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Paul Samuelson Challenges Outsourcing
Noryungi writes "Paul A. Samuelson, Nobel Laureate in Economics, a professor at MIT challenges the outsourcing of jobs (retinal scan login required) to India and China. Choice quote: To put things in simplified terms, he explained in the interview, being able to purchase groceries 20 percent cheaper at Wal-Mart does not necessarily make up for the wage losses."
...stop making decisions in your purchasing habits based solely on price (aka Wal*Mart shopping), and encourage those around you to do the same. Support a heterogenous shopping environment where quality, service, support AND price are all factors in the purchasing decision, rather than the first three being secondary considerations.
The corporate mentality of cutting costs to increase revenue and profits is a reaction to the market's demand for lower prices, not the other way around. My $.02.
What does it mean to wake out of a dream
and be wearing someone else's shorts?
BNL, Born on a Pirate Ship (1998)
It's easy to understand that buying cheap or from out of town or out of state causes problems with your local economy, so outsourcing (effectivly buying some things from overseas), causes problems.
But the general public will never pick up on this. They are the 5 year olds that are offered 1 oreo now or 2 in 30 minutes and they take the 1 oreo now. That's how the American public will function, and continue to function unless the media drills it into them that it's a Bad Thing and they see the tangible difference in their pocketbooks in a reasonable amount of time.
Has it occurred to you that we're losing our edge, not because outsourcing, but because we haven't been working very hard to keep it? Our education system is in shambles, our young people are complete morons, and we as a culture pretty much revile the educated and glorify the average.
This has been a long time coming, and outsourcing is a symptom, not a cause.
A deep unwavering belief is a sure sign you're missing something...
Wow, that's unbiased right there.
The man is in his late 80s. He's been a professor at MIT for ~60 years. He's written the book (now in it's 100000th edition) that is the standard for economics.
Of course the man is biased.
The baby boomers retirement income is all invested in 401k's. Social security sure can handle that generations retirement needs if their 401k's aren't flush. They're allowing todays companies to buy cheap labor to accomplish this goal.
Tomorrows economy will be servicing the baby boomers with income from their 401k's, and developing IP.
If you think their is trouble now, what happens when social security can't pay what's owed 20 years from now, and the 401k's are valueless.
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"The problem with the US economy is that there are not enough highly skilled people willing to work for minimum wage."
Expect Freedom.
Actually, he said that if you believe that shipping wages elsewhere won't reduce the wages here, then you believe in the tooth fairy. He's not against international trade, which he claims is another thing entirely.
I'm still wrestling with how it actually does compare.
Javascript + Nintendo DSi = DSiCade
According to the article, economist Jagdish Bhagwati (a former student of Samuelson) agrees with the theory but says it is not all that significant in practice. Speaking of the labor force that can compete with Americans for high-value IT jobs, he says:
"You have a lot of people, but that doesn't mean they are qualified. That sort of thinking is really generalizing based on the kind of Indian and Chinese people who manage to make it to Silicon Valley."
This may be true now, but Samuelson's argument is about whether the past benefits of global trade will inevitably continue. This has nothing to do with the current state of affairs. When you look at the structural issues, it does seem likely that outsourcing of high-value jobs is here to stay. There will probably be some slowing of the trend eventually -- it's easy for the Chinese economy to grow quickly, because it's "underutilized." But as their economy matures, it will slow down. Of course, by then, they will have taken many more American jobs.
The other issue is that even where there is no direct competition, the low cost of Chinese and Indian skilled labor can depress American wage growth indirectly. Even if your job cannot be outsourced, a general wage pressure is present, and employers will use the *threat* of outsourcing to press employees for more work.
Suddenly, globalization cheerleaders are saying that businesses HAVE to be allowed to ship jobs off to overseas countries because if they can manufacture their widgets for pennies on the dollar, that results in lower product prices and more consumer spending, etc etc.
And nevermind all the people that get laid off in the process.
So why the assumption that suddenly companies have to be able to shaft their workers if they want to stay competitive? Virtually all the history of manufacturing in the world is the history of innovative PROCESSES. From the printing press, to Henry Ford's assembly line, to Wal-Mart's inventory tracking. One company comes up with a really great new way of doing business, other companies in other fields pick up on it, and everybody REALLY wins.
It seems to me that allowing companies to outsource and offshore and cut wages whenever they please is a cheat. It's a bandage. No one learns anything, no new processes are invented, there is no ACTUAL progress.
There's just a competition to see who can stream the most money into the most poor countries, often, at the same time, propping up repressive governments *cough*china*cough* that are responsible for the huge poverty (and ergo, low manufacturing costs) in the first place.
For this reason, I have no problem with so-called "protectionist" policies at all. Instead of allowing business to take the quick, easy, and ultimately destructive path, they have to actually INNOVATE - as they have so many times in the past - and come up with new ways of doing business. THAT, to my mind, is putting your faith in business.
Otherwise it's just allowing them to find creative new ways to reinvent feudalism.
Bush: He's Liberal in all the wrong ways.
I am not ready to move to a third world country to compete.
Paying someone from India one third of my pay would give them a very good standard of living in India.
Maybe we should pay the CEO's their equivalent wages of a small business owner in a third world country?
Better yet, lets go to New Delhi and choose the first ~535 (or so) people off of the street and replace Congress with them. I am sure they will work harder and cheaper!
No really. What is wrong with making a good wage for a good job in your own country? The money my boss pays me gets spent in this country (mostly - I dont drive imports). When I spend money in my own country, it iunvigorates the LOCAL economy, which in turn, give LOCAL people mnore income and eventually spurs demand for more products so my company's CEO can make more money.
This offshoring is the filthy rich big business executive's way of quickly lining their pockets with money so they can cash out quick and retire.
They don't give a damn about the long term.
I am done ranting now...
I live the greatest adventure anyone could want. - Tosk the Hunted
- I live the greatest adventure anyone could possibly desire. - Tosk the Hunted
Try doing this in the real world, where an Indian can live on 10% of the salary of an American. It's not reasonable to expect people to somehow be able to work ten times as hard. There are limits to how hard people can work.
I agree that as Americans, we are being hypocrites by whining about our own problems if we don't at the same time address the problems of the 3rd world that we allow our corporations to exploit. Isolating ourselves, and focusing only on ourselves and our own needs is exactly what makes us so easy to exploit. There is another reason that we shouldn't allow corporations to take over 3rd world countries, it robs their citizens of the opportunities to control their own destiny. Further, the solution to this problem is not to write our congressman, and it's not inside any one country, the solutions lies in joining together with those who are being oppressed outside our country.
The problem of corporate globalization, as well as it's solution, lies outside the borders of any single nation state. It's time for us to realize this fact.
It's actually a lot like the olympics. The United States consitently fields a huge ammount of great athletes and manages to win a bigger portion of metals than any other nation. Yet the average American is fat (and often lazy). The best and the brightest in the US have managed to drag the rest of us to the top of the pile, but in the end even that can't turn the tide forever. Especially when the people at the top gut the infastructure to support such a system, for their own gains.
It's the generational gap on a grand scale (and slower). The first generation busts their ass making a living and providing for their child so that they can have a better life. The next generation goest to school and does quite well, and respecting what their parents did for them. The third generation sits on their ass and always had it good, and isn't particularly interested in working hard or going to school.
Has it occurred to you that we're losing our edge, not because outsourcing, but because we haven't been working very hard to keep it? Our education system is in shambles, our young people are complete morons, and we as a culture pretty much revile the educated and glorify the average.
Oh yes. The US education system is just god awful. Worst in the world. Terrible even! Same with the rest of the wester world! Thats why everyone wants to come over here to go to Harvard or Yale or MIT or Oxford or Stanford or even our high schools. Oh and we haven't been trying hard either. God knows NOT A SINGLE PERSON in the US innovates or starts a new company or attempts to advance technology anymore. Pfft. Way to troll!
If outsourcing is a symptom of anything its corporate greed. They can save millions by paying unintelligable people to stumble along with english over the phone and have their customers take it up the arse. It has nothing to do with education. Its economics... which I belive is what the article is about...
Matt
You have 1 Moderator Point! Use it or lose it! Is that a threat? -vapid
First of all brilliant article by Prof. Samuelson. I've long recognized that the assumptions used by the pro-outsourcers to be flawed, the Keysian model that assumes a free flow of labor, and capital, that does not account for immigration laws, environental impact, and tax structure. A recent survey indicates that companies who use outsourcing are only saving around 20 to 40 percent, if they save money at all. This is roughly equivalent to the de-facto tax breaks obtained by outsourcing in avoiding payroll taxes. In other words the only reason anyone on average saves money outsourcing is because they avoid US payroll taxes. One would think that the current administration would be concerned about the loss of tax revenue, instead they have proclaimed that outsourcing is all good, and the lack of tax revenue is irrelevant because according to the VP 'deficits don't matter'. The good news is the outsourcing problem could be easily addressed by repealing the tax break, and forcing companies to pay taxes on outsourced labor. At least Senator Kerry claims he will address the outsourcing issue, if he is sincere, I'm sure there are things that can be done to change the tax structure to at least improve the situation. We can all go out on Nov 2 and vote to fire the current administration who financial recklessness threatens us all, and who's mantra seems to be 'Outsourcing is always good' and 'deficits don't matter'. M
America [US] is becoming land of the mediocre by the decree of our own government.
/. .
"No child left behind" means no child gets ahead. Sure there are exceptions, but my wife who is a teacher has to teach to the lowest common denominator. It frustrates her because due to "social promotion" she has 7th graders who can't read/write at a 4th grade level. Now imagine being an above average student in that class where the teacher has to talk "down" to and teach to the "slowest" kids. Due to budget cuts (hey, tax cuts don't come for free), after school clubs and honor level classes are being trimmed if not entirely cut so many of the "smart" kids are being taught at a 4th grade level/pace since there are no classes/teachers for them. No wonder they lose interest in school and just start reading
"Look Lois, the two symbols of the Republican Party: an elephant, and a fat white guy who is threatened by change."
You've hit this one right on the head....
And it isn't just a US issue, it's occurred throughout history...because it is simply a matter of human nature.
When a culture has to struggle to survive, there is motivation to work hard and think hard, and this (combined with some good fortune) makes the culture thrive. Then, when the culture becomes wealthy and comfortable, they get lazy and greedy and sit on their asses, usually until disaster stikes and the culture collapses. This is the reason that the rise and fall of civilizations is cyclical.
The trick to having a long lasting "up" phase is to catch the early signs of the downswing and get your collective asses in gear before it's too late. For the US, whether that happens is still to be seen, but so far what I've observed is people sitting around complaining about "rights" and "entitlement" rather than doing anything.
If God had had a computer it would have taken him 7 months to create the earth...if he even bothered to do it at all.
Did you notice that the people who finally speak out for/against a policy generally wait until they are no longer impacted by it?
Today the globalization hounds must beat the drum that globalization is good. Innovaton is lost and companies cannot figure out how to make a product or service more valuable so they make the cost of providing it cheaper.
In 1820 transitions occurred over time. To become a "global player" it took literally decades to move an industry to that level. During that time the industry workers transitioned. In current examples, the transition will occur in less than a decade. With Y2k,and the internet we built the infrastructure to make transition nearly immediate.
Now, add countries that would like the US work, but do not share US values. For example, India while more than outsourcing jobs, runs one of the most protectionist regimes in the world. Try, as a non-Indian to start a business and you will be kept out at the government, economic, and even social level.
The idea that we should not protect ourselves against such countries is ludicrous. This is like saying we should not stop terrorists because, by us not being terrorists they can see the benefits and will become outstanding citizens. (What drugs are these people taking?)
In the end, we are replacing 65K+ jobs with 30k+ jobs. Samuelson is correct ""If you don't believe that changes the average wages in America, then you believe in the tooth fairy," It does not take an economist to figure out that with only half the wages, the impact is on the entire economy. Two income families that bought two cars, can only afford one, or certainly not two new cars. Home buyers that had combined incomes of 130k, now have 70k to use as their financial base.
The West certainly hasn't lost any of it's skills or expertise. It's developing countries that have, well, developed! The West may have blazed the trail for our current world economy, for good or for bad, but it was only a matter of time before other countries started catching up. Unless artificial market restrictions are employed this trend will see the wealth of the world spread out over more and more nations rather than concentrated in just a few. While it may suck for the West, it's good for the majority of people in the world.
The only question is, how do we deal with this? Do we throw our hands up in the air, say we had a good run, and walk quietly off into the sunset? Do we impose artificial trade restrictions that turn us into hypocrites? (Yes, this is the current tactic. It's already being done. Free trade is great so long as you're more free than the rest.) Our best bet is probably to try to compete better by improving our education system and finding new ways to encourage research. (Read: Overhaul the cumbersome copyright/patent system so you don't need a team of 20 lawyers and a fat bankroll for bribes in order to invent something remotely useful.) So long as we're ahead on the tech curve we'll get business. Unfortunately, other countries can do this too and they just happen to have a lot more people than we do.
Yep. It sucks to be the West right now, but it does give one hope for all the backwards shitholes on the planet. How you feel about all this depends entirely on how selfish you are I suppose. Ask not for whom the bell tolls and all that.
I think Marx said that a capitalist is a person who will sell you the rope with which to hang him.
Outsourcing also inevitably results in skill erosion here in the US and skill development overseas. For example, if you outsource a software job by lobbing a requirements spec over the wall, just reading that requirements spec gives the vendor a better idea of the sorts of skills and ideas needed to do it themselves next time.
So, the split incentives of capitalism may result in general losses in economic value. That's why the economy is regulated. (Samuelson did not prescribe protectionism, and I don't think that's the right answer in low-skill areas, but perhaps educational subsidies and R&D credits, etc.)
You are certainly correct, but I do disagree that complete globalization will be for the better of the united states. I think that the USA will have to be brought down to the level of the rest of the world before globalization is finished. It is inevitable that over time our profits will slowly trickle out into cheaper workers. The proliferation of degrees across the world means there is a significantly bigger job market that Americans can't currently compete in because of cost of living in the states.
My Best analogy for true globalization is osmosis or diffusion. Currently America has an extremely high concentration of money. Without some way to keep that money in the states, the money will diffuse out across the world to the point where we are at a more equal distribution.
There simply isn't the need for highly skilled workers across the entire world to make the impending situation possible. If every country across the world had the same distribution of labor jobs, and highly skilled jobs as is the case in the united states, then things might work out so that an even distribution of money would be positive for all. Currently, we are simply over saturating the markets with labor. Everyone is competing for the jobs that make products for the United States. Everyone is trying to get our money. We have the biggest pot of money and so thats where the market is. If current trends continue then there will be true diffusion.
This is only mildly good for everyone else. They will all have slightly more money, but there will come a poitn where everyone is equal and there will no longer be this enormous pot to draw from. Whats worse is recession. Currently, everything in the United States is horribly inflated. What costs a dollar here costs significantly less in the countries that want our business. To be globalized and competitive we nee dto change that. We will never be able to inflate the rest of the world to be equal with us, instead, we must completely deflate the US economy to be equal with the rest of the world. It wouldn't work, and hence, recessions happen. The amusing part is that the economies of the rest of the world would go down with a US economy collapse. Its all rather amusing, and its bound to topple. I don't think there is much anyone can do to stop it short of a world-wide effort to equalify the global system, which will also never happen. So, everyone sit back and watch the show, and hope it holds off long enough for you to be out of the mix.
I'd like to type out how bad I think this internationalization stuff is for the US economy as I sit here in a cafe sipping columbian coffee made in an italian coffee maker poured into a chinese mug, while typing on a japanese laptop connected to a tiwanese access point. Oh, I just forgot, I left my norwegian cellphone in my german car in the parking lot. Be right back!
-- Greg
Slashdot, would a spell-checker for posting be too much to ask? It's not rocket science!
Ultimately, you could be better off in the USA, even if it does depress wages by moving jobs overseas as long as the cost of living goes down more than the wages get depressed. That could be a net good.
Basically the argument comes down to that of altruism. If you think that helping everyone helps you, then globalization is good, if you think you will be better off by hoarding or protecting your assets from others, then it is a threat.
IANAE(conomist), so I may have missed some of Samuelson's nuances. But he is just seeming to point out to some of the rah-rah outsourcers that there may be some negative consequnces to the one doing the outsourcing.
I will RTFA after work hours, when I have time. However, most of the discussions and comments regarding outsourcing and regional specialization miss what I find to be an essential point.
Human beings have diverse sets of abilities, let alone inclinations, that support our complex social structures. Not everyone can do everything themselves, especially as society has grown more complex, and so we've developed individual specializations that allow complex social structures to be supported, with all the benefits these supply. Doctors can be such good doctors because they don't have to tailor all their own clothes, let alone grow and harvest the cotton, sheep, and oil wells they come from.
And this is not just reflected in the "elite" we all envy. There are extroverts who want to be face to face 24/7, and introverts who would like a private office, or to work by themselves out in a field. There are those who are extremely verbal, and those who are extremely visual. Those who are a whiz with a contract, and those who can keep even the most decrepit machine "alive" almost by intuition.
As we shift jobs over national boundaries and overseas, we disrupt the balance of work within a society. The jobs move, but the people are not free to follow them. Further, we essentially sell out the rights of people performing those jobs by moving them to locations where those rights don't exist. We've all heard about the labor practices in China and many other countries where manufacturing has grown. Even if a U.S. manufacturing working could move there, there would be strong disincentives.
With all this talk of "retraining", I become frustrated. Even were it to be effectively supported, not everyone is cut out to be the banker or lawyer that some think this country should become full of. 30 years ago, we needed a lot of manufacturing capability here, and people who enjoyed doing that. 50 years ago, the family farm was still a mainstay of society.
These aren't just a matter of training. They are also a matter of basic personality (whatever the details of defining such). And such things don't just change overnight, or in the span of one generation. There are people of a different mindset borne into this society who, by our very laws, deserve a place within it.
It's on the collective backs of all of us that the "elite" have become the elite. Some of them may be very gifted, in ways that are ostentatiously rewarded. But they didn't achieve this glory on their own.
And yet, we divorce ourselves of much of the infrastructure supporting those less "glorious". And we expect this to have no serious repercussions? It is a breach of social contract.
And before you say "who cares", laissez faire, or Darwin, see how long you survive when the garbage piles up into a health hazard. Or when those with no future decide that yours has been achieved at their cost. With nothing to lose, things can get very ugly. As they have in the past.
Or, see how long it is until the rest of the world realizes they don't need American bankers and American lawyers. As their social structures solidify, especially their legal codifications, ours will become superfluous.
A healthy society is one that is sustainable. What we are creating is not.
The world will get by, in the long run, but this country may become, in the meantime, a far different place, and one far less reflective of the ideals too often used as a blind in selling this shortsightedness.
It's interesting to note how many successful entrepreneurs in the US are immigrants, or first generation children of immigrants.
Well, that's natural. Think about it -- immigrants are the people who were smart enough, active enough, entrepreneurial enough to leave their country and move to the US. Is it really surprising that they tend to do well?
Kaa
Kaa's Law: In any sufficiently large group of people most are idiots.
...and then not passing on any benefits to the rest of the consumers.
What's worse is, while a small minority benefit from these policies, not only do they not pass the savings on to consumers, but society in general. The systems that were put in place after the turn of the century (and to a greater extent, FDR) to force beneficence from those who are lucky enough to fall into privilege is slowly being eroded by lower taxation on the wealthy and the elimination of the estate tax -- effectively, we're creating a hereditary oligarchy of extremely rich people that will only become more concentrated as the years progress.
And tho those who hold the erroneous notion that we live in a "fair" society, thus "If I make the money, I should keep the money," I ask you to consider the phrase "It takes money to make money." There is an inherit advantage to having money already, at the starting gate if you will. Lower interest rates on loans, (hell, loans in general), an easier supply of capital to pursue your dreams, better access to quality education -- the list goes on and on.
What cracks me up are Conservatives who think we should reduce programs aimed at all those "lazy poor people" because they haven't done anything to deserve them, yet see no contradiction in the "lazy rich people" who can survive on inherited wealth and never do a lick of work.
I'm not an economist either, but I do understand a few basics:
US workers unemployed by offshoring make 0, lowering the average wage.
US workers finding new employment find the glut of unemployed workers (low supply + high demand) and the low wages in India devaluing their wages. Again, the average wage is also lowered.
US workers with existing employment find their wages frozen, their benefits cut, their hours longer and more stressful (to both compensate for the extra work of downsizing, and for goofs from offshore workers), and their job security nonexistent.
The only "winners" are the CEO and his cronies whose salaries go up, their benefits go up, and laughing is heard in the vicinity of the bank. Note that few if any of these people are US IT workers, or do much work at all.
As for as cost of living goes, that depends on inflation. With high gas prices, that will be going up, up, up, and the cost of living will tag along.
So US IT workers will "win" high cost of living, low wages, debt (to make ends meet), savings and credit consumed by the unemployed, and bankruptcy.
But if it makes you feel any better, those CEOs won't make off like quite the bandits they want to be. You see, offshore workers have done a great job learning the business of offshoring US companies. So good in fact, that IBM consulting, for instance, is now having to compete for business with their own offshore workers who have formed a nice little consultant company of their own. The fun thing is, the Indian consulting company can of course, under bid IBM. Gotcha!
Unfortunately, for us IT workers in the US, that is only going to drive wages lower as companies like IBM are forced to compete with Indian consultant companies on their way to the bottom.
The only way off this nightmare escalator? Stop treating employees like costs to cut, and start treating them like your company's most valuable resource (remember Human Resources?). Then you can hire quality people, pay them what they are worth, and compete on quality. Then everyone is a "winner"!
Don't think quality works? Who survived the fall 2000 PC crash the best, with the fewest layoffs, a quick return to profitability, and billions in the bank? Apple! Apple kept their prices up, focused on quality instead of the sub $500 PC, and worked feverishly to bring out OS X to build a future. The rest of the companies slashed workers by the tens of thousands, and huddled in their storm shelters. When they came out, the only thing left standing and thriving was the Apple tree, laden with fresh, high quality, fruit.
"No one's going to die, mister. Mothra's going to come and save us."
Taiki Goto, "Mothra", December 14, 1996
(Released in Japan six days before Apple's surprise announcement of the return of Steve Jobs.)
He used to compliment the Soviet Union's growth out of feudalism, when he was justified by the economics. Before the Soviet glory days of the 1960s, his textbook explicitly called Marx "wrong" on several predictions demonstrated wrong by intervening history.
Soviet socialism was unable to sustain its unbalanced military economy on top of a giant energy hungry populace filled with ethnic and other divisions, and millions of political deaths. Other socialisms, like Germany, Canada, France, England, and most other industrialized countries, have fared quite well. Growth, citizen satisfaction and stability are all high. It's not quite the crock you'd like it to be.
--
make install -not war