The realities of outsourcing

Jobs are just like any other commodity in a free market. Sure, it's easy to point at someone that lost a job and say 'we have to do something', but that is exactly the wrong thing to happen. That is the reaction of being able to see a person suffer, but not being able to 'see' the benefits of letting a free market work. The current study that people are in an uproar about says that the US will outsource 3.3M jobs by 2015. 500,000 of them will be in the IT sector. "Eek! Let's close our borders and hide our heads in the sand! What can we do to save ourselves from the evil corporations?" Is that about right? Here's reality. Just like trade in goods, trade in services forces painful redistributions of employment. However, the truth is that outsourcing is less of a threat than US workers understand, and there are enormous benefits to the US economy. There isn't a one-for-one relationship between jobs lost in the US and those gained overseas. For example, outsourcing of IT services typically leads to domestic job losses of less than 20 percent. To say that more clearly: for every 100 jobs sent overseas, only 20 US jobs are actually lost. In addition, a recent report on offshoring from McKinsey estimates that every dollar of costs the United States moves offshore brings America a net benefit of $1.12 to $1.14 (the additional benefit to the country receiving the investment comes on top). Part of this arises because, as low value-added jobs go abroad, labor and investment can switch to jobs that generate more economic value. This is what has happened with manufacturing: employment has dwindled, but workers have moved into educational and health services where pay is higher (and conditions often more agreeable). The increases in efficiency that corporations will be able to enjoy will also have ancilliary benefits. For example, the globalization of computer hardware manufacturing led to a 10 percent to 30 percent decline in prices. This made computer equipment more affordable and led to a far greater increase in jobs in the long run than were lost initially when production went abroad. In another thread, someone mentioned the fear of shipping technical expertise overseas. I assume that reference was a fear that US innovation would suffer. Perhaps all those bright young Chinese and Indians will steal not just jobs but the rich world's most precious skills. To such fears there are two answers. First, some innovation will undoubtedly move abroad: the relocation of research and design, and the enormous increase in the numbers of highly trained graduates, will ensure that happens. But the transfer may be slower and more modest than the isolationists fear. Innovation needs the right culture to flourish. Chinese and Indians in California generate more new ideas than they do in their homelands. I say with some confidence that America's long tradition of embracing new ideas and new ways of doing things, combined with a willingness to question authority, ensures that we will continue to foster innovation more effectively than most industrializing countries can do. Second, innovation abroad makes everyone richer. Remember, the British once feared the rise of America's industrial might: today, both nations are vastly wealthier than they were. In services, as in goods, trade brings benefits too great to refuse.