Fighting back on outsourcing

Posted: Apr 02, 2004 12:00 AM

 Reluctantly, Republicans have concluded that the outsourcing issue is not going away.  Their first response was to shoot the messenger--in this case, Council of Economic Advisers Chairman Greg Mankiw, who simply said the phenomenon is an inevitable byproduct of free trade.  House Speaker Dennis Hastert (R-Ill.) called for his head and Mankiw was forced to apologize.  Journalist Robert Novak called the White House action "clumsy."

 With polls showing growing numbers of Americans apprehensive that their jobs may soon be sent to China or India, Republicans eventually recognized that a more appropriate response was needed.  According to a March 21 poll by Democratic pollster Stan Greenberg, respondents cited a fear of jobs being outsourced overseas 43 percent of the time when asked about America's most serious economic problems.

 Of course, it is absurd that almost half of Americans should fear outsourcing.  The vast majority of jobs can never be outsourced, because they require physical contact, close proximity to markets, and other factors.  Nevertheless, fears of outsourcing can be potent politically if many people think that they are next, however remote that possibility may be.  Senator John Kerry (D-Mass.) is doing his best to stoke those fears by making multinational corporations the scapegoats for slow job growth.

 What has been seriously lacking in the outsourcing debate thus far is hard data.  Estimates of huge job losses have been churned out by consultants in order to get outsourcing business.  And because the data is proprietary, few people have been able to examine them in detail.  One who did is Stephen Roach, chief economist for Morgan Stanley.  He looked at Forrester Research's widely cited projection that 3.3 million U.S. jobs would be outsourced by 2015 and found it to be "pretty flaky."

 Now, at last, we are starting to get some serious studies with good numbers.  They paint a very different picture of the outsourcing phenomenon.

 A new report from the Commerce Department shows that the U.S. runs a large trade surplus in information technology (IT) services.  This is precisely the area where most of the job loss from outsourcing is supposed to be taking place.  In 2002, the U.S. exported $3 billion worth of computer and data processing services and $2.4 billion in database and other information services, while importing just $1 billion of the former and $200 million of the latter.

 A new study from the respected economic forecasting firm, Global Insight, found that the total number of jobs lost to IT outsourcing last year was only 104,000.  This amounts to just 2.8 percent of IT jobs in the U.S.  A much larger number were lost due to unrelated factors, including the collapse of the dot-com boom in 2000, the recession, and rising productivity.

 The most important finding of the Global Insight study is that the cost savings from outsourcing don't just flow into higher corporate profits.  They contribute significantly to higher output in the U.S., which leads to job increases elsewhere in the economy.  The study estimates that the gross domestic product was $34 billion higher last year because of outsourcing and that this created over 90,000 net new jobs.  These figures will continue to rise in future years.  By 2008, GDP will be $124 billion higher and the number of new jobs created by outsourcing will rise to 317,000.

 It's important to recognize that these new jobs are almost entirely outside IT.  According to Global Insight, the largest beneficiary is construction, which will gain 75,757 net new jobs due to outsourcing.  Other industrial gainers are transportation and utilities (63,513), education and health services (47,260), and wholesale trade (43,359).

 Additional benefits of outsourcing are lower inflation, lower interest rates and higher real wages, which flow to all Americans.  Global Insight gets these results because it looks at the ripple effects of outsourcing throughout the entire U.S. economy and not just on IT, as other studies often do.

 Federal Reserve Governor Ben Bernanke also emphasizes the broader economic benefits of trade and outsourcing.  The narrow focus on jobs tends to be misleading, he says, because much of the payoff accrues to consumers in the form of lower prices.  Moreover, careful economic analysis has shown no relationship between jobs and trade in the aggregate.  "There is little basis for blaming the recent poor employment performance on import competition," Bernanke concludes.

 Faced with the reality that there was nothing they could do about outsourcing even if they wanted to, Republicans are slowly going on the offensive.  Greg Mankiw was once again allowed to speak publicly.  His colleague on the CEA, Kristin Forbes, made a forceful defense of free trade.  And Treasury Secretary John Snow even spoke out in defense of outsourcing.  It may not be enough to reverse the tide of public opinion, but it's a start.