9/14/2004

Outsourcing

Earlier this year Gregory Mankiw stated that if there was a service that could be produced more cheaply abroad then Americans were better off importing it than trying to do it on home soil. Outsourcing, both within and outside of the country, has become a major form of doing business. Many people, including a large number of politicians, see outsourcing as a possible cause for concern, but an article I read on the economist.com webpage suggests otherwise. The article states that a pretty tiny proportion of jobs lost in America are acutally going overseas.

The article suggest three themes for what is actually going on. The first is that most of the jobs being lost are cyclical in nature and not structural. Now that the economy is recovering after the 2001 recession a dramatic change in the job picture is expected. The second theory seems to go along with the theory of comparative advantage. Outsourcing has been going on for centuries. The process allocates money and resources to areas in which they will be most productive and, helped by competition, lowers prices. The third theme states that even though more IT jobs will be done abroad, many more, higher paying jobs will be created in America due to outsourcing.
The creation of new jobs always overwhelms the destruction of old jobs by a huge margin.

I have a hard time seeing how outsourcing and globalization can be detrimental to our economy as a whole and in the long run. Naturally there will be certain groups that will be adversely affected by outsourcing but I think the process will be beneficial overall.

3 comments:

John West said...

Mankiw is completely right in believing that outsourcing is healthy for the United States' long-run economic picture. What you have going on are politicians doing what they do best. What are two things you always hear a candidate promise? They are: more jobs, and less taxes. When citizens are losing jobs overseas an outrage is sure to ensue and this gives the politicians fodder in which to justify their own cause and tear down that of another's. Besides that most people in the country don't understand or have never heard of the ideas behind comparitive advantage. All they know is that a loss of jobs is bad news for everyone. You try to explain to a man or woman that just lost their job to an Indian that it will be okay because the country will be better off in the long run, well let's just say it won't be pleasant.

Bush and Kerry are sure to debate about this very issue and each will promise what? More jobs and less taxes.

Julie said...

I read an article last spring in the Wall Street Journal that reported more jobs were being created in the United States through insourcing than were being lost through outsourcing. Why is this never mentioned when people complain about outsourcing? We benefit from other countries' outsourcing to us!

Dr. Tufte said...

The post and comments are all correct. Pay special attention to Julie's comment - she's right that we do insource more than we outsource.

I'll go out on a limb and perhaps sound like a jerk here, but this is all about politicians appeal to tribalism. It is very easy for them to threaten some people "over there" to get votes here.

Another pet theory of mine is that politicians prefer to engage in cheap talk. That is, find issues which are good to gab about, but on which you really can't do much harm if you end up taking action and screwing up. They can complain a lot about 1) foreigners having wages that are low for their productivity, and 2) U.S. managers buying services where they are cheap, but what are they really going to do about it? Make foreigners get paid more? Make foreigners work in the dark so that they're less productive? Tell U.S. managers they shouldn't buy things that are cheaper? The bottom line is that I think there will be far more talk than action on this issue.

P.S. Greg Mankiw is a demigod among economists - if he says something it is always worth listening too.