Thursday, June 17, 2004

Truth about Outsourcing: Rock and a Hard Spot

There have been any number of triumphalist people gloating about the rhetorical and media triumph of the meme of outsourcing. Dan Drezner has been quite disappointingly among it's most ardent proponents.(FAM)

Should Americans be concerned about the economic effects of outsourcing? Not particularly. Most of the numbers thrown around are vague, overhyped estimates. What hard data exist suggest that gross job losses due to offshore outsourcing have been minimal when compared to the size of the entire U.S. economy. The outsourcing phenomenon has shown that globalization can affect white-collar professions, heretofore immune to foreign competition, in the same way that it has affected manufacturing jobs for years. But Mankiw's statements on outsourcing are absolutely correct; the law of comparative advantage does not stop working just because 401(k) plans are involved. The creation of new jobs overseas will eventually lead to more jobs and higher incomes in the United States. Because the economy -- and especially job growth -- is sluggish at the moment, commentators are attempting to draw a connection between offshore outsourcing and high unemployment. But believing that offshore outsourcing causes unemployment is the economic equivalent of believing that the sun revolves around the earth: intuitively compelling but clearly wrong.

I had been prepared to do a long review of Dan's piece but recent news has depressingly made this completely unnecessary. The reason why is the recent BLS report on outsourcing that on the surface seems to vindicate and corroborate other claims that outsourcing is minimal.

However there is a fundamental problem with the BLS survey's methodology. It seems to only report as offshoring jobs that are directly reallocated overseas. Jobs that are cut back in times of economic contraction, and then later the company expands its operations overseas when the business picks back up aren't counted. However Dan seems to willfully disregard this fact. In the face of such, let's admit it - intellectual expediency if not dishonesty - there is no real further point in chasing around explanations.

Am I being unfair to Dan? Let us listen to the words of Alan Greenspan as reported by the NYT.

The nation's trade deficit widened in April to a record $48.3 billion, the Commerce Department reported this morning, as America's appetite for imported goods and services continued to grow.

The trade gap comes after a $46.6 billion deficit in March. Most economists had forecast that the April numbers would narrow a bit.

On an annualized basis, the April numbers translate to a trade gap of about $575 billion, or nearly 5 percent of gross domestic product...

Federal Reserve Board chairman Alan Greenspan has argued that the burgeoning trade deficit, which must be financed by importing capital from abroad, is not a source of serious concern.

Part of the Fed chairman's argument is based on the fact that in the age of globalization, multinational corporations are shifting sources of production around the world. Those shifts, he maintains, have reduced the relevance of America's trade figures as a reflection of the country's competitive position on world markets. Moreover, the rising trade deficit reflects the fact that relative to the rest of the world the American economy is growing very rapidly.

Still, the burgeoning deficits should be a source of concern, some economists said.

"The trade deficit is less of a manifestation of companies and countries competing fairly or unfairly, and more a reflection of our lack of national savings," said Steven Roach, chief economist at Morgan Stanley.

"We have such a low savings rate that we need to import surplus savings from abroad. To me, the trade deficit reflects America's penchant to consume beyond our means, and that is a serious problem."

During the recession the outsourcing proponent meme seemed to be that the quickest way to cut back on imports and balance the trade deficit was to plunge the economy into a horrible recession. However the trade deficit - the current accounts balance - has been growing irregardless of the current phase of the business cycle. It grew while the economy was in recession. Now that it's recovering the current accounts deficit is growing even more. At this point it's become a structural problem.

Furthermore note Greenspan's not so comforting words:
Federal Reserve Board chairman Alan Greenspan has argued that the burgeoning trade deficit, which must be financed by importing capital from abroad, is not a source of serious concern.

Part of the Fed chairman's argument is based on the fact that in the age of globalization, multinational corporations are shifting sources of production around the world. Those shifts, he maintains, have reduced the relevance of America's trade figures as a reflection of the country's competitive position on world markets.

In other words Greenspan is saying that outsourcing is such a big deal that it's counteracting the current accounts balance problem. This is entirely inconsistent with the BLS position that the number of jobs directly offshored is miniscule - less than some 2% of all jobs lost. Unless of course a lot of jobs are going overseas off the books. Either we have a sufficient capital and production capacity flight overseas to competitively retrench American companies against the trade deficit, or offshoring isn't a big deal and the trade deficit is a big problem.

Both can't be true. As usual the over eagerness of "free trade" proponents to explain away the evidence of our eyes has tripped itself up. I feel really bad talking this way about government numbers. Despite their own occasional inaccuracy I have never throughout my life been forced to take such a stringent position regarding their fallibility.

However corruption in the numbers seems to have spread throughout the entire system. The jobs numbers are floated by an ad hoc insertion of a hundred thousand or so jobs a month, productivity numbers are glutted because they count production transferred from overseas affiliates but not the labor hours from such overseas employees, offshoring is only counted as job losses if there is a direct one to one transfer when most job losses are not direct transfers but a contraction here and a later expansion over there, and the inflation numbers are becoming dangerously irrelevant rather than just mildly skewed.

I'm not arguing for a conspiracy here except perhaps the conspiracy of mendacity and laziness. Government in general has found it easier in both Republican and Democratic administrations to toot its own horn by padding the numbers to its benefit. The Federal Reserve and Greenspan has motivation to go along with this because it gives them increased latitude in administrating monetary policy which otherwise would be much more constrained by the figures as central banks in Europe are now currently constrained. The dollarization of the free trade sphere has increased corporate profits at the expense of labor and employees. The electorate get's to demand continued expansion of government benefits while supporting politicians who pander to their social biases left or right instead of forcing themselves to choose pragmatists who might not be as radical but would balance the books. Finally politicians are free to borrow and spend because the low interest rates enable them to finance living beyond our means and pursuing narrow ideological agendas to obtain power and office - on both sides of the aisles. Nowhere does it seem that probity, honesty, integrity, or fiscal discipline prevail.

It's a recipe for a fucking financial catastrophe. We're talking Titanic style catastrophe here. It's time to get off this fucking ship. No more rearranging deck chairs on this billet for the oldman. From here on out he's looking for a way to check out of this decadent and doomed floating circus.

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