In Defense of Outsourcing

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Over at Foreign Affairs, Daniel W. Drezner has some interesting things to say about outsourcing. A snippet:

Until robust job growth returns, the debate over outsourcing will not go away—the political temptation to scapegoat foreigners is simply too great.

The refrain of "this time, it's different" is not new in the debate over free trade. In the 1980s, the Japanese variety of capitalism—with its omniscient industrial policy and high nontariff barriers—was supposed to supplant the U.S. system. Fifteen years later, that prediction sounds absurd. During the 1990s, the passage of NAFTA and the Uruguay Round of trade talks were supposed to create a "giant sucking sound" as jobs left the United States. Contrary to such fears, tens of millions of new jobs were created. Once the economy improves, the political hysteria over outsourcing will also disappear.

It is easy to praise economic globalization during boom times; the challenge, however, is to defend it during the lean years of a business cycle. Offshore outsourcing is not the bogeyman that critics say it is. Their arguments, however, must be persistently refuted. Otherwise, the results will be disastrous: less growth, lower incomes—and fewer jobs for American workers.

To his credit, Drezner does defend outsourcing and he even offers up a couple of strategies to deal with the politics of the matter. Worth reading in full, which you can do here.

[Link via Arts and Letters Daily]

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  1. Aside from the obvious NAFTA/Uruguay=”free trade” howler (which neoliberal dead horse I won’t beat again), Drezner made one obvious non-sequitur.

    He treated the ’90s boom, with its tens of millions of jobs, as a result of globalization. It was, arguably, a result mainly of the high-tech and biotech booms, comparable to the automobile boom of the early 20th century–a qualitatively new industry with high rates of return, attracting surplus capital with no other outlet in the older, overaccumulated industries. If so, it was a result of new industries created almost entirely by state intervention.

  2. “He treated the ’90s boom, with its tens of millions of jobs, as a result of globalization. It was, arguably, a result mainly of the high-tech and biotech booms…”

    “Arguably” perhaps, but causality is a tough gig, Kevin. Demographic factors, like the Baby Boomers hitting their peak earnings years coupled with the emergence of the 401k and internet trading must have had some effect.

    Low interest rates can have a big effect on economic activity too, and a major factor in interest rates is inflation.

    The Gingrich budget cuts and the Asian Flu had an enormous effect on inflation.

    An enormous portion of the world exited communism toward the end of the eighties. China coming on-line in a big way and giving the world economy a seeminly inexhaustable source of inexpensive labor certainly must have had something to do with keeping inflation down.

    But NAFTA and GATT didn’t help?

  3. The countdown to Daniel Drezner, Radley Balko, and Reason Mag supporting the FTAA starts…. now!.

  4. The political strategies have a couple of tradeoffs worth pondering. I posted them on my blog, but in a nutshell they are: to maintain support for free trade we might need an expanded government program or corporate tax break.

  5. Ken,

    I agree, causality is a tough gig–but it’s tough on all such assertions, including Drezner’s. I don’t have a problem with the idea that factors were involved besides the tech boom. My intention was to show that GATT and NAFTA were pretty far down on the list of likely contributing factors.

  6. Drezner is right, of course; the problem is that Joe Six-Pack won’t bother to listen.

  7. To bring a positive note to this thread, I personally can’t wait to see more U.S. capital invested in Eastern Europe, particularly those states vying for or recently accepted into NATO and the E.U. These nations, by and large, GET IT.

    They are sick and tired of both the paternal and the nanny state, and are seeking a more independent destiny even as they seek to align themselves with those of similar mind.

    Many of my ancestors were from Danzig, Germany, now Gdansk, Poland. If I had the wherewithal, I’d locate my production plant or call center there, a sister facility in the United States and say: Okay gang, compete!

  8. Jeff wrote –
    Just once I’d like to hear a CEO say “We are outsourcing to China because our new, cozy relationship with the one-party, recently reformed Communist government there makes it easier to force wage rates down than it is in Western countries.”

    Here’s an example of a despotic third world government forcing down wage rates (Nick Gillespie blogged this item yesterday). India experienced something like 14 % wage inflation last year &, by the way, its been heading in that direction (more or less) all thru the 90’s. In the 80’s by contrast, when you say India was freer, WI was much lower, probably at around or less than 3%. Very poor despotism. Maybe you can consult with them on how to crush the unions ?

    http://news.com.com/2100-1022_3-5180589.html?tag=nefd_lede

    Next excuse ?

  9. SM (sado-masochst?) –

    I read that piece on India too. Great, say I! I hope wage rates there skyrocket to U.S. levels as soon as possible. Great example of short-sighted corporate thinking and the consequences thereof. Where’s the next temporary stop on the productivity railroad going to be, and how long will it last?

    But, hey, what’s with the tone, Sparky? Can’t you conduct this debate in a civil manner?

  10. OK, i’ll be civil. As long as civility doesn’t preclude some degree of sarcasm.
    Now would you mind not making stuff up as you go along ?
    BTW, if you had read the article carefully & from top to bottom you’d know that Indian companies are already “outsourcing” to China. I happen to know that several are exploring setting up in Russia and in your favorite part of the world ie eastern europe which is of course flawlessly undespotic. Civil smily face 😉

  11. “Making stuff up,” hmmm, okay, but am I to take YOUR assertions on faith? (“I happen to know…”)

    But as a person of good will, I will do just that. Granted that outsourcing, outshoring, whatever the euphemism of the day is, is not new, it’s not exclusive to U.S. companies, and it is not intrinsically a bad idea. Nowhere have I asserted that.

    My position is simply that the decision to transplant the production or support facilities of a going concern from a location where the political and governmental framework supports freedom of choice for labor and capital alike – which is LARGELY the case in the U.S., where agreements are generally kept, and contracts are enforceable, to one where the labor pool has fewer degrees of freedom, where agreements are difficult to enforce, and where larger degrees of corruption and manipulation exist such as mainland China – or are you prepared to argue with me on the virtues of the Communist Party? – is ethically suspect. Also, by virtue of the fact that these companies are taking advantage of the rules of such a state to benefit itself, they cannot then crow about it as an example of free market economics asserting itself. At least not and be truthful.

    Now, if you are prepared, SM, to demonstrate how economic transactions can be divorced entirely from the political framework in which they take place, I’ll be interested to read all about it. Also about how much freer the market is in mainland China, India and Mexico than in the U.S. Cite facts and figures, if you please, since you prefer we don’t “make stuff up.”

  12. I am not interested in demonstrating anything of the sort as should be clear from my posts. Why is it that you suddenly choose to hide behind generalizations when a specific assertion of yours regarding some coercive practice (union busting, holding wage down !) in a country that the US trades with is refuted ?

  13. Jim Walsh – “Drezner is right, of course; the problem is that Joe Six-Pack won’t bother to listen.”

    No, the problem is that folks like Drezner talk above Joe’s head, patronize him and his problems, and treat his personal experience as immaterial. Being out of work is certainly not immaterial to those experiencing it. Been there, done that myself.

    To someone trying hard to feed his or her family who’s just seen his job go overseas to some despotic third world country, spinning rosy scenarios in academic terms sounds like nothing more than cruel, head-patting political b.s.

  14. Despotic third world country being defined arbitrarily as any country experiencing economic growth that also happens to be on Jeff’s s**tlist for any reason whatsoever. I suspect Jeff would have characterized Japan as such in the 80’s.

  15. SM – You can try to frame my statement any way you want. I think China qualifies as a despotic regime, don’t you?

    India, perhaps moreso now than in the 80’s, given its propensity to quibble dangerously with Pakistan over Kashmir, flirting with nuclear weaponry in the process, and with a rather intolerant flavor of Hindu philosophy and politics currently on the rise.

    Japan? Probably not, all things considered. Remember, though, that, cultural issues aside, we built, or at least rebuilt, the Japanese economy and it is perhaps the one Asian economy and political system that best mirrors our own. I once had quite a collection of Occupied Japan porcelain and ceramics. Japan and the U.S. have each influenced the other back and forth since then, mostly for the better.

    Latin America I have the most personal experience with, and am quite certain that many economies there are as mired in political corruption as ever, if not moreso in some cases.

    In any case, I really don’t care. All I ask is that companies not benefit from commerce in these places, under their rules, while at the same time touting their actions as examples of “free trade.” They can’t have it both ways.

  16. The inequitable geographic distribution of global trade winners and losers across America’s cities also fails to make it into the thinking of “Free Trade” cheerleaders. Even granting the proposition that greater trade and outsourcing will be a winner for America in the aggregate, there will still be cities, neighborhoods, possibly even entire states or regions, for whom the dislocations of globalization will result in economic losses. Unfortunately, for a community whose economy depends on a certain industry that is sending its jobs overseas, the loss of that industry will have repercussions that extend beyond those particular jobs. Storefront businesses closing; homes, public infrastructure and cultural/recreational facilities – exactly those features that need to be attractive in order to appeal to globalized businesses and the type of workers they need – being undercapitalized (deferred maintenance); crime rising; all the problems that drive away footloose capital.

    In other words, the places that stand to lose their existing economic base under the globalized economy will also be put at a competitive disadvantage in their efforts to attract the industries that are supposed to replace that base. The rising tide may lift everything that floats, but it is so violent that it is ripping open the hulls of many craft and sending them to the bottom.

    When free traders have deigned to notice these places at all, the only policy prescription they’ve offered has been “not my problem.” When Joe Sixpack notices that globalization has done a lot to harm, and nothing to help, Gary Indiana, he isn’t imagining things.

  17. I’m an Objectivist, but the Bible holds much wisdom for me. There is a Biblical proverb: “Do not bind the mouths of the kine (oxen) that tread the grain.” It is a metaphor, of course.

    Those countries who, as a matter of policy, bind the mouths of those who tread the grain are despotic, in my opinion. Those for whom the free market is allowed to work for both labor and capital alike, as it is theoretcally supposed to, are not.

    Varying degrees in between apply, of course.

    Just once I’d like to hear a CEO say “We are outsourcing to China because our new, cozy relationship with the one-party, recently reformed Communist government there makes it easier to force wage rates down than it is in Western countries.”

    Honesty, that’s all I ask.

  18. joe – Very well said. I can’t improve on it at all.

    Personally, I love the outsourcing debate. It allows me to gin up discussion to the point where Libertarians begin to sound like hardcore lefties – dissing the United States and defending the PRC, Cuba, etc. and making all sorts of glib excuses why corporations should be free to operate under the rules of such places, while fleeing the relatively (note the qualifier carefully) benign economic influence of the U.S. government.

    Call it what you will – Globalization, free trade, etc. Certain parties in the transaction are certainly much, much freer than others.

  19. I hate to break into this argument, but here’s some stuff you might find interesting: Drezner gets the big-picture economics right, but makes a rookie error on the politics of protection. http://geffen.blogspot.com/2004_03_01_geffen_archive.html#108023756919298661

    I’ve also posted about a much scarier form of outsourcing:
    http://geffen.blogspot.com/2004_03_01_geffen_archive.html#108049314057853836

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