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Outsourcing America: What's Behind Our National Crisis and How We Can Reclaim American Jobs

June 7, 2005

With author Ron Hira, Assistant Professor of Public Policy at Rochster Institute of Technology, Senior Member of the IEEE

Aaron Bernstein, Senior Writer, BusinessWeek
Bruce Mehlman, Co-founder, Mehlman Vogel Castagnetti, Inc.
Shang-Jin Wei, Advisor and Head of Trade Unit, Research Department, International Monetary Fund; Senior Fellow, The Brookings Institution

The Program on Science, Technology, America, and the Global Economy is hosting a series of meetings on how current economic and S&T trends will affect the American and global economies. As part of that series, STAGE hosted a discussion with Ron Hira, co-author of a new book, Outsourcing America: What's Behind Our National Crisis and How We Can Reclaim American Jobs. Hira is an Assistant Professor of Public Policy at Rochester Institute of Technology.

To add a variety of perspectives, we included three commentators, Aaron Bernstein, Senior Writer and Assistant Editor of BusinessWeek; Bruce Mehlman, former Assistant Secretary of Commerce for Technology Policy and founding partner of Mehlman, Vogel and Catagnetti, Inc., and Shang-Jin Wei, chief of the Trade and Investment Division of the International Monetary Fund, Senior Fellow at the Brookings Institution, and Director of the National Bureau of Economic Research's Working Group on the Chinese Economy.

In Outsourcing America, Ron Hira and his brother and co-author Anil spell out several of the questions raised by new technologies, the rise of China, India and other emerging economies, and the phenomenon of offshore outsourcing of high-skilled services. Among other questions, they ask how much offshoring is taking place, why companies are turning to offshoring, and the potential impact of offshoring on America's economic future.

Hira emphasizes how inadequate the data is with regard to offshoring. One government study, conducted by the Government Accountability Office (GAO) found that official federal data do not specifically identify offshoring activities. In the first quarter of 2004, the U.S. Bureau of Labor Statistics added two questions on offshoring to their Mass Layoffs Survey of employers and found that only two percent of layoffs were attributed to offshoring. Hira is skeptical of the result – noting that a mass layoff involves at least fifty people and employers can cite many causes for the layoff. Given the controversy over offshoring, Hira notes that companies have good reason to keep their offshoring or overseas hiring plans private. Indian data or a quick perusal of the English language Indian press yields much higher figures for offshoring.

Hira stresses that the offshore outsourcing or offshoring extends well beyond the call centers that have gotten so much attention. India and other countries can now offer Internet based services that range from chip design to radiology to legal research. Other countries are intent on providing on-line services as well. Hira notes that China has made the study of English a national priority so that it can match the language skills that currently give India a competitive advantage in attracting foreign investment and jobs. Citing an article in The New York Times, Hira notes that most Chinese workers will speak English within twenty years.

Why do companies move offshore? Hira points to a variety of changes that have made offshoring feasible and attractive to companies. The spread of broadband and the growth of the digital economy have made global sourcing of services feasible. Much lower wages and the availability of highly skilled scientists and engineers have made it attractive. Hira also points to the use of policies by China, India and others to attract skilled service sector activities. The United States, by contrast, has no economic strategies in place to preserve or increase high-skilled job opportunities.

Hira drew a sharp contrast between the 1980s when companies and workers often formed an effective partnership to respond to the rising international competition – especially from Japan. Today, Hira argues that U.S. firms have become truly global entities who have few, if any, incentives to put as much weight on the interests of their incumbent workforces.

What will be the impact on the U.S. economy? As with many major economic shifts, Hira suggests that there will be winners and losers. He wonders, however, if the United States as a whole will not be weakened by the growth of offshoring. He sees a downward pressure on wages, students shying away from computer science degrees to avoid working at Indian salary levels or layoffs from outsourcing, and rising uncertainty among many professionals about their economic future.

Hira also calls for a reexamination of the assumptions underlying the current approach to trade policy. He points to a recent article by Nobel Prize-winning economist Paul Samuelson that notes how the technological rise of one trading partner can erode the gains of trade for the other. Hira also notes the recent work of Ralph E. Gomory and William J. Baumol. (Gomory is currently the head of the Sloan Foundation in New York and previous served as IBM's senior vice president for science and technology. Baumol is a highly regarded economist currently on the faculty of New York University, an emeritus professor from Princeton University, and former president of the American Economic Association.) Gomory and Baumol find that under specific circumstances, one trading partner can lose major (including high technology) industries to a trading partner with significant negative repercussions.

Hira ended his presentation (and his book) with a series of policy suggestions. He emphasized the critical need to collect, publish, and analyze much better data on offshoring. In terms of the losers, he proposes extending the current Trade Adjustment Assistance Program (for manufacturing workers displaced by imports) to service employees. More fundamentally, he wants to shift the dialogue from a focus on winners and losers to an emphasis on the long-term competitiveness of the American economy.

Aaron Bernstein was concerned about a seemingly technical discussion that lacked an ethical dimension. He cited the Stolper-Samuelson Theorem (free trade can lead to equalizing factor prices including wages) as a warning of the potential impact on workers subject to global competition. Was it right, he asked, for us to ask one set of workers to take a significant pay cut so that the rest of the country can do better?

Bruce Mehlman started by complementing Hira on his balanced and thoughtful presentation. Like Hira, he was concerned about workers adversely affected by international competition but also stressed the broader gains in terms of consumer welfare, more competitive companies, and added innovation. Mehlman argued that we were not shredding the American Dream but sharing it with others.

In Mehlman's view, the decision to go offshore for manufacturing, services or research and development was a competitive necessity and not simply an option. Mehlman also stressed that outsourcing and offshoring has benefited the United States as many foreign-based companies decide to invest in the United States.

In terms of policy, Mehlman also emphasized the need for better data. He also stressed the importance of education, investments in infrastructure, and an economic and policy climate that supported the entrepreneur.

Sheng-Jin Wei argued that emphasizing outsourcing or offshoring to India was much too narrow a focus. The rest of the world also outsources with much of the work being done in the United States. The United States, he added, runs a healthy trade surplus in services.

Wei argued that the impact of outsourcing would most likely be lower costs and rising productivity. Other analysts have made the same suggestion, noting that the 1980s offshore production of computers and related equipment drove down their price, sharply increased their usage, and thus contributed to the rapid productivity growth of the 1990s.

Wie warned against measures that would add rigidity to the labor market. He did, however, favor extending adjustment assistance to service workers and adopting a portable safety net.

Prepared by Kent Hughes, Director, Program on Science, Technology, America, and the Global Economy Ext. 4312