the research in this area."

So now I've got expectations to meet. How do I satisfy my expectant readership? [Sex up the topic!!--ed.]

With that suggestion, it's worth highlighting a McKinsey Quarterly analysis which concludes that even in a world where offshore outsourcing is possible, location still matters a great deal. This is especially true when trendy undergarments are involved:

We found compelling evidence that in a number of cases, offshore manufacturing isn't all it's cracked up to be. One reason is that for many manufacturers, the importance of direct labor is declining rapidly. Since it often accounts for just 7 to 15 percent of the cost of goods sold, hard-goods and high-tech manufacturers often say that wage rates are hardly the most critical determinants of their overall economic performance.

Consider the case of one fashion apparel company based in Los Angeles. Its 1,500 workers, paid at rates well above the minimum wage, make casual wear in an old, multistory downtown brick warehouse. The executives view labor costs, currently 3 percent of the retail price of these goods and heading lower, as a secondary concern to the company. If it were to move its operations offshore, logistics costs might well swallow up any savings from lower wages. Another example: A consumer electronics manufacturer we interviewed has stripped away roughly 60 percent of its labor costs from production and reduced lead times from weeks to days. Even if an offshore competitor drove down its own labor costs close to zero, this manufacturer would still have an insurmountable advantage in logistics—a fact that has emboldened the company to reverse-engineer low-end Chinese goods for manufacture in California.

Since keeping plants near customers shortens lead times, it facilitates greater responsiveness to changing market conditions. The Los Angeles apparel maker can fill orders for up to 160,000 units in 24 hours, since the entire supply chain--including weaving, dyeing, and sewing—is located downtown. The company carries less than 30 days' worth of inventory and could even become a build-to-order producer. Another Los Angeles garment maker produces hand-sewn fashion accessories with a lead time of less than five days.

This kind of speed can be a competitive weapon--and its absence a trap. In the fashion apparel industry, with its spiky, unpredictable demand, the five-month lead times that accompany offshore production can leave manufacturers with excess inventories of fading styles or shortages of hot items. When a brief fashion craze ended before one California designer's shipment of goods had arrived from China, for instance, the company was left with a boatload of velvet knickers that could be sold only at a high discount. And with mass retailers penalizing suppliers for late orders by as much as 2 percent a day, the cost of miscalculation can be high....

Not that all U.S. manufacturers should make their goods at home; offshoring will always be a valuable component of manufacturing strategies. And for companies that make goods such as socks or spark plugs--for which demand is stable, inventory-holding costs low and labor a high proportion of total costs--overseas production in low-wage countries is a very attractive idea.

Nonetheless, offshoring often isn't the right strategy for companies whose competitive advantage comes from speed and a track record of reliability. And with buyers in advanced markets like California becoming more sophisticated--demanding shorter product life cycles, quicker delivery, and lower inventory costs--slow, unreliable manufacturers forgo valuable opportunities to gain market share or revenues. (emphasis added)

Read the whole thing.

UPDATE: Gary Rivlin penned a less-sexy but similar-themed piece on Dell's decision not to engage in much offshoring in a New York Times piece behind their archive wall. Fortunately, the Charlotte News Observer republished it. Key paragraph:

Dell's decision to expand its U.S. manufacturing presence, however, has nothing to do with patriotism. Executives here say their decisions are based on the bottom line as well as on geography; it is simply more efficient to stamp out computer equipment closer to the customer. "The reason we continue to manufacture in the United States is that it's the optimal place to do so, and we can do it most cost effectively," said John Hamlin, who oversees Dell's consumer line.

Whenever I talk to critics about offshore outsourcing, they tell me that the claim by proponents that offshoring addresses the problem of a skills shortage in the U.S. is bogus, that there are more than enough tech workers here to perform the necessary tasks. I don't think that holds for the late 1990's, when offshoring and the H1-B visa craze started, but that's neither here nor there. The point is, they argue that firms have no compelling need to to outsource offshore since the set of necessary skills resides in the United States.

Beyond the IT sector, however, there do appear to be instances where offshoring is a necessary and effective means of accessing a labor supply of specialty skills for which there is a shortage in the United States. Lindsey Tanner reports in the Associated Press of one example in radiology. The highlights:

When a patient in Altoona, Pa., needs an emergency brain scan in the middle of the night, a doctor in Bangalore, India, is asked to interpret the results.

Spurred by a shortage of radiologists in the United States and an exploding demand for more sophisticated scans to diagnose scores of ailments, physicians at Altoona Hospital and dozens of others are outsourcing work.

Over the past few years, the number of nighttime emergency cases was swamping Altoona's seven radiologists.

"Somebody was waking up all night to cover all this extra work," said Dr. Richard Wertz, a radiologist. And while that doctor was groggy, "we didn't have the luxury of that guy taking the next day off."

Using radiologists halfway around the world where it is daytime, "solves that problem for us," Wertz said.

Such moves are part of the telemedicine trend, with technology enabling the speedy transfer of medical data over the Internet to a compatible computer anywhere in the world. That means radiologists in Australia, India, Israel and Lebanon are reading scans on U.S. patients.

Despite fears of some doctors, advocates insist offshore radiology is not stealing U.S. jobs and replacing them with unqualified cheap labor. Most of the doctors are U.S.-trained and licensed, though Indian radiologists generally earn about a tenth of the estimated $350,000 median salary for those in the United States.

More typical is the Altoona situation, which involves doctors such as Arjun Kalyanpur. A U.S.-licensed and credentialed radiologist, Kalyanpur got his postgraduate training at Yale University and runs a two-man service in southern India.

The Pennsylvania hospital is among 40 that use Teleradiology Solutions....

In recent years, demand has far exceeded the supply of radiologists in the United States. A trade journal reported this year that an average of four vacancies existed for each radiology department at American academic centers since 2002.

Two questions on this:

1) I know nothing about the supply and demand of different medical specialties -- is the statement about there being a drastic shortage ofradiologists an accurate one?

2) Assuming that the answer to the first question is "yes," would traditional opponents of outsourcing concede that this case looks like a standard trade story that clearly provides value added to the United States?

UPDATE: This might be the most bizarre twist on outsourcing I've seen yet -- Europeans emigrating to India to work in offshored call centers (thanks to N.D. for the link)

Keen readers of danieldrezner.com may have noticed that I haven't blogged much about offshore outsourcing since my NYT op-ed in late September. This has been for several reasons:

a) I had a book manuscript to finish;
b) There was an election occupying my attention;
c) I was a bit burned out on the topic.

Well, the election is over, the book manuscript is off my desk, and a few months have passed since I've blogged about the topic. So... I'm back, baby!!

So what's been written that's worth reading on the topic since I've been away?

A couple of selections:

1) Mary Amiti and Shang-Jin Wei, "Fear of Service Outsourcing: Is It Justified?" Their answer would appear to be no:

The recent media and political attention on service outsourcing from developed to developing countries gives the impression that outsourcing is exploding. As a result, workers in industrial countries are anxious about job losses. This paper aims to establish what are the hypes and what are the facts. The results show that although service outsourcing has been steadily increasing it is still very low, and that in the United States and many other industrial countries “insourcing” is greater than outsourcing. Using the United Kingdom as a case study, we find that job growth at a sectoral level is not negatively related to service outsourcing.

Here's a link to a more accessible precis, which closes with the following:

Although service outsourcing is growing rapidly, it still remains a small fraction of industrial countries’ GDP. And it is not dominated by lopsided, one-way outsourcing from developed to developing countries. In fact, most industrial countries do not outsource more (when adjusted for economic size) than many developing countries. The United States, for example, which is a large importer of business services, is also a large exporter of these services and, as has been noted, has a growing net surplus in business service trade.

As for fears about job loss, our studies show that jobs are not being exported, on net, from industrial countries to developing countries as a result of outsourcing. In fact, the evidence suggests that job losses in one industry often are offset by jobs created in other growing industries. (emphasis added)

One problem with this study is that the data stop in 2002 -- and, to be fair, most opponents of offshore outsourcing argue that the phenomenon didn't really heat up until the last two years.

2) Kate Bronfenbrenner and Stephanie Luce, "The Changing Nature of Corporate Global Restructuring." This report was prepared for the US-China Economic and Security Review Commission (USCC) and argues that existing estimates of job losses due to offshoring have been underestimated. From the executive summary:

Despite the increasing amount of trade between China and the US, and the increase in foreign direct investment from the US into China, there is no government body that collects information detailing the incidence of production shifts out of the US to China or any other country.... In order to conduct this research we developed a methodology that involves a combination of online media tracking and corporate research and the creation of a database including information on all production shifts announced or confirmed in the media during that period. In July 2004 the USCC asked us to update that research, starting with an initial period of January 1 through March 31, 2004....

Altogether we found announcements or confirmations for shifts of 48,417 jobs out of the US to other countries in January-March including 23,396 to Mexico, 8,283 to China, 3,895 to India, 5,511 to other Latin American countries, 4,419 to other Asian countries, and 2,933 to all other countries. Based on our estimates that media tracking captures approximately two-thirds of production shifts to Mexico and about a third of production estimates to other countries, these data suggest that in 2004 as many as 406,000 jobs will be shifted from the US to other countries compared to 204,000 jobs in 2001.

This is a serious study, and does a good job of suggesting that the Bureau of Labor Statistics has underestimated the raw number (though not necessarily the percentage) of jobs lost through offshoring in the first quarter of this year. However, that topline number seems based on some dodgy assumptions and serious guesstimation. And be sure to read pages 8-16 to get a sense of their methodology -- it's still unclear to me whether their count includes all actual and announced plant closings/layoffs during that time period, or just one or the other.

3) The University of South Florida's Globalization Research center commissioned Innovation Insight to produce a report, "Baseline Analysis of Offshoring in the Tampa Bay Region." From the executive summary:

The Tampa Bay region is estimated to have imported approximately $627 million in “other” private services from the US and abroad in 2002, including $33 million in fi nancial services, $97 million in business and professional services, and approximately $12 million in information technology (database plus computer services). However, the Tampa Bay has a signifi cant import/export surplus when it comes to private services; for all “other” private services combined, the region exported $478 million more than it imported in 2002.

Offshoring practices are increasing the demand for selected “soft skills” in US employees, in particular project management and defi nition skills, fl exibility, cultural sensitivity and facility, training, creativity, and organization skills.

Take those numbers with a small grain of salt. This paragraph best expresses the sentiment of the report:

We explored analysis, statistics, and relations between a number of other data sources for evidence of employment shifts caused by offshore outsourcing. Unfortunately, the US economy has demonstrated some large employment shifts away from agriculture, mining, and manufacturing into service and professional industries, and has also has seen its unemployment levels rise and fall during recent recessions. Tampa Bay’s economy refl ects national economic trends; our findings suggest that if an intra-sector shift (from one occupation or industry category to another) due to offshoring exists, it is so small compared to ongoing large scale (macro) employment shifts that it is effectively obscured. In other words, given existing data sources, it is difficult to tell which occupations are changing specifically due to offshoring or just the evolution of the national economic structure.

4) Finally, do check out Corante's new blog on outsourcing, which takes a critical view of the phenomenon (link via Tyler Cowen).

Thanks to Bruce Bartlett and Amardeep Singh for being good enough to help keep me up to speed.

The good economist's assessment of the capital of offshore outsourcing:

Apparently production costs are rising out of control in a city that accounts for a third of India's software exports. The major culprit is congestion; a seven-kilometer commute can now take ninety minutes. Population has grown by a third since 1995, and the new metro and airport are badly behind schedule. Bombay has had similar problems.

The remedy? Madras (Chennai) is rising in popularity as is Calcutta, despite its propensity to elect communist governments.

The bottom line: Indian infrastructure is chaos. This economy has only a limited ability to absord outsourcing ventures.

Megan McArdle has further thoughts on this. Key line: "Trendline extrapolation is a silly business in almost any economic situation, but never more so than where trade is concerned."

Wondering whether my New York Times op-ed was based primarily on memos from the seventies that mysteriously reappeared this month? Relax, I have some footnotes for you.

The principal source for the op-ed was the GAO's report on the offshoring of services -- about which I've previously blogged. And a big thank you to the GAO staff for their professional and courteous responses to the myriad e-mails queries I sent them (not that they necessarily endorse anything I said in the op-ed)

This post also has some relevant material in terms of discussing the relative importance of different factors contributing to job losses.

Four other sources -- IBM's adventures with offshoring are summarized in this Industry Week story by Tonya Vinas. The Kodak anecdote came from a paper by Daniel T. Griswold and Dale Buss for the Mackinac Center for Public Policy. Kerry's quote was widely reported -- here's one link. Here's a link to the full .pdf version of their report, "Outsourcing Benefits Michigan Economy And Taxpayers." The polling data comes from this Foreign Policy Association report on public attitudes towards foreign policy. Alas, this also reveals the one error of fact in the op-ed -- Zogby's polling was conducted in August and not September.

Finally, readers who want to read more of what I've written on the topic should this June 2004 piece from The New Republic online, and my Foreign Affairs article from May/June of this year, "The Outsourcing Bogeyman."

For a dissenting view, read this report sponsored by WashTech and conducted by the the Center for Urban Economic Development at the University of Illinois, Chicago (I commented on it here)

Those poor souls with enough time on their hands to click on this blog's "about me" page may recall one reason I gave for blogging:

I love the academic side of my job, i.e., the researching and writing about international relations theory. But I’m also a policy wonk. And since the New York Times op-ed page mysteriously refuses to solicit my views, the blog lets me scratch that itch.

Well, today I have an op-ed in the New York Times on offshore outsourcing. Here's the opening paragraph:

John Kerry is making the outsourcing of jobs by American companies a centerpiece of his campaign, telling audiences that "because of George Bush's wrong choices, this country is continuing to ship good jobs overseas." President Bush's team has in turn accused the senator of hypocrisy, noting that many of Mr. Kerry's supporters in the business world run companies that are sending jobs offshore. Yet as each side angles for votes, neither is addressing the real issue: is the outsourcing of jobs a problem? The answer, surprisingly, is no.

I'm less than thrilled with the title, "Where Did All the Jobs Go? Nowhere" because I'm not claiming that the employment situation is hunky-dory -- it's not. I'm claiming that the contribution of offshore outsourcing to that employment picture is prett minimal -- contrary to popular belief.

Anyway, I have every confidence that this will be the topic of discussion among policy cognoscenti for today!

[Ahem, did you see who wrote the other op-ed for the Times today?--ed. Hey, who are Americans going to listen to -- an untenured professor located somewhere in flyover country, or the guy who won the popular vote for President in 2000? Besides, the last time a prominent big shot shared a prominent piece of publishing real estate with me was when Sandy Berger had a Foreign Affairs essay in the same issue as me. And look at what happened to him!]

Anyway, an awkward question arises -- if I can publish in places like the New York Times op-ed page.... do I still need the blog for itch-scratching?

An internal debate worthy of only the most pure of egomaniacs.....

Over a year ago, U.S. Representative Adam Smith (D., Wash.) asked the GAO (which used to be called the General Accounting Office, but has since been renamed the Government Accountability Office) to study "issues related to offshore IT services outsourcing." As the offshore outsourcing brouhaha heated up, more and more congressman dogpiled on top of this request, expanding the GAO's mandate beyond just the IT sector.

The first part of that report has been released today. It's essentially a literature review of available government data on the magnitude and impact of offshore outsourcing. There are two themes that come out from this: 1) the government data on this phenomenon is incomplete and imperfect; 2) what data exists suggests that offshore outsourcing is not quite the tsunami it's been made out to be.

This is from the Results in Brief (p. 3):

Federal statistics provide limited information about the effects of offshoring IT and other services on the U.S. labor force and the economy overall. The Department of Labor’s Mass Layoff Survey (MLS) shows that layoffs attributable to overseas relocation have increased since 1999, but these layoffs represent a small fraction of workers laid off—of 1.5 million layoffs reported in the 2003 MLS, 13,000 (0.9 percent) were reportedly due to overseas relocation. The data also show that most of these layoffs were in the manufacturing sector.

And this is from p. 15:

U.S. government data provide some insight into the trends in offshoring of services by the private sector, but they do not provide a complete picture of the business transactions that the term offshoring can encompass. In particular, they do not identify U.S. imports of services previously produced by U.S. employees. Similarly, federal procurement data on purchases of IT and other services provide some insights, but it can be difficult to determine where such work is performed. The available data indicate that the trend in offshoring show little change over the past 5 years. (emphasis added)

This is consistent with my own back-of-the envelope-calculations from earlier this year.

Now, what's interesting is the responses to this report. This is a snippet from the press release by two Seattle-based labor unions, SPEEA-IFPTE and WashTech:

"This study is a good first step," said Charles Bofferding, executive director of SPEEA. "It recognizes that outsourcing is growing and a troubling trend for our workers and our country."

"The GAO has clearly stated in this report that outsourcing of U.S. jobs abroad can not be ignored, and the government needs to act in order to address the issue in terms of data collection and policy solutions," said Marcus Courtney, WashTech president.

Released in Washington, D.C., the study was made at the request of Washington state Reps. Adam Smith (D-9th District) and Jay Inslee (D-1st District). The congressmen were prompted to make the request by the Society of Professional Engineering Employees in Aerospace (SPEEA), IFPTE Local 2001 and the Washington Alliance of Technical Workers (WashTech), CWA Local 37083. (emphasis added)

Now let's go to what Representative Adam Smith has to say about the report in his press release:

The extent of outsourcing is probably less than they [the GAO] had expected going into the study. Also, at least by using the metrics available, they were unable to separate out the impact of outsourcing on the economy versus other “meta” factors such as the burst of the technology bubble and the hangover from the pre-Y2K tech buildup.

Services are still a relatively small part of the US imports.

“This study shows us that we have the opportunity to address the growing trend of offshore outsourcing with positive and aggressive solutions,” said Smith. “We should increase investment in research and development, improve math and science education in K-12, enhance training and professional development for workers, open markets for American goods and renew the government’s focus on promoting innovation. By doing so, we can make sure that our economy remains the most vibrant and competitive one in the world.”

Smith continued, “We are at a relatively early state in the offshore outsourcing trend. We must get the facts straight and have a serious and educated policy dialogue on outsourcing. It’s my hope that this study will help “kick off” that process and move the discussion in a positive way that is focused on real issues and solutions. I am committed to continuing my work on identifying real solutions to this potentially growing problem for the American people.” (emphasis added)

A tip of the cap from everyone here at danieldrezner.com to U.S. Representative Adam Smith. Beyond the unbelievably cool-sounding name, Smith has acted like a responsible grown-up on the offshore outsourcing issue. His one op-ed on the subject didn't demagogue the issue, and offered an eminently sensible, constructive request -- expanding coverage of Trade Adjustment Assistance to include service sector workers. No hysterical claims that offshoring was destoying the American economy, or even his district. Just a sensible policy proposal and an appropriate request for more information. Also, in contrast to the aforementioned unions, it appeared he's actually read the GAO report.

A politician who seems reasonably well-informed and resists scapegoating a non-issue. Damn, that's refreshing.

Oh, and for those who just can't get enough of offshore outsourcing, the United Nations Conference on Trade and Development (UNCTAD) has just released its 2004 World Investment Report. If you download Chapter IV, there's a nice overview of the offshoring phenomenon.

UPDATE: Brier Dudley and Marilyn Geewax have dueling stories at the Seattle Times and Seattle Post-Intelligencer respectively. One data point that captures attention is the fact that "the number of business, technical and professional services, flowing into the United States, however is rising, from $21.2 billion in 1997 to $37.5 billion in 2002," as reported by Geewax (this is CNN's lead as well).

That's an increase of 76.9%, which sounds really bad. But it's only half of the picture. What about exports of business, technical and professional services?

Those precise figures weren't in the GAO report, so I e-mailed their staff to see if they knew -- and they promptly replied. As it turns out, during the same period, exports of these services rose from $44 billion in 1997 to $64.5 billion in 2002 (This is from the Bureau of Economic Analysis's Survey of Current Business, October 2003, p.65, Table E).

So in other words, between 1997 and 2002, when offshore outsourcing is supposedly taking off, the balance of trade in the services likely to be offshored went from a $22.8 billion surplus to a.... $27.0 billion surplus.

My heart be still.

FINAL UPDATE: In fairness, see this erudite comment below by an IT consultant. I certainly won't deny that offshoring can have a hard affect on indivudual workers -- I just don't think it warrants the hysteria that, say, this comment epitomizes.

One of the more common critical responses to defenses of offshore outsourcing is the claim that defenders of the practice are being deluded by a set of archaic economic ideas that only work in the ivory towers -- they need to get out in the real world, man.

Beyond ignoring the intrinsic value of economic theory as a device for understanding the world, what's amusing about this line of argumentation is that protectionists throw it out the window the moment someone comres up with an economic theory that seems to support their argument. Which is fine -- except that, far more often than not, the models they embrace rest on assumptions that are often harder to satisfy in the real world than the standard neoclassical trade models.

For exhibit A on all this, consider Paul Samuelson's recent contribution to the outsourcing debate. In The American Prospect, Eamonn Fingleton has a rhetorical field day proclaiming that Samuelson's bombshell has eviscerated the orthodoxy of free trade. One excerpt:

For James Fallows, a liberal-leaning critic of Washington's blink-first style in trade diplomacy, Samuelson's analysis is a call to policy-makers to break free from utopian theories and, instead, take a hard look at the real world.

"The great problem in Western discussion of trade theory has been its simpleminded Panglossianism," he says. "The main thing that has supported globalism, apart from the self-interest of many powerful participants, has been the idea that economic theory was 100 percent on the side of Dr. Pangloss. To have the most esteemed of all modern economists say that things are not this simple is a very important step."

There's just one problem with all of this -- Samuelson's paper has nothing to do with offshore outsourcing as it's commonly understood.

Arvind Panagariya -- Professor of Economics at Columbia -- provides a concise explanation for where Samuelson gets confused on offshore outsourcing (thanks to Asif Dowla for the link). Here's a long excerpt to explain what Samuelson was arguing:

Samuelson employs the standard Ricardian model, which assumes two countries (called America and China), two goods (called 1 and 2) and one factor of production (called labor). Because the endowment of labor is taken as fixed in the Ricardian model, any change in the total national income are reflected fully in the change in the real wage. If the real wage rises, real incomes of all individuals and therefore the nation rise. Alternatively stated, the wage also represents the per-capita income in the model....

Samuelson conducts three experiments in this model:

(1) He starts at autarky and then allows the countries to trade. Both America and China unambiguously benefit from this opening to trade. America has a comparative advantage in good 1 and specializes completely in that good and China in good 2. Nothing controversial arises here.

2) Starting at this free-trade equilibrium, Samuelson next introduces a productivity increase in China in the good it exports, good 2. With more of good 2 produced, its relative price falls. America can now buy good 2 more cheaply from China, which benefits America. Nothing controversial arises here either, at least from the American viewpoint.

(3) Starting once again at the free-trade equilibrium, Samuelson finally introduces a productivity improvement in China in the good it imports and America exports, good 1. If this productivity improvement is just right to equalize the cost ratios between America and China that gave rise to trade in the first place, all trade is wiped out and America is robbed off all benefits of trade it previously enjoyed....

Samuelson’s analytic result... that technical progress in China can wipe out all potential gains for America is not in dispute at all—as I describe below, it has been known to trade economists at least since 1950s when the late Harry Johnson who taught International Trade at the University of Chicago first demonstrated it. What is in dispute is whether it represents outsourcing.

Thus consider the example given by Samuelson in the last first of the two paragraphs quoted above (which is incidentally fully in conformity with the definition of offshore outsourcing provided at the beginning of this note): “High I.Q. secondary school graduates in South Dakota, who had been receiving from my New York Bank wages one-and-a-half times the U.S. minimum wage for handling phone calls about my credit card, have been laid off since 1990; a Bombay outsourcing unit has come to handle my inquiries. (Emphasis added)” In the analytic model, the good experiencing productivity change in China is the one exported by the United States to China (i.e., good 1). But did any high I.Q. secondary school graduates from South Dakota (or elsewhere in America for that matter) handle the phone calls for the customers in China? Not really. The calls were made by the Americans and answered by the Americans—no international trade in them took place. Virtually all activities associated with outsourcing—call center services, x-rays transmitted electronically to be read abroad, transcribing services, accounting services and virtually all back office services—have this property of having been non-traded before the Internet, phone and fax turned them into traded services. Therefore, the equilibrium at which Samuelson considers the productivity change is simply the wrong one to represent outsourcing.

The Ford Foundation has sponsored a study by the Washington Alliance of Technology Workers (WashTech), a local of the Communications Workers of America (an AFL-CIO affiliate union), in conjunction with the Center for Urban Economic Development at the University of Illinois, Chicago, on IT employment since 2001.

Their press release paints a grim picture:

The report found that high-tech workers have seen a doubling of unemployment rates in the past three years. The University of Illinois at Chicago conducted the research for the Washington Alliance of Technology Workers, a local of the Communications Workers of America.

The report goes on to analyze job growth and unemployment in six key regional high-tech labor markets. For example, San Jose continued to lose more than 14,000 IT jobs after November 2001, and its neighbor to the north, San Francisco, lost 9,300. The unemployment rate faced by San Jose area technology employees still remains high, going from 1% in 1997 to more than 6% by 2002, and in San Francisco from 1.3% in 1997 to more than 8.8% in 2002, the last year for which data are available.

The other labor markets studied are Boston, Chicago, Dallas, Seattle and Washington, DC. Nearly every labor market mirrored the Silicon Valley's experience, with Washington, DC the only location to show positive job growth in the past year.

The report cited offshore outsourcing as contributing to the lack of strong job creation in this sector. (emphasis added)

Here's a link to the actual report, and here is the AP wire report by Allison Linn.

The sum total of the discussion about offshore outsourcing comes on p. 5 of the report:

While there is a lack of current and reliable information on the extent of job losses due to offshore outsourcing, there is little doubt that it has contributed to soaring unemployment rates in the industry. For instance, UIC-CUED analysis of the Current Population Survey
reveals that national unemployment rates for computer programmers was 6.7% in 2003, two years after the end of the recession, compared to 2.5% in 2001. Incidentally, computer programming is also one of the top occupations sent offshore.

That's it -- lots of data about the unemployment picture, one paragraph on the causal connection between offshore outsourcing and that employment picture.

Certainly, their analysis could be correct -- but I have my doubts. One of them is that it's not clear whether their data are accurate -- a point made in Ed Frauenheim's analysis of the report at CNET.com:

In recent weeks, conflicting information has emerged about the job scene for tech professionals....

A survey by a staffing firm found gradually increasing confidence among IT workers in the job market. But a recent study by the Information Technology Association of America trade group found just a "slight" recovery for the IT job market in 2004.

That report concluded that the number of U.S. IT workers rose 2 percent, to 10.5 million, in the first quarter of this year, but demand for IT workers is dropping.

ITAA's report included workers in the internal IT departments of many types of corporations, while the new study for WashTech is limited to companies in the technology industry, such as Internet service providers and software publishers. (emphasis added)

Why is that last paragraph so important? Because if you look at Frauenheim's story about the ITAA report, you find the following sentence: "ITAA said nearly 89 percent of new jobs came from non-IT companies, despite popular fears over mass job loss to outsourcing and globalization." If one really believes that offshore outsourcing is responsible for massive job losses in the IT sector, that last figure is a puzzling one -- because the line that management consultants continually push is that offshore outsourcing is great for firms that don't specialize in IT services and want to subcontract those operations to the lowest-cost provider out there.

If the UIC/CUED study omitted the strongest source of job creation, that's somewhat problematic.

Even the AP report contains the following:

Sung Won Sohn, chief economist at Wells Fargo Bank, said he has seen some evidence that the high-tech job market began improving in the months after this study was completed. Still, he said, those in the software industry have fared better than those in the computer hardware industry.

Overall, Sohn thinks the high-tech industry will rebound, although the new jobs created might require different skills. That still leaves high-tech workers in better shape than other industries, he said.

"I view the setbacks in tech as temporary," he said, "whereas if you're talking about old-style manufacturing, those jobs are gone forever."

Before angry IT workers start posting comments, let's make it clear that I'm not claiming that it's a rosy jobs situation for IT workers. But some of the unemployment numbers sound a bit overstated. And what this report does not say -- indeed, the quoted paragraph acknowledges that that the authors can't say -- is the extent to which offshore outsourcing is responsible. There's no attempt to parse out the relative explanatory power of each possible cause (dot-com bubble, Y2K overhiring, productivity gains combined with slack demand, offshore outsourcing, etc.)

UPDATE: Some of the press reportage of this study has been very good on pointing out the flaws in the report. Barbara Rose's story in the Chicago Tribune has the following:

The American Electronics Association, which represents high-tech employers, agreed with the report's data but said the industry's outlook is brighter than the study suggests.

The group argued it is misleading to measure losses starting in 2001, when employment was near a historic peak.

"There was so much venture capital being thrown at the tech industry, it was a spike, a bubble, an abnormality," said Matthew Kazmierczak, the association's research director.

He said employment has been growing since January in categories included in the study.

Economist Bill Testa, director of regional programs at the Federal Reserve Bank of Chicago, said he was not surprised the Chicago region lost 16,400 jobs, including 10,200 after the official end of the recession.

"We really did take it hard in that area," he said. "We were late getting going with a lot of new companies being created near the end of the boom, and we went down hard."

The study defines IT employment narrowly, focusing on software firms, Internet service providers, data processing and computer systems design companies. It excludes high-tech manufacturing and the large numbers of IT jobs at financial-services firms and other companies.

The study identifies 47,000 information technology jobs in greater Chicago. By contrast, a University of Minnesota study identifies 347,000 IT workers in the Chicago area.

"It all depends on the methodology," said Paul O'Connor, executive director of World Business Chicago. "There's still been demand for skilled IT people."

This is from Diane Lewis' Boston Globe story:

Staffing agencies and recruiters in the Boston area said demand is up for individuals with project management experience or unique IT skills but not necessarily for those with basic skills. They said the demand appears to be in the financial services sector.

"A lot of what we are seeing is some demand for software engineers in the financial services area and stronger demand for the infrastructure people," said Aaron Green, president of the Professional Staffing Group, an employee staffing agency in Boston. "We have not seen a lot of demand for software outside of financial services."

Steve Lohr breathlessly reports in the New York Times that Nobel prize winner and undisputed godfather of modern economic theory Paul Samuelson is coming out with an article in the Journal of Economic Perspectives on outsourcing that contradicts the mainstream economic take:

At 89, Paul A. Samuelson, the Nobel Prize-winning economist and professor emeritus at the Massachusetts Institute of Technology, still seems to have plenty of intellectual edge and the ability to antagonize and amuse.

His dissent from the mainstream economic consensus about outsourcing and globalization will appear later this month in a distinguished journal, cloaked in clever phrases and theoretical equations, but clearly aimed at the orthodoxy within his profession: Alan Greenspan, chairman of the Federal Reserve; N. Gregory Mankiw, chairman of the White House Council of Economic Advisers; and Jagdish N. Bhagwati, a leading international economist and professor at Columbia University.

These heavyweights, among others, are perpetrators of what Mr. Samuelson terms "the popular polemical untruth."

Popular among economists, that is. That untruth, Mr. Samuelson asserts in an article for the Journal of Economic Perspectives, is the assumption that the laws of economics dictate that the American economy will benefit in the long run from all forms of international trade, including the outsourcing abroad of call-center and software programming jobs.

Sure, Mr. Samuelson writes, the mainstream economists acknowledge that some people will gain and others will suffer in the short term, but they quickly add that "the gains of the American winners are big enough to more than compensate for the losers."

That assumption, so widely shared by economists, is "only an innuendo," Mr. Samuelson writes. "For it is dead wrong about necessary surplus of winnings over losings."

Sounds like a radical break -- oh wait, let's get into the details:

Mr. Samuelson, who calls himself a "centrist Democrat," said his analysis did not come with a recipe of policy steps, and he emphasized that it was not meant as a justification for protectionist measures....

According to Mr. Samuelson, a low-wage nation that is rapidly improving its technology, like India or China, has the potential to change the terms of trade with America in fields like call-center services or computer programming in ways that reduce per-capita income in the United States. "The new labor-market-clearing real wage has been lowered by this version of dynamic fair free trade," Mr. Samuelson writes....

For his part, Mr. Bhagwati does not dispute the model that Mr. Samuelson presents in his article. "Paul is a great economist and a terrific theorist," he said. "And in markets like information technology services, where America has a big advantage, it is true that if skills build up abroad, that narrows our competitive advantage and our exports will be hit."

But Mr. Bhagwati, the author of "In Defense of Globalization" (Oxford University Press, 2004), says he doubts whether the Samuelson model applies broadly to the economy. "Paul and I disagree only on the realistic aspects of this," he said.

The magnified concern, Mr. Bhagwati said, is that China will take away most of American manufacturing and India will take away the high-technology services business. Looking at the small number of jobs actually sent abroad, and based on his own knowledge of developing nations, he concludes that outsourcing worries are greatly exaggerated....

The Samuelson model, Mr. Bhagwati said, yields net economic losses only when foreign nations are closing the innovation gap with the United States.

"But we can change the terms of trade by moving up the technology ladder," he said. "The U.S. is a reasonably flexible, dynamic, innovative society. That's why I'm optimistic."

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.

"You need more temporary protection for the losers," Mr. Samuelson said. "My belief is that every good cause is worth some inefficiency."

Before I throw my two cents in, let me just add the following caveats:

1) I haven't seen Samuelson's essay (anyone who's got a copy of it, e-mail it to my brand-new gmail address listed on the right);

2) I'm not an economist;

3) Paul Samuelson is way, way, way, way, way, way, way smarter than I am.

That said, this dispute boils down to a few empirical questions:

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

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

3) Will the United States continue to be a locus for value-added innovations?

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 (and highly paid) tasks?

In the past, my answers to these questions have been a) not as many as you think; b) no, c) yes, and d) not a lot. [On (d), see Tyler Cowen's and Arnold Kling]. Which is why I side with Bhagwati on the outsourcing question.

Furthermore, Samuelson appears to partially fall into the Douglas Irwin trap of firing a warning shot on outsourcing but providing little in the way of a solution that departs from those who believe outsourcing is not a problem. Indeed, Samuelson explicitly rejects the solution most favored by those who oppose outsourcing -- higher trade barriers.

So, in the end, I'm not convinced that Samuelson's dissent changes the substantive issues of debate. But as a political scientist, it is impossible to deny the extent to which Samuelson's article will alter the rhetorical balance of power in this policy debate. Samuelson will succeed in reigniting debate on this topic, as well as provide aid and comfort to those who wish oppose the practice of offshore outsourcing.

So let the debate be joined.

UPDATE: Arnold Kling links to a draft version of the response paper by Jagdish Bhagwati, Arvind Panagariya, and T.N. Srinivasan alluded to in Lohr's Times story. Kling's summary:

The authors point out that some of the concern is not about trade per se but about the accumulation of capital and know-how in China and India. They suggest that this could harm the U.S. if it reduces trade by eliminating the division of labor. That is, suppose that the U.S. stays stagnant, but China and India learn how to do everything that we know how to do. Then they will no longer export cheap goods to us, and we will lose. This, they claim, is what Samuelson's theoretical paper describes. If so, then it does not really describe outsourcing.

LAST UPDATE: Douglas Irwin – who’s read the paper – is underwhelmed. This is from an e-mail he sent to me:

[Samuelson’s paper] doesn't have much to do with outsourcing. If a foreign country experiences technological progress in a home country's export industry, it can deteriorate the terms of trade of the home country and make it worse off (not vis a vis autarky, but its previous trade situation). We've know this since the U of C's great Harry Johnson pointed it out in the 1950s…. Pretty thin stuff.

VERY LAST UPDATE: One of the commenters linked to Joe Stiglitz's outsourcing essay in the Singapore Straits-Times from May of this year. That essay contains the following:

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.

Sounds dispassionate, except for one thing -- I have not seen any estimate even remotely suggesting that "one job in two might eventually be outsourced." That's way higher than any of the upper bound numbers I've seen (the highest I've seen is 30%).

Readers are invited to post a link to any study that suggests otherwise.

Yesterday, Virginia Postrel posted and linked to several stories about a Public Policy Institute of California study on the effect of offshore outsourcing on the Californian economy. Postrel wrote, "The study found that outsourcing actually increases employment in California. Now the Assembly is sitting on the study."

The Assembly may have sat on the study, but it now appears to be available to the public. I clicked over to the PPIC web site and found the report by Jon Haveman and Howard Shatz, which is dated today. Some of their analysis sounds awfully familiar. The good parts (from p. 22-24):

[T]here is evidence that some California jobs eliminated by offshoring are similar to those likely to be created in the state by offshoring. Offshoring can allow the economy to reallocate labor and capital from one set of tasks to another set of higher-level tasks, and California has a strong supply of highly skilled workers who can take on these higher-level tasks. A second mitigating factor for the U.S. economy, and especially for California, is that there is growing world demand for the U.S. provision of services that are similar to those being sent offshore. This is a source of job creation for workers dislocated because of offshoring. California is a significant producer and exporter of these services, and this fact should ease the transition for affected workers in the state.

These two points suggest that jobs are being created in industries and occupations that are relatively similar to those being eliminated. For example, computer programming is one occupation that is projected to be negatively affected by offshoring, and evidence suggests that this is in fact the case. Between 1999 and 2002, 71,000 computer programmer jobs were eliminated, 23,000 of which were in California. Note, however, that offshoring is only responsible for a small fraction of these lost jobs; the technology bust explains most of them.

At the same time that opportunities for computer programmers were declining, more than 115,000 software engineering jobs were created, a disproportionately large share of which – 24,000 – were in California. The transition between these occupation categories – programmers and software engineers – may be unsettling but also may be easier than the transition between many other jobs, and the software engineering jobs pay over $10,000 more per year on average. It is certainly true that not all the workers who held computer programmer jobs became software engineers, and tracing how any such transition might have taken place is difficult. However, the decline of programmers and the rise of software engineers illustrates the fact that as old opportunities disappear – through economic cycles, technological change, and offshoring – the U.S. economy has the capacity to create better opportunities, and in this case, the skill sets required are similar.

As a result, the economy’s adjustment to this new phenomenon need not be as difficult as it was to the shift from manufacturing to service sectors in the 1980s and 1990s. Many of the workers displaced by offshoring have significant skills, and this bodes well for their future employment prospects. This observation is consistent with the evidence suggesting that workers with more skills have less difficult transitions to new jobs; the transitions are faster and involve less wage erosion. This is not to minimize the effect on workers who lose their jobs, especially less-skilled workers, but merely to put it in perspective....

An additional item is worthy of note. It is likely that “outstating” – outsourcing to another state – is a much more important phenomenon than is offshoring for California. The recent mass layoffs report of the Bureau of Labor Statistics noted that of the job relocations where the destination was known, more than 68 percent took place within the United States, rather than overseas. California companies have actively engaged in outstating back-office processes for years. These are the very same processes that are the most vulnerable to offshoring. It is possible that many jobs being moved offshore by California companies would have left the state anyway. Newspaper accounts in places such as Phoenix express the fear that back-office jobs that have only recently arrived from California are headed abroad.

I look forward to the California state legislature's efforts to impose a tariff on services from Arizona.

Here's the report's conclusion regarding the bills designed to block the offshore outsourcing of government contracts (from p. 31):

In the end, the policy of restricting government contractors to vendors employing only domestic labor falls short of the optimal choice in several respects. First, on a per worker basis, it is likely to be more expensive than other options. Second, it is likely to assist a very small subset of workers displaced by offshoring. Third, policies banning offshoring are most likely to assist relatively skilled workers with high earnings capacity. In this time of tight budgets, more cost-effective means of assistance are available and should be investigated.

Red Herring has more on the California situation. Daniel Weintraub concludes in the Sacramento Bee:

The bottom line, though the researchers don't put it this bluntly, is that politicians, either from ignorance or malevolence, are trying to scare Californians into believing that offshoring is bad for the economy, and bad for them. The reality is that the opposite is true, and that the proposals seeking to freeze the economy in place will do far more harm than good.

Indeed.

[Sure, that's California. The rest of the country is losing jobs, right?--ed. Not according to this Business Week story from earlier this month]:

Foreign investment for setting up U.S. subsidiaries and plants doubled, to $82 billion, between 2002 and 2003, according to the Commerce Dept. That means 400,000 new jobs, most of them tech-related, figures the Organization for International Investment, a trade association based in Washington, D.C. Over the same period, outsourcing has taken away about 300,000 U.S. jobs, according to tech consultancy Forrester Research. So, on a net basis, foreign outfits have actually added some 100,000 U.S. jobs.

There's plenty of incentive to keep the trend going. For starters, foreign companies often find that having a U.S. base can be a big help when selling to the lucrative U.S. market. That's one reason Fremont (Calif.)-based Infosys Consulting, a subsidiary of Indian outsourcer Infosys, plans to hire about 500 consultants -- most of them Americans -- over the next two years, says Basab Pradham, senior vice-president and head of worldwide sales....

As U.S. companies begin to outsource such mission-critical functions as human resources and finance, they still want to be able to coordinate and oversee such work more closely. "What we're beginning to witness is a change in the [offshoring] business model," says Wipro's [corporate vice-president of human resources Pratik] Kumar. "A lot of outsourcing companies used to be completely offshore. But as they've begun to handle more complex work, they find that they need to have more local expertise deployed."

UPDATE: Ashish Hanwadikar has more links on this.

Lou Dobbs has just published a book, Exporting America : Why Corporate Greed Is Shipping American Jobs Overseas. To promote it, Dobbs gave a long interview to Bill Moyers on the latter's PBS program.

The interview provides a field day of contradictions and economic illiteracy, but the one thing that came through loud and clear is that Lou Dobbs is not the best writer in the world. Moyers quotes the opening passage from Exporting America:

The power of big business over our national life has never been greater. Never have there been fewer business leaders willing to commit to the national interest over the selfish interest for the good of the company over that of the company's they head. (emphasis added)

I'm pretty sure I know what Dobbs meant by that second sentence -- but I can't swear complete certainty.

UPDATE: Thanks to alert reader gw, who actually went into the bookstore and discovered that the underlined sentence is written as: "Never have there been fewer business leaders willing to commit to the national interest over the selfish interest for the good of the country over that of the companies they head."

Slightly more intelligible, but I think the Pulitzer committee will be underwhelmed.

Hi everyone. I'm looking forward to trading ideas this week while Dan takes a well-deserved break. We must all respect a man who, however unwisely, has put his blog where his mouth is and outsourced it. One or two readers have complained that we're not actually located in Bangalore, something we'll try and rectify in the future. If we had done this next week, I could have blogged while on vacation in Asia, which with time difference would have allowed the blog to run 24/7, demonstrating how outsourcing can release the full potential of American capitalism (to say nothing of web-based opinion journalism). And don't worry too much about our willingness to blog for no wages--so is Drezner.

If you've read our bios, there will be no prizes for guessing who the straight man is this week. So, rather than asking Reihan, "Who's on first?", let me jump in with a news item...

One of Bill Clinton's political gifts was to take at a divisive issue and frame it in a way that sidestepped traditional political faultlines. Quick example: his call for making abortion "safe, legal, and rare." That phrase epitomizes the vast American middle on the issue. One could argue that this is the core of "Third Way" politics in general -- Tony Blair's "tough on crime -- and tough on the causes of crime" would be another example.

Which brings me to Hillary Clinton and outsourcing. The good Senator from New York has managed to play both sides of the fence on this issue, blasting Treasury Secretary John Snow for suggesting that outsourcing helps the economy -- while simultaneously welcoming one of India's biggest outsourcing firms to Buffalo, NY. How to explain this? Some have accused her of lacking a firm grasp on policy issues -- but it could be that Hillary is stumbling around, trying to find a Third Way on the issue.

Which brings me to her Wall Street Journal op-ed of a few days ago. No stumbling here -- she comes up with a superior political response to offshore outsourcing -- that it's not as cost-effective as firms believe it to be:

New Jobs for New York, a nonprofit corporation focused on economic development, commissioned a study by Howard Rubin to explore the real facts on outsourcing. He found that next year, nine out of the 10 largest firms in New York are predicted to perform IT or business process work offshore. The primary reason given by 90% of these firms is "cost savings." So he analyzed these savings by category.

It turns out that the savings from outsourcing were not as large as many employers believe. While they cited average savings of 44% per outsourced job, Prof. Rubin demonstrates that the actual figure approximates 20%. Lower wages are only one part of the offshore equation. When you tabulate all the costs, our nation is more competitive than employers think.

You're probably asking, "How can we compete against countries where a computer programmer's wages are $10,000 per year while the equivalent U.S. wage is $100,000?" The explanation is that additional costs must be added to the offshore wages themselves to get the complete picture on costs. Companies have to spend money for planning, offshore transition, vendor selection, technology, communications, offshore management, travel and security. Many employers do not take every one of these costs into consideration. Add up all the costs and suddenly a call-center worker with a raw wage of $5 an hour offshore has a true cost of $17. And that's why we have the potential to be competitive.

The article then goes on to propose many of the things John Cassidy said wouldn't be discussed by politicians in his New Yorker essay. The political brilliance of this argument is that it allows the junior Senator from New York to blast the trend of offshore outsourcing without having to agitate for inane policy solutions like protectionism. Her argument is that if firms only realized the true costs, they wouldn't outsource to Bangalore, but to Buffalo instead.

Now, I'm pretty sympathetic to Clinton's argument -- it's a definite improvement over the position taken by the senior Senator from New York. It also buttresses a point I made in "The Outsourcing Bogeyman":

It is also worth remembering that many predictions [about the explosion of outsourcing] 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. Much of the perceived boom in outsourcing stems from companies' eagerness to latch onto the latest management trends; like Dell and Lehman, many will partially reverse course once the hidden costs of offshore outsourcing become apparent.

My one caveat: eager to learn more, I checked out the New Jobs for New York web site to find the Howard Rubin study. I found this press release and this summary of the Rubin report (co-authored with Patricia Jaramillo). What I did not find was any hard numbers to back up Rubin's findings. It's not that they don't necessarily exist -- I just couldn't find any copy of the full report, and the summaries provided no data on this point.

Lest I be accused of not doing enough shoe-leather reporting, I, like, actually picked up the phone and called New Jobs for New York. The executive director was very friendly, and suggested I contact Rubin directly. I've left a message with him.

Should I see hard numbers, the readers of danieldrezner.com will be the first to know.

In the meantime, consider this a case study of how Hillary is learning from Bill.

UPDATE: Rubin might have his own consulting prejudices -- according to Forbes, he's a VP for Meta Group.

I got a lot of e-mail requests to discuss John Cassidy's New Yorker story from last week on offshore outsourcing. I resisted them because Cassidy's essay was not on the New Yorker website, so it seemed like it would have been weird. But the e-mails kept coming. So here goes:

What's weird about the piece is that it reads like Cassidy wrote it back in April and then put it in a desk until The New Yorker had some pages to fill. For example, the estimate Cassidy cites from Forrester Research on the number of jobs that will be outsourced was revised upwards in May -- which would bolster Cassidy's point -- but the older figure is used.

This paragraph is emblematic of the problems with the story:

While outsourcing isn't the only reason that business are so reluctant to hire American workers -- rising productivity and a lack of faith in the recovery are others -- it is certainly playing some role, a fact that corporate executives are much more willing to admit than economists are. Moreover, economists tend to overstate the theoretical case for outsourcing, arguing that trade liberalization is always and everywhere beneficial, which simply isn't true.

OK, let's skip over the fact that 70% of those corporate execs have said they have no immediate or future plans to outsource. What's important is that Cassidy's small caveat about productivity gains allows him to commit a major fudge, blaming outsourcing for the larger, lackluster employment picture. This simultaneously ignores the importance of productivity and conveniently ignores the fact that the employment data doesn't back Cassidy up.

Don't take my word for it, though -- Charles L. Schultze has more on this in a Brookings Institution policy brief. Schultze makes important caveats about the official data, but nevertheless concludes:

If the disappointing employment growth of the past several years came about because America's production needs were being met to an increasing degree by production from foreign rather than American workers, as Americans increased the share of consumer and capital goods they bought from abroad, or as domestic firms expanded the share of their operations located abroad, this should show up as a rise in the inflation-adjusted value of imports relative to GDP. During the 1990s the import share rose steadily, but apart from some short-term fluctuations the share leveled off thereafter. It is difficult from this data to see how changes in the combination of import substitution and offshoring could have played a major role in explaining America's job performance in recent years.

The estimates on imports of goods come from relatively comprehensive U.S. customs data. Conceivably, the surveys of business firms used by the Department of Commerce to collect data on service imports may be missing some of the increase attributable to offshoring.... But the absolute size of any such errors in the import data cannot realistically be anywhere near large enough to alter the earlier conclusion that the speedup in productivity growth was by far the dominant factor behind the disappointing job growth. (emphasis added)

Both Schultze and Cassidy state that outsourcing and productivity gains can cause the gross destruction of jobs. However, Cassidy wants the reader to believe that outsourcing is the real villain -- Schultze shows that it isn't.

Cassidy closes with the following paragraph:

If the United States is to meet the challenge posed by a truly global economy, it will have to insure that its scientists are the most creative, its business leaders the most innovative, and its workers the most highly skilled -- not easy when other nations are seeking the same goals. A truly enlightened trade policy would involve increasing federal support for science at all levels of the education system; creating financial incentives for firms to pursue technological innovation; building up pre-school and mentoring initiatives to reduce dropout rates; expanding scholarships and visas to attract able foreign students and entrepreneurs to these shores; and encouraging the development of the arts. In short, insuring our prosperity involves investing in our human, social, and cultural capital. But don't expect to see that slogan on a campaign bumper sticker anytime soon.

Brad DeLong has his own problems with this closing. For me -- beyond the dubious linkage between arts funding and outsourcing -- what's missing from the Cassidy piece is a recognition of American strengths in innovation for the future. Hell, even the Progressive Policy Institute -- in a policy brief on offshoring by Richard Atkinson that reads like Cassidy's wish list no less -- recognizes this fact:

The next wave [of innovations] is not just about technology. It is also about innovative new business models, which the United States is particularly well positioned to develop because of its unique combination of information technology (IT) talent, entrepreneurial energy, and flexible capital markets. India boasts high-level computer programmers, but innovative companies that combine IT with creative business models, such as Yahoo!, Amazon.com, Akami, and Google, were all developed in the United States.

When the Progressive Policy Institute agrees with the former head of the McKinsey Global Institute, it does suggest that this is kind of important.

Also on this point, Tammy Joyner has a long Atlanta Journal-Constitution story on the hidden costs that can come from offshoring -- in large part due to the infrastructure deficiencies that Cassidy elides in his essay.

Two other offshoring stories worth checking out:

1) Bruce Bartlett has a policy brief on insourcing vs. outsourcing.

2) William Bulkeley has a Wall Street Journal story on how IBM is adopting new policies to reduce layoffs due to offshore outsourcing. Key line: "IBM is increasing employment for the first time in three years. Earlier this year it said it expected to boost world-wide employment by 15,000 to 330,000 in 2004, including a net U.S. employment boost of up to 2,000, despite offshoring."

I've taken Josh Marshall to task for essentially outsourcing the thought behind his lone outsourcing post to the Kerry campaign.

However, it now turns out that there was an error in the underlying story -- a speech that U.S. Chamber of Commerce President and CEO Thomas Donohue gave to the Commonwealth Club about offshore outsourcing. Here's how the Associated Press initially reported the story:

Donohue acknowledged the pain for people who have lost jobs to offshoring - an estimated 250,000 a year, according to government estimates. But pockets of unemployment shouldn't lead to "anecdotal politics and policies," he said, and people affected by offshoring should "stop whining."

"One job sent overseas, if it happens to be my job, is one too many," Donohue said. "But the benefits of offshoring jobs outweighs the cost."

The Associated Press now admits it was in error:

In a story June 30 about a speech by U.S. Chamber of Commerce President Tom Donohue to the Commonwealth Club of California, The Associated Press erroneously reported that Donohue said people affected by offshoring should "stop whining."

According to a transcript of the speech provided by the chamber, Donohue said of offshoring, "Let's not whine."

Let me stress here that this is entirely the fault of the Associated Press; neither the Kerry campaign nor Marshall can or should be blamed for relying on the AP wire.

However, I do wonder if those in the blogopsphere who linked to this story will post the correction -- because it drastically alters the perception of what Donohue said. [Why?--ed. Because the new formulation sounds far less haughty. Iinstead of Donohue addressing others, the pronoun used is first person plural, implying that he is not placing blame.]

I'd like to congratulate Joshua Micah Marshall for improving his productivity by recycling a John Kerry press release in his snarky post on offshore outsourcing. Sure, some bloggers might have dug a bit deeper to get more information -- like the fact that John Kerry's policy proposals on outsourcing would have zero effect on the job losses Marshall broods about. And sure, by completely outsourcing his research to Kerry's campaign, Marshall may have missed just a few of the nuances involved in the debate on offshore outsourcing -- but Marshall did post first on this. Congratulations, Josh!!

[Hey, didn't you just do this as well?--ed. Yeah, but I said it was a press release when I did it.]

More seriously, in the wake of mediocre job numbers for June, Paul Blustein has a Washington Post story that's worth checking out on the topic. The lead paragraphs look scary:

A report by an influential consulting firm is exhorting U.S. companies to speed up "offshoring" operations to China and India, including high-powered functions such as research and development.

In blunt terms, the report by the Boston Consulting Group warns American firms that they risk extinction if they hesitate in shifting facilities to countries with low costs. That is partly because the potential savings are so vast, but the report also cites a view among U.S. executives that the quality of American workers is deteriorating.

However, the story goes on to quote some interesting research findings:

Matthew J. Slaughter, a professor at the Tuck School of Business at Dartmouth, pointed to research he published in March using Commerce Department data to show how offshoring can have a positive impact on U.S. job growth, as part of the "churn" in employment that constantly eliminates jobs but also adds them.

Although U.S. multinationals expanded their overseas payrolls by 2.8 million from 1991 to 2001, in moves that often involved factory closures and layoffs in the United States, they expanded their U.S. employment levels by nearly 5.5 million, according to Slaughter's study. That is partly because as such firms expand the scale of their operations abroad, they need more personnel at home to handle functions such as marketing, logistics, finance and product design. For similar reasons, McKinsey & Co., one of Boston Consulting's main rivals, has estimated that for every $1 invested abroad by U.S. companies, the U.S. economy gains $1.14, which can be plowed into job-creating enterprises.

Click here for a case study that buttresses Slaughter's aggregate data. And here's the relevant table:

If I wasn't busy trying to get tenure and all that, I'd be sorely tempted to write a quickie paperback with that title. Never mind Dobbs' tendentious reporting about outsourcing -- now he's got bigger ethical quandries.

Back in March, James Glassman pointed out in Tech Central Station that Dobbs was praising companies like Boeing and Washington Mutual as worthy stocks in his eponymous investment letter -- even though he was bashing these very same companies for offshore outsourcing on his CNN show, Lou Dobbs Tonight.

Last week, Zachary Roth at CJR's Campaign Desk followed up on this tendency of Dobbs to say one thing to his viewers and another thing to readers of his investment letter:

Unlike most investment advisors, Dobbs goes beyond talking up the earning potential of these companies. He typically goes out of his way to praise them as good corporate citizens. The newsletter keeps a running tally of the companies profiled, under the heading, "The following companies have been featured in the Lou Dobbs Money Letter as those 'doing good business with good people.'" The appeal is alluring: You're not just buying a smart investment choice, you're buying a piece of good citizenship.

Dobbs devoted a column in the March issue to touting the prospects of the Minnesota-based Toro Company, which makes outdoor landscaping-maintenance equipment. He told subscribers that Toro was a "long-term wealth-builder," and praised Toro's "formal code of ethics, something I think is sorely needed at more of America's companies," and its "...exemplary corporate governance structure, which aligns the interests of shareholders, employees, and customers." He concluded his interview with Toro CEO Kendrick Melrose by frankly telling him, "I like the way you treat your shareholders, employees, and customers."

One wonders whether Dobbs' admiration extends to Toro's 2002 decision to move 15% of its workforce -- about 800 jobs -- to Juarez, Mexico. Indeed, CEO Kendrick Melrose might be interested to know that Toro appears on Dobbs' own list of companies that are "exporting America."

And Toro is not alone. Of the 14 companies Dobbs has highlighted for investors since starting his newsletter last year, eight appear on his CNN website as companies that outsource jobs (emphasis added).

Read both Glassman and Roth. We here at danieldrezner.com are appalled -- there are actually people out there who would pay $398 a year for Lou Dobbs' investment advice?! To be fair, however, Glassman does point out in another column that on his TV show, Dobbs is the perfect anti-predictor when it comes to investment decisions.

Amazingly, Dobbs is proving to be somewhat two-faced in his response to the Campaign Desk post. In a follow-up post, Roth writes, "When we contacted him, Dobbs was unrepentant, saying that he didn't see a problem with using one hand to reprimand companies for outsourcing, while using the other to promote the same firms." However, when the Wall Street Journal came a callin', Dobbs changed his tune:

In an interview, Mr. Dobbs said he would change his newsletter in response to critics' concerns. In the future, Mr. Dobbs said, every examination of a company and every interview in the newsletter will include mention of that business's offshoring record. "It makes absolute sense," Mr. Dobbs said. "If this is a concern -- and it certainly is a concern of people -- I will respect that. It's something I will begin implementing in the newsletter."

Lou, Lou, Lou -- it's never the original scandal that brings you down -- it's the cover-up to the scandal.

I'll give Roth the final word of this post:

It's nice that Dobbs will now inform the thousands of subscribers to his newsletter about the offshoring records of his featured companies. It would be even nicer if he informed the much larger number of people who watch his anti-outsourcing crusade on CNN that he promotes some of the companies on his "exporting America" list.

With the BLS report, I suspect I'll have little need to post on offshore outsourcing for some time -- no doubt inspiring a sense of relief among regular readers.

However, before I get off my outsourcing high horse, it's worth noting that the phenomenon is not limited to the for-profit sector -- now the Catholic Church is getting in on the act. Saritha Rai has the details in the New York Times:

With Roman Catholic clergy in short supply in the United States, Indian priests are picking up some of their work, saying Mass for special intentions, in a sacred if unusual version of outsourcing.

American, as well as Canadian and European churches, are sending Mass intentions, or requests for services like those to remember deceased relatives and thanksgiving prayers, to clergy in India....

In Kerala, a state on the southwestern coast with one of the largest concentrations of Christians in India, churches often receive intentions from overseas. The Masses are conducted in Malayalam, the native language. The intention - often a prayer for the repose of the soul of a deceased relative, or for a sick family member, thanksgiving for a favor received, or a prayer offering for a newborn - is announced at Mass.

The requests are mostly routed to Kerala's churches through the Vatican, the bishops or through religious bodies. Rarely, prayer requests come directly to individual priests.

While most requests are made via mail or personally through traveling clergymen, a significant number arrive via e-mail, a sign that technology is expediting this practice.

In Kerala's churches, memorial and thanksgiving prayers conducted for local residents are said for a donation of 40 rupees (90 cents), whereas a prayer request from the United States typically comes with $5, the Indian priests say.

Bishop Sebastian Adayanthrath, the auxiliary bishop of the Ernakulam-Angamaly diocese in Cochin, a port town in Kerala, said his diocese received an average of 350 Mass intentions a month from overseas. Most were passed to needy priests.

In Kerala, where priests earn $45 a month, the money is a welcome supplement, Bishop Adayanthrath said.

Thanks to alert danieldrezner.com reader R.S. for the link.

CNN's Chris Isidore provides the most in-depth coverage of the BLS report showing that offshore outsourcing is responsible for a piddling number of lost jobs. Among other things, he has the only story I've seen that actually quotes anyone from the BLS.

Isidore's story provides a lovely contrast with to how fellow CNN employee Lou Dobbs ran with the same information on his show. Let's compare and contrast!

Isidore first:

Only a small portion of jobs lost in the first quarter were due to outsourcing of work overseas, according to a government report Thursday that's already being questioned by critics of the Bush administration.

The Bureau of Labor Statistics (BLS), in its first look at layoffs due to the relocation of work, identified only 4,633 jobs that were lost due to relocation of work overseas during the first quarter.

The jobs lost to overseas relocations were outweighed by 9,985 jobs lost due to relocation of work within the United States.

And both types of relocations made up just a tiny fraction of the mass layoffs that accounted for the loss of 239,361 jobs in the quarter.

The number of jobs lost to overseas relocations equals 2.5 percent of overall layoffs in the quarter, excluding seasonal job losses, while the domestic job relocations accounted for another 5.4 percent....

Josh Livens, an Economic Policy Institute economist, and critic of the Bush administration and corporate outsourcing of work overseas, said he is pleased the BLS has started collecting this survey data. But he's concerned it will be misused to minimize the impact of overseas outsourcing.

"It's interesting for a number of reasons, but it doesn't shed a lot of light on what's happening in the broader job creation and destruction picture," he said.

Read the whole thing -- Isidore does a good job of explaining the caveats to the BLS numbers, as well as giving critics an opportunity to make their points.

Here's how Dobbs treated the same information:

The government for the first time is beginning to track the number of American jobs lost to cheap foreign labor markets. A Department of Labor report released today finding that more than 4,600 American jobs were exported to those cheap foreign labor markets in the first three months of the year.

That report, however, is certainly incomplete. It does not, for example, count every job lost to a foreign worker. Companies that laid off fewer than 50 employees are not even included, and companies that employ fewer than 50 people in total are not included as well in this first government effort.

But it is certainly at least a long-awaited, much-needed beginning.

The government study also confirmed what we've been reporting here for more than a year, that the manufacturing sector has been devastated by the export of American jobs to cheap overseas labor markets. While corporate America increases its reliance on cheap foreign labor, a new report finds that outsourcing simply doesn't pay.

Lisa Sylvester reports from Washington.

LISA SYLVESTER, CNN CORRESPONDENT (voice-over): The survey by the Bureau of Labor Statistics found off-shoring is still in its early stages with less than 3 percent of all job loss due to overseas outsourcing. But the trend is expected to grow.

A survey by "CFO" magazine asked corporate managers who have already sent work overseas whether they will increase off-shoring in the next two years. Sixty-four percent said yes. And white-collar jobs are increasingly in jeopardy.

To be fair, Dobbs and Sylvester did not out-and-out lie in their version of events. They just left out two one minor details: 1) The BLS survey suggests that the percentage of jobs lost due to offshoring was less than 2.5% of the total (sorry, my screw-up -- Sylvester did mention this -- Dobbs didn't); and 2) That cited CFO survey showed that 70% of respondents had no present or future plans to engage in any offshore outsourcing.

We here at danieldrezner.com salute Lou Dobbs for his unique ability to slant data that flatly contradicts his hypothesis -- as well as CNN's other reportage. Way to go Lou!!

For other treatments of this story, check out Paul Blustein in the Washington Post, as well as the New York Times and Financial Times. The Washington Post also has a nice round-up of other press treatments.

One of the problems with the outsourcing debate is that the estimates about job losses due to offshoring are mostly coming from management consultants, who appear to be basing those numbers on some really shoddy guesstimates. Official data collection from the Bureau of Labor Statistics didn't sem to directly address this phenomenon. My back-of-the-envelope calculations from the BLS Mass Layoff data suggested that the number of people laid off due to offshoring was around and about 3% of total layoffs.

Starting this calendar year, however, the BLS decided to ask employers whether offshore outsourcing -- or onshore subcontracting that led to offshore outsourcing -- was the reason for the mass layoff.

Data for the first quarter are now available for extended mass layoffs -- and it turns out that my 3% estimate was incorrect. This is from the Bureau of Labor Statistics press release:

Of the 239,361 private sector nonfarm workers who were separated from their jobs for at least 31 days in the first quarter of 2004, the separations of 4,633 workers were associated with the movement of work outside of the country, according to preliminary data. Domestic relocation of work--both within the company and to other companies--affected 9,985 workers....

In establishments that had layoffs related to the movement of work, the average size of a layoff was 135 workers. This compares with an average of 199 for all establishments that had extended mass layoffs in the first quarter of 2004....

Sixty-eight percent of the layoff events involving the movement of work and 65 percent of the laid-off workers were from manufacturing industries during the first quarter of 2004.

So, to conclude -- the percentage of jobs lost due to mass layoffs -- in turn due to offshore outsourcing -- as a percentage of total jobs lost through mass layoffs was not 3% -- it was a whopping 1.9%. If you drop out seasonal employment, the figure rises to 2.5%. So my back of the envelope calculations from a few months ago are an exaggeration. My apologies.

The caveats -- this data does not cover two other kinds of job loss via outsourcing -- 1) Those let go due to ousourcing when fewer than 50 people were let go; and 2) Those jobs created de novo overeas that may have been created in the U.S. instead were it not for the outsourcing phenomenom.

At the same time, this data also does not cover two kids of job gains via outsourcing -- 1) Those jobs created via insourcing, when a foreign firm hires U.S. workers; and 2) Those jobs created via the budgetary savings reaped from outsourcing.

The bottom line -- offshore outsourcing is responsible for a piddling number of lost jobs.

I'll be commenting on these figures this evening for Nightly Business Report on PBS. Check your local listings!!

UPDATE: Here's how Reuters plays the story:

The bulk of outsourced jobs never leave U.S. shores, the government said on Thursday in a new report suggesting concerns over American workers losing jobs to cheaper foreign labor may be exaggerated.

Nine percent of non-seasonal U.S. layoffs in the first quarter were due to outsourcing, but less than a third of the work was sent overseas, the U.S. Labor Department said in releasing new figures on mass layoffs and outsourcing.

"In more than seven out of 10 cases, the work activities were reassigned to places elsewhere in the U.S.," the Bureau of Labor Statistics said in its report on mass layoffs for the January-to-March period.

Only trouble is, the headline says "OUTSOURCING CAUSES 9% OF U.S. LAYOFFS" -- which is true but includes onshore as well as offshore outsourcing.

A while back, I blogged here and here about how American consumer behavior seems generally unaffected by the spectre of outsourcing -- i.e., Americans make choices based more on price than origin of production.

To be fair, some people do not think this way -- click here for a few examples courtesy of Newsweek. Beyond anecdotal evidence, however, what do Americans now think about outsourcing? And do these feelings affect their behavior?

Two recent polls -- one by the Employment Law Alliance ("the world’s largest independent network of labor and employment attorneys") and one by Ipsos (for the Associated Press) suggest some commonalities and cleavages on the issue.

On the one hand, the polls largely confirm that most Americans are mercantilists at heart. The Ipsos poll shows that 69% of Americans believe that outsourcing hurts the country -- and only 17% think it helps the economy. 58% of respondents in the ELA poll believe that companies outsourcing work that could be done by Americans to offshore contractors should be penalized by the US government.

At the same time, the ELA poll shows that 46% of Americans believe that offshoring has been exaggerated by the media. Still, it would be hard not to conclude that most Americans think offshore outsourcing is a bad thing.

So how does this affect actual consumer behavior? Here the answer changes. On the one hand, the Ipsos poll shows that when asked to choose between a product made in the USA and a similar one made elsewhere, 93% of Americans say that they'd buy the American product. However, if the foreign good is cheaper, that percentage falls to 54%. Furthermore, a slight plurality (38% to 35%) do not check product labels so as to "buy American."

The AP story by Will Lester goes on to suggest a generational divide in the economic reaction -- with younger folks more sanguine:

"That's not a big deal to me, where it was made," said Serena Evans, a machine operator from Hurt, Va. "I look for the cheapest product, because I barely have the money to buy it."

Evans, 24, was typical of her age group.

Nearly two-thirds, 63 percent, of those younger than 30 said they seldom if ever check to see where a product is made -- more than three times the number who do. A majority of young adults said they would buy a lower-priced product from another country over a more expensive U.S. one.

Americans 60 and older were almost twice as likely to say they usually or always check labels to see where a product is made. And by more than 2-to-1, they said they would buy an American product even if it cost more than foreign goods.

As the story concludes, "Fresh concerns about U.S. jobs being shipped overseas are not being turned into renewed public sentiment to buy American."

So, to sum up -- Americans do not like offshore outsourcing as a phenomenon -- but over time, and increasing number of them are happy to reap the benefits of it as consumers.

This is really the biggest intellectual divide on the outsourcing issue -- whether one thinks the most important effect of offshoring is on employment or on consumption. Most Americans say the former but do not act on it. The data I've seen suggest that outsourcing's effect on employment is negligible -- and the effect on consumption is a positive one.

It seems that California is not the only state that is coming to grips with the costs that come from outlawing offshore outsourcing.

The AP's Allen Breed reports that in the wake of efforts to block the offshore outsourcing of government contracts, some state legislatures don't like the pricey hangover:

Governors and legislators in two-thirds of the states have ordered or proposed antioutsourcing actions.

But many of those efforts at "economic patriotism" have run headlong into another time-honored American tradition: taxpayers' demands that the government give them the most bang for their buck....

When Kansas officials learned that food stamp questions were being answered by workers in India under a contract with an Arizona company, state senators added language to the budget requiring the work be done in the United States.

But the language was deleted when negotiators learned it would boost the state's costs by $640,000, about 38 percent.

The Boston Globe's Diane E. Lewis reports on the effect that offshore outsourcing is having on IT salaries:

Technology specialists with hot skills continue to command top salaries and bonuses despite the outsourcing of some information technology jobs to India, Russia, Ireland, and other countries, according to a report released today.

Offshore outsourcing has had little impact on the salaries of those with critical skill sets such as senior network architects or senior database management staff, said the report by the META Group, based in Stamford, Conn. Based on a compensation survey of 650 large and midsized firms with at least $200 million in annual revenue, the report includes salary data for 180 information technology positions in 14 industries.

The technology research firm found that technology workers with general skills are more likely to experience stagnant wages than those whose expertise is in demand. The survey also found that 19 percent of the companies polled outsource IT work to foreign countries. Of those, the majority send jobs to India.

Opponents of outsourcing jobs offshore have maintained the practice causes layoffs and depresses salaries in the United States, forcing many full-time IT professionals to seek work in other professions or turn to temporary contract work.

The IEEE-USA, which represents electrical engineers, electronics engineers, and computer specialists, declined to comment on the META Group findings yesterday. The industry group has spoken out against the outsourcing of IT jobs. A spokesman said the organization needed time to study the report.

Maria Schafer, the report's author and a senior program director at META Group, said salaries for IT specialists are starting to return to their 2000 levels.

Read the whole article -- and you can download the executive summary of the META group report by clicking here (registration required).

Given that 2000 was the peak of dot.com hysteria, the salary rebound is pretty impressive.

UPDATE: This elaboration on salary structure comes from page 11 of the executive summary:

1) companies paying staff this much more than others in the organization are very eager to retain these individuals; 2) there is a continuing and strong market for experienced individuals with critical skills; and 3) the job market is picking up. The rate of increase in salaries has slowed, but IT staffs have held onto salary levels because their role is necessary to the organization. There are many more available workers — due to the net effects of continuing vendor-side layoffs in the high-tech sector, fewer opportunities for consulting, and the overall sluggishness in companies of all sizes — yet the issue of quality in the available labor pool is compounded by a continuing lack of some skills (mainly in the highly specialized areas that represent emerging technology needs, such as wireless, security, and data management).

As for the magnitude of offshoring (from page 16):

Of the 20% of organizations that are currently engaged in sourcing (or siting) labor offshore, the percentages vary substantially for how much companies are deploying labor this way. Forty percent of this number have only 5% or less of their total workforce deployed offshore.

Practicing what I preach, instead of posting my latest mini-essay on offshore outsourcing here at danieldrezner.com, I've outsourced it to... GlennReynolds.com. Regular readers will recognize some of the material, but there's a lot of new stuff as well!

Go check it out.

Not often, but every once in a while, opponents of outsourcing manage to implement policy designed to thwart the subcontracting of tasks overseas. We here at danieldrezner.com feel that they should be congratulated for these efforts, as well as the transparently obvious economic benefits that such policy measures bring to our great country.

So let's hear it for the state of California's anti-outsourcing procurement rules, which are having quite an effect on the state's efforts to rebuild the Bay Bridge. Jean-Paul Renaud of the Los Angeles Times reports:

When officials six years ago unveiled their plans to rebuild portions of the earthquake-damaged San Francisco-Oakland Bay Bridge, they said the span would rival even the famed Golden Gate Bridge.

They envisioned a sleek, modern design that would have at its center a 525-foot suspension tower rising from San Francisco Bay, providing a distinctive addition to the area's skyline.

But this gem is proving to be costly. The elaborate design, praised at its inception, now is being blamed for ballooning costs and several delays. Caltrans says it will cost about $4 billion to build the bridge — three times more than the agency expected in 2001.

This week, officials announced that the suspension tower alone would cost $1 billion more than originally expected.

One reason, they said, is the state's "Buy America" rules, which dictate that Caltrans can use foreign steel on the bridge only if its cost is at least 25% less than domestic steel. In this case, the difference is only 23%, so the state must go with domestic steel. That added $400 million to the price tag. (emphasis added)

$400 million? It's a good thing the state of California doesn't face a budget crunch or anything! Way to stop outsourcing!!

Thanks to alert danieldrezner.com reader C.W. for the tip.

UPDATE: Thanks to alert danieldrezner.com commentor gw, who points out that the Buy American Act is a federal law. One wonders, however, how the cost differential of 25% was determined as meeting the "unreasonable cost" standard.

ANOTHER UPDATE: gw strikes again!! Here's the relevant link for an explanation of how Buy America affects steel. And here's a link to Michael Cabanatuan's San Francisco Chronicle story about the bridge, which has further details:

Transportation officials were stunned Wednesday when the only bids on the new suspension span, both from a joint venture of American Bridge, Nippon Steel Bridge and Fluor Enterprises, came in at $1.4 billion and $1.8 billion, the latter more than a billion over estimate.

Because the bridge project is subject to federal Buy America requirements, the contractor was allowed to submit two bids -- one using only steel from U.S. firms, one using foreign steel. (emphasis added)

However, it appears that even California officials were temporarily confused by the provisions of the Buy America act:

On Wednesday, when the bid was opened in a Caltrans basement in Sacramento, it appeared that the agency would have to go with the $1.8 billion domestic steel bid, unless it chose to reject the bid and start over.

But transportation officials said Thursday that the way the cost differential is calculated would allow the state Department of Transportation to take the lower bid -- and use foreign steel.

"The way everyone thought it works apparently isn't,'' said Randy Rentschler, spokesman for the Metropolitan Transportation Commission, a partner with Caltrans in building the new Bay Bridge.

Dan McElhinney, Caltrans deputy district director, said that as long as the bid is deemed "responsive and responsible" and in tune with market conditions, Caltrans is free to use the foreign steel bid.

Many thanks to gw for doing the cyberwork on this story.

The Washington Post's Sara Kehaulani Goo has a story on how the outsourcing phenomenon is affecting aircraft maintenance. Turns out to be a two-way street:

Northwest Airlines is gutting two hangars at Minneapolis-St. Paul International Airport because the standard work of overhauling the airline's 747 fleet has moved to Asia.

Air China, meanwhile, is sending its planes to San Francisco for high-tech engine work by United Airlines mechanics.

U.S. carriers have outsourced thousands of maintenance jobs. At the same time, however, some airlines have stepped up their efforts to bring maintenance work into their shops. The major carriers are "insourcing" work from domestic low-cost carriers that don't have their own maintenance crews and from airlines based in China, South Korea, Canada and elsewhere.

The aircraft maintenance industry is "a classic manifestation of globalization," said Martin N. Baily, senior fellow at the Institute for International Economics. "Labor-intensive, somewhat less technically sophisticated stuff goes overseas, but more high-tech, leading-edge stuff would remain in the U.S. Maybe the U.S. even has a comparative advantage."

Delta Air Lines' insourcing includes repair work on engines for Atlantic Southeast Airlines and Comair at Delta's hub in Atlanta. Its revenue from such work has increased, to $200 million last year from $40 million in 1999.

American Airlines recently signed a contract that gives it the option to repair Rolls-Royce aircraft engines for other airlines. United does maintenance work for Air China, Korean Air, Air Canada and the U.S. military.

"We make a high profit margin on engine overhauls and landing gear," said Joseph Prisco, president of Local 9 of the Aircraft Mechanics Fraternal Association, the union representing mechanics at United Airlines. "Air China sends a lot of their engine overhaul work to us. The costs are probably more expensive per head, but we do a faster job and better job than they can get done in their own country."

The article also highlights a genuinely worrisome regulatory gap, however: "For example, airline maintenance workers in other countries do not have to undergo mandatory drug and alcohol testing or criminal background checks as they do in the United States." If I'm a terrorist wishing to strike fear into American travelers, this is an obvious loophole to exploit.

To be fair, the Transportation Safety Administration is planning on promulgating regulations this month to deal with this loophole -- I just hope they're implemented soon.

UPDATE: If you're interested in the topic, be sure to check out the Discovery Channel's "The Other Side of Outsourcing" this evening -- it's a documentary of Tom Friedman's trip to Bangalore. 10:00 PM, ET.

Thank God The Onion didn't write this before my Foreign Affairs piece. It's shorter, funnier, and (particularly the last point) hits home.

Joshua Kurlantzick has an interesting essay in The New Republic on the growth of Indian-Americans as a politically influential interest group, to be wooed by Democrats and Republicans alike. [So why is this filed under the outsourcing category?--ed.] Apparently, the Democratic rhetoric on offshoring have hampered their efforts to woo this bloc of voters. The good parts version of the article:

Indian Americans have long had the resources to compete in politics. The nation's wealthiest ethnic group, with a median family income over $60,000, its population doubled between 1990 and 2000, to 1.7 million, and is likely to double again by 2010. They are also among the best-educated groups in the country. Yet only in the past four years has the Indian community become more politically active. The first generation of Indians to come to the U.S., in the 1960s and 1970s, was made up primarily of doctors, engineers, and other science workers--U.S. policies at the time favored immigrants with science skills--and was interested primarily in building families and earning a living. Indeed, before 2000 only four Indian Americans had held office on a state or national level, and only one Indian American had ever been elected to Congress.

But since 2000, all that has begun to change. The war on terror contributed to a rise in hate crimes against brown-skinned and turban-wearing Americans, and that has galvanized many Indian Americans to become more politically involved. The White House's increasing chumminess with Pakistan--the administration recently decided to name Islamabad a "major non-NATO ally"--added to the sense of political urgency among Indian Americans. And most important, the recent furor over information technology offshoring, much of it to India, has sparked fears of a rise in anti-Indian sentiment, further convincing many Indian Americans of the need to organize. In March, Christopher Dumm, executive director of the Indian American Center for Political Awareness, told the Financial Times, "There is fear about a possible backlash that could mean discrimination at work, xenophobic rhetoric, or even violence."....

Democrats already have an advantage, as the Indian-American community, like other Asian-American groups, has traditionally backed liberal positions on immigration and other social issues. To do so, Democrats must first tone down their rhetoric on outsourcing, which has become perhaps the most important issue to many Indian Americans. Unfortunately, John Kerry and others show little sign of abandoning the issue. Shared Lakhanpal, head of the Association of American Physicians of Indian Origin, told Far Eastern Economic Review that many Indian Americans were moving to the GOP because Bush is "not bashing India for outsourcing like Kerry is doing."

All that's left is for Pat Choate -- you know, the 1996 Reform Party candidate for vice president -- to write his follow-up to Agents of Influence, which was about how the Japanese were lobbying to take over the U.S.

Senator Joe Lieberman gave a speech this morning at the New America Foundation on offshore outsourcing and what the U.S. government should do about it. Here's a link to his white paper summary of proposals -- and here's a link to Grant Gross' coverage of the speech for IT World. Among other things, Lieberman calls for increased wage insurance, expanded Trade Adjustment Assistance (TAA), and a bipartisan commission to study the problem.

I'm of two minds about the speech and proposal. I like the proposals. Boosting R&D investment, expanding TAA, expanding education spending, getting our macroeconomic house in order -- I'm in favor of all of these, and promoted some of them in my Foreign Affairs article.

The problem is the speech, which is alarmist in the extreme. Here's one sample:

We know that manufacturing jobs have been shifting overseas for some time. But now the services sector is being hit hard by offshore outsourcing – and that hurts. The services sector provides 83% of America’s jobs, employing 86 million people. It dominates our economy. Customer call centers and data entry facilities are being relocated to places where capable labor can be found at lower wage levels. High-speed digital technologies make a connection between Boston and Bangalore as fast as between Boston and Baltimore.

But offshoring is no longer limited to entry-level services jobs. Higher skilled professional jobs like computer chip design, information technology services, programming, architecture, engineering, consulting, automotive design and pharmaceutical research are beginning to go overseas. That is the bulk of the iceberg below the surface of the sea. The outsourcing of R&D is probably the most alarming illustration of this new problem. American companies now invest $17 billion in R&D abroad every year. IT multinationals have now established 223 R&D centers in China alone.

OK, lets count the inaccuracies in these two grafs:

1) Manufacturing jobs are not moving offshore -- they're largely disappearing due to technological innovation and productivity gains.

2) The service sector is not being "hit hard" by offshoring -- job losses due to overseas relocation represent a trivial amount of total job destruction.

3) Offshoring is, in fact, largely limited to entry-level services jobs, even in the IT sector. This CNet article on R&D strikes an equally alarmist tone, but the interviews and raw numbers show that not a lot of high-level tasks are going to move offshore. Two tidbits:

Like many technology executives, Rhonda Hocker saw offshore outsourcing as an ideal way to stretch her budget and speed the development of new systems.

The chief information officer at San Jose-based software maker BEA Systems contracted with an Indian outsource company six months ago to handle maintenance and support of internal enterprise software from PeopleSoft, Siebel Systems and Clarify. She then outsourced help-desk work and made plans to do the same for the development of Web services components.

But even Hocker, a fan of outsourcing by any measure, has her limits.

"We'll never outsource any of our IT architects," she said of her "rocket scientists," BEA's top information technology developers. "I would never envision putting them over there or outsourcing that to anyone."....

Microsoft, the world's largest software maker, has an R&D budget that is also one of the world's largest--some $6.8 billion for fiscal 2004. It operates research labs in China and the United Kingdom, but the bulk of its work takes place in the United States.

"We will push some product development projects to India and China, but the lion's share will stay where it is, because we think the best work force is here," Microsoft's chairman and chief software architect, Bill Gates, said in an interview with CNET News.com.

The article looks at some firms with R&D operations overseas. Typical is IBM, which has 70 researchers in Delhi, India, and 90 in Beijing -- in contrast to 3,000 total research staffers, and 2,000 in the United States.

Lieberman is correct about the education gap and the decline in public R&D investments -- but those problems have little to do with the alarmist tone of the speech.

Why wrap such sensible proposals around such exaggerated rhetoric? Because it's politically effective. The key Lieberman proposals --- education, R&D, macroeconomic prudence -- are smart things to do on their own. However, only the spectre of foreign competition seems capable of motivating Washington -- a fact that flummoxed Paul Krugman a decade ago.

While I'm very enthusiastic about the Senator's concrete proposals, I'm very, very queasy about the scaremongering tactics that are associated with them.

Oh dear -- Indian companies are messing with the dominant narrative that U.S. jobs are being outsourced to the subcontinent at an increasing rate. According to Contractor UK:

In the latest twist in the outsourcing tale, two Indian companies have announced the creation of jobs in the telecoms and software services sector that will boost the domestic jobs market in the US.

Although the numbers are comparatively small in relation to the exodus of jobs going the other way, the decision represents a marked positive step for the future of US-India trade relations....

Bharti Tele-Ventures, India's largest private telecommunications company, has awarded an IT services contract to US computer giant IBM, worth up to $750m (ÂŁ424m) in a 10-year deal. Bharti said IBM would now take care of all its hardware and software requirements, improve its data centres, IT help desks and disaster recovery capabilities.

"Arrangements like this will take the sting out of outsourcing," said Sunil Bharti Mittal, chairman of Bharti Televentures

Infosys, the second-largest software manufacturer in India, has announced that it will be creating 500 consulting jobs in the US. Infosys is investing $20 (ÂŁ11.3m) into creating a US-based subsidiary, Infosys Consulting, providing services to US companies.

The group plans to hire 75 consultants in the first year, with 500 hires total at the end of five years.

Damn Infosys and Bharti!! Next thing you know, Americans might actually realize that trade is a win-win game!!

Christopher Miller has an interesting article in the Bowling Green Daily News about how the town of Campbellsville, Kentucky responded to the 1997-98 decision by Fruit of the Loom to offshore production:

At that time, Fruit of the Loom let 3,200 jobs go overseas to save costs at its plant in Taylor County, with a population of 22,000.

Instead of giving up, the city pulled together. The town has since added 13 new employers, including Amazon.com. More than 3,700 jobs have been created from those employers and expansions from others.

Read the article to see how the town pulled this off.

A hint -- education and insourcing are involved.

Izyumov, an associate professor of economics and director of the Center for Emerging Market Economies at the University of Louisville, makes a modest proposal in the Boston Globe about dealing with the real villians behind recent job losses:

While corporate CEOs do send thousands of jobs abroad, someone else steals them by the millions. Patriotic citizens can easily identify the corporate wrongdoers -- as Senator John Kerry does in his campaign speeches and CNN's Lou Dobbs does in his list of the 200-plus worst outsourcers -- but confronting this other enemy is much more difficult. Because this enemy is the US consumer.

In 2003, the United States imported close to $1,500 billion in products, mostly consumer goods such as cars, electronics, and textiles. Assuming that each $50,000 of this spending could support one domestic job, imports killed off close to 30 million American jobs last year. Compared with that, the employment impact of offshore outsourcing is peanuts: The highest estimates put those job losses at no more than 300,000 a year for the last three years....

We hereby appeal to all professional economic patriots, especially these among state and federal legislators: Do not waste your energy fighting the paper tigers of corporate outsourcing. Have courage and go after the main enemy. Make these traitorous consumers repent! Lead them by the way of personal example: Allow no more Italian suits, French perfume, German cars, or Chilean wine in your households. And no more foreign trips either -- you know that every vacation spent in Paris or Cancun means tourism jobs lost in Chicago or New Orleans or Boston.

The Los Angeles Times reports that the political tide may be turning on offshore outsourcing:

Although public opinion polls show Americans are worried about this outsourcing of jobs, few people appear willing to back that up if it means spending more money or more time.

Even those who have lost jobs sometimes express more resignation than outrage. The lack of widespread passion on the subject, some say, helps explain why dozens of measures in Congress and state legislatures for limiting outsourcing have failed to gain much traction.

And the presumptive Democratic presidential nominee, Sen. John F. Kerry of Massachusetts, who in February characterized executives who outsourced as traitors, lately has toned down his rhetoric on the subject.

Against this backdrop, the nation's unemployment report for April — to be released Friday — becomes crucial. A strong report, coming on the heels of March's impressive net gain of 308,000 nonfarm jobs, will diminish remaining incentives to restrain outsourcing.

Sluggish job growth, on the other hand, will conjure up the slack reports of last winter. Outsourcing became a prominent election issue in December after a string of poor job reports sparked fears that U.S. job creation was in a long-term slump.

Opponents of outsourcing aren't sure how they were put on the defensive so quickly.

"It was shocking to find a Democratic-controlled House in the liberal state of Washington could not pass a significant piece of legislation dealing with the offshore-outsourcing issue," said Marcus Courtney, president of the Washington Alliance of Technology Workers. The bill would have prohibited state contracts from being sent overseas.

Courtney blamed "a nationally coordinated lobbying effort by corporate America" for the fact that none of the 80 bills in Congress and legislatures has passed.

It's just coordinated lobbying?! What about well-honed rhetoric backed by cogent analysis and hard data? [Yeah, you know it's actually the lobbying, right?--ed. Allow me my meager illusions of influence, OK?]

Part of the Times' reasoning is based on the E-loan experiment that I blogged about in March. Consumers are given a choice between having their paperwork processed in 10 days overseas or 12 days in the United States. According to the LAT, "In the three months that ended Monday, 85.6% of 14,329 loan applicants chose processing overseas."

Meanwhile, Miguel Helft writes in the San Jose Mercury News that data privacy concerns with regard to offshore outsourcing are grossly exaggerated:

like most issues in the polarized debate over outsourcing, the privacy fears are stoked by hype, misconceptions and a dose of xenophobia. Preventing personal data from going overseas will do little to keep Americans safe from privacy violations and identity thieves. Unless Americans get better privacy protections at home, they'll continue to be victimized by unscrupulous businesses and criminals.

To be sure, there have been some well-publicized privacy horror stories overseas. But American companies have been handling credit cards and financial records offshore for years with no evidence that there are any more privacy abuses or breaches overseas than domestically.

"The security of data is not determined by where it is geographically,'' says Dave Wyle, president and CEO of SurePrep. Wyle's California-based company employs a largely Indian workforce to help accounting firms with data entry and other tasks involved in tax preparation.

Wyle describes SurePrep's Indian operations as airtight. Customer data is stored at a highly secure data center in Irvine. All electronic correspondence with India is scrambled with the highest level of commercially available encryption. At the Indian offices there are no removable data storage devices, no printers, no Internet connections or telephones that reach outside the building. Workers aren't even allowed to bring paper and pens to take notes or cell phones to make unauthorized calls.

By comparison, Wyle says, at U.S. firms you'll find paper files stuffed with sensitive data lying around, data stored in removable hard drives and e-mail everywhere. "SurePrep has better security than any firm I've ever seen,'' says Wyle.

I have no way to confirm Wyle's claims, and it's likely that many other firms are less careful than SurePrep.

But Wyle makes a good point. American companies have been hacked countless times. Rogue employees have stolen and sold data from the most pedigreed blue chip companies. Once stolen, data is only a click away from Romania, Russia or any other organized crime haven. Because privacy laws in the U.S. are weak, at best, companies that are lax about data security rarely face consequences.

"We need to get our privacy protections in order first, before we start chastising other countries,'' says Chris Larsen, CEO of E-Loan.

Read both pieces.

The Bureau of Labor Statistics has a Mass Layoff Statistics program, in which firms that lay off 50 or more workers must provide as reason for such a move to the BLS. Those reasons range from automation to product line discontinuation. Offshore outsourcing is not one of the options, but "import competition" and "overseas relocation" are options. So, it's possible to estimate the extent to which offshore outsourcing is respinsible for job destruction via mass layoffs [How do you know that the firms aren't lying to the government?--ed. You don't -- but since the names of the firms are kept strictly confidential, there's no reason for them to lie either]. You can do it too -- just click here to create your own table.

Here are the percentages of jobs lost through mass layoffs because of either import competition or overseas relocation for the last seven years:

1996: 1.78%
1997: 1.87%
1998: 2.10%
1999: 2.50%
2000: 1.82%
2001: 2.88%
2002: 1.89%
2003: 2.41%

Now, these figures do not cover instances when a firm let go less than 50 people, so clearly there's a bias in the data towars multinational corporations over small businesses. That said, these numbers reveal two important facts:

1) Offshore outsourcing is not responsible for a significant percentage of the jobs that have been lost.

2) There is no evidence that offshore outsourcing is responsible for an increasing number of jobs lost over time.

Finally, some have argued that the massive increases in U.S. labor productivity are due to sloppy GDP accounting: "[T]he work done by Indian software firms is being recorded as US economic activity and growth because it's been offshored." If true, this would be a serious measurement error, since the government would be overstating both economic growth and labor productivity

The BLS issued a memo in late March on this very issue back in March that's worth perusing. The highlights:

[W]e have experienced nearly 13 years of faster productivity growth. While a number of explanations have been put forth and to this list some have added measurement issues related to outsourcing and offshoring, any set of explanations should cover not just the last few years, but the entire 13 year period....

Offshoring affects business sector productivity change only through changes in the composition of domestic production and its effect is likely to be small. In manufacturing, the combination of domestic outsourcing and offshoring has contributed about 1.5% per year to sectoral output per hour growth through 1995 but only about 1% per year thereafter and as a result, they do not appear to be an explanation for the productivity speed-up.

This conclusion must be qualified in two ways. First, there is no information on the relative importance of offshoring relative to domestic outsourcing and so it is not known if foreign suppliers have become a growing substitute for domestic suppliers of intermediate inputs. Even if they have, under reasonable assumptions, offshoring appears to explain only a small fraction of the productivity speed-up. Second, not all BLS data extend beyond 2001 and so it cannot be ascertained if there has been a sudden shift in trends. Even if there has, the impact of outsourcing and offshoring on productivity change is likely to be small.

While we're talking about offshore outsourcing, here are a few stories about the benefits that accrue to the United States from insourcing. The Cleveland Plain Dealer's Stephen Koff reports on Honda's Ohio operations as an example of this phenomenon:

Honda, celebrating its 25th year here this summer, has provided a multibillion-dollar boon for central Ohio, with five large factories plus research and engineering facilities and a test track. Last year, it spent more than $7 billion just on parts from 175 suppliers in the state.

Bush cited its success in March when he said that global trade flows two ways, and without it Ohio would not have Honda and its jobs.

In pure dollar terms, insourcing -- whether from Japan-based Honda, or Switzerland-based Nestle, or Dutch-owned Tops markets, to name three firms in Ohio -- has had a significant impact on the American economy. Even counting the steep dropoff that followed the terrorist attacks and recession in 2001, Commerce Department figures show that over the last 10 years, foreign-based companies poured more money into U.S. operations than U.S. companies sent abroad.

Furthermore, most of the foreign investment in the United States came directly from abroad - whereas Commerce Department data show that nearly half the American money sent abroad was actually reinvested earnings.

The Associated Press' Charles Sheehan makes a similar point in analyzing the effect of outsourcing and insourcing in Pennsylvania:

economists note that globalization is a two-way street: States like Pennsylvania also benefit greatly from foreign companies sending jobs to their American subsidiaries, offshoring in reverse.

Dozens of jobs at C&D Technologies, a Lancaster County company that produces electrical power storage and conversion products, are being shipped to Mexico this summer because C&D was losing money. Yet Nissin, a Japanese company also operating in Lancaster County, has 248 employees making dried noodle soups.

In neighboring Berks County, Agere Systems Inc. sent 3,000 jobs to Mexico and Spain after it announced a plant closing in January 2001.

On the flip side, about 190 miles west, Sony's Technology Center-Pittsburgh in Westmoreland County employs 2,400 people, about 20 percent from neighboring Fayette County, where unemployment is consistently above state levels. And they may have to hire more with digital television orders booming.

To be fair, some of the numbers on insourcing are contested. The Economic Policy Institute's Robert Scott and Adam Hersh argue that the number of jobs created due to insourcing isvastly overstated, because those figures include cases of acquisition rather than greenfield investment -- i.e., Daimler's takeover of Chrysler. Unanswered is whether foreign acquisition prevents those firms and jobs from disappearing entirely. For a counter, read the U.S. Chamber of Commerce's April report, "Jobs, Trade, Sourcing, and the Future of the American Workforce.”

Some odds & ends on outsourcing:

1) For the most recent spate of reporting on the phenomenon, you could do far worse than what's been written by the Portland Press Herald's Edward Murphy or Fortune's Jeremy Kahn. The first article looks at the effect that offshore outsourcing is having on medical transcription. The latter looks at how offshore outsourcing is affecting small businesses. Both are complex tales, but there's a familiar pattern -- the jobs being outsourced are the ones that could also disappear through automation.

2) I received an illuminating e-mail from a call center manager at America Online's Arizona facility:

I'm not sure what all the hand wringing is about, but anybody who is worried about job losses should come talk to our Tucson job recruiter -- she can't find enough people to fill the jobs we have. We are hiring big time!

As far as jobs lost, well it's true, America Online sent about 1200 jobs to Bangalore, India, but the net result means our own employees no longer have to work graveyard shifts. Thus, their quality of life is improved because they can spend more time with their families, and single parents don't have to sweat finding day care for an 11pm to 7am shift anymore. We haven't closed a single call center in the US, and there are PLENTY of jobs available at any of our call centers in Arizona, Utah, Oklahoma, New Mexico, and Florida. My own employees earn between $40,000 to $60,000....not a bad wage for Tucson, Arizona let me tell you.

Eduardo Porter's report in today's New York Times reinforces what I said in Foreign Affairs about outsourcing and the tech sector -- that while more low-skill jobs will undoubtedly be created overseas, the complex tasks are going to stay in the United States. The good parts:

As more companies in the United States rush to take advantage of India's ample supply of cheap yet highly trained workers, even some of the most motivated American companies — ones set up or run by executives born and trained in India — are concluding that the cost advantage does not always justify the effort.

For many of the most crucial technology tasks, they find that a work force operating within the American business environment better suits their needs.

"Only certain kinds of tasks can be outsourced — what can be set down as a set of rules," said Nariman Behravesh, chief economist of Global Insight, a forecasting and consulting firm based in Waltham, Mass. "That which requires more creativity is more difficult to manage at a distance."

Another Indian executive in the United States who has soured on outsourcing is Dev Ittycheria, the chief executive of Bladelogic, a designer of network management software with 70 workers, also in Waltham. Bladelogic, whose client list includes General Electric and Sprint, outsourced work to India within months of going into business in 2001. But it concluded that projects it farmed out — one to install an operating system across a network, another to keep tabs on changes done to the system — could be done faster and at a lower cost in the United States.

That was true even though programmers in India cost Bladelogic $3,500 a month versus a monthly cost of $10,000 for programmers in the United States. "The cost savings in India were three to one," Mr. Ittycheria said . "But the difference in productivity was six to one."

Bladelogic's chief technology officer, Vijay Manwani, born and educated in India, predicts that once the "hype cycle" about Indian outsourcing runs its course, projects will come back to the United States "when people find that their productivity goals have not been met."

The upshot is that high-technology corporations are likely to ship more and more business functions to India to take advantage of its well-trained work force. However, even as they do so they will keep many essential tasks here....

In the end, many say the advantages of keeping some of the most sophisticated work in the United States are related to the factors that draw technology entrepreneurs from India and elsewhere to this country in the first place: Indian engineers and software designers in this country know that the businesses whose needs are driving technological innovation are mostly in the United States. It comes down to being where the customers are. (emphasis added)

Read the whole thing.

The Chicago Tribune reports today on how offshore outsourcing is aiding in the creation of more small business start-ups -- which help to create American jobs. The story focuses on one Chicago entrepreneur:

While offshore outsourcing has come under political fire in a tough job market, entrepreneur Jai Shekhawat said the approach has enabled him to create jobs in Chicago.

His business-to-business Web-based software start-up, Fieldglass Inc., wouldn't be employing 66 people in the U.S., most in Chicago, if not for the company's decision to outsource overseas from the get-go, he said. In fact, without outsourcing, he said, "I wouldn't have started the business."

In a difficult economy, offshore outsourcing has become essential for many emerging companies, experts say.

"I can't think of one of our portfolio companies that doesn't use offshore outsourcing," said Travis Winkey, general partner at BlueStream Ventures in Minneapolis, one of five venture capital firms investing in Chicago-based Fieldglass. "As a start-up, you care about getting as much mileage out of every dollar. A great tool to leverage is offshore," he said....

While politicians may bemoan offshore outsourcing as a missed opportunity for domestic tech workers, venture capitalists often take a different view.

They see its potential in stimulating new businesses, which in the long run will help companies add jobs domestically. "If you outsource 10 positions, it might help you employ 20 in the U.S. It has a multiplier effect," said Deborah Farrington, partner at StarVest Partners in New York and a Fieldglass director.

Developing new software such as Fieldglass' InSite is a perfect example of how cross-border employment can pay off, said Winkey, who is also a director of Fieldglass. "If we had to build out that same kind of engineering, we would have had to sacrifice in other areas. It allows us to hire more skilled positions here," he said.

Which helps to explain the continued expansion of small business hiring that I alluded to several months ago.

Virginia Postrel posts another example of how (onshore) outsourcing facilitates small business growth.

Treasury Secretary John Snow apparently sparked some controversy in a Monday interview with the Cincinnati Enquirer. Why? Snow said what Greg Mankiw said last month -- that the outsourcing of U.S. jobs "is part of trade ... and there can't be any doubt about the fact that trade makes the economy stronger."

Hillary Clinton wasted no time in bashing Snow, saying: "I don't know what reality the Bush administration is living in, but it's certainly not the reality I represent, from one end of New York to the other."

Funny thing, though -- Snow appears to be right, according to this CNN report:

The outsourcing of prized information technology jobs overseas has created tens of thousands of new jobs in the United States, according to a recent study commissioned by the information technology industry....

According to this study, these benefits "ripple" through the economy, leading to about 90,000 net new jobs through the end of 2003. This effect, the study said, should produce a total of 317,000 net new jobs through 2008.

The study also said outsourcing added some $33.6 billion to U.S. gross domestic product (GDP) in 2003 and could add a total of $124.2 billion through 2008.

And outsourcing lifts the wages of U.S. workers, according to the study, though minimally -- real wages were 0.13 percent higher in 2003 because of outsourcing and could be 0.44 percent higher by 2008.

[C'mon, this study was sponsored by the IT industry -- can it be credible?--ed. According to the relevant Global Insight web page, Novel Nobel Prize winning economist Lawrence Klein was a major contributor to the report. But go read the press release and the executive summary of the report -- you be the judge!]

UPDATE: To clear up one source of confusion from some of the comments -- the study is not claiming that an economy with outsourcing will create only 317,000 jobs by 2008. The study says that holding other factors constant (population growth, fluctuations in aggregate demand, etc.) an American economy creates an additional 317,000 jobs.

The lion's share of the critical feedback I've received from "The Outsourcing Bogeyman" essay has been targeted at my claims about the IT sector. I'm supposedly wrong on the IT side of the equation, and therefore better-paying jobs will follow lower-paying jobs overseas.

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?

[Now you're just goading your critics--ed. No, just curious -- plus, it might make a good article about public perceptions of economics.]

Scott Kirwin posts his critique on why I’m wrong on outsourcing. It boils down to:

1) I’m relying on the outdated theory of comparative advantage, which according to Paul Craig Roberts, no longer applies when capital and technology are mobile.

2) I’m relying too much on statistics from the McKinsey Global Institute to support my case because it’s “the research arm of one of the world's great outsourcing firms. It's like citing Japanese gov't statistics to justify whaling.”

3) I’m underestimating the extent to which better-paying jobs can be outsourced.

I’ve dealt with the “death of comparative advantage” argument in the past – or rather, Noam Scheiber has.

However, it’s worth pointing out that the current direction of capital flows bears no resemblance to what either Roberts or Kirwin fear. The U.S. currently runs a massive capital account surplus, which finances both our budget and trade deficits. When restricted to foreign direct investment, the overwhelming majority of U.S. outrward FDI goes to other OECD countries. This objection is the reddest of red herrings.

On relying too much on MGI data because they’re big into outsourcing – hey, I’ll relinquish MGI data if Kirwin and others renounce the use of data from Gartner, Forrester, Deloitte, etc. [You're being flippant!--ed. Here's a more substantive response.] All of these firms are equally into outsourcing but still put up overhyped guesstimates about projected job losses. As I pointed in the Foreign Affairs article, these firms also have a strong incentive make outsourcing a business fad. Think their job loss numbers might be exaggerated a tad?

On the future of better-paying jobs, Jacob Kirkegaard of the Institute for International Economics points out that the Forrester study that got everyone hyperventilating in the first place points out that most jobs projected to be lost are below the US average wage.

Certainly the data to date don’t support Kirwin at all. According to Kirkegaard:

Computer programmers engaged in relatively simple tasks (when compared to other software occupations) have seen a sustained job loss since the end of 1999, while more advanced software occupations have increased their employment since the beginning of 1999. This is an indication that indeed low-skilled tasks within the software sector may be migrating out of the United States, but higher-skilled tasks remain. Such a trend of technological destruction of US IT jobs, where increasingly standardized tasks are either automated or offshore outsourced, may also be present in other IT occupations…

[E]xcluding management occupations, of the 12 IT occupations that earned more than $50,000 in 2002, 75 percent increased their employment from 1999 to 2002. IT jobs earning more than $50,000 expanded by 184,000 from 1999 to 2002, of which computer software engineers earning approximately $75,000-a-year accounted for 115,000 jobs.

Next!!

Regular readers might have noticed that I was focusing a bit on offshore outsourcing recently. There's only so much one can say about the topic in a blog post, however, so I figured, what the heck, let's turn it into a paper:

According to the election-year bluster of politicians and pundits, the outsourcing of American jobs to other countries has become a problem of epic proportion. Fortunately, this alarmism is misguided. Outsourcing actually brings far more benefits than costs, both now and in the long run. If its critics succeed in provoking a new wave of American protectionism, the consequences will be disastrous -- for the U.S. economy and for the American workers they claim to defend.

That's the abstract of my Foreign Affairs essay, "The Outsourcing Bogeyman," which will come out in the May/June issue of that journal, but is now online at their web site.

Here's a link to the bibliography and footnotes, but you should comment on the piece here.

Welcome, Foreign Affairs readers! If you want to comment on the essay, please go to this blog entry. If you're reading this it means you want to know where all the facts, figures, and quotations from "The Outsourcing Bogeyman" came from. I don't blame you -- as an academic, I'm leery of publishing an essay without the proper acknowledgments and citations.

Acknowledgements:

Bruce Bartlett and Sreenath Sreenivasan provided useful and informative links to the outsourcing phenomenon. Many thanks to Virginia Postrel, Sebastian Rosato, and Nick Schulz for reading draft versions of the article and providing trenchant feedback. I am also grateful to Daniel Kurtz-Phelan, Gideon Rose, and James F. Hoge, Jr. at Foreign Affairs for their sage advice during the drafting process. Through their links and commentary, Tyler Cowen, Brad DeLong, Mickey Kaus, Glenn Reynolds, and especially Virginia Postrel made the writing of this essay considerably easier.

A crude version of this paper was delivered -- crudely -- to my American Foreign Economic Policy class a few weeks ago (amusing side note: I had planned to give a lecture on the topic when I drafted the syllabus back in November. The week I wound up delivering it was coincidentally the same week outsourcing was the cover story of Economist, Time, Business Week and Wired. The students were very impressed with the topicality). They provided me with excellent feedback. And finally, lots of blog readers posted their own comments in response to my myriad posts on the subject. Agree or disagree, their feedback helped me to figure out how best to frame my arguments.

Sources for quotations:

Mankiw's comments come from Warren Vieth and Edwin Chen, “Bush Supports Shift of Jobs Overseas,” Los Angeles Times, 10 February 2004. Reaction comments from Edmund Andrews, “Democrats Criticize Bush Over Job Exports,” New York Times, 11 February 2004. I posted about this here.

Stephen Roach's comment comes from "Debating the Jobless Recovery" on the Morgan Stanley web site. It should be noted that Roach is hardly an advocate of protectionism.

The IBM official was quoted in Bob Herbert, “White-Collar Blues,” New York Times, 29 December 2003. Nilekani was quoted in Steve Lohr, “Many New Causes for Old Problem of Jobs Lost Abroad,” New York Times, 15 February 2004. Fiorina's statement came from Carolyn Lochhead, “Economists Back Tech Industry’s Overseas Hiring,” San Francisco Chronicle, 9 January 2004.

The billboard quotation came from Elizabeth Becker, “Globalism Minus Jobs Equals Campaign Issue,” New York Times, 30 January 2004. Kerry's line about "Benedict Arnold CEO's" has been everywhere, but here's James K. Glassman's use of it.

Tom Daschle's later quote comes from Ted Landphair, “Outsourcing, Costly for US Workers, an Issue in Election Year,” Voice of America, 7 February 2004. Robert McTeer's very funny line comes from “Delta Air, General Electric Say Creating Jobs Abroad Helps U.S.,” Bloomberg, 23 February 2004. The Bloomberg story was also the source of information regarding how Delta Air Lines was able to create additional American jobs via offshore outsourcing.

While not a quote, the Commerce Department report I referenced is Raymond J. Mataloni, Jr., “U.S. Multinational Companies: Operations in 2001,” Survey of Current Business, November 2003. The relevant passage is on p. 89.

Sources for numbers:

Many of the sources can be found in the general references below. For the plethora of job loss projections, I relied on Clay Risen's “Missed Target," The New Republic, 2 February 2004; and CIO Magazine, “Offshore Outsourcing – The Backlash,” September 2003.

On the gap between Gartner's estimation of firm-specific job losses due to outsourcing versus Joglekar's estimates, see Thomas Hoffman, “Researcher Says Offshore Moves Don’t Leave to Big U.S. Job Losses,” ComputerWorld, 22 December 2003. Professor Joglekar was also kind enough to speak to me by phone -- I wish more of what he said could have fit into the final version of the essay.

On the overestimation of call center outsourcing, see Dick O’Brien, “Outsourcing threat is overstated,” ElectronicNews.Net, 26 January 2004. The TPI estimates came from this press release and this report comparing European and American outsourcing trends. See also Justin Pope, "Some Managers Hold Firm Against Pressure to Move IT Jobs Overseas," Associated Press, 1 February 2004.

The effect of sugar tariffs on jobs come from Aaron Lukas, “A Sticky State of Affairs: Sugar and the U.S. Australia Free-Trade Agreement,” Center for Trade Policy Studies, 9 February 2004. The total effect of steel tariffs on jobs was calculated based on annual costs projected in Gary Clyde Hufbauer and Ben Goodrich, “Next Move in Steel: Revocation or Retaliation,” Institute for International Economics Policy Brief 03-10, October 2003, p. 10.

IBM's fund for displaced workers can be read about in Stacy Cowley, “IBM Starts Fund to Aid Displaced Workers,” ComputerWorld, 2 March 2004.

The data on manufacturing output and employment can be found in this Alliance Capital Management report.

Data on insourcing comes from Michael Walden, “A Potent �Insource’ of U.S. Jobs,” Raleigh News and Observer, 2 February 2004, Lawrence Kudlow, "Outsourcing �Outrage,’" New York Post, 3 March 2004, as well as the Commerce Department.

Facts about the trade adjustment assistance program can be accessed at the U.S. Department of Labor's Employment and Training Administration Fact Sheet.

General references on outsourcing:

Space constraints made it difficult to cite them in the piece, but two worthwhile sources are Sreenath Sreenivasan's outsourcing page, which has tons of links, and Alan Greenspan's recent speeches and testimony that touch on the subject -- here, here, and here. Brink Lindsey has just written a policy brief, "Job Losses and Trade: A Reality Check," that's worth checking out. Finally, you can access all of my blog posts about outsourcing -- if you've read through the Foreign Affairs essay, several of them will look familiar.

Otherwise, here are the most in-depth treatments of the subject that I've seen:

International Data Corporation, Offshore Services: The Impact of Global Sourcing on the U.S. IT Services Market, November 2003.

Catherine Mann, “Globalization of IT Services and White Collar Jobs: The Next Wave of Productivity Growth,” Institute for International Economics Policy Brief 03-11, Washington, DC, December 2003

Jacob F. Kirkegaard, “Outsourcing – Stains on the White Collar?” Institute for International Economics working paper, January 2004

McKinsey Global Institute, “Offshoring: Is It a Win-Win Game?” San Francisco, CA, August 2003

Rafiq Dossani and Martin Kenney, “Went for Cost, Stayed for Quality?: Moving the Back Office to India,” working paper, Stanford University Asia/Pacific Research Center, November 2003

Ashok Bardham and Cynthia Kroll, “The New Wave of Outsourcing,” Fisher Center for Real Estate and Urban Economics, University of California At Berkeley, November 2003

Erica Groshen and Simon Potter, “Has Structural Change Contributed to a Jobless Recovery?” Current Issues in Economics and Finance 9 (August 2003): 1-7

Jyotti Thottam, "Is Your Job Going Abroad?" Time, 22 February 2004.

Gene Grossman and Elhanen Helpman, "Outsourcing in a Global Economy," NBER Working Paper No. w8728, January 2002.

Daniel Pink, “The New Face of the Silicon Age,” Wired, February 2004

General references on globalization and the U.S. economy:

Douglas Irwin, Free Trade Under Fire (Princeton: Princeton University Press, 2002).

Raghuram Rajan and Luigi Zingales, Saving Capitalism from the Capitalists (New York: Crown Business, 2003).

Kenneth Dam, The Rules of the Global Game: A New Look at U.S. International Economic Policymaking (Chicago: University of Chicago Press, 2001).

Kenneth Scheve and Matthew Slaughter, Globalization and the Perceptions of American Workers (Washington: Institute for International Economics, 2001).

A common meme from those who blast offshore outsourcing is that it's driven by rapacious firms eager to maximize short-term profits. This raises an interesting question -- what if consumers are the ones driving offshoring?

I raise this because Tyler Cowen links to a press release that's an interesting test of the extent to which consumers reveal their preferences on the subject:

E-LOAN, Inc., a consumer direct lender, today announced that home equity customers designated to its Indian outsourcing program have the power to decide whether they want to participate before they complete their application. Home equity customers who choose to participate in the program enjoy the benefit of closing their loan two days faster than if the entire transaction was processed domestically.

"Our Indian outsourcing pilot program is an important component of our overall strategy to cost efficiently provide customers with even faster service by becoming a 24-hour processing operation," said Chris Larsen, E-LOAN's Chairman and Chief Executive Officer. "At the same time, we continue to believe that privacy and security, combined with transparency and choice, are key to building a trusted brand. Therefore, we have decided to fully disclose our outsourcing program and empower customers to weigh the benefits of their participation in it. We believe that this approach will help us continue to earn and preserve consumer trust and confidence in E-LOAN."

The pilot program, which launched in early February, currently has the capacity to process 25 percent of E-LOAN's home equity applications. Testing shows that 86 percent of the customers designated for the program are choosing to take advantage of the faster processing time associated with it -- the ability to close their home equity loan in ten days versus twelve days. (emphasis added)

CBS Market Watch has a story on this as well.

A question to those who oppose offshore outsourcing -- should this expansion of consumer choice be banned or restricted?

If so, what other limitations should be placed so this sort of thing doesn't happen? Eliminate Wal-Marts? Japanese auto imports?

In other words, to what extent is the outcry over outsourcing a slippery slope to policies designed to block all forms of trade and technological innovation?

UPDATE: This story talks about how other firms are dealing with the offshoring phenomenon in their marketing strategies. Key line: "'No outsourcing' could become the latest twist on the 'made in the USA' slogan."

Just to be clear, even though I've defended offshore outsourcing as a good thing, I have no problem whatsoever with this kind of marketing strategy. If consumers prefer to pay higher prices in return for the satisfaction of buying American, that's fine. Consumer choice should not be restricted in either way.

Brad DeLong is mostly correct in pointing out that the Bush administration has not been the most vigorous defender of open trade policies since the outsourcing brouhaha bubbled up. However, President Bush has apparently decided get off the fence and put the administration on the rhetorical offensive in reaction to Congressional moves to penalize corporations for offshore outsourcing. According to the Financial Times:

In a speech in Virginia, Mr Bush said: "There are economic isolationists in our country who believe we should separate ourselves from the rest of the world by raising up barriers and closing off markets. They're wrong. If we are to continue growing this economy and creating new jobs, America must remain confident and strong about our ability to trade in the world."

Robert Zoellick, the US trade representative, similarly warned Congress on Tuesday that "given the fact we're now in a stage of an economic recovery, the absolutely worst thing we could do would be to turn to economic isolationism".

Mr Zoellick told the Senate finance committee that increasing US exports to countries such as China and India, encouraging foreign investment in the US, and helping workers adjust to the loss of some jobs abroad were better responses than "bureaucratic interventions that will increase prices to our people".

Mr Bush's comments came less than a week after the Senate passed legislation aimed at preventing US government contracts from being carried out by workers in developing countries.

Here's a link to the entire text of the speech.

As part of the offensive, Zoellick's testimony before the Senate Finance Committee contains this opening:

“With America’s high standard of living, we cannot successfully compete against foreign producers because of lower foreign wages and a lower cost of production.” Perhaps this pessimism sounds familiar. It could very well have come from one of today’s opponents of trade, arguing against a modern-day free trade agreement. But in fact these words were written by President Herbert Hoover in 1929, as he successfully urged Congress to pass the disastrous Smoot-Hawley Tariff Act that raised trade barriers, destroyed jobs, and deepened the Great Depression.

Meanwhile, one of John Kerry's pledges on trade policy is as follows:

[A]n immediate 120 day review of all existing trade agreements to ensure that our trade partners are living up to their labor and environment obligations and that trade agreements are enforceable and are balanced for America’s workers.

Looks like he'll be getting part of his agenda implemented through the help of Senate colleagues and the General Accounting Office:

A key Senate lawmaker, amid a ballooning trade deficit and festering disputes with foreign countries over wireless standards and other barriers to open markets, today asked the General Accounting Office to review the 250 trade agreements to which the United States is a party.

“This study, which will be completed in 2005, will help Congress and the administration better assess how well we do at enforcing trade agreements and how to allocate our resources to achieve the best possible results,” said Sen. Max Baucus (D-Mont.), ranking member of the Finance Committee, at a hearing this morning.

Sreenath Sreenivasan, an associate professor at the Columbia School of Journalism, has set up an ousourcing page with tons of links. Go check it out and see which fact/story you think is the most interesting.

My winner is this story by Sreenivasan about what piqued media interest in the offshoring phenomenon:

[A]part from tech and business reporters, most folks I spoke to had little interest in the [outsourcing] story, presuming this was just like other movements of jobs overseas, such as, say, manufacturing to China....

Everything changed Feb. 9, 2004, thanks to small items in The New York Times (by media reporter Jacques Steinberg) and on the AP wire. Reuters was going to hire six journalists in Bangalore, India, to cover announcements from U.S. companies (none replacing existing employees elsewhere, Reuters said). This served as a wake-up call to journalists who had had no interest in the topic of jobs moving overseas.

I immediately started getting e-mail messages and phone calls from people whose attention I'd been trying to get. Nothing like the prospect of our own necks being on the line to make us listen. Gee, if I spend most of my day "reporting" by using the phone and the Internet, couldn't someone who is paid one-tenth of my salary easily do this job?

Alas, this confirms what I wrote here about the Reuters story.

This piece of information is also interesting:

About 10 percent of the dues-paying members of the ITPAA, the main anti-outsourcing group in the U.S. are Indian-Americans.

How is Europe dealing with outsourcing? This article provides an interesting clue:

IBM Corp. cornered an outsourcing contract with Dutch life assurance and pensions business Delta Lloyd Group on Monday. The seven-year deal is worth - 200 million (US$255 million), according to IBM....

European companies are increasingly turning IT operations over to large U.S. corporations such as IBM and its competitors Hewlett-Packard Co. (HP) and Electronic Data Systems Corp.

"It is an interesting time in the outsourcing industry, where you have massive companies, like IBM, that dwarf their customers," said Kirk Smith, of U.K. IT services provider LogicaCMG PLC. European companies are feeling the pull of U.S. and U.K. business models that require businesses to control the level of costs, playing into the strengths of outsourcing deals, according to Smith.

"Companies in Europe realize they have to exist in a global economy, and in doing so are turning to outsourcing," he said. "The large companies like IBM and HP are appealing because they are well-known brands with a global reach." Across Europe, businesses are outsourcing departments from IT to human resources as well as finance and accounting. "It's now really getting to the heart of business," Smith said.

Last month, Nokia Corp., the world's largest mobile phone maker, announced it had granted IBM a five-year global IT outsourcing deal valued at - 200 million. IBM will handle Nokia's IT Helpdesk operations as well as manage and develop the Espoo, Finland, company's desktop IT environment.

[Sure, that's what European firms are doing. But the European Union is cheesed off, right?--ed. Not according to this report:

A European Union delegation said Monday outsourcing was beneficial for the world economy and added it understood India's concerns about objections in western nations to shifting jobs overseas.

"It's something that is good for you (India) and good for our service industries," EU's External Relations Commissioner Christopher Patten told reporters in New Delhi.

"We have no problems with outsourcing. We are very understanding of India's concerns on the issue."...

Patten said the EU believed western outsourcing of jobs to countries like India, Mexico and China, where labour costs are lower and goods can be produced more cheaply, was an "an aspect of a more liberal world economy."

UPDATE: This trend of European outsourcing to the United States is consistent with this editorial by Michael Walden from two weeks ago. The highlights:

While outsourcing has captured current attention, it is not a new phenomenon. If the term is defined as jobs operated by U.S. companies in foreign countries, the current total is 10 million positions, or 7 percent of domestic U.S. employment. Further, there's been an upward trend in the number of outsourced jobs since the mid-1990s, when trade barriers were significantly reduced following the signing of the NAFTA and GATT agreements.

What is less well publicized and understood is that "insourcing" also occurs in our economy. Insourcing happens when foreign companies establish jobs in the United States.

The latest statistics show insourcing accounts for over 6.5 million jobs nationwide. Although this is less than the number of outsourced jobs, the gap has actually narrowed in the past quarter century. That is, there's been a recent trend of foreign companies adding jobs in the U.S. faster than U.S companies have increased jobs in foreign countries....

The scorecard on job outsourcing versus job insourcing has actually moved in the favor of the U.S. in recent decades, and policy-makers must consider both when evaluating the worldwide movement of jobs.

Today's Times has a round-up story on outsourcing in the aftermath of Gregory Mankiw's comments. Jagdish Bhagwati, an esteemed trade economist at Columbia, is quoted.

He also has an op-ed in today's Times as well. The good parts:

John Kerry, the presumptive Democratic presidential nominee, described executives who import services — such as using lower-paid workers in foreign countries to handle customer-service calls and Internet queries from American consumers — as "Benedict Arnold C.E.O.'s."

In objecting to moving service jobs overseas, Senator Kerry is wrong on two counts. First, his economics is faulty: the practice only adds to the overall economic pie and improves the competitiveness of American companies. In a world economy, firms that forgo cheaper supplies of services are doomed to lose markets, and hence production. And companies that die out, of course, do not employ people.

Second, Mr. Kerry is making a political error. By playing to the understandable but incorrect fears of American workers that outsourcing is "taking away" jobs from Americans, he is painting the Democratic Party into the wrong corner on trade issues.

The most interesting part is Bhagwati's point that while many blame trade for job losses, it has far more to do with technological change:

Unfortunately, the issue is further confused by claims that American jobs are being "transferred" abroad. This is usually not the case. When I came to my university 25 years ago, I got a secretary. Today, the new hires get a computer instead. In India, where a secretary costs a small fraction of what one would in New York City but a computer costs more, any Indian professor who asked for a new laptop would probably get a secretary instead. It is simply a matter of economic reality in both places. The hiring of the secretary in India should not be seen as "transferring" a job out of New York.

The fact is, when jobs disappear in America it is usually because technical change has destroyed them, not because they have gone anywhere. In the end, Americans' increasing dependence on an ever-widening array of technology will create a flood of high-paying jobs requiring hands-on technicians, not disembodied voices from the other side of the world.

For more on the technological driver behind the current creative destruction, Glenn Reynold's TCS column from last November is still salient.

The final outsourcing link of the day is the February 12th transcript from Lou Dobbs Tonight, during which Mr. Dobbs tangled with James K. Glassman on the subject. It was, to say the least, a yeasty conversation. [UPDATE: Dobbs' exchange with Bruce Bartlett is less yeasty but equally informative.]

In theory, trade is a Pareto-improving for an economy as a whole -- that is to say, through free trade, some people can be made better off without others being made worse off. Now, that doesn't necessarily work in practice, unless the losers from trade are compensated by the winners.

In theory, Trade Adjustment Assistance -- a program introduced in 1974 -- provides exactly this form of compensation. According to this Labor Department fact sheet, such benefits include:

Training for employment in another job or career. Workers may receive up to 104 weeks of approved training in occupational skills, basic or remedial education, or training in literacy or English as a second language.

Income Support known as trade readjustment allowances (TRA) are weekly cash payment available for 52 weeks after a worker's unemployment compensation (UC) benefit is exhausted and during the period in which a worker is participating in an approved full-time training program. Income Support is a combination of UC and TRA benefits for a maximum of 78 weeks (26 weeks for UC and 52 weeks for TRA).

Job Search Allowance may be payable to cover expenses incurred in seeking employment outside your normal commuting area.

Relocation Allowances provide reimbursement for approved expenses if you are successful in obtaining employment outside your normal commuting area for you to relocate to your new area of employment.

In other words, TAA is designed to facilitate workers let go due to trade pressures to find jobs in more competitive sectors.

Sounds great -- but it's not clear that, as currently written, outsourced workers would fit the criteria for inclusion. The criteria are:

(1) that workers have been totally or partially laid off, and

(2) that sales or productions have declined, and

(3) that increased imports have contributed importantly to worker layoffs.

Since a lot of offshore outsourcing takes place within a single firm, and it increases productivity, I doubt (2) would be met -- sales/output would increase and not decrease.

Here's my question to informed readers:

1) Am I reading this correctly?

2) If so, to what extent should the TAA criteria be expanded?

N. Gregory Mankiw, chairman of the White House Council of Economic Advisers, testified before Congress yesterday to present the Economic Report of the President. Here's what he said about outsourcing:

New types of trade deliver new benefits to consumers and firms in open economies. Growing international demand for goods such as movies, pharmaceuticals, and recordings offers new opportunities for U.S. exporters. A burgeoning trade in services provides an important outlet for U.S. expertise in sectors such as banking, engineering, and higher education. The ability to buy less expensive goods and services from new producers has made household budgets go further, while the ability of firms to distribute their production around the world has cut costs and thus prices to consumers. The benefits from new forms of trade, such as in services, are no different from the benefits from traditional trade in goods. Outsourcing of professional services is a prominent example of a new type of trade. The gains from trade that take place over the Internet or telephone lines are no different than the gains from trade in physical goods transported by ship or plane. When a good or service is produced at lower cost in another country, it makes sense to import it rather than to produce it domestically. This allows the United States to devote its resources to more productive purposes.

Although openness to trade provides substantial benefits to nations as a whole, foreign competition can require adjustment on the part of some individuals, businesses, and industries. To help workers adversely affected by trade develop the skills needed for new jobs, the Administration has worked hard to build upon and develop programs to assist workers and communities that are negatively affected by trade.

Later on, he told reporters, "Outsourcing is just a new way of doing international trade. More things are tradable than were tradable in the past and that's a good thing."

As I've argued ad nauseum, Mankiw's correct on the economics. Alas, on the politics, it looks like he's stepped on a land mine. Here's the Washington Post lead:

Democrats from Capitol Hill to the presidential campaign trail lit into President Bush's chief economist yesterday for his laudatory statements on the movement of U.S. jobs abroad, seizing on the comments to paint Bush as out of touch with struggling workers.

"They've delivered a double blow to America's workers, 3 million jobs destroyed on their watch, and now they want to export more of our jobs overseas," said John F. Kerry, the Massachusetts senator and front-runner for the Democratic presidential nomination. "What in the world are they thinking?"

Kerry's statement is a shame -- until now, he had been the most adult Democratic candidate when it came to foreign economic policy save Lieberman [Given the rest of the field, he could say this and still be the most adult candidate on this issue!--ed. Plus, he needed to get out in front on the issue.]. What's more worrisome is that Republicans are making similar noises:

Rep. Donald Manzullo (R-Ill.) called for the resignation of N. Gregory Mankiw, the chairman of the White House Council of Economic Advisers and a prominent Harvard University economist. Manzullo said industrial state Republicans are furious.

"I know the president cannot believe what this man has said," Manzullo said. "He ought to walk away, and return to his ivy-covered office at Harvard."

More from the New York Times:

Democrats in Congress and on the campaign trail, citing remarks by a top White House economic adviser, accused President Bush on Tuesday of encouraging companies to export jobs overseas....

Asked about the role of farming out production and services to low-wage countries like China and Mexico, Mr. Mankiw acknowledged that the practice was on the rise but said it would ultimately benefit the United States.

"I think outsourcing is a growing phenomenon, but it's something that we should realize is probably a plus for the economy in the long run," Mr. Mankiw told reporters on Monday.

"We're very used to goods being produced abroad and being shipped here on ships or planes," Mr. Mankiw continued. "What we are not used to is services being produced abroad and being sent here over the Internet or telephone wires. But does it matter from an economic standpoint whether values of items produced abroad come on planes and ships or over fiber-optic cables? Well, no, the economics is basically the same."

Many if not most economists contend that the expansion of free trade, in goods as well as services, ultimately benefits all countries that participate....

"If this is the administration's position, I think they owe an apology to every worker in America," said Senator Tom Daschle of South Dakota, the Senate Democratic leader. "There is absolutely no justification for arguing that we could support jobs going overseas, especially under these circumstances."

Actually, the Senator owes an apology to every consumer in America, but I'm not going to hold my breath in wait.

An interesting question is whether economists who are also Democrats -- and generally support free trade -- will defend Mankiw on this point.

UPDATE: Drezner gets results from Brad DeLong!! The Wall Street Journal gets results from other Democratic-leaning economists -- Janet Yellen and Laura D'Andrea Tyson.

FINAL UPDATE: Virginia Postrel chips in with this point:

More important than the election-year political bias is the subtle but extremely important difference between supporting "shift of jobs overseas" and supporting trade and specialization--the processes on which economic growth depends. Expanding the international division of labor doesn't shift "jobs" overseas. It shifts "some jobs" overseas, while creating new ones at home. The transition can be extremely painful for the workers affected, but the process itself is valuable. That's why government policies should address the specific problems of specific people, not attack the process as a whole.

Yep.

A few years ago, the Economist reworded an old aphorism:

When your neighbour loses his job it’s a slowdown; when you lose yours, it’s a recession; when an economic journalist loses his, that’s a depression.

If this New York Times report is accurate, expect to hear a lot of depression talk from Reuters:

Outsourcing has become all the rage in recent years, and India has become a favorite destination for Western companies that want to send jobs to cheaper markets. Companies as different as Delta Air Lines and Dell Computer have hired workers or subcontractors to perform customer service, data entry or other computer-related jobs once done in the United States.

Now, Reuters is going a step further. It told its editorial employees in an electronic posting late last week that it planned to hire six journalists in Bangalore, India, to do basic financial reporting on 3,000 small to medium-size American companies.

"It's a place where you can get people who understand English, understand financial statements, understand journalism and who are educated to a very high standard and eager to do this kind of work,'' David Schlesinger, global managing editor of Reuters, said in a telephone interview. They are also relatively inexpensive, he added....

In the message to employees about the journalism project, which will deal with companies Reuters does not cover regularly now, Mr. Schlesinger did not rule out expanding the project.

"I'll keep you informed as how this develops,'' he wrote. "This could be a very exciting way to get more news on our wires in a more efficient way.'' (emphasis added)

Given the underlined passage, it probably won't generate many complaints, since the idea is to get greater coverage for less money.

One of the problems in the outsourcing debate is that those who defend the practice lose the war of anecdotes. [What about economic models and statistical evidence?--ed. Then the arguments in favor of outsourcing win hands down. You'd think those pieces of information would be more important for public policy debates, but that's not the way it works. Between econometric models showing that trade is good for the economy and tangible anecdotes of job losses due to import competition, most citizens go with the anecdotes.]

It is easy to point to large multinational corporations laying off American workers because of offshore outsourcing -- cue IBM. However, the jobs that are either saved or created from outsourcing seem less impressive. In the case of jobs created, it's because a healthy share of new hiring takes place among smaller firms, the anecdotes of job creation seem much less convincing -- even though there may be more examples of the latter than the former.

In the case of jobs saved, the difficulty is that such statements require counterfactual reasoning -- "If outsourcing had not occurred, then a greater number of jobs would have been lost." Counterfactuals are extremely difficult to demonstrate beyond a reasonable doubt.

So, in the debates over trade and unemplyment, protectionists have juicy media stories, while those who favor an open economy are often left sputtering.

Bruce Bartlett tries to address "anecdote gap" on offshoring with this anecdote:

A Jan. 30 report in the Wall Street Journal illustrates how this works, using the case of a computer mouse manufacturer called Logitech. It sells a wireless mouse called Wanda for about $40 that is assembled in China. Of the $40, China gets only $3. The rest goes to suppliers, many based in America, which make components for the mouse, and to domestic retailers. The biggest component of Logitech's cost is its marketing department based in Fremont, California, where the staff of 450 Americans makes far more than the 4,000 Chinese who actually manufacture the product.

Those 450 Americans, making good wages in California, might not have jobs at all if Logitech wasn't able to stay competitive by outsourcing some of its costs. Studies have also shown that workers displaced by outsourcing are often retrained for better jobs within the companies doing the outsourcing. Cisco, for example, is a leader in outsourcing, but has not reduced the number of its domestic employees because they have been redeployed into other areas, doing higher value-added work. These jobs often pay better than those that were outsourced.

I know that this is no solace to those who have lost jobs due to outsourcing. But the nation as a whole will be worse off if outsourcing is restricted.

UPDATE: More on this over at the Marginal Revolution. And Steve Verdon had a great post from last month that's worth reading.

FINAL UPDATE: I've posted more on job growth here.

Chuck Simmins makes an important distinction (link via Glenn Reynolds):

Most outsourced jobs don't go to India. They stay right here in the good, old U.S.A. That clerk from Accountemps or secretary from Kelly. That RN at your hospital. The cleaning crew in your office. Outsourced jobs.

That's why I worry as the rants go on and on about the evils of outsourcing. For the few jobs that go overseas, the correction potentially stands to bite a whole bunch of good people here in the United States.

Most outsourcing is done in the United States and Americans work for outsourcing firms.

He also criticizes those on the right who complain about "offshoring" which is outsourcing done overseas:

The discussion is about outsourcing jobs overseas. I see many conservatives and libertarians abandoning their principles here to oppose the transfer of any jobs overseas.

"Good" jobs are being sent overseas. "Good" is code for high paying jobs. And the hidden yet primary argument is that Americans deserve to have high paying jobs, no matter what the circumstances.

I understand unions pushing this point, but I don't understand the many conservatives and libertarians who are. Job entitlement is not a conservative nor a libertarian position. And that is what the argument about outsourcing overseas boils down to; "we" are entitled to those jobs.

Simmins is conflating libertarians and conservatives on this issue. The former are free market advocates and the latter are economic nationalists. Economic nationalists value social stability and relative gains more than maximizing either static or dynamic economic efficiency. With this set of preferences, it's not surprising to see this group of pundits ract bash offshoring.

[UPDATE TO MSNBC READERS: If you're interested in all of my outsourcing posts, click here]

Virginia Postrel has two posts up today on the political economy of outsourcing.

The first post appears to reflect the limited power of danieldrezner.com:

As a faithful reader of Dan Drezner's blog, I knew about Catherine Mann's important policy paper on the future of info-tech outsourcing (.pdf download here) almost as soon as it came out. I somehow assumed everyone else did too, equating blog awareness with widespread media coverage. Then I met Mann... and I also learned that Dan's blog and the New York Sun pretty much accounted for all the press attention the paper had gotten.

So I devoted my latest NYT column to Mann's work.

Two thoughts: first, to be fair, Bruce Bartlett also picked up on the Mann study. Second, Virginia, you're one of the people that helps translates blog awareness to wider media coverage. Counterintuitive ideas don't travel without your help!!

Postrel's column expands upon the Mann study I discussed here. Some good parts:

Compared with the end of 1999, which was still a good time for programmers, December 2003 data show a 14 percent increase in business and financial occupations, a 6 percent increase in computer and mathematical jobs, and a 2 percent drop in architecture and engineering jobs. New programming jobs may be springing up in India, but they aren't canceling out job growth in the United States....

These projections aren't much comfort, of course, to unemployed programmers. While their skills may be in demand, Dr. Mann explains, those jobs may be in new industries - a hospital, for instance, rather than at I.B.M. - and therefore be harder to find. Or programmers may need new training to move into systems integration jobs.

Read all of it.

Later in the post, Postrel criticizes Glenn Reynolds for hyping the outsourcing meme. Glenn responds here. [UPDATE: Virginia responds to the response.]

Meanwhile, Virginia's other post follows up on Paul Craig Roberts. Outsourcing opponents have embraced him as one of their own since he co-authored an op-ed with New York Senator Chuck Schumer in the New York Times last month.

Eugene Volokh gets to the root causes of Roberts' protectionist rhetoric. It's not a pretty picture.

That said, it would be equally unfair to assume that everyone who agrees with Roberts about outsourcing shares the same root causes. Thirty years ago, Roberts was a supply-side nutball. He's just morphed into a protectionist nutball. [UPDATE: Tyler Cowen defends some of Roberts' earlier work.]

Two new stories on the web today about the outsourcing phenomenon, about which I've blogged here, here, here, here, here, here, here, here, and ... er, here. [Why don't you just create a new category for these posts?--ed. Hey, good idea!]

The Washington Post has an editorial blasting the Democrats for demagoguing the outsourcing issue (link via David Adesnik). The last paragraph:

It's true that the shift of service jobs to countries such as India, like other trade-related dislocation, adds to the temporary pain of structural unemployment. But, as Mr. Greenspan says, new jobs will be created. If a U.S. firm shifts employment abroad, the savings flow back to the United States in the form of lower prices for consumers and higher dividends for shareholders; the consumers and shareholders will direct their new spending power at things that create employment. Meanwhile, the fall in prices will allow the Federal Reserve to keep interest rates lower, boosting the job-creation engine. At its meeting today and tomorrow, the Fed is almost certain to keep short-term interest rates at a rock-bottom 1 percent because forces such as "offshoring" are keeping inflation in check despite a rebounding economy. Offshoring, like trade, creates winners and losers, which is why open trade should be accompanied by social safety nets. But the winners will outnumber the losers, because the adjustment creates new efficiencies. Each worker can produce more, meaning that he or she can be paid more. Do the Democrats really mean to oppose that?

Meanwhile, Wired has an in-depth cover story (and a few sidebars) on the outsourcing phenomenon (thanks to axiom for the link). One the one hand, the main piece by Daniel Pink gets at the core of current frustrations:

A century ago, 40 percent of Americans worked on farms. Today, the farm sector employs about 3 percent of our workforce. But our agriculture economy still outproduces all but two countries. Fifty years ago, most of the US labor force worked in factories. Today, only about 14 percent is in manufacturing. But we've still got the largest manufacturing economy in the world - worth about $1.9 trillion in 2002. We've seen this movie before - and it's always had a happy ending. The only difference this time is that the protagonists are forging pixels instead of steel. And accountants, financial analysts, and other number crunchers, prepare for your close-up. Your jobs are next. After all, to export sneakers or sweatshirts, companies need an intercontinental supply chain. To export software or spreadsheets, somebody just needs to hit Return.

What makes this latest upheaval so disorienting for Americans is its speed. Agriculture jobs provided decent livelihoods for at least 80 years before the rules changed and working in the factory became the norm. Those industrial jobs endured for some 40 years before the twin pressures of cheap competition overseas and labor-saving automation at home rewrote the rules again. IT jobs - the kind of high-skill knowledge work that was supposed to be our future - are facing the same sort of realignment after only 20 years or so. The upheaval is occurring not across generations, but within individual careers. The rules are being rewritten while people are still playing the game. And that seems unjust.

On the other hand, Chris Anderson makes the most trenchant point:

For US workers, the path beyond services seems uncertain. But again, history provides a guide. Thirty years ago, another form of outsourcing hit the US service sector: the computer. That led to a swarm of soulless processing machines, promoted by management consultants and embraced by profit-obsessed executives gobbling jobs in a push for efficiency. If today's cry of the displaced is "They sent my job to India!" yesterday's was "I was replaced by a computer!"

Then, as now, the potential for disruption seemed infinite. Data crunching was just the start. Soon electronic brains would replace most of the accounting department, the typing pool, and the switchboard. After that, the thinking went, the modern corporation would apply the same technology to middle management, business analysis, and, ultimately, decisionmaking. If your job was emptying an inbox and filling an outbox, you were begging for someone to draw the I/O analogy - and act on it. Indeed, computer terminology is littered with traces of what were formerly jobs: printers, monitors, file managers; even computers themselves used to be people, not machines.

Computers have, of course, reshaped the workplace. But they have also proved remarkably effective at creating jobs. Bookkeepers of old, adding columns in ledgers, are today's financial analysts, wielding Excel and PowerPoint in boardroom strategy sessions. Secretaries have morphed into executive assistants, more aides-de-camp than stenographers. Typesetters have become designers. True, in many cases different people filled the new jobs, leaving millions painfully displaced, but over time the net effect was positive - for workers and employers alike.

At the same time, we learned the limits of computers - especially their inability to replace us - and our fear of a silicon invasion diminished.

Comment away.

Clay Risen takes a hard look at outsourcing fears in The New Republic and finds them overblown:

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

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

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

Risen doesn't even mention the Catherine Mann study, which provides some hard data to back up Risen's conterarguments.

Another story suggests that reports of the outsourcing of call centers has also been greatly exaggerated.

The opportunity cost of debating Brad DeLong over the operationalization of data sets is that truly stupid popular economic writing can slide by unscathed. Like the Senior Senator from New York, Chuck Schumer, who on Tuesday co-authored a New York Times op-ed that said the following:

The case for free trade is based on the British economist David Ricardo's principle of "comparative advantage" — the idea that each nation should specialize in what it does best and trade with others for other needs. If each country focused on its comparative advantage, productivity would be highest and every nation would share part of a bigger global economic pie.

However, when Ricardo said that free trade would produce shared gains for all nations, he assumed that the resources used to produce goods — what he called the "factors of production" — would not be easily moved over international borders. Comparative advantage is undermined if the factors of production can relocate to wherever they are most productive: in today's case, to a relatively few countries with abundant cheap labor. In this situation, there are no longer shared gains — some countries win and others lose.

What's wrong with this statement? Let's go to Noam Scheiber at TNR's &c.:

so-called factor immobility is NOT, in fact, one of the assumptions underlying the theoretical case for trade--at least not the way Schumer and Roberts seem to think it is. To see this, let's back up for a second. At its broadest level, the point of free trade is to expand the size of the global economic pie by eliminating production inefficiencies, which arise when one country tries to produce everything itself using only the "endowments" of capital and labor (i.e., machines and workers) it has within its borders. Now, there are two ways you can eliminate these inefficiencies: When it's not so easy to move machines and workers across borders, countries can specialize in the goods they produce most efficiently, which they then trade with one another. (We'll be more precise about what we mean by "most efficiently" in a second.) When it is easy to move machines and workers across borders, you don't have to specialize (at least not by country) and trade, because every country already has access to the most efficient machines and workers.

Put differently, you can either trade machines and workers (which is basically what you're doing when you're outsourcing), or you can trade the goods these machines and workers make. But, as a theoretical proposition, the two scenarios are EXACTLY THE SAME: They both maximize productive efficiency. Indeed, one of the great accomplishments of international trade theory, post David Ricardo, was to prove mathematically that trade in goods accomplishes the exact same thing, efficiency-wise, as trade in machines and workers.

David Adesnik has more on this as well, including links on the future of employment in the computer sector. [UPDATE: DeLong comments as well].

ANOTHER UPDATE: Michael Kinsley dissects the op-ed in Slate. Among the highlights:

Schumer and Roberts cling to the free-trade label and endorse the general principle while claiming it no longer applies because "the factors of production can relocate to wherever they are most productive." In fact, that makes the theory even more compelling. If the factors of production become more productive, the whole world becomes richer. If there is some explanation of how a society can get richer by denying itself the fruits of this process (and most likely curtailing the whole process itself, as others misguidedly retaliate), Schumer and Roberts do not offer or even hint at it....

But the real difference between traditional trade in heavy earth-bound objects and 21st-century trade in weightless electronic blips, or in sheer brainpower, is that the losers in new-style trade are more likely to be people that U.S. senators and fancy economic consultants actually know. These are people with advanced degrees and high incomes. Their incomes will likely be above average for our economy even if they are driven down by competition from poorer economies. Under these circumstances, denying the benefits of free trade to the whole nation—and denying opportunity to the rising middle class in developing countries—in order to protect the incomes of a relative few seems harder to justify, not easier, than it was back in the days when our biggest fear was Japanese cars.

This last point is one I have made before. The first point is spot-on. Going back to the op-ed, here are the sinister forces that, according to Schumer and Roberts, undercut the free-trade position:

[There has been] a seismic shift in the world economy brought on by three major developments. First, new political stability is allowing capital and technology to flow far more freely around the world. Second, strong educational systems are producing tens of millions of intelligent, motivated workers in the developing world, particularly in India and China, who are as capable as the most highly educated workers in the developed world but available to work at a tiny fraction of the cost. Last, inexpensive, high-bandwidth communications make it feasible for large work forces to be located and effectively managed anywhere.

More political stability. Better education. Lower communication costs.

Yeah, I can see how this devastates the free trade position.

[What about Joe Stigltz's gloomy op-ed on NAFTA on the same day? Aren't you going to pick on him?--ed. Well, according to Mark Kleiman, I'm supposed to tread carefully on the domain of other experts. But, I will point out that even Stiglitz acknowledges that Mexico's growth in GDP per capita since NAFTA's ratification is "better than in much of the rest of Latin America". Stiglitz also overlooks the political benefits of NAFTA in democratizing Mexican politics and improving the rule of law south of the border.]

The Chicago Tribune had another story this week on the outsourcing of American manufacturing jobs. The cause? American protectionism:

BRYAN, Ohio -- Here in what could be called the candy cane capital of the world, residents like to boast that food doesn't get more American than this old-fashioned, red-and-white striped confection.

That's because more than 90 percent of those peppermint canes are consumed within the United States. And nearly all were made domestically as well.

But no more.

In the last three years, nearly half of all U.S. candy cane production has shifted to Mexico, industry experts say.

That's true of the candy cane maker based in this northwest Ohio town, Spangler Candy Co., which recently opened a plant in Juarez that generates half of Spangler's striped treats.

But the story of the Mexican candy cane isn't your typical tale of American manufacturers chasing lower wages. It's more about the cost of sugar than the cost of labor.

Because federal tariffs and subsidies push the price of U.S. sugar far above what it fetches on the world market, candy cane makers such as Spangler are opening factories overseas, where sugar can cost 6 cents a pound compared to 21 cents back home....

Other makers of hard candy have followed a similar pattern, at least in part because hard candy, unlike chocolates which can use corn syrup substitutes, are so sugar-intensive.

In Chicago, for example, Brach's Confections plans to shut its plant in 2004, forcing about 1,000 workers out of their jobs. The Chicago area, the center of the U.S. confection business, has lost an estimated 3,000 candy-related jobs since 1998.

The good news -- if the Central American Free Trade Agreement is passed, manufacturers that rely on sugar as an input of production would no longer have the same need to relocate.

The Institute for International Economics' Catherine Mann has a great policy brief on the globalization of IT services. There's a lot of interesting info, but the discussion of employment effects is particularly interesting:

[S]tories that report dramatic movement of jobs offshore need to be put into the current economic perspective. First, these citations frequently use the peak of the economy and technology boom as the base for their analysis, thus ignoring the business cycle, trend decline in manufacturing employment, dollar overvaluation, and technology bust. Second, data on international trade do not corroborate the frequent citations but rather point to sustained international competitiveness of US service providers.

Table 2 shows developments in the US labor market from 1999 to October 2003. These data cut through the technology boom and peak of the business cycle but also clearly show the slow recovery in employment so far. Data confirm disproportionate and continuing employment losses in manufacturing (2.7 million or 16 percent since 1999), including production jobs in the IT sector. Among occupational categories, there similarly has been a trend decline in “management occupations,” where 1.1 million jobs have disappeared since 1999 (a 14 percent decline). In contrast, employment in the private service–providing sector increased throughout the period and is 1.5 percent higher in October 2003 compared with 1999.

Employment in white collar occupations related to IT or deemed vulnerable to IT-enabled international trade, is stable and recovering (architecture and engineering occupations) or higher (computer and mathematical occupations is 6 percent higher and business and financial occupations, 9 percent higher) in October 2003 compared with 1999. Without a doubt there is offshore job activity, and the domestic labor market situation remains subdued, but job growth in many white collar occupations at home deemed particularly at risk to offshore operations is expanding, not contracting. (emphasis added)

By all means, read the whole thing.

UPDATE: Cold Sping Shops has further thoughts.

One of the perks of teaching at the University of Chicago is that the school requires much of its faculty to teach beyond their area of expertise. I'm teaching in one of the "core sequences" at the University of Chicago this quarter, entitled Power, Identity, and Resistance. You can access a copy of the syllabus here or on my teaching page.

We're currently immersed in Adam Smith's An Inquiry Into the Nature and Causes of the Wealth of Nations. There are many great qualities about the work, but what strikes me today is its topicality -- like all great works in social science, Smith's observations are constantly relevant.

For example, consider this passage from Book I, Chapter X, Part II -- "Inequalities occasioned by the Policy of Europe":

The property which every man has in his own labour, as it is the original foundation of all other property, so it is the most sacred and inviolable. The patrimony of a poor man lies in the strength and dexterity of his hands; and to hinder him from employing this strength and dexterity of his hands; and to hinder him from employing this strength and dexterity in what manner he thinks proper without injury to his neighbour is a plain violation of this most sacred property. It is a manifest encroachment upon the just liberty both of the workman and of those who might be disposed to employ him. As it hinders the one from working at what he thinks proper, so it hinders the others from employing whom they think proper. To judge whether he is fit to be employed may surely be trusted to the discretion of the employers whose interest it so much concerns. The affected anxiety of the law-giver lest they should employ an improper person is evidently as impertinent as it is oppressive.

Indeed.

Irwin Stelzer has an interesting essay in the Daily Standard on how economic interdependence can constrain U.S. foreign policy. Buried within it is this nugget of analysis:

the trade deficit issue is more complicated than the simple trade figures suggest. Take Wal-Mart. The giant retailer imports about $12 billion in goods from China every year, enabling it to sell trainers, T-shirts, and a host of other goods to American consumers at prices they just love.

So is the trade deficit costing Americans jobs? Perhaps not. Stephanie Pomboy of consultants MacroMavens reports that "Since China first pegged the Yuan to the dollar in 1994, Wal-Mart has nearly tripled its workforce from 528,000 to 1.4 million today. And that's before counting the jobs associated with its plans to add 210 supercenters and 40 Sam's clubs [Wal-Mart's bulk discounter] stores this year."

The hundreds of thousands hired by Wal-Mart probably don't realize that their jobs depend on their employer's continued access to Chinese goods. But the 300,000-500,000 U.S. workers who lost their jobs over the past three years as a result of the "relocation of U.S. production to overseas affiliates" are certain that low-cost Chinese labor and the undervalued currency are the source of their woes. And they don't care that job losses due to such relocations come to only 0.1 percent of employment per year.

Indeed.

UPDATE: In September the U.S. economy shed another 17,000 jobs in manufacturing, according to CNN at the horrible cost of creating 74,000 new jobs in services, most of them in the "professional and business services" category. Oh, wait...

Last month I talked about how the outsourcing phenomenon was affecting rural communities in particular, and how this would affect the 2004 election. What I did not talk about was how rural communities could respond to the secular decline in manufacturing jobs.

Last Sunday the Hartford Courant ran a story about how a rural area near and dear to my heart -- the northwest corner of massachusetts -- has dealt and is dealing with this phenomenon. The answer appears to be mass infusions of contemprary art:

Cities across the country that lost heavy manufacturing are discovering the arts as a tool for revival. In Connecticut, Hartford and Norwich, among others, have promoted artist housing; New Haven sponsors a major international arts festival. But few cities have made as big or as bold a bet on the arts as North Adams.

The Massachusetts Museum of Contemporary Art, or MASS MoCA, opened four years ago in a complex of two dozen 19th-century factory buildings - not dissimilar to Hartford's Coltsville - that occupy almost a third of the small city's downtown.

Part of the sell was that it would breathe life into the other two-thirds and drive local economic development. It's still early. Progress has come in fits and starts and is still fragile. But, yes, the signs are good....

Arts tourism by itself isn't the ultimate goal. The hope is that it will attract "knowledge industries" to replace some of the jobs that went elsewhere.

And they've gotten a couple of these. Storey Publishing LLC, a division of Workman Publishing Co., and Kleiser-Walczak Construction Co., which specializes in computer-generated animation and visual effects, are both tenants in the MASS MoCA complex....

Artists are small business operators, and Rudd figures each new mill building that's renovated for artists brings about $1 million into the local economy. "If a few more buildings are done," he said, "it will make this a very interesting town.

Read the whole thing -- and thanks to Official Blogmom Esther Drezner for the link.

From this story, it's possible to carry Virginia Postrel's argument in The Substance of Style farther than she may intend for it to travel. It's already been argued that the cities that have the cultural endowments to attract a "creative class" do the best in terms of economic vitality. It's logical to believe that this could apply to rural communities as well. In the 21st century, aesthetics will play as crucial a role in determining national, regional or local competitiveness as proximity to raw materials played in the 19th century.

The Washington Post had an article two days ago on why this employment decline is different from all others. The answer is that many of the jobs that have disappeared aren't coming back. The reason? Outsourcing:

Most past recessions have been followed by a rapid recovery of jobs, as companies that laid off workers during the downturn brought them back when business picked up. But a growing body of evidence suggests that this recession and recovery are different. Large industrial companies with such cyclical employment policies account for just 21 percent of the workforce, down from 49 percent in the early 1980s, according to the Fed study.

Now, even as the economy has slowly expanded over the past 20 months, businesses have stepped up automation, sent jobs overseas and produced more while employing fewer people.

Mickey Kaus -- who links to the story -- gives one spin on this phenomenon:

This is a continuation of a long term trend, with one new wrinkle. This time white collar jobs "brain" jobs are going overseas (e.g. to India) along with blue-collar jobs.

And that's Mickey's optimistic interpretation of events!!

Sounds bleak. Until you read these couple of grafs in the WaPo story:

A new study by the McKinsey Global Institute, the think tank of the consulting firm McKinsey & Co., suggests why [outsourced jobs won't return]. When a firm ships a $60-an-hour software job to a $6-an-hour code writer in India, the most obvious benefit goes to the Indian. But, the McKinsey study reports, the U.S. economy receives at least two-thirds of the benefit from offshore outsourcing, compared with the third gained by the lower-wage countries receiving the jobs.

American firms and consumers enjoy reduced costs. Larger profits can be reinvested in more innovative businesses at home. New and expanding subcontractors abroad create new markets for U.S. products. And, at least theoretically, displaced U.S. workers will find new jobs in more dynamic industries.

If you go to McKinsey Global Institute's (MGI) summary of its own report, you run into this startling graf:

Of the $1.45 - $1.47 of value MGI estimates is created globally from every dollar spend a domestic company chooses to divert abroad, the U.S. captures $1.12 - $1.14 while the receiving country captures on average 33 cents. In other words, the U.S. captures 78 percent of the total value.

Click here to download the actual report (you'll have to register). It's not blind to the unemployment question. In fact, the report makes an intriguing proposal to cushion the blow:

[B]ecause the perceived risk of unemployment is higher than the actuarial risk, and because the pain of employment is greater than the economic cost of it, the situation lends itself well to highly targeted insurance products. Specifically, as part of a severance package, and for a small percent of the savings from offshoring, companies could purchase insurance for their displaced workers that would cover their loss in wages for the time a worker is unemployed. To avoid the "moral hazard of such insurance... the insurance program could cover occupational groups and not individuals, covering only the median period taken by an occupational group to be reemployed.

This proposal would convert the static gains from outsourcing into a Pareto-improving move -- i.e., someone can be made better off without anyone being made worse off. Not eveyone understands this concept, but it's an important one in making policy decisions.

Dynamically, the gains from outsourcing will benefit all Americans. There will be a lag between the increase in the corporate rate of return, the concomitant increase in investment, and an uptick in the domestic economy.

But it will happen.

Alas, Glenn Reynolds' prediction about the politicization of outsourcing seems to be coming true. Even though the election is more than a year away, President Bush seems fully prepared to pander to protectionist sentiments. From ABC News:

President Bush announced Monday he is creating a high-level government post to nurture the manufacturing sector, which is bleeding jobs in states crucial to his re-election.

On a rain-soaked Labor Day trip to a factory training center, Bush said he had directed Commerce Secretary Don Evans to establish an assistant position to focus "on the needs of manufacturers." Keeping factory jobs is critical to a broader economic recovery, the president said, his outdoor venue ringed by cranes, backhoes and bulldozers.

Bush said the nation has lost "thousands of jobs in manufacturing." In fact, the losses have soared into the millions: Of the 2.7 million jobs the U.S. economy has lost since the recession began in early 2001, 2.4 million were in manufacturing. The downturn has eliminated more than one in 10 of the nation's factory jobs.

The president attributed the erosion to productivity gains and to jobs flowing to cheaper labor markets overseas. He suggested that jobs moving to foreign shores was his primary reason for creating the new manufacturing czar.

"One way to make sure that the manufacturing sector does well is to send a message overseas, (to) say, look, we expect there to be a fair playing field when it comes to trade," Bush said.

"See, we in America believe we can compete with anybody, just so long as the rules are fair, and we intend to keep the rules fair," Bush said, his audience of workers and supporters cheering. (emphasis added)

Let's be clear -- creating an assistant to the Commerce Secretary will have zero effect on manufacturing jobs. Stimulating domestic economic growth is the best way to affect this sector of the economy. The creation of such a position is pure politics. So maybe the protectionist sentiment is pure rhetoric.

What worries me is that the politics of this phenomenon suggests that Bush will be unable to ignore demands for greater barriers to foreign trade and investment. To understand why, go read this Chicago Tribune story on the effect of globalization on rural labor. The key grafs:

For decades, growth-minded rural towns have vied to attract manufacturers by offering tax breaks and other incentives. The expansion strategy is based on what economists call the "multiplier effect": When a new employer comes to town, the influx of new payroll money creates jobs throughout the local economy, as workers begin buying new homes, cars, and other goods and services.

Now, with manufacturers closing U.S. plants and switching production to cheap-labor sites in Mexico and China, the multiplier is working in reverse. The attribute that has long made manufacturing so attractive to communities--its ability to spark an outsize number of new jobs--is magnifying the economic disruption caused by manufacturer pullouts.

Rural communities' strategy of seeking growth through manufacturing "is colliding full force with a globalizing economy," said Mark Drabenstott, an economist with the Center for the Study of Rural America at the Federal Reserve Bank of Kansas City.

Bush, in order to win, desperately needs rural voters. He cannot and will not ignore this constituency. Which means more protectionist rhetoric and more protectionist policies to come.

[But don't these articles also highlight real economic pain?--ed. Yes, but these article are also emblematic of the "lump of labor" fallacies that I discussed last fall. Blocking either investment or trade flows will do nothing but act as a massively inefficient subsidy for manufacturers. It's a disastrous policy. So what policies would you propose?--ed. You mean besides letting the market sort itself out? Based on this article, introduce subsidies for plastic surgery (link via Virginia Postrel)].

Follwing up on some previous links on outsourcing, Brad DeLong has a long post on why outsourcing will not doom the U.S. economy. He's particularly trenchant on this point:

Remember: few would be worried about "outsourcing" if the U.S. unemployment rate were still close to four percent, rather than at the above six percent level that it is. To the extent that a structural cure is being proposed for what is really a macroeconomic problem, do not expect it to end well. And remember: a network-design job artificially kept in Sacramento when it could be done more cheaply in Singapore produces extra income for a network engineer in Sacramento, but has costs as well: in a diminished capital inflow that reduces construction and the earnings of construction workers, in higher costs for businesses installing their networks that shows up in lower salaries they pay their workers, in lower earnings and stock prices for HP.

That said, Glenn Reynolds is also correct in pointing out that precisely because of our current macroeconomic travails, this will be a campaign issue.

Why? Not because outsourcing is new, but because it's going to affect an entirely new set of professions. As Raghuram Rajan and Luigi Zingales (for more about them, click here) point out in Saving Capitalism from the Capitalists, (p. 282):

For centuries, technology has created new products and new ways of making them that render workers and their skills redundant. While the dislocation stemming from technological change is not new, its pace has increased tremendously. Moreover, it is now affecting the professions that have not much changed their way of doing business over the centuries (emphasis added).

That quote, by the way, provides the best counter to outsourcing anxiety. Opposing it perfectly akin to opposing technological progress. They're both Luddite.

[That's easy for you to say. You're an academic facing minimal market pressures.--ed.] Not true. Rajan and Zingales use academia as one example of a profession newly affected by technology:

Technology is also having a differential impact on within professions. Take our own, teaching in universities. Using new communication technologies, one gifted professor can teach students in many locations around the country. While technology will increase the demand for such superstar teachers, it will reduce the demand for the mediocre that may vanish completely. Teaching is a job that has been performed the same way for thousands of years, by people who have not feared becoming redundant even in the worst of economic depressions. This will change. While the new economy will increase the demand for education, it may not have room for all of us (p. 283).