Outsourcing: The “Divider Effect”

PRESS RELEASE Citizens for Corporate Accountability

-US housing and homeowners ultimate victim of outsourcing
-Outsourcing negates immigration--but US mortgages banking on immigration
-Later outsourcing predictions make earlier immigration projections obsolete
-Mortgage debt is increasing proportional to increased outsourcing, due to peculiar interest rate relationship

(UPDATE 3) (SEATTLE) 03/31/04 - A long-proven axiom in economics is known as the “multiplier effect.” Specifically, it is an established fact that each US job generated or kept, multiple other jobs are generated. This is particularly true of higher-paying white-collar jobs. The evidence for the multiplier is manifest all over the United States, where new communities have sprung up around successful businesses.

Unfortunately, the reverse also holds true, a single US job lost leads to multiple job losses, not to mention-multiple losses of US tax revenue, leading to a larger US deficit. In effect, outsourcing leads to the opposite of the multiplier-effectively, a “divider effect.” Despite experts conjecturing otherwise, actual evidence shows outsourcing leads to this very thing: as both blue collar and white collar jobs are being lost due to outsourcing, a domino effect is produced in the job market. Such explains the current economic situation entirely--as outsourcing picks up, net job gains aren’t there. In other words, a little bit of outsourcing goes a long way towards US unemployment.

While there is clearly a divide in America surrounding outsourcing, there seems to be no disagreement that the trend has been on the rise for over a decade. Yet of late, outsourcing has picked up as companies seek to increase profits (without cooking balance sheets), and also, as companies have to avoid the costs associated with recent dramatic rises in US inflation. This rise, by almost every inflation measure that applies to producers, is brought on by low interest rates, a weak dollar, and marked consumption related to real estate development. The resultant high inflation and low employment growth is somewhat different than many expected. Indeed, in such an environment, major companies are now accelerating outsourcing, rather than hiring in the US. Astonishingly, several Federal Reserve members appear to be denying the reality, leading to a loss of credibility among both conservative and liberal Americans.

But there is no ambiguity as to what is going on. Manufacturing companies such as General Motors have experienced huge leaps in the price of such items as steel, aluminum, and nickel, due to pressures from domestic and international industries. Voracious consumers include US homebuilders, as well as existing production of US multinationals already abroad (China is effectively the “factory floor” of US manufacturing). Since the US tax structure favors outsourcing, accelerating the movement of jobs offers the path of least resistance to higher profits. The trend is so successful, that more recently, an acceleration of movement of white-collar jobs has occurred.

But the question is not only the pain of the individual unemployed. Rather, the bigger question is the probable result of the movement of both white and blue collar jobs at the same time. In this respect, the US situation is entirely new. In the past, it was possible to “move up” and re-train from blue collar to white collar jobs, or move from one white collar job to another. Now, such a choice is severely limited at best--because new job skills learned at expense to a worker may also be found elsewhere by employers, at a lower cost. In other words, the problem isn’t a matter of poor US worker skills, as many suggest. Rather, the problem is a matter of a new kind of corporate monopoly, which can largely evade the pricing power of US workers, regardless of skill. Hence, the Federal Reserve’s interest rate actions matter little, except inasmuch as they generate inflation related to non-staffing costs, which companies can offset with cheaper offshore work.

Arguments that outsourcing will “create” US jobs are weak. While it’s true that a management job or two may be created for some larger number of jobs shipped offshore, such a scenario acts to narrow, rather than to expand the US economy. The multiplier effect has in the past led to sustainable, and broad-based expansion of the economy. For example, prior to the outsourcing boom, companies such as Microsoft and others used to bring in immigrants from other countries for high-paying white-collar jobs. Neighborhoods east of Seattle sprung up with wide-ranging businesses. And the core of those neighborhoods was, not unexpectedly, a wealth of new houses, often occupied by immigrants, including Indians or Asians.

Thus, it is not surprising that subsequent to a 2000 census projection, a number of planners projected a healthy US housing market for many years to come, justifying increased growth driven by the influx of immigrants. These planners include those at mortgage giants Fannie Mae and Freddie Mac, as well as at various homebuilders, who (until recently) have stated their projections publicly and repeatedly.

But now the immigration model has been thrown into reverse by outsourcing--forget about immigration, there are even reports of skilled immigrants leaving the US. Now the employee doesn't have to have a house at all. While non-skilled, low wage workers may remain in the US, a few very important people are being kept up at night with good reason--and it isn’t those at Freddie and Fannie. Namely, a certain person who--as luck would have it--happened to testify and praise both housing and outsourcing (in sequence). That is, none other than Alan Greenspan. And yet, confounding many, Greenspan followed up his praises with a seemingly unrelated warning about the potential collapse of the US mortgage system.

Perhaps the Greenspan comments weren’t as unrelated as it seems. Observers will note Congress, at this very moment, is working on the rules for “receivership” (collapse) of the US mortgage giants. Meanwhile, US citizens are borrowing and buying unaware.

[Mountainman]

1. I wish every DUer would read this and know why many of us oppose sending

jobs to India.

In India outsourcing helps to increase the standard of living while in America it has the opposite effect. Those who have the outsourced jobs want us to stop whining and get use to it. Why? Because it is great for them. They care very little what happens to Americans. Yet they expect us to just deal with it.

I want all Americans to refuse to do business with companies that outsource and refuse to talk on the phone with those who have the outsourced jobs. When you get a call from India be polite and tell the person you will not talk to them and to never call you again. It is your right to have the company stop sales calls to you number.

If more of us would not just take it and do something about it, we could make it more costly for companies to outsource.

Globalization is not a good thing. We are being forced to have internet gambling and other things we would not want yet the free traders say that we are hurting global business by enforcing our own laws in our own land.

Do you want to live in a country of your making or one of the globalists making. Our middle class is shrinking while the investor class grows richer by the day.

Do not buy the argument that we are being isolationists. That is not true. We do not want tariffs we just want to exorcise out right to not contribute to something that is hurting us, our country and our way of life.

4. Your house depends on everyone elses job

Another reason to be concerned.

[Bhaisahab]

5. what's India got to do with it?

let me tell you that globalization is bad not just coz it allows internet gambling. globalization has hurt third world countries like mine more than the west. you, after all, are seeing the dark side of "free trade" only now.
you should someday take a walk to my world, and you will see that a decade of globalization has ripped the heart out of this nation. for whatever it was worth, this country was getting by on homegrown food and drink, but now farmers are committing suicide at a rate of 1.27 a day, more than the US troop mortality rate in iraq, and hordes of cheese packets and cola cans are dumped on us to make someone in the west rich.

[idlisambar]

9. no one should blame "India", it's our fault first

Globalization has been hurting a lot of Americans for a while now as well, but it is only now starting to affect the educated classes, hence the latest wave of uproar. Our politicians in both parties have been devastatating our manufacturing base and hurting blue-collar America for the last three decades, while many of us in white-collar America were complicit.

The second irony is that even the investor class that pushes "free trade" is going to get hurt eventually. If we allow our productive capacity to drain by hiring foreigners to do everything, the foundations of our wealth will disappear.

[cryofan]

2. Good work

It might be a bit "Chicken Little", but no one else has so clearly enunciated this divider effect by naming, at least that I have seen.

3. It is a serious matter

The Fannie Mae mortgage debt has grown bigger than US Treasury debt, and the new people to support the housing market just are not showing up!

The whole model doesn't work going forward, counting in outsourcing.

WHOOOOOOOOOOOPS

[cryofan]

6. Tell me about it--I am sending out resumes, but my BS in Computer Sci

....is now attracting no responses, whereas 3 years ago it was a big help.....

[orwell]

7. Something to think About

Thanks for another great piece Dan. I consider productivity increases a greater culprit in the recent lack of job creation than outsourcing but your piece presents information that challenges that claim.

BTW- Do you publish these pieces as part of the liberty website?

Do you have a formal background in economics or is it just a passion for you.

Thanks again.

O

8. US productivity figures include outsourcing gain

As far as I can tell, US productivity figures would in fact include the net benefit for outsourcing. The calculation includes cost of labor and output (per unit labor).

So outsourcing IS a big part of the productivity gain. You and I are both correcr.

But here is the kicker...I have heard that when outsourced, labor costs for the outsourced segment of production may be set to essentially zero. In effect, the foreigners aren't counted as people, so this makes the productivity numbers go up. I don't have any way to verify this.

Even if not "zero cost", think about the absurd nature of reporting US "productivity" figures, including largely NON-US workers. The would-be workers are sooooooo productive, standing in the unemploymen line....

I have a Computer Science Degree, and a minor in economics. I am also working on another degree. I publish on my own website.

Glad you liked my story. There are references I can add, if I have time. I normally include those, but it takes longer, and people don't often look at all the links I put in.

Dan

10. Kick