An Independent Study on Offshoring IT?

vsprintf writes "What are the real effects of offshoring on the U.S. technology sector? Pick your economist on the subject. The Bush administration's Gregory Mankiw says it's all good, and exporting jobs is just a new way to do trade. In Congressional testimony, Ralph Gomory says a little bit is okay, but too much is bad, while Herman Daly says it's just plain bad. The ITAA's paid mouthpiece, Harris Miller, says it must be good because IT workers in India wear Nike tennis shoes. At last, it appears the IEEE-USA has persuaded Congress to pay for an independent study to determine how offshoring really affects U.S. IT."

Comments

The race for the bottom

[Anonymous Coward]

The only people who will benefit from outsourcing are corporate execs and stockholders.

The rest of us will be left with nothing to do and it won't matter if goods and services are cheaper if you don't have a wage to pay for them.

Meanwhile the Indians etc. will be undercut by the Chinese and they'll be undercut by someone else.

Where does it end?

Re:The race for the bottom

[jcr]

The only people who will benefit from outsourcing are corporate execs and stockholders.

Do you have a retirement plan? If so, then you're a shareholder.

Get over your zero-sum marxist mind set. The more people working, the more wealth is created. The USA is the economic powerhouse that it is, because there are basically no trade barriers from coast to coast, for some 200 million people.

As international trade barriers fall, wealth everywhere increases.

-jcr

Re:The race for the bottom

[Znork]

"As international trade barriers fall, wealth everywhere increases."

That would be true if the other factors were globalized at the same time, the way they are in the US. Education, labour rights, workplace environment, worker protection, social development, freedom of movement, etc.

For the moment, it's hardly as if people can move to a place where there's a lot lower cost of living and follow the jobs. Instead they have to wait for equilibrium to be reached, and those other countries to evolve, until they lose the jobs in question, whereupon another labour pool gets exploited for a certain period.

Wealth everywhere does not increase from that. Wealth gets concentrated to the abusers of the situation, and a miniscule amount (as small as is possible to maximize profits) gets redistributed to the exploited labour pool.

The problem with globalization is that it's not going far enough. Opening markets should be accompanied with freedom of movement and balancing social systems.

Otherwise we end up with the current exploitation system that ultimately will benefit only a few individuals.

Re:The race for the bottom

[Phoenix666]

IAACSE (I am a Chicago School economist):

The previous post by jsebrech was much closer to what actually happens: corporate execs and shareholders benefit from outsourcing, the average American does not. There is some benefit to a person holding a retirement plan, sure, but do you really think that a 2% rise in your well-diversified , oh, say, $70,000 stock portfolio due to outsourcing will offset the $90K job you just lost because they outsourced you? And I'm not even getting into externalities here, such as unemployment insurance to be paid, broken marriages because of increased stress, lost tax revenue for the government, etc. etc.

Losing lots of jobs is, I'm sorry to say, a big deal. Especially when no new jobs are being created to replace them, at the same general salary level. The only way for outsourcing to not be a zero-sum game is for them to be able to move to India to keep their same jobs. That's classical economic theory. In order for labor and capital to balance, they must be allowed to seek equilibrium. But while capital is allowed to move freely, labor is not. If your annual income is less than seven figures, outsourcing is most likely a zero-sum game for you at this point.

Re:The race for the bottom

[dave420]

What I want to know, is why someone with a $90k job feels it's their right to have that job, especially when someone else can do it for less. If you're that worried about money, you should be able to understand why your vastly-overpaid job went elsewhere.

That's the risk you run being in a footloose sector. There are no physical requirements for the IT work being offshored, so there are no reasons for it to stay anywhere. The person who offers the best deal (note: not necessarily the cheapest) gets the business. It's not just charging a low price that gets these companies the IT work, but a certain guarantee of quality. If the US can't compete financially, then it must add some value that can't be added somewhere else.

It's the free market at work. Something the US has been pushing on everyone for a long time. Something about cakes and eating springs to mind ;)

Re:The race for the bottom

[dave420]

"Thumb-scratch decorated husband". Right. As opposed to Bush, who was pissing on cars and shouting abuse at policemen while that "husband" was actually fighting in Vietnam. Bush is the pussy, not Kerry. I mean, at least think for yourself here, not some "Swift boat veterans for whatever the whitehouse wants to say" advert. People like you are why other people want to park jetliners in your skyscrapers.

Re:The race for the bottom

[demachina]

Unfortunately you've really oversimplified the situation. Do you work for the Bush administration? They do that too.

Your glossing over the fact that countries like China artificially manipulate their currencies and wage rates, and have a dramatically lower cost of living. It will simply be impossible for anyone living in a developed country with a free floating currency to complete against them in any field outside of the service sector. If you want to rant about free trade then China has to let their currency float. Until they do they are going to steal the rest of the world blind.

Amazingly enough the U.S. is evolving to nothing but service sector jobs for precisely this reason.

To put it another way, if a Chinese worker and an American worker are equally educated, equally qualified and equally hard working the Chinese worker will win everytime.

Now lets turn to an area where the U.S. did have an advantage. If a creative mind in the U.S. invents something and patents it, or a company invests a bunch of money developing a complex and innovative device. This is a one of a kind device that would insure the company financial success especially with the backing of a patent. You see patents are bad in software but they are priceless in the hardware world. What does China do. It buys the device, reverse engineers it for a fraction of what it cost to develop originally. They sell a knock off for half the price and the American company goes out of business.

Another path to the same demise, an American company has over the years developed a huge portfolio of intellectual property, a dumbass CEO decides he wants to exploit cheap labor and offshore the manufacturing of the products based on the IP. When he does his IP is quickly stolen by an employee and a competing company pops up owned and operated solely by the Chinese and they again bury the American company.

All in all I agree America has spent all its history singing praises of free markets so they should live and die by them, but if you are going to have them they have to be really free, which means freely floating currency and wages along with intellectual property protection. We don't have free trade today, we have trade completely stacked in favor of America's competitors. Unfortunately the Bush administration is to stupid to realize this is going to bury the U.S. in the end. All they see at the moment is cheap labor and improved profitability for corporations who are off shoring. Republicans are generally dumb enough to think thats all that matters.

It should also be noted that Bush's labor secretary is, I think second generation American. Her family is from China. Intestingly enough they make their family fortune in container shipping from China to the U.S. Isn't it interesting the Labor Secretary who should be looking out for the welfare of American workers actually has a personal conflict of interest in favor of off shoreing. Of course she isn't heading the Labor Department to look out for American workers, she is entirely there to drive down wages and improve corprate profitability, for example through the new overtime rules designed to deny overtime pay to millions of American workers.

Re:The race for the bottom

[WCMI92]

"No, he's referring to the french revolution. You remember that one, right? The average worker couldn't afford to buy bread, so revolution was inevitable. The current crop of aristocrats don't seem terribly concerned with the welfare of the masses."

And that, is our future less than a century from now, I'm afraid.

Eventually the corporate oligarchy will be overthrown by sheer weight, as we outnumber them.

The tech industry is the LAST (and pinnacle) wave of the industrial revolution. Lose those jobs and the middle class is gone forever.

Re:The race for the bottom

[demachina]

"I fail to see the corellation between the economic differences between China and the U.S. and our current administration."

Well you are correct that Democrats are about as much to blame as the Republicans. They were integral to America's destroying its economic base through the WTO and NAFTA. The WTO might have worked if it had led to really free markets and fair trade but its resulted in American markets being nearly wide open while places like China are maintaining massive barriers and are engaging in wholesale cheating. They know they can get away with it as long as American CEO's are turning a profit. When China has achieved world economic dominion and they don't need American companies any more those CEO's are going to rue the day they sold out America to China, but of course they probably wont because by that time they will probably be rich and retired to a life of luxury so why should they care as long as the gate on their gated community works to keep out the starving people they sold down the river.

The only thing in the Democrats favor is they've realized now it was a mistake and are backtracking. The problem with the Bush administration is they are still singing praises of the current trends, and are encouraging it to accelerate in face of the obvious evidence its going to devestate the U.S. economy in the long run. It is a tribute to blind stupidity driven by short term greed.

They fail to realize that, in China's case in particular, this is warfare, economic warfare designed to defeat the U.S. and Old Europe, something that would have been difficult or impossible to do militarily, but is proving to be child's play to do economically. China has already started to try to dictate to the U.S. about policies and arms sales to Taiwan. In the not to distant future they will be able to blackmail the U.S. in to doing anything they want by the simple threat of stopping the container ship traffic from China to the U.S. Even more so if there is eventually armed conflict between the U.S. and China, the U.S. will realize it was a mistake to move all of its machine tools and steel mills to China. The U.S. wont be able to manufacture anything. It will wake up one day and realize the last machine tools were sent to China and it will take years to rebuild the U.S. industrial base, from scratch, in a time of crisis. Having machine tools and being able to build machine tools is pretty important to a manufacturing base.

"Also, given the fact that China is where U.S. companies are looking to move jobs wouldn't it make sense to have someone with some Chinese ties directing the American job market in hopes to maybe fight fire with fire?"

I could see you making this argument for Commerce Secretary. I don't see anyway you can rationalize it for Labor. Its just a basic indicator the people who appointed her are openly hostile to working people. Everyone knows they are, its not like its a secret. Your union comment is just classic Republican rhetoric. Fact is working people should have a shot at making a living and surviving, unions, CEO's and you be damned.

Re:Nike shoes

[Senjutsu]

And this is good for anyone who isn't an exec at Nike, or significant shareholder therein, how exactly?

Re:Nike shoes

[ashwinds]

and it should be - why ? Someone buys shoes somewhere with money they have earned - earning money for someone making the shoe and I should benefit?

Re:Nike shoes

[Senjutsu]

There's an argument there, but it's irrelevant here. The claim here is that IT outsourcing is beneficial to the US as a whole, because the IT engineers in Bangalore wear Nike tenis shoes.

If this is at all true, then clearly there must be some way in which Indians purchasing shoes made in Indonesia is beneficial to the average US citizen. The question is, outside of the vanishlingly small minority of the population who are either Nike execs or large Nike shareholders, how does the US (taken here to mean the majority of citizens thereof) benefit?

Re:I'm confused

[Anonymous Coward]

Somehow Clinton made millions upon millions of jobs.. many of them very well-paying tech jobs. But at the same time, he was a major proponent of globalization and the governmental practices that encourage outsourcing.

Though maybe Clinton is unique in being able to accomplish this... he always seems to be able to get away with breaking the rules. :-)

How's that?

[melted]

Corporations don't pay any taxes these days. If this poorly made garbage never enters the US, no US tax will be paid on it.

hypocritical

[JanneM]

Well, first you persuade other countries to open up their economies to your imports, claiming this will enable them to step up on the ladder towards geater societal wealth and towards a more skill-based economy.

Then, when they actually do, and start reaping some rewards from it, you start acting like it's the second coming of antichrist.

So what do you suggest? Stop outsourcing, stop manufacturing abroad? Are you also then prepared to accept the trade retaliations from the rest of the world? Some people applauded your steel tariffs as something good. Of course, the US ended up losing a lot more money - and more jobs - total than it saved in that particular sector by postponing an inevitable restructuring.

Re:Nike shoes

[ashwinds]

Social Responsibility Vs Entrepreneurial Spirit - always a delicate balance. I guess in a round about way the average citizen benefits because more profits => more corporate tax => more benefits/facilities/amenities/ less personal tax. But I know that it doesnt make sense to someone who has just lost their paying job. As an Indian, I would like to point out a couple of things: 1. Dont worry too much about outsourcing - its America which holds the strings of that puppet show - the Govt. can step in any time to level the playing field - it could be taxes, could be subsidies for local operators - anything which would make it not as viable to outsource. 2. Worry a lot about out-shoring - thats when (1) happens and corporate greed will find workarounds by not outsourcing but operating right out of cheaper countries. Now Free Enterprise is what makes America great - its a paradox US will have to deal with. As usual the truth is a shade of gray somewhere in between.

The fallacy

[hopethishelps]

US gets the money

The big fallacy in all the economists' arguments for offshoring is right here: "US GDP increases, so that must be good for the US."

But what's really happening is this: incomes of a few CEOs go up from (say) $1M to $2M, while incomes of 10 times as many engineers go down from (say) $100k to $20k. That's a gain in money terms, but it's very bad for 90% of the people affected. So, it's bad for the USA.

Re:The fallacy

[Qzukk]

health care is very good. Rich people from around the world send their family to US based hosiptals

This is probably the most unintentionally funny thing I've read in this whole comment list. While it is true that other countries send their people here, are you not aware that due to the rising costs of US healthcare, upper-middle-class people in the US routinely leave the country for major elective surgeries (and some other non-critical surgeries where travelling half a day isn't a problem), to have them done by American-schooled foreign doctors in modern facilities (largely paid-for by these American patrons) in other countries where expenses are lower? How long before the rich people around the world realize that they're paying too much?

As for earning wealth, what exactly does a CEO do that merits their "vast" wealth? They don't create new products for their company to sell, they don't market these products to people, and as Enron has proven, they don't even take the fall when their corporation does something illegal. To me it seems that they play golf and find new people to trade board positions with, and to promise to vote each other big raises at the next board meeting.

There is an entire world out there

[QuickFox]

As it is today, people in poor countries see their young children starve to death, or die from lack of medicine, just so people in rich countries don't have to suffer the discomfort of looking for a new job. Outsourcing is part of a re-shuffling of wealth that may be uncomfortable for a while, but in the long run economies around the world will become more similar, so we won't see the extreme cruelties and conflicts of desperation that we see today.

Re:I'm confused

[Roger Keith Barrett]

If he did it was for public consumption only. If you go over his record you will find plenty of "for public consumption only" statements that are directly contradicted in policy decisions.

Bush's REAL consitutancy is the corporate class. Look at his decisions over the past 3 1/2 years and almost ALL of them directly benifit the corporate class. The rest of them benift pals in the radical religious right.

Re:Nike shoes

[jrumney]

If you make a six-figure income, in most states the government will take 40-50% of it.

If you declare a six figure income, the government will take 40-50% of it. But most people earning that sort of money can afford the services of an accountant who can give them advice on how to make six figures look like five.

Re:Nike shoes

[jsebrech]

It's called taxes. If you make a six-figure income, in most states the government will take 40-50% of it. If you work hard at avoiding taxes (residing in a favorable state, using loopholes, etc.) you can generally get it down to around 25%, but it's still nothing to be sneezed at.

For a low range in the six figures this is true, but as you progress towards the richer and then the wealthy, the actual percentage of assets paid in taxes drops dramatically. And let's face it, the people making money from off-shoring aren't in the low range of 6 figures. This is because most of the money the federal government gets from the rich and the wealthy comes from capital gains tax (the sale of shares) or dividends tax. The bush tax cuts have dramatically reduced these. Also, you have to actually sell your shares or get dividends for this to kick in. If, like Bill Gates, you keep your fortune in paper, then you are not taxed at all.

Also, lately there has been a wave of corporate off-shoring (also known as inversion), where you reincorporate in a tax shelter (like the tax-free bermuda), so that you pay dramatically less taxes. It's part of the reason why 60 percent of US corporations didn't pay any taxes between 1996 and 2000 (microsoft being one of those 60 percent).

But it is dumb to say that the average Joe in the US gets no benefit if some rich honcho makes a few billion bucks from some folks in India.

Objectively true, some of that money does flow back to regular people. But more is lost by off-shoring than comes back in corporate profits, since only a percentage of the profits gets spent or reinvested inside the US.

Oh but we will

[MacFury]

so we won't see the extreme cruelties and conflicts of desperation that we see today.

Problem...not everyone can live like the US...if they do...then we all die. There aren't enough resources to go around. 6 billion plus people all can't drive cadilacs. Not that we shouldn't raise the standard of living...but we need population control before that becomes a universal option.

Some people live in the desert and complain that there's no rain

More wealth - for whom?

[hopethishelps]

Get over your zero-sum marxist mind set. The more people working, the more wealth is created.

You are correct to remind us that capitalism is not a zero-sum game; wealth is created. It is unevenly distributed, but still, most people have gained in the past. If your boss increases his own income by $100k and increases yours by $5k, well, the bottom line for you is a gain of $5k.

Now, that is changing. Today's CEO is greedier than Carnegie or Rockefeller or J. P. Morgan were. To increase his personal income by $1M, today's CEO will destroy the careers of dozens of engineers. They are not being replaced by automation, which increases the productivity of other American workers. They are being replaced by Indians and Chinese. To economists, it's a gain if one man gains $1M while 10 others lose $80K each. In the real world, it's a disaster for our society.
One possible way to attack the problem, without unduly restricting the economic freedom which helps the whole world to progress, would be to recognize what these CEO's are doing. They determine their own salaries, in reality. A CEO who takes home more than 40 times the median salary of employees in his company is basically a thief. "Compensation" in excess of 40 times the median salary in the same company should be regarded as prima facie evidence of theft.

Re:More wealth - for whom?

[dpilot]

To add to that point, and sound more capitalistic about it...

That one person's work can be worth more than another's is obvious, IMHO. That it is worth THAT MUCH more (your example is 40X, I'm not going to quibble about numbers) indicates to me that the CEO is grabbing money. I would argue that the CEOs have formed a sort of club, and in that club they can all raise their own pay, and that they have done so completely out of line with what they're producing.

Even failing companies have highly paid CEOs with golden parachutes. If the CEO were worth THAT much, the company wouldn't be failing. Even when a CEO gets dumped, he gets a severance package that exceeds my life's earnings.

The disparity is not the issue, the magnitude is.

Coming full circle or selling tomorrow ?.

[Gopal.V]

*DISCLAIMER* I'm a programmer in India

What I'm personally seeing is that the US/EU companies are firing the junior programmers and keeping the senior architects due to outsourcing to India. The effect of this is to essentially cut out the entire next generation of software architects because they do not get enough experience (and often quit IT totally).

If you were a selfish nationalist , they are selling tomorrow for today. But if you were a Capitalist nation , it makes perfect sense :). In fact America is hit harder by outsourcing because it means "make a quick buck" for the Execs , while EU people are a lot more cautious , as culturally they are not that brainwashed with capitalism and rags to riches stories.

Don't dish it out , if you can't take it applies for Capitalism as well. (think of this as payback for all the agent orange and napalam used in name of Capitali^H^H^HDemocracy)

The real sad part is that actual losers in this nothing to do with the past events which built up to this (and neither will those of the future).
-- 250 USD per month and 70 hour weeks does not a sweatshop make.

Because you like most geeks don't know shit.

[Shivetya]

Big corporations, the ones doing the outsourcing, do not provide the bulk of the jobs. For geeks, which to some implies having more intelligence than the common worker, some of you are dumber than the proverbial doorknob.

The primary job creation engine of the economy is the small businessman (or woman). Big corporations get the headlines because they usually affect people in larger numbers at one time. However their numbers are really not that meaningful when you look at the number of people employed in this country. There are 138 MILLION people working in the US.

How many jobs were outsourced? Now, looking back on history shouldn't we consider the 70s the age of outsourcing automobile workers? The 80s textile workers?

As for the job creation. The capital gains tax cuts and similar equalizing of the percentage of income tax benefit the small business greatly. I know, I have four relatives with small businesses who have grosses from as low as 500k to nearly 5 million. Guess what, they have more money and they did exactly what was expected, they hired to grow even bigger.

Now what will stop this? Simple, raising the taxes on the "evil rich". Sorry, the proposed plans will smack down more small businesses than anyone. The ones with the millions and billions have relatively no income and have the means to dodge nearly most forms of taxes.

In the end the only proper way to deal with taxation is by consumption. The rich consume in a very big fashion and the fairtax will accomplish that. http://www.fairtax.org

Re:Comin...selling tomorrow ?.- You sorry fuck

[Archibald Buttle]

Somehow I don't think that the service men/women who died trying to "save" South Vietnam were thinking about "Capitalism" or "Democracy" either. I am sure that most of them were thinking something like "I've got to get out of here".

However I do think that this was exactly the thinking that led the senior brass in Washington to send them there. The Vietnam war (and the Korean war too) was prosecuted because the rise of communism was seen as a threat to the American way of life - in other words a threat to Capitalism.

Unfortunately America preaches capitalism and free market economics all the time but is very two-faced about this kind of stuff. Massive subsidies to domestic industries and sanctions against foreign industries is directly contrary to these ideals.

Interference in the affairs of other nations is rarely welcomed, whether that is done through economic means or with a gun. The US doesn't like it when other nations try to interfere with its own internal affairs. For some reason though they seem to think it's perfectly OK for them to interfere with the affairs of others.

When you behave like that payback is inevitable - another name for this concept is Karma.

Offshoring by definition can't be good

[WCMI92]

These "Benidict Arnold" corporations, in exporting good paying jobs to other countries, will do themselves in in the long run.

These megacorps want to get away without paying US wages, while at the same time, being dependent on a US consumer-supported MARKET to sustain their product.

Dell and HP, for example, aren't selling their expensive services and products to India. They are selling them to the USA and Europe.

Therefore, outsourcers depend on EVERYONE ELSE NOT outsourcing middle-class jobs, or else their market will ultimately collapse.

It's not just the corps that are betraying the American worker. Corporations will do anything allowed by law to make a buck. I don't have a problem with that, if business didn't make money, NONE of us would have jobs.

The traitor here is our government which does NOTHING to stop this practice, nor to even discourage it. Both parties are responsible. Both parties are beholden to the corps.

John Kerry gave some lip service to stopping outsourcing, but when you look at where his fortune comes from (his wife), mainly from OFFSHORING Heinz plants, one must wonder how serious he is about it.

The problem of outsourcing, like the IP cartels (MPAA/RIAA) are enemies that we can't vote out of power because BOTH parties are under their spell.

My solution to outsourcing is very simple.

Give all American businesses a tax credit equal to the salaries of all American citizens they employ inside the USA, minus the salary of all non-US citizens employed outside the USA.

This will allow outsourcers to play by the existing rules, while giving businesses who employ Americans a tax advantage over them.

There really won't be a loss in tax revenue, as all corporate taxes are illusory (all taxes get passed on to the customer), and it will help it, as it will encourage employers to employ more people and to pay higher wages.

Re:Nike shoes

[Qzukk]

Hm, the AC who botched responding to you has a point, the people who aren't complaining about the Mercedes Benz plant are the Americans driving the Mercedes made by other Americans. The people complaining about outsourcing are doing so because the trend historically has been for the corporation to absorb 100% of the profit. Can you show me the day that Nike shoes went from $100 to $10 when they moved their production to China and paid a dollar a day for a person to churn them out by the dozens?

Second, in EVERY wave of outsourcing in the past, both the government and the corporations have been there to provide retraining programs and a safety net for those between whole new careers. Low rate loans for returning to college, placement support for finding the displaced people new jobs. When textiles were lost long ago, these people who operated looms and presses were retrained to operate other machinery and moved into better paying jobs. When the manufacturing sector really started to bite the dust, you could open a paper on just about any given day and see articles about what the government was doing for you, and articles about how this company or that company was offering its laid off workers workshops in moving up to higher-paid white collar positions.

Each time, this was hailed as an advancement for the people being displaced. Sure, it sucked for them at the time, but they had something to look forward to, and help in getting from where they were to where they were going.

When the dotcom boom died, there was still the corporate placement efforts, but the government had largely quit caring. People lined up for unemployment, but damned if you could get a scholarship or a loan to learn a new profession. The dot com bust was a correction of an over-saturated sector of the economy. Now that its corrected though, we're asked to tolerate additional losses.

Are we given some light at the end of the tunnel? Are we moving up? No, instead we're told to smile when we say "would you like fries with that?" and that in the long term after we're all dead, things will be OK. Better paying jobs? Doing what? The best answer so far is that the cream of the crop will float to the top and hold onto jobs paying better than ever, the rest? Well, they can go pump out people's toilets. Assuming of course they can get retrained for that, given the apprenticeship and licensing barriers of entry into plumbing, carpentry, and electricial work in most states. The worst answer so far, which nearly everyone offers is "I don't know." What can Americans do to have a stable non-outsourceable income now that all production industries have left? "I don't know."

The difference really is in the hoping. Before, people could aspire to something better and were at least given a good show of it. Now, we're all bitter cynics without even hollow promises of a better future.