The Phantom Menace

Profblogger Dan Drezner scores a spot on the New York Times op-ed page today with a nice concise piece deflating the outsourcing panic. His "footnotes" to the piece, using recent GAO data, are here. Our July cover story by Brink Lindsey made the more extended case.

Comments

[joe]

I never understood that tile. Does it mean there really wasn't a menace? That there was a menace that was, somehow, a phantom?

Who, or what, was the phantom menace?

[Highway]

*Geek Mode On*

My guess from then is that The Phantom Menace is the shadowy presence of the Sith, perhaps driving events from unseen places, as we later found out to be true. A menace made of phantoms, as it were.

[joe]

My guess is that they focus-grouped various words, and the two that most consistently got the reactions they wanted were "menace" and "phantom."

Now "The Menacing Phantom" sounds sort of wimpy, but "The Phantom Menace..."

[SM]

"Lost in all the clamor about I.B.M.'s outsourcing plan was the company's simultaneous announcement that it would add 5,000 American jobs to its payroll. For the second quarter of this year, the company reported a 17 percent increase in earnings, allowing it to trim its outsourcing plan by a third and raise its overall hiring plans by 20 percent. The conclusion is obvious: I.B.M.'s outsourcing of some jobs helped it reduce costs, increase earnings and hire more American-based workers."

I wonder is Drezner is playing fast and loose here ? Somebody with time on their hands should check out all these assertions.
Specifically - it is by no means "obvious" that outsourcing contributed substantially or at all to the 17 % YOY. There is usually a significant up-front cost to outsourcing which is accounted as a one-time only expense. Also, IBM has a billion cost centers/business units any of which could have been responsible for the increased earnings. There seems to be an unseemly rush to declare that every good number here is undeniably due to outsourcing whereas nothing bad is. Also - i'd really like know if IBM does eventually hire 5000 in the USA as opposed to doing it "globally". The in-joke in Silicon Valley is that when a company announces 1000 global hires it breaks down this way - 9025 in India, 50 in China, 22 in Brazil and 3 in Colorado.

This is not to say that Drezners overall thesis is wrong. I personally think it's correct. But it's gotten to the point where people can phone in CW articles like this.

[Julian Sanchez]

Evan-
You're right in principle, of course, but the realistic options may be either free trade with some transition handouts to blunt the concentrated effects of adjustment or a genuinely ruinous rebirth of protectionism. If that's the case--and I suspect that it is--I'll countenance some temporary welfare as the price of avoiding an Age of Dobbs.

[joe]

"If, as he correctly notes, outsourcing is not a problem, then why does the government need to "fix" it?"

For the same reason that quadruple bypass patients are given anesthesia and stitches. For the same reason hospitals don't just lock detoxing junkies in a room, cold turkey.

Drastic shocks to the system, even if they represent positive developments, can themselves cause so much pain that "the treatment worked, but the patient died."

[Jason Ligon]

Wasn't the Phantom Menace the one distinguished by not being the Real Menace?

[Jason Ligon]

The hard part is creating some form of support for transitioning labor that doesn't turn into a never ending entitlement that incentivizes unemployment.

Another question is, do we apply the same logic to people who have been replaced by technology? How about people who have been replaced by better workers? I suspect I know how joe feels, but what about the more libertarian among us? Evan seems to have a point that if A) Most job losses aren't the result of outsourcing and B)People who lose their jobs to outsourcing deserve some sort of support, one would think that everyone else would deserve the same kind of support no matter what the reason they became unemployed.

[Ben]

I will willingly admit to being a Star Wars geek/freak/nerd/loser/etc.
The Phantom Menace is a direct reference to Emperor Palpatine/Darth Sidious.

[Gadfly]

SM, a few years ago IBM laid off around 12,000 and then bought Price-Waterhouse for $3.5 billion. Then PWC laid off another 5,000 or so. My suspicion is they've unloaded all the people they can and are now hiring entry levels for the grunt work and using outside contractors (domestic, not foreign, outsourcing is where the growth is) when they can for the high end work.

This is pretty typical of large corporations and keeps a steady downward pressure on salaries and benefits.

[SM]

Point taken, Gadfly. But my argument is somewhat different. I was hoping that someone qualified would superimpose Drenzner's op-ed over IBM's blown-up balance-sheet and scan for anachronisms in super-scripting/proportional fontage. This is not some comparative advantage macro but a very specific proof that adduces one Company only. There is a 50 % chance that Drezner, (and, incidentally, this applies to the folks at Techno Central Station where tall tales of this ilk abound) actually did his homework vis-a-vis IBM and i'm all for giving him the benefit of the doubt. But for right now, not buyng, pending proof. Seems to me he's on better ground with the GAO numbers.

And I shudder to think of how dismissive Julian or Nick Gillespie might have been if Team Dobbs had held up the example of one failed corporation as proof that outsourcing doesn't work.

[Jason Ligon]

"And I shudder to think of how dismissive Julian or Nick Gillespie might have been if Team Dobbs had held up the example of one failed corporation as proof that outsourcing doesn't work."

I think the point is to let the market sort it out, not to suggest that all jobs everywhere are better performed by the cheapest labor possible.

[SM]

What's that got do with issue being discussed ? I'm saying they would have rightly questioned the tendentious use/ misuse of statistics.
Anyway, the IBM link doesn't work, so who knows how he arrived at his conclusions.

[dlc]

Evan and others:

I'll take off the libertarian hat and put on the (admittedly amateur, Econ 101) economist hat for a moment, for a simplified defense of trade assistance transfer payments. If my economics are off, feel free to refute the arguments.

The Trade Adjustment Assistance Program, in theory, generates an efficient outcome. I believe it is the Kaldor-Hicks (?) model that states that an efficient outcome is achieved when the gains from exchange are partly used to compensate the losers from said exchange.

In this case, all of us benefit, through increased productivity, cheaper consumer goods, etc, from outsourcing. However, the losers (those with outsourced jobs) potentially lose more than they gain. This is not technically pareto-efficient, in that the gains from exchange do not result in all parties being better off such that no party is made worse off. In order to achieve an efficient outcome, the losers must be compensated to a level such that they do not lose from the exchange. As the beneficiaries of outsourcing (the exchange) are all of us, it makes sense that all of us (ie taxpayers) should be the ones compensating.

Now this may offend libertarian sensibilities in a political sense, but efficient markets and economics in general should not be anathema to any libertarian....

dlc