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Thinking About Offshoring

Offshoring is becoming a very hot issue indeed. As I discussed in a recent post, the offshoring issue is at the top of voters' economic concerns (along with health care costs). And, as I mentioned in another recent post, Bush's job rating on handling jobs and foreign competition is a bottom-scraping 28 percent, with 60 percent disapproval.

So: how to handle this? Obviously, Kerry and the Democrats are going to go after Bush for allowing the outsourcing trend to gather steam and link that to his overall lousy record on jobs.

That's the easy part and they should do it. Beyond that, however, to gain maximum political advantage from this issue, the Democrats will need a plausible program and compelling message around the issue.

To think this through, let's examine some of the basics around offshoring. Specifically, how big is the problem now and where is it going?

According to Doug Henwood, writing in The Nation (and see Henwood's excellent new book, After the New Economy, for more of his astute economic analysis):

Since the peak in employment in March 2001, the US economy has lost 2.4 million jobs. But that actually understates the jobs deficit. Historical averages for normal postrecession job growth indicate that employment should be some 8 million higher than it was in January. But estimates of outsourcing, while imprecise, are in the low- to mid-six figures, suggesting that it can explain no more than a twentieth of our jobs problem. And in a more "normal" economy, the US economy would generate half a million jobs every two months. Something else is clearly awry.

The most widely cited projections for offshoring come from Forrester Research, which estimated in a November 2002 report that 3.3 million service-industry jobs would go offshore by 2015. That looks like a big number, but it needs to be put in perspective. In January the United States had 108 million service jobs. According to the Bureau of Labor Statistics, the economy should add 22 million jobs between 2000 and 2010 (almost all of them in services); if we stretch that projection to account for the additional years in the Forrester study, that's 33 million. So the best estimates we have are that the outsourcing total equals about one in thirty of today's jobs, or one in ten of the next decade's new jobs.

So offshoring, especially of service jobs, where much of the intensity of current concern comes from, is only a relatively minor contributor to our overall job problems and, projecting forward, seems unlikely to cripple US job growth in the future.

Why are people so worried then? I think the answer has to do with the type of jobs--service jobs, including highly-skilled ones--that are increasingly being lost. The numbers may not (yet) be large in absolute terms, but, as far as many Americans are concerned, the handwriting is on the wall: no jobs, including well-paid, highly-skilled, white collar ones, are truly "safe". That's quite anxiety-provoking for Americans who are used to thinking of manufacturing jobs disappearing and/or going abroad, but have assumed good white collar jobs, which could be accessed through obtaining more education, would, in the end, replace them.

Now people are thinking: "Maybe not!" And that's scary. As Lee Price and Josh Bivens of the Economic Policy Institute put it:

The offshoring of white-collar jobs could pressure labor markets for skilled professionals in much the same way that manufacturing trade pressured blue-collar labor markets for the past 20 years - by placing steady downward pressure on wages....The full impact of [this] phenomenon will be felt in the years to come as (1) a very large proportion of the jobs in America today could be done outside the country and (2) those jobs can be done much more cheaply abroad. In little more than a decade, governments of nations constituting more than half the world’s population (China, India, Eastern Europe) have decided to join the world market system. Those countries have large and rapidly growing pools of talented and educated people with much lower incomes than people with similar skills in the U.S.

(Gulp) Professional jobs getting into the same pickle (or even close to it) as blue collar jobs? Whodda thunk it?

In this context, let's consider what the Kerry campaign has put on offer. The centerpiece (so far) of their program in this area is a proposal to end tax benefits for companies investing abroad, coupled with a reduction in the domestic corporate income tax. Most economists sympathetic to the proposal see it as being somewhat effective at the margin in keeping some jobs in the United States, but unlikely to have a large effect on the long-run offshoring trend or (as with Kerry's proposed tax credit for manufacturers) on the current US jobs situation.

This suggests two things to me.

1. This approach can't substitute for an overall job creation strategy. Such a strategy should have a central role for direct government spending--on infrastructure, on schools, on an energy independence plan, all of which are in Kerry's policy platform on his website--which is likely to be much more effective and sound much more effective than tax incentives.

2. This approach will not even have a substantial effect on the offshoring trend, its ostensible target. The problem is too fundamental to respond much to changes in tax incentives.

Therefore Democrats need to think bigger if they are to put something on the table that actually sounds like it might make a real impact on this problem.

Here are two sets of recommendations, from Gene Sperling and Bob Kuttner, that provide useful raw material for such bigger thinking. Note particularly the emphasis both put on socializing benefits costs to US employers and investing in technology, infrastruture and education.

Gene Sperling's recommendations: (from his March 1 op-ed in The Washington Post)

Take job creation seriously....[call] for new jobs tax credits, temporary tax cuts for families who would spend the money, and state assistance that would reduce education cuts, tax increases and tuition hikes that only fuel downturns....we should address the degree that tax policy as well as high health and energy costs make job creation less attractive here. Furthermore, we need to invest in a modern infrastructure in remote and poor areas. While lower wages in India and China may be a fact of life, why should we ever be outpaced because there is better broadband in Bangalore than Buffalo?

A "preemption strategy."....Why not employ "reverse industrial policy" ideas such as creating "globalization adjustment zones" and investment incentives for communities and retraining options for workers before, not after, jobs are lost? We could even consider buy-out strategies for small-business owners, workers and small farmers in select cases where a few stakeholders block clear and broad-based interests of the U.S. economy or global poverty reduction.

Real dislocation insurance, not token retraining....[merge] our unemployment insurance and our retraining and reemployment services into a seamless system available at a single location where we also provide temporary health care, mortgage assistance and wage insurance for older workers willing to work but unable to find jobs at comparable wages. Access should be universal, not dependent on whether a job was lost to trade, technological changes or a weak economy.

Education -- really. For less than the cost of the recent tax cuts for only the top 1 percent of earners, our nation could have afforded a universal preschool and after-school initiative and a dramatic effort to encourage more young, disadvantaged Americans to seek and afford a college degree.

Break the deadlock on trade and global poverty reduction....[seek] a broader and more creative globalization agenda that supports universal basic education, fights abusive child labor and sweatshops, strengthens civil society watchdogs and independent monitors, and funds transition assistance to workers and small farmers hurt by market opening, while insisting on codes of corporate conduct that support core labor rights.

Bob Kuttner's recommendations (from his March 5 American Prospect column):

Raise purchasing power in the Third World (and at home.) Democrats have pledged support for global labor standards, including the right to join a union. But right now the United States would not pass that test, because our own labor laws are not enforced.

Raise wages, especially in service-sector jobs. Some jobs will never move overseas, because they have to be close to their customers-teachers, health care workers, retailing and hospitality workers. This "new-collar" service sector is the successor to the blue-collar middle class. It needs higher minimum wages, benefits, and unions to fight for them.

Demand fair trade. China and India have a right to compete for jobs, but not to steal our technology and intellectual property. Japan needs to be as open as the United States. The administration needs to demand a level playing field.

Socialize costs that put US firms at a competitive disadvantage. American companies pay health care and pension costs that are paid socially overseas.

Use public funds to invest in new technologies that create good jobs and serve other national goals such energy independence. John Kerry has already led on this one.

So: lots of good ideas about dealing with offshoring and the general effects of trade. Let's hope we start hearing some of them on the campaign trail


A collection of excellent points and ideas. My one thought, however, is that virtually every one plays into that Republican mantra of "He's going to raise your taxes by 114 Gajillion dollars!"

I'm not saying that that's a reason to discard or even withhold presentation of any of them. I'm rather suggesting that this discourse needs to be reclaimed from the Republican wind machine.

The Repubs basic premise seems to be: "Taxes bad. Tax cuts good." Sounds great, and certainly resonates well with a gullible public, but a reasonable retort would be something along the lines of: "You get what you pay for!" The logically ultimate extension of Bush's approach would be that taxes will be cut completely, leaving the government with nothing left to provide ANY domestic services, let alone defense. That approach should perhaps be turned back around to the rather more truthful manifestation of "You may be keeping more, but you're getting less!"

I just think we need to reclaim the discourse on the role of government and taxes in society. Currently the Repubs own it.

"Education -- really. For less than the cost of the recent tax cuts for only the top 1 percent of earners, our nation could have afforded a universal preschool and after-school initiative and a dramatic effort to encourage more young, disadvantaged Americans to seek and afford a college degree."

This isn't enough.

There has to be significant subsidy of college-level education.

People talk of "retraining" for new jobs, but what's needed is the longer, more in-depth sort of education that is needed to start a new career. "Retraining" seems to usually mean teaching a factory worker how to bake, and shifts of that nature.

Teaching a software engineer how to make donuts isn't going to make use of the person's abilities. It's an underutilization of resources.

Community colleges are often suggested as a source of education for career changes, and they do a good job, but they aren't really sufficient, especially in some fields, particularly fields where the standard practitioner has an MS or higher.

Masters' programs often want applicants to have an undergraduate background in the same field. An associates' degree is unlikely to suffice.

I suspect what is needed is something like a 2 year bachelor's degree, for people who already have a BA or BS. Take out all the non-core classes so students can focus on the major.

Then with the 2 year 2nd Bachelor's, a student could get into a good graduate school for the next step, if necessary.

But the main thing is education funding which takes into account a lifetime of career shifts and the likelihood of having difficulty paying off big loans.

If people are going to have to undergo career-changing education several times in their life, then they can't afford to take on 20 thousand dollars or more of debt every time.

Outsourcing is gaining more and more momentum because companies think their competition is doing it, so they better do it to compete and survive.

Well, one way to take the wind out of this increasing momentum is to make companies pay a significant severance payment for each employee laid off due to their job being sent offshore. And by significant, I mean something equal to a year or more of salary.

This might seem wrong or excessive, but companies will make it up in a few years. Moreover, this would change the breakeven for analyzing whether outsourcing is a good idea, thus saving many jobs. And since these jobs are never coming back to the USA, this would give laid off workers a fighting chance to survive until they can get back into the work force.

I think we are under estimating the potential impact of a New Jobs Tax Credit. Bob Haveman and I published a paper in the American Economic Review (May 1979) that measured the effect to be 400,000 jobs (+ or - 180,000) from March 1977 to March 1978 in just the construction and retailing industries. That compares to total employment growth in these two industries of 1,100,000.

For the private economy as a whole payroll employment grew by an astonishing 6,422,000 jobs from March 1977 to December 1978. While the NJTC was in force private jobs grew by 3.7 million annually. In the 12 months prior to its introduction private jobs grew only 2.3 million. In the 12 months after its expiration growth of private jobs slowed to 1.7 million. If it had been better designed and publicized it could have had even larger impacts on private employment.

Great post. We've been discussing the same topic at http://techpolicy.typepad.com/tpp/2004/02/what_to_do_abou.html

Looking for practical, implentable policies to help American's deal with out sourcing.

from the site... and I'd love to get your feedback

Let's work from the following assumptions (start another thread if you don't agree with these) :

a. Free trade of goods, services, and labor is a generally positive thing
b. Its important to keep Americans employed in good, high-paying jobs, with an acceptable unemployment rate (say 4 to 6%)

To start things off:

For the recently fired:
- A strong safety net, with unemployment and health benefits
- Strong re-education, training program so people get the latest skills
- Support for helping find new jobs (although I'm skeptical about this because of Monster.com, and that most good jobs are gotten through social networking)

Education and research
- Strong K to 12 education system
- Continue American leadership in its university and community college system
- Strong government support for both basic and applied research to keep America at the leading edge of the technology curve

- Create government paid jobs in slumps

Tax credits??-
Don't give tax credits to firms who outsource. OK... I'll be honest, I've heard this about a million times, but never have seen the underlying facts, can anyone enlighten me here?

Free marketeers
Take no action, allow for lower cost of goods and services in US to create wealth and let the market take its course. (we've seen that, politically, this don't fly)
Recognize that more job loss has happened due to technology, then all the Indians and Chinese put together.

I know there's got to be more then this... this list just doesn't seem to cut the mustard.

Perhaps we need to begin with the areas where we are outsourcing both education and training, and then importing the trained personnel.

Nursing professional organizations estimate something like a 25-30% defecit in American trained Nurses given projected needs. Instead, we are recruiting experience and training from third world locals (South Aftica, India), contributing to their defecit in trained personnel, (brain drain) and cheaply usine their training resources.

We are doing the same thing vis a vis science and math teachers for Jr. and Sr. High Schools.

What the Kerry Campaign should do is identify fields and jobs such as these that cannot realisticly be outsourced (unless we want to send our ill to S. Africa for instance), and talk seriously about placing the needed subsidy in both the educational institutions and programs -- and on what is necessary to make the jobs attractive. I actually believe that begins with treating them as real professions, and not as parallel to replacable factory labor. But the actual political issue here is providing sufficient training and education opportunities to meet projected needs in these fields, and then considering how you properly structure careers and compensation packages so as to retain the valued personnel once trained.

It doesn't directly impact offshoring, but why must we continue to import people to take many of the jobs that can't be offshored from the Americans who can do them? I'm talking about the H1B and L1 visa programs which were created to address a labor shortage that may have existed in the high tech field around 1998 or so but clearly no longer does.

Simply ending these programs would aid a large portion of the high tech workers who can't find jobs now. Sure, the high tech companies who are probably contributing up the wazoo to Democrats and Republicans might scream, but too bad!

Offshoring is a long-term problem in which all of the ideas mentioned by Ruy need to be looked at - but that doesn't mean we should ignore the things we can do in the short run to help. Otherwise, you wind up like the Bush Administration's approach to al Qaeda in 2001 - do nothing in the short run, while you whip up the ultimate solution.

Sara has hit the proverbial nail on the head. I would like to believe in the “education will save us.” But the recent trend in offshoring proves is that there are many educated people elsewhere in the world that can compete for these service jobs. Simply telling folks to get a college degree when it is college-educated jobs that are now in play competitively is like telling the high-school drop out to go back to school in order to qualify for one of those great steel-mill jobs.

We need to re-thinking of the production process and take a realistically look at:
1) how to make footloose jobs more competitive so they stay in the US
2) how to foster sticky jobs – those that are difficult, but not impossible to move
3) how to train for and promote rooted jobs – such as nurses

Remember, we need can not sustain an economy only on non-traded (rooted) jobs; we need traded jobs (footloose and sticky) as well. We need to figure out how to make those jobs competitive.

how can Democrats present the ideas listed here without being hounded for tax and spend- big government Liberalism or complaints about socialism and the welfare state? These are great ideas that will require a much more solid majority (ie mandate) and incrimental reform. The 50-50 nation means Republicans will kick and scream and piss and moan all the way, trying anything to drag down someone bold enough to push these issues. How bold can Kerry be without causing a backlash and losing the slim majority?