More On The Outsourcing Myth

The Economist has a very interesting piece on why worries about a "jobless recovery" are based on false assumptions. The Democrats and other are worrying about a torrent of jobs flowing overseas to places like China and India where labor costs are dramatically lower. What The Economist finds is an entirely different picture:

Outsourcing (or “offshoring”) has been going on for centuries, but still accounts for a tiny proportion of the jobs constantly being created and destroyed within America’s economy. Even at the best of times, the American economy has a tremendous rate of “churn”—over 2m jobs a month. In all, the process creates many more jobs than it destroys: 24m more during the 1990s. The process allocates resources—money and people—to where they can be most productive, helped by competition, including from outsourcing, that lowers prices. In the long run, higher productivity is the only way to create higher standards of living across an economy.

For instance, my current occupation is based on the fact that computer hardware prices have fallen in recent years. What would once by at least a $1500 product can now by had for as low as $700 and sometimes less. This means that PCs have come into markets they would not have years ago. Much of this is due to increased foreign competition creating cheaper products. The entire IT boom is largely due to this.

Now, imagine that Clinton hadn’t been a free-trader and had been a John Edwards-style protectionist. The results would be no NAFTA, no GTO, no MFN status with China – and the results of that would have been computer hardware remaining an expensive commodity product. Therefore, no IT boom, no 1990s tech bubble, and the recession of 1991-1992 broadening into a deeper economic malaise, à la Jimmy Carter.

The Economist illustrates this with some interesting facts and figures:

Meanwhile, there is another side to the ledger. Instead of focusing on jobs lost to the globalisation of information technology, Catherine Mann of the Institute for International Economics in Washington looks at globalisation’s power to reduce prices and so help spread new technology, new practices and job-creating investment through the economy.

She uses the example of cheaper IT hardware, one of the main aspects of globalisation in the 1990s. Most of the drop in prices for PCs, mainframes and so on was caused by the relentless advance of technology; but she still thinks that trade and globalised production—all those Dell Computer factories in China, for instance—was responsible for 10-30% of the fall in hardware prices. These lower prices led to higher American productivity growth and added $230 billion of extra GDP between 1995 and 2002, equivalent to an extra 0.3 percentage points of growth a year.

These days, software spending is increasing at twice the rate of hardware spending, as businesses struggle to make their new computers work better. The manufacturing sector is where such integration has gone furthest. In many other parts of the American economy, the process has barely begun—particularly among smaller- and medium-sized businesses. Mr Mankiw’s example of the Indian radiologist shows how the internet could help lower costs and raise productivity in health care. Who would object to that?

Well, apparently protectionist paleoliberals like John Kerry and John Edwards, for one. They would prefer to argue that by preventing business from outsourcing jobs overseas that those jobs would stay in the United States. They wouldn’t. They would evaporate, leaving an economy being hit with the double-whammy of increasing unemployment and higher prices.

While trying to paint themselves as champions of the poor, the Democrats would create the economic conditions that would ensure that a family making $40,000 a year would be plunged below the poverty line through higher taxes, higher prices, more regulation, and fewer opportunities. The process of outsourcing is a function of the larger change from an industrial to an Information economy. We don’t need such a large manufacturing base because workers can be more productive through automation.

Does that mean that these jobs are going to permanently disappear? Well, automobiles made buggywhip manufacturers close down, but it’s hard to argue that we should have banned automobiles in 1900 to preserve the job of dung-scoopers and horsemen. Eventually the economy will settle into yet another expansionary cycle that will continue to lower unemployment – and indeed this already happening:

This week, the White House retreated from a claim that 2.6m new jobs would be created this year. But there are reasons to think that job growth will be more robust. In particular, the remarkably strong productivity growth, running at twice its long-run average of 2.1%, must slow down eventually. In the face of rising order books, businesses will have to hire more workers.

This may already be happening in some parts of the country. William Testa, director of regional research at the Federal Reserve Bank of Chicago, points out that the downturn began in the mid-west (because of its relative emphasis on manufacturing, notably business equipment, the mid-west was hit first by the slump in business investment) and then spread to the coasts. Now a recovery is spreading in the reverse direction—starting on the coasts and ending up, alas for Mr Bush, in the key electoral states of the industrial heartland.

It is somewhat ironic that the party that once stood behind the statement: “we have nothing to fear but fear itself” has become the party of fear itself. By playing on the insecurities of Americans, the Democrats are cynically creating an unjustified cycle of fear. This recession has been exceptionally mild compared to recessions in the early 80’s and 90’s, yet the rhetoric of the Democrats seems to indicate that the sword of Damocles is hanging over the country just waiting to drop.

Of course, as the economy continues to steam forward and the employment cycle continues to pick up the Democrats will have a harder time making their rhetoric match the reality of everyday life. That is why in the end, all the doom and gloom from the Democrats will amount for little – and the economy will be a benefit for Bush rather than a liability.

4 thoughts on “More On The Outsourcing Myth

  1. Economically, Mankiw is right, and I’ve said so before on this site. I hate that he’s being targeted for this report–it’s just like targeting a Surgeon General that says marijuana is not as dangerous as cigarettes and alcohol. But the fact remains that outsourcing causes shocks to the economy, and when we’re trying to recover from recession (“trying” is the operative word–the effects have yet to be felt in the job market) it’s politically a stupid point to make. Hence, my question: is Mankiw really working for Bush? I’ve read enough of Greg Mankiw’s work to know that he doesn’t particularly agree with supply-side economics, which is exactly what the Bush tax plan was. Has anyone considered that Mankiw raised this point, where he is technically correct, in an attempt to politically weaken Bush for the upcoming election?

    By the way, Jay, the fact that it takes so long for you to explain your point is indicative of the complicated nature of the issue. Economies of scale only work to a certain extent. For example, if producing manufactured goods is cheaper in Mexico, US companies will outsource production there, leaving less money in the US economy in exchange for lower costs of production and lower prices–in theory (look, Nike’s biggest cost of production is Andre Agassi–outsourcing and subcontracting their production to third-world sweatshops has lower production costs, but it hasn’t done much for the price on the shelves).

    This is a complex issue, and like most aspects of economics is not one of “right and wrong” decisions, but of different possible courses of action with positive and negative aspects to each. Mankiw gets the facts right, takes some heat from it, and now Bush has to explain a complex mathematical and economic issue on the trail while simultaneously noting that he’s “not a statistician.” I think the “fifth columnist” might already be in place….

  2. I don’t think it’s nearly that complex. Mankiw is an economist, not a politician. He was speaking off the cuff, and while what he said was correct, it wasn’t very politically astute. To be honest, only .1% of the voting public know who Mankiw is, and if its some secret plan to hurt Bush it’s hardly a good one.

    People don’t pay attention to economic figures, they pay attention to their own economic situation, and as long as the economy continues to improve, it will be a benefit to Bush.

  3. It matters, because reporters know it matters and have been asking Administratinon officials repeatedly about those job figures that have now proven to be so embarrassing to our Non-Statistician-MBA-in-Chief.

    Plus, this isn’t the first stir Mankiw has caused. Remember last fall, with the “deficit as a percentage of GDP” prediction that he made with no real substantiation that the White House had to back off of? I sure do.

  4. “as long as the economy continues to improve, it will be a benefit to Bush.”

    And as long as consumer confidence continues to remain low, and as long as the net job loss continues to be analyzed, Bush will have to find somehting other than the economy to campaign on if he wants to finally get elected.

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