The problem with outsourcing
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ysf ...@ziplip.com (Your Special Friend)
http://www.boston.com/news/globe/editorial_opinion/oped/articles/2004... The problem with outsourcing By Robert Kuttner | April 21, 2004 THE PEOPLE who insist that outsourcing is a trivial problem are wrong
-- but so are those who tell you that there is an easy solution.
The basic dilemma has several parts. First, the productivity of workers in poor countries is running far ahead of the wages they receive. That means Mexican autoworkers, unlike their American counterparts, can't afford to buy the cars they build.
This reality is unprecedented. There has always been a lot of trade between rich countries and poor ones. But the ability of the world's lowest-paid workers to work with advanced production technology, the dropping of barriers to trade, and the integration of a global information economy are all relatively new.
The analogy to trade within large countries is entirely false. Imagine that M***achusetts was paying an average wage of $15 an hour and Connecticut was paying $1. An awful lot of jobs would eventually go to Connecticut. The United States has always had regional disparities in pay levels -- that's why New England's textile industry went south.
But these were never anything like today's global disparities. And the United States, at least since the 1930s, has had nationwide minimum wage laws, followed by national laws on labor rights, workplace health and safety, and pollution standards. Not so the global economy. So the low-road countries are magnets for outsourcing.
It's surprising that a lot of economists dispute this. One of the most fundamental laws of economics is the law of one price. If Exxon is selling gas for $1.60 a gallon and Gulf tries to sell it for $2.60, everyone will go to Exxon. The technical term for this is "factor-price equalization." Wages are a price, and in an economy with free commerce, they will tend to converge. So unless wages rise in the Third World, global wages will tend to converge downward and American wages will move in the direction of Mexican and Indian wages.
As it happens, the outsourcing problem is occurring while three other factors are compounding the problem -- productivity, the trade deficit, and deregulation. Rising productivity means workers are being replaced by machines. In the long run, this is a good thing; it makes the society wealthier. But who gets the increased wealth, and what does everyone do for a living?
A century ago, when people came off the farms and into factories and then into service work, the problem took care of itself. But where will today's displaced workers go if so many jobs are being drained overseas? In principle, as long as foreign countries buy from us as much as we sell them, their purchases will create a lot of American jobs. But a third factor, America's huge structural trade imbalance, keeps this from occurring.
Finally, these events are playing out in an era of deregulation. That means that even domestic jobs that could well pay higher wages are being battered down by businesses' new power to play off workers against each other.
A generation ago, industries such as telephones, gas and electric utilities, broadcasting, airlines, and hospitals were highly regulated. Prices were pegged and returns ***ured, so there was no competition between companies based on who could batter down wages.
These industries had good, secure, middle-cl*** jobs, blue collar as well as white.
This was also the era when basic industry, such as autos and steel, were largely sheltered from foreign competitors. Thanks to strong unions, they were spared wage competition, too. Deregulation of financial markets has also fostered a climate in which insiders can award themselves astronomical salaries and stock benefits.
In the 1960s, the ratio of chief executive pay to average worker pay was about 70 to 1. Today it's around 700 to 1.
There is no reason why a company has to pay $50 million to get a talented chief executive. People would line up to take the job for a paltry million. The reason for this shift is simply a shift in political power. Insiders grab these astronomical salaries because they can. Workers fail to defend their wages because they can't.
Another myth is that "it's all about skills." Some of the most highly skilled people in the economy, from computer programmers to brain surgeons, are suffering income declines.
The good news is that we do have the means to restore a high-wage economy. The remedy has several dimensions. All have more to do with the political power to make the right choices than with laws of economics. I'll have details in next week's column.
Robert Kuttner's is co-editor of The American Prospect. His column appears regularly in the Globe.
"Mad World" madwo...@nospam.com
It comes down to this... which would you rather end up with?
1. Open border employment (a.k.a. 'Outsourcing') with a Communist infrastructure.
or...
2. A protectionist employment architecture under Capitalism?
You can't mix-and-match here. It's one or the other. Because when all the jobs are gone, the millions of have-nots are going to survive... one way or another. You can provide them jobs and give them an opportunity to earn their living. If you don't... expect to see the m***es to banging down the doors of the wealthy and taking what they need to survive! Modern day Robin Hoods, if you will. Your choice, America.
musicboy ...@yahoo.com (bobber)
The restructuring of employment patterns will lead to restructuring of a great many things, some willingly, some painfully, some unknowingly.
You have to trust the collective decision making power of millions of minds which runs capitalism and learn to adjust. The problem is not a lack of generation of income, outsourcing will generate more income than previously else the model will fail, the problem is that of re-distribution of income. The fat cats who run the corporations that outsource cannot pat themselves on the back and award themselves another $50 million bonus. They will have to share the increased income with those who are paying the price of adjustment in employment patterns and moving to areas which have not been outsourced. The members of the economy, no matter what their occupation, need to get their share of the increased income of the economy in the form of higher wages.
LES ...@JRLVAX.HOUSTON.RR.COM (leslie)
Sure they can. What's to stop them ?
: : They will have to share the increased income with those who are paying : the price of adjustment in employment patterns and moving to areas which : have not been outsourced.
: That sharing isn't happening now. Some are calling for reducing CEO compensation: http://www.usatoday.com/money/economy/fed/2002-09-11-mcdonough-ceo-pa... USATODAY.com - Fed's McDonough calls for CEO pay cuts "NEW YORK (Reuters) -- New York Federal Reserve President William McDonough Wednesday called on U.S. corporate executives to take pay cuts, saying their salary packages are bloated and morally hard to justify.
"Beginning with the strongest companies, CEOs and their boards should simply reach the conclusion that executive pay is excessive and adjust it to more reasonable and justifiable levels," McDonough said in a speech at Trinity Church just steps from the World Trade Center site.
"Should there not be both economic and moral limitations on the gaps created by the market-driven reward system?" McDonough asked in a speech to mark the Sept. 11 attacks.
His remarks were the strongest denunciation yet by any public official of chief executive pay, which McDonough said has swollen in publicly traded companies to 400 times that of production workers on average from 42 times two decades ago.
The New York Fed president said voluntary pay cuts, starting with the best companies, will benefit shareholders and strengthen the United States' market economy.
In recent months, stunning corporate excess during the boom years of the late 1990s has fueled investor outrage as share prices have collapsed but executives walked away with huge riches from stock options, corporate perks and loans..." : : The members of the economy, no matter what their occupation, need to : get their share of the increased income of the economy in the form of : higher wages.
: The distribution of wealth is concentrating more and more wealth in the "fat cats": http://www.epinet.org/content.cfm/webfeatures_snapshots_04122004 Lopsided trends in profits and wages threaten to topple growth "Snapshot for April 12, 2004.
Lopsided trends in profits and wages threaten to topple growth The rise in the stock market over the last year reflects spectacular growth in profits but not a generally healthy economy nor sustainable growth. Profits have never fared better, nor wage and salary income so poorly for this period of the business cycle. Since the last expansion ended in the first quarter of 2001, corporate profits in the United States have expanded by 57.5%. Meanwhile, private wage and salary income has contracted by 1.7% and total labor compensation has increased by a meager 1.5%.
This imbalance is potentially bad news for the economy. Labor compensation is more likely to be converted to demand for domestic production and fuel a sustained growth spiral. In contrast, when income goes to corporate profits, a larger share is likely to be spent abroad (on imports or investments abroad) or to pay down debt.
Corporate profits grew from $635 billion in the first quarter of 2001 to exactly $1.0 trillion in the latest quarter of available data (the fourth quarter of 2003). In the eleven quarters after the peak of the previous eight business cycles (going back to 1948), profits rose by an average of 14% and never more than 21% (see Figure 1). Had profits grown at the average pace of the past, they would have been $278 billion lower.
Figure 1: Change in real corporate and labor income, in percent While corporate profits expanded by $365 billion, private wage and salary income contracted by $73 billion (from $4,330 billion to $4,257), as shown in Figure 2. Had private wage and salary income grown at the 6.3% pace typical of the last eight cycles, it would have grown by $272 billion and be $344 billion higher than the actual level.
Figure 2: Change in income, in real dollar terms Other forms of labor compensation have grown, but at slower rates than in the past. Government wage and salary income grew 8%, down from the prior average of 12%. Likewise, all other labor costs (e.g., pension contributions, health insurance premiums, and payroll taxes) grew 10%, compared with 24% growth in earlier cycles.
Total labor compensation wage and salary income plus other labor costs has grown just 1.5%, far below the average 8.8% gain in past business cycles. If labor compensation had grown at the average pace of the past it would be $447 billion higher.
The nations income has grown more slowly in this cycle than in the past 6.7% versus 8.4%, a difference of $158 billion. This recovery will not be on sound footing until a sustained growth in jobs and incomes kicks in.
Note: All numbers in this Snapshot are adjusted for inflation.
Today's Snapshot was written by EPI Research Director Lee Price."
--Jerry Leslie Note: les...@jrlvax.houston.rr.com is invalid for email
eunome ...@yahoo.com.au (Eunometic)
Although the arguments for free trade are a strong one on the basis of the principle of comparative advantage historical records show that nations that hace benefited mostly from trade invariably practised protectionism untill they grew strong and competitive.
The other aspect is that free trade never implied free movement of people. This is a lunar extension to the idea of free trade.
The commodised morality of the market place says that it is cheaper to replenish and grow the population by immigraion than to create a tax structure friendly to the needs of children, familie, housewifes and working mothers.
Free trade is a religion that has exhausted its uses in even conservative circles. Perservere with this. Its worth it: VDARE.COM - http://www.vdare.com/roberts/us_china_econ.htm Published on VDARE.com - September 29, 2003 Statement of The Honorable Paul Craig Roberts, Ph.D. Before the U.S.-China Economic and Security Review Commission Washington, D.C. - September 25, 2003 By Paul Craig Roberts Members of the Commission, I appear before you as an independent witness, representing no interest group. I was ***istant Secretary of the Treasury for Economic Policy during President Reagan's first term.
I have worked on the Hill for Jack Kemp (I wrote the Kemp-Roth Bill), for the House Budget Committee and for Orrin Hatch and the Joint Economic Committee. I have held a number of academic posts. I was an editor and columnist for the Wall Street Journal and for 16 years a columnist for Business Week.
Currently, I am chairman of the Institute for Political Economy, a Senior Research Fellow in the Hoover Institution at Stanford, and a syndicated columnist.
I offer a different perspective on the "job loss recovery." If my view is correct, we face a new problem that cannot be handled with exchange rate adjustments, retraining programs, employee protections, tax cuts, low interest rates, tort reform, and deregulation. If I am correct, the job losses that we are experiencing are not the result of the normal workings of free trade through which resources are reallocated from uses where they are noncompetitive to uses where they have comparative advantage.
I suggest for your consideration that comparative advantage, which permits free trade to create gains for trading partners, has been undermined by the international mobility of factors of production.
Instead of sectorial adjustments from changes in competitive conditions, we might be experiencing the flight of factors of production to countries where their productivity is highest.
Let me explain. The case for free trade is a strong one with which I agree. David Ricardo discovered the principle of comparative advantage and based the case for free trade on this principle. He showed that if countries avoided self-sufficiency, instead specializing in economic activities where they had the greatest advantage or least disadvantage and trading for other goods, the gains from trade would make each country better off than if countries remained self-sufficient.
For comparative advantage to work, resources within each country must be mobile so they can be reallocated to areas of comparative advantage. However, factors of production must not be internationally mobile; otherwise, they will flow to those countries that possess the greatest absolute advantages. The productivity of factors of production is greatest in countries with absolute advantage.
Historically, there have been barriers to the international mobility of factors of production. In Ricardo's time, GDP was largely determined by climate and geography, neither of which can migrate. In our own time, world socialism served to constrain capital and technology within the first world of North America, Western Europe and Japan where there are not large differences in labor costs.
Multinational corporations would have felt unsafe investing in China and India even if they had been permitted by those governments to do so.
The collapse of world socialism has made vast pools of cheap and willing labor in Asia and Mexico available to US capital and technology. The Internet has made the physical location of employees unimportant for many knowledge and Information Technology jobs. The Internet, out-sourcing, and offshore production for the home market allow US firms to substitute cheap foreign labor for expensive US labor in their production functions.
The questions I pose are these: Are the job losses that we are experiencing the result of internationally mobile factors of production flowing to where their productivity is highest?
Does the ease with which foreign labor can be substituted for US labor in the production functions of US firms make foreign labor internationally mobile to the US where its productivity is highest?
Alternatively, does the international mobility of US capital and technology allow these factors of production to be put to more profitable use in countries with abundant and cheap labor?
Traditionally, American wages were protected by American productivity.
Americans worked with more capital, higher technology and better education, which made them much more productive than cheaper foreign labor. An American's pay was higher because his output was higher.
The mobility of capital and technology means an Asian can work with the same capital and technology as the American. However, the Asian does not have to be paid the same wage. He lives in countries with lower costs and standards of living. The large excess supply of labor in Asian markets means that the market wage is far lower than the value of labor's marginal product or contribution to the firm's revenues. It will be many years before Asian labor markets tighten to the extent that workers will be paid in keeping with their productivity.
In the meantime, will the US continue to bleed jobs, both manufacturing and knowledge jobs that don't require an on-the-scene presence?
Understand that the incentive to substitute foreign for American labor is greatest among high productivity jobs. The hundred-fold difference between $26 dollar an hour US manufacturing wages and 25 cents an hour Chinese wages is a great incentive to offshore production. Hospitals that have their CT scans read in India for $20 don't have to hire $300,000 a year radiologists.
Understand that when Americans are substituted out of high productivity jobs, by default they move into lower productivity jobs.
National income is adversely affected. The US cannot lose its high productivity jobs and remain in the first world.
Understand that foreign hires, outsourcing and offshore production for US markets add to our trade deficit and are paid for by Americans giving up ownership of ***ets and the future income streams produced by these ***ets.
What to do?
A revaluation of the Chinese currency would reduce the gains from substituting Chinese labor for American, but the current differences in pay scales are probably beyond correction by revaluation. Moreover, revaluation makes Americans poorer. All those cheap goods in Wal-Mart would go up in price. This would simultaneously set off US inflation alarms and reduce American real incomes.
Capital and technology controls and protective tariffs bring their own inefficiencies.
The solution, to the extent that there is one, comes from Sir James Goldsmith: One free trade zone for the first world, one for the second world, one for the third world. When countries move from one world to another, they depart one zone and enter another. Foreign investment could continue, only US investments in China would be for that market, not for displacing US production in the home market.
This would deal with manufacturing. But what about knowledge workers hired over the Internet who work in their home countries for US offices? One solution is an employment tax on foreign hires.
Multinational or transnational corporations could evade this tax by ***igning foreign hires to foreign payrolls. More costly regulation would be required to attempt to determine which entity is the recipient of the employee's work.
What we are witnessing in part is the loss of a sense of national identity. Many things have brought about this loss of identity. Open borders, m***ive immigration of third world peoples, attacks on American identity by cultural Marxists and post-modernists. Many things are eroding a sense of cohesiveness. A tower of Babel is not a country.
Our approach to the world is based on the ***umption that we are experiencing free trade. If, instead, we are experiencing the flow of factors of production to absolute advantage, our entire trade policy will need to be revised.
As the solution is draconian, it is important to be certain that we are experiencing the substitution of American labor out of American production functions, and not merely lagging employment after a recession or layoffs due to productivity increases.
Time will tell. If the economy continues to shed jobs while it grows, either in absolute terms or relative to the established growth-employment relationship, the case for my view strengthens.
In the meantime, it would be helpful to track the kinds of jobs that are lost and the kinds that are gained. If we are losing manufacturing and knowledge jobs and gaining retail and government jobs, the ladders of upward mobility are collapsing along with the growth of income.
Paul Craig Roberts is the author with Lawrence M. Stratton of The Tyranny of Good Intentions : How Prosecutors and Bureaucrats Are Trampling the Constitution in the Name of ...
"OutsourceCongress.org" n...@hannatroup.com
Where the hell have you been the past decade? Mars? What you wrote is the absolute opposite of what is happening.
The fat cats are walking away with a larger and larger bonuses. Take Gr***o for one, he just left the NYSE with $170 MILLION. Who is he sharing that with? His mistress(es)?
Mike http://www.OutsourceCongress.org/ ...
<>...
josesop ...@aol.com (jose soplar)
Close down the plants in Mexico! It's not fair that Mexicans have jobs in Mexico where the cost of living is extradinarily lower than it is in the United States and yet the wages they are paid are not comensurate with wages paid to similar workers in the U.S.
LES ...@JRLVAX.HOUSTON.RR.COM (leslie)
Some of the plants in mexico are being closed down and those jobs moved to Asia...
http://www.siliconvalley.com/mld/siliconvalley/4386032.htm AP Wire | 10/28/2002 | U.S.-Mexico border industry transforming after blow from global crisis "JULIE WATSON ***ociated Press Writer CIUDAD JUAREZ, Mexico - The signs of crisis are everywhere. Homeless people sleep in abandoned factories where workers once ***embled irons, toasters, shirts and other goods. Border migrant groups air radio announcements in the countryside, telling job seekers to stay away.
Mexico's northern border industry, hit hard by a year-long downturn, is finally starting to recover, but with some of its biggest factories shuttered, no one expects the region to return to the thriving export economy it enjoyed for a decade.
Toy maker Hasbro Inc. has moved its Tijuana plant to China. Canon Inc.
moved its Tijuana inkjet printer plant to Vietnam. Philips Electronics shifted one of its Ciudad Juarez computer monitor plants to China.
It is a dramatic change from the influx of manufacturing that began in the 1960s when mostly U.S.-owned ***embly plants came to the 2,000-mile frontier in the 1960s to take advantage of Mexico's proximity and low labor costs.
Mexico recently complained to the World Trade Organization about China's luring away its factories, but Asia is not the border's only competition. Some companies have opted for Central America and Mexico's impoverished southern states, where labor is cheaper than along the border.
"It's going to be very difficult for the border to bounce back to the way it was with labor-intensive plants," said Rolando Gonzalez, president of Mexico's ***ociation of Maquiladoras, as the plants are known in Spanish. "Labor is too expensive. The border can't compete paying $2.50 to $4.50 an hour when China pays less than 50 cents an hour." For decades before the crisis, busloads of Mexico's unemployed arrived daily and found work amid the boom of the North American Free Trade Agreement, or NAFTA. Plants offered gymnasiums, daycare and other perks to compete for laborers. More than 3,500 plants employed 1.2 million people.
But the maquiladora industry has since lost 250,000 jobs, most along the border. Some jobs have been created recently, but most are in the interior - not the border, Gonzalez said..." http://www.washingtonpost.com/wp-dyn/articles/A14093-2002Jun19.html Mexican Workers Pay for Success (washingtonpost.com) "Mexican Workers Pay for Success With Labor Costs Rising, Factories Depart for Asia By Mary Jordan Washington Post Foreign Service Thursday, June 20, 2002; Page A01 TIJUANA, Mexico -- Cesiah Ruiz Brena came to Tijuana in 1989, deliriously happy to get a job at a new Japanese factory. Her work space was grand, the lights were bright and the pay was unimaginably good: $100 a week to start.
But after 13 years during which her wages rose to $200 a week, Ruiz Brena lost her job on June 1. Her Canon inkjet printer factory shut down. She and her co-workers shared a cake, snapped photos of one another and said goodbye. The factory, they were told, was moving to Thailand and Vietnam, where wages are as low as $15 a week -- less than what she earns in a day.
All along the Mexican border with the United States, once-busy factories are closing. Since the end of 2000, tearful farewell parties have been held for 250,000 factory workers in Mexico. Some of the same jobs that left North Carolina textile plants and Ohio auto-parts ***embly lines for Mexico in the 1980s are now moving to Asia. The reason is the same: cheaper labor.
The loss of jobs here in part reflects the slowdown in the U.S.
economy. But many of the plant closings are just the globalized economy at work. Factories came to take advantage of low wages; now that success has driven wages up, they are moving on. Mexico is left with a bittersweet legacy: higher wages, but fewer jobs.
More than 500 foreign-owned ***embly-line factories in Mexico, called maquiladoras, have closed in the past two years, in part because wages have doubled in the past 10 years and are no longer considered low in the world economy. An entry-level factory worker in Tijuana earns $1.50 to $2 an hour, compared with 25 cents an hour in parts of China.
International companies once wary of China are increasingly inclined to invest there. Those include a golf-club manufacturer that laid off 1,500 employees in Tijuana and an electronics factory in Guadalajara that left 4,000 workers jobless when it moved. Suddenly Mexican workers feel that China is their fiercest competitor, sucking their jobs east..."
--Jerry Leslie Note: les...@jrlvax.houston.rr.com is invalid for email
insuranc ...@aol.com (InsuranceBroker)
You must really read before you past. The New York Stock exchange was one of the largest employers of computer personnel in the New York area. What Gr***o did not send to India, he imported Indian workers to do in New York. The other brokerage companies saw what was going on and they all followed. There is not one brokerage company computer facility that does not look like down town Bangalore. GE which is a large financial company was one of the first companies to move to India. Gr***o should be looked like a crooked CEO just like the rest of the scumbags companies that employ CEO like Gr***o who make all their money destroying the UNited States.
Doing Insurance business in the Garden State
robertr ...@aol.composite (RobertR237)
What we must realize is that by US standards, almost everybody in Asia is poor.
Even the poor in the US have a much higher standard of living than a majority of the worlds population. I will agree with you, if the plants are moving from Mexico to Asia, it is most likely a result of corrupt Mexican government officials. Bob Reed www.kisbuild.r-a-reed-***oc.com (KIS Builders Site) KIS Cruiser in progress...Slow but steady progress....
"Ladies and Gentlemen, take my advice, pull down your pants and Slide on the Ice!" (M.A.S.H. Sidney Freedman)
AJ a...@avconslt.net
No, its $20/day versus $15/week. Next move will be to $12/biweekly. Than to full Automation and than we have to rethink the whole concept of economy. Curruption can be found here to but we legalized it and call it lobying.
aj
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