In the News, In the Debates

1. In the News, In the Debates Antu Panini Murshid

2. Did We Learn Anything From the Debates? • Perhaps not… • But they were fun… • If nothing else, we learned that John Kerry was “misunderestimated”

3. What Were the Debates About? • A large portion of the debates was on foreign policy • Bush talked flip flopping • Kerry talked about the mistake of “rushing to war” • Part of the third debate however had to do with economic policy • One topic that was on something few know much about… • …Outsourcing

4. What is Outsourcing • What is outsourcing? • A good or service is purchased from an outside vendor as opposed to being produced in-house • Within the context of the current presidential debate “outsourcing” refers more specifically to the outsourcing of jobs overseas

5. John Kerry Strong on Outsourcing • Is outsourcing bad for US jobs? • John Kerry thinks so… • …“Benedict Arnold CEOs send American jobs overseas,” John Kerry • Perhaps Kerry “meant Benedict Arnold in a good way” but really the more logical conclusion is that outsourcing is bad

6. John Kerry Nuanced View on Outsourcing • Kerry’s view is perhaps more nuanced • “We recognize that outsourcing is a reality, but at the same time, we want to develop our jobs and industries more at home here too” John Kerry • Here Kerry takes a very balanced views on outsourcing • This seems to suggest that the realities of outsourcing are not so clear cut

7. The Kerry Plan • Provide tax incentives for businesses that create jobs in the US instead of outsourcing them overseas • So really “John Kerry doesn't want to end outsourcing. But he does want to end the kind of outsourcing that results from distortions in the tax code,” Lael Brainard, Kerry Advisor

8. Not Everyone Agrees With Kerry? • Not everyone agrees with Kerry that: • (a) outsourcing is necessarily bad for US jobs • (b) that outsourcing can feasibly be halted

9. Bush’s View • “Outsourcing of professional services is a prominent example of a new type of trade. The gains from trade that take place over the Internet or telephone lines are no different than the gains from trade in physical goods transported by ship or plane. When a good or service is produced at lower cost in another country, it makes sense to import it rather than to produce it domestically. This allows the United States to devote its resources to more productive purposes,” CEA, The Economic Report to the President

10. Many Economists Tend to Agree • Outsourcing service-sector jobs is “the latest manifestation of the gains from trade that economists have talked about … and that’s a good thing,” Gregory Mankiw, Chairman of Council of Economic Advisers • “Our economy is best served by full and vigorous engagement in the global economy…The protectionist cures being advanced to address these hardships will make matters worse than better,” Alan Greenspan, Chairman of the Federal Reserve

11. However Many Voters However Agree With Kerry • Many Americans agree with John Kerry • “Speak out against the economic holocaust that the foreign outsourcing of American jobs is inflicting on America's lower, middle, and upper-middle classes” • You can purchase t-shirts (for your dog!) as well as mugs that reflect this point of view

12. Why the Backlash Against Outsourcing? • The current backlash against outsourcing reflects a perception that jobs lost because of outsourcing exceed the number of jobs created • Estimates paint a fairly ominous picture • Demands for protection always increase during economic slowdowns • Protectionism always has undeniable short-term political appeal

13. What Are the Facts? • It is difficult to find good hard data on outsourcing • The numbers are vague and more useful as politicians that applied economists • Nevertheless we have some sense of which countries are receiving jobs as a consequence of outsourcing and which industries are being affected the most

14. What Countries? What Industries? • Where are the jobs going? • China and India • What industries are being affected? • According to projections the hardest hit sectors will be financial services and information technology (IT) • Outsourcing affects white collar workers • Traditionally protectionism was championed as a way of “safeguarding” blue collar jobs • Two decades ago, auto industry

15. The Numbers Are Ominous • McKinsey Global Institute—volume of offshore outsourcing will increase by 30 to 40% a year for the next five years • Forrester Research—3.3 million white-collar jobs will move overseas by 2015 • Gartner research—1 out of every 10 IT jobs will be outsourced overseas • Deloitte Research—outsourcing of 2 million financial-sector jobs by 2009 • New India Press—number of US outsourced jobs to India from the computer industry will increase from 177,000 in 2002 to 1.2 million in 2008

16. Gross Figures Paint a False Picture • These numbers paint a gloomy picture moreover the jobless recovery tends to support the conclusion that outsourcing destroys US jobs • But there are no precise estimates as to the extent of the problem • What figures do exist do not take into consideration job-creation possibilities that outsourcing fosters • The numbers are gross figures

17. No Reason for Hysteria Quite Yet • Even the worst predictions e.g. Forrester Report need to be put into perspective • 3.3 million job losses spread over 15 years or 220,000 job losses per year • Total employment in the US is 130 million • Between now and 2010, 22 million new jobs are expected to be added

18. Outsourcing Is Unlikely to Affect Most Jobs • Nearly 90 percent of jobs in the US require geographic proximity • Services such as retail, restaurants, marketing and personal care • Jobs in the high-value-added sectors are much less at threat • Outsourcing impacts standardized tasks such as data entry, accounting, and IT support • Less at threat is innovation and deep business expertise

19. So What If It’s Not That Bad. It’s Still Bad! • Although the outsourcing problem may be small it still leads to job losses in the US. Right? • No! Not necessarily • Outsourcing can have very positive effects • In terms of future productivity • In terms of long-term growth • In terms of jobs

20. Can Outsourcing Be a Good Thing? • Outsourcing is definitely good for a firm • Outsourcing is an example of a new type of trade • Outsourcing can increase productivity • Outsourcing can actually generate jobs • Outsourcing helps to raise third world countries out of poverty

21. Outsourcing is Good For a Firm… • Outsourcing reduces costs • 1. There are fixed costs associated with production in-house • 2. Foreign labor may be cheaper • 2.1. Lower wages • 2.2. Fewer employee benefits • 2.3. Indirect costs associated with worker conditions • 3. Other indirect costs—business taxes, environmental regulations, etc.

22. …But Is It Good For Us? • How does it all work? • 1. Cheaper labor free up resources for investment • 2. Higher growth • Due to increased investment • Due to increased productivity • 3. Growth will stimulate employment • 4. Firms will be more competitive against foreign comp. • Protect current jobs • 5. Cheaper goods for consumers

23. Does Lower Costs Mean Higher Productivity? • When a firm “outsources” to a firm in India it does so because of cheaper labor • But cheaper labor doesn’t mean higher productivity does it • No not necessarily • So why do people say that outsourcing raises productivity? • In fact there are many reasons that outsourcing can impact on productivity…

24. How Does Outsourcing Increase Productivity? • Allocation of capital and labor • A reduction in labor costs might permit a different and perhaps more efficient allocation of capital and labor • Specialization • Outsourcing allows a firm to specialize in other activities where it has a comparative advantage • Investment and R&D • Higher profits often imply higher investment and increased R&D • Spillover effects • Lower prices imply lower costs for other industries hence there are spillover effects to other industries

25. Is There Any Hard Evidence? • Is this all speculative or is there any hard evidence that outsourcing raises productivity? • There are few rigorous empirical studies that look at the effects of outsourcing: • Mann (2004), Amiti and Wei (2004a) and (2004b), Gorg and Hanley (2003) are three recent examples

26. Mann (2004) • Mann, Catherine L., 2004, “Globalization of IT Services and White Collar Jobs: The Next Wave of Productivity Growth,” International Economics Policy Briefs 3–11. • She finds that materials (not service) outsourcing in IT sector lowered prices (by 10%-30%). This raised productivity in all sectors relying on IT hardware • She argues that IT software—a form of service outsourcing—will have the same (perhaps even larger) effects

27. Gorg and Hanley (2003) • Gorg Holger and Aoife Hanley, 2003, “International Outsourcing and Productivity: Evidence from Plant Level Data,” Research Paper 2003/20, University of Nottingham • They find that international outsourcing of services had a positive impact on productivity in the electronics industry in Ireland between 1990 and 1995 • They also found that outsourcing of tangible inputs did not have a significant effect on productivity during this period

28. Girma and Gorg (2003) • Girma, Sourafel and Holger Gorg, 2003, “Outsourcing, Foreign Ownership and Productivity: Evidence from United Kingdom Establishment Level Data,” Discussion Paper 361, German Institute for Economic Research • They find that service outsourcing had a positive effect on labor productivity and total factor productivity in the U.K. between 1980 and 1992 • They were however unable to distinguish between domestic and foreign outsourcing

29. How Does Outsourcing Raise Jobs? • Outsourcing can raise employment through a number of channels • Outsourcing makes firms more competitive. This may save jobs in the long run • This might have spillover effects for other firms which also become more competitive • Most importantly however outsourcing raises productivity and this means higher growth • While some jobs may be lost in the short-run in the long-run there should be growth in employment

30. Is There Any Hard Evidence? • There is some evidence that suggests that outsourcing can lead to an increase in employment • Amiti and Wei (2004a) also find that job growth is not negatively related to job growth at a sectoral level • The evidence in Amiti and Wei (2004b) is very interesting: (a) Service outsourcing reduced employment by 0.4 and 0.7 percent at an industrial level; (b) However at a more aggregate level service outsourcing actually raised employment

31. Amiti and Wei (2004a) • Amiti, Marry, and Shang-Jin Wei, 2004, “Fear of Service Outsourcing: Is It Justified,” NBER Working Paper 10808 • Amiti and Wei find that service outsourcing is very low and in the US and many other countries “insourcing” is greater than outsourcing • Using data for the UK they find that job growth at a sectoral level is not negatively related to outsourcing

32. Amiti and Wei (2004b) • Amiti, Marry, and Shang-Jin Wei, 2004, “Service Outsourcing, Productivity and Employment: Evidence From the US,” IMF Working Paper forthcoming • The main conclusion is that there is a small negative effect of outsourcing (about 0.5%) on employment when industries are finely disaggregated • This effect disappears at a more aggregate level of 100 industries. The implication could be that the spillover effects of outsourcing are important

33. Outsourcing Benefits Developing Countries Also • Outsourcing allows people in developing countries to earn higher wages • This in turn has positive implications buy goods produced overseas • Higher employment in the long run • Cheaper goods for consumers

34. We Need Freer Trade and Not Protectionism • Most economists feel that free trade bolsters growth while protectionism hampers it • Greg Mankiw refers to outsourcing as the “latest manifestation of the gains from trade” • While outsourcing isn’t trade in goods (it’s trade in jobs) the standard free trade arguments continue to apply • Countries with comparative advantages in certain sectors should specialize in those sectors

35. Specialization and Comparative Advantage • Labor is cheaper in India and China, so if that labor can perform simple standardized tasks more efficiently than US workers then India and China should specialize in those tasks and the US should specialize in other areas • The US should focus in areas where it has a comparative advantage • By doing so world output will increase

36. Protectionism Is Not a Good Idea • Protectionism when practiced in the past has generally led to bad outcomes • 20-years ago the US auto industry cried out for protectionist policies. The consequences of these policies were not good for either US jobs or US growth

37. Protectionism in the Car Industry • 20 years ago the US auto industry cried out for protection against cheaper Japanese cars • As a consequence Congress negotiated a voluntary export restraint (VER) with Japan. This restricted exports of Japanese cars in the US to slightly less than 1.7 million cars per year

38. The $250,000 Job • Richard Crandall estimated that the impact of the VER was to push up the price of Japanese cars by $1500 and the price of US cars by $600 • In the first year the American consumer paid $6.5 billion more for cars • 26,000 jobs were saved in the auto-industry • $6.5 billion/26,000 = $250,000 • We could have just made a transfer from the consumer to the auto-workers and it would have cost us less!

39. Should We Be Concerned About Outsourcing? • Why are we concerned about outsourcing all of a sudden? • Stories of workers affected by outsourcing are powerful • Demands for greater protectionist policies increase during recessions • The political appeal of protectionism is therefore. undeniable However while blaming foreigners for domestic business cycles is smart politics, it is not smart economics • Protecting domestic markets only provides the illusion that we are taking direct, decisive action. However all we are doing is hurting the economy in the long-run

40. Summary of the Arguments For and Against • Let’s first summarize the arguments for and against outsourcing • Against: • Job losses at home • For: • Protectionism is generally bad. Outsourcing will permit increases in productivity. This will generate future jobs and higher incomes • Outsourcing allows people in developing countries to earn higher wages and—in turn—a buy goods produced overseas