TRADING PLACES: Is Outsourcing Good for America?

Friday, March 26, 2004

Does outsourcing—whether it means the transfer of customer service and high-tech jobs to India or of manufacturing jobs to China—benefit the American economy or harm it? And if American workers are being harmed by outsourcing, what should be done about it? Do we need legislation to prevent corporations from sending jobs overseas? Or should we focus our attention on creating new opportunities for the American labor force through education and job training?

Recorded on Friday, March 26, 2004

Peter Robinson: Today on Uncommon Knowledge: my bonnie (job) lies over the ocean...

Announcer: Funding for this program is provided by the John M. Olin Foundation.


Peter Robinson: Welcome to Uncommon Knowledge, I'm Peter Robinson. Our show today: outsourcing--is sending jobs overseas bad or good for America? Senator John Kerry calls corporate executives who sends jobs overseas "Benedict Arnold CEOs." President Bush counters that we cannot wall ourselves off against economic globalization. Is outsourcing, whether it means sending customer service jobs to India or manufacturing jobs to China, a net gain or loss for the United States? And if American workers are being hurt by outsourcing, what should be done?

Joining us, three guests. Kenneth Judd is a fellow at the Hoover Institution. Harley Shaiken is a professor specializing in labor and the Gglobal economy at the University of California at Berkeley. And Stephen Haber is a professor of history and political science at Stanford University.

Title: A Passage to India

Peter Robinson: Gregory Mankiw, Chairman of the President's Council of Economic Advisors and I quote him, "Outsourcing is just a new way of doing international trade. More things are tradable than were tradable in the past and that's a good thing." Senator John Forbes Kerry, once again I quote him, "My economic policy is not to export American jobs. Unlike the Bush Administration, I want to repeal every tax break and loophole that rewards any Benedict Arnold CEO or corporation for shipping American jobs overseas." Mankiw or Kerry? Who has the right attitude? Stephen?

Stephen Haber: Mankiw.

Peter Robinson: Harley?

Harley Shaiken: Kerry without question.

Peter Robinson: Kenneth?

Kenneth Judd: There's some truth in both. I'm more likely on the Mankiw side.

Peter Robinson: Oh, Judd! All right. The jobless recovery and outsourcing. Since President Bush took office, the economy's lost some 2.3 million jobs. Even now that the economy's growing handsomely, as we tape this show, new jobs are only being created at the rate of about 100,000 a month, very feeble. Harley I quote you to yourself, "Clearly not all of these jobs," lost jobs, "have been outsourced but outsourcing has played a very important role." Explain yourself.

Harley Shaiken: Well, outsourcing and off-shoring--that is both white collar jobs and manufacturing…

Peter Robinson: Outsourcing is used to mean white collar jobs?

Harley Shaiken: Usually white collar jobs and off-shoring usually means manufacturing. I think have, in fact, combined played a very major role in the number of jobs that have been lost. In the last 42 months, manufacturing alone has dropped 2.8 million jobs not of manufacturing, a good chunk; perhaps a third to a half might be attributable to outsourcing. We don't have the exact--to off-shoring I mean. We don't have the exact figures but this is a very significant phenomena to date. And I think even more importantly we may be at the beginning of the curve in terms of what both are likely to do in the near future.

Peter Robinson: Lost jobs?

Stephen Haber: Well A, it's clear that there's a jobless recovery. Some of it is due to outsourcing and off-shoring but not all of it is due to outsourcing and off-shoring. And those that are due to "outsourcing or off-shoring" there's a question that needs to be asked which is how many of those jobs would you have held onto anyway? Right. There's always an implicit notion in these numbers when they're thrown around that something you could have done would have prevented them from leaving. What the something you could have done is, is often left unspecified.

Peter Robinson: Ken, I just want to pin down one--do you consider the proportion of jobs lost to outsourcing significant?

Kenneth Judd: No, the government statistics that try to look at this say it's a small fraction of the number of jobs lost.

Peter Robinson: Small fraction means ten percent...

Kenneth Judd: Less than ten percent. It's nowhere near ten percent.

Peter Robinson: Okay. Them's fightin' words, Harley.

Harley Shaiken: Are we talking outsourcing? Are we talking white collar jobs?

Peter Robinson: Can we just stipulate for the purposes of television which is a simplifying medium, outsourcing and off-shoring are the same thing.

Harley Shaiken: Absolutely.

Peter Robinson: Jobs going overseas. All right go ahead.

Kenneth Judd: The other thing to keep in mind when we talk about the jobless recovery is that what we're talking about is a net number. There's millions of jobs being created each month. There's millions of jobs that are lost each month for a variety of reasons.

Peter Robinson: Let's take a closer look at job loss in one particular sector of the economy: manufacturing.

Title: Loss Leaders

Peter Robinson: According to economists at Alliance Capital Management, between 1995 and 2002, the United States lost eleven percent of its manufacturing jobs which sounds startling until you read on and discover that Japan lost sixteen percent of its manufacturing jobs and even China suffered a fifteen percent drop. In other words, we're not losing manufacturing jobs to other countries so much as we are losing manufacturing jobs to greater productivity. Manufacturing is simply following the same pattern that agriculture followed eighty and a hundred years ago, which is to say you can produce more and more and more with fewer and fewer workers and that's no bad things because who wants to work on an assembly line all the time?

Harley Shaiken: That's not what I get out of the Alliance figures. China and the U.S. for example, are losing manufacturing jobs for very different reasons. China had a huge part of its manufacturing base that was very antiquated and bloated under the previous state regime. Now that China's developing as an export power, the overall number's contracting but the number of export related jobs are increasing very rapidly. The U.S…

Peter Robinson: Because you're getting modern factories…

Harley Shaiken: Absolutely. So it's very, very different. It's apples and oranges. I think to put the numbers in perspective and why they're very, very serious when we say that we've lost almost three million manufacturing jobs in the last forty-two months. You know, one's eyes glaze over. But to put that in perspective, we had a huge debate in this country in the early 1980's about the Chrysler Corporation, whether or not Chrysler would survive and a billion dollars in loan guarantees were given. The huge national crisis that provoked this was the loss of 140,000 Chrysler jobs. We, over the last forty-two months, have lost the equivalent of the Chrysler Corporation every other month. That's serious. And outsourcing plays a very central role in that.

Peter Robinson: Okay so--go ahead Steve.

Stephen Haber: You know, I'm always surprised about these arguments about outsourcing because the--one of the arguments that's always been made in the United States is that we need to do something about developing other countries and that there's gross inequities between countries. And in the last decade, one of the things that's happened is a lot of relatively high skill, high wage jobs, have moved to other countries, which is what we usually call economic development. And now we find ourselves in the position, right, of saying that oh well we didn't mean economic development of that variety. It's economic development when it's, you know, getting Guatemalan book bags. But when it's producing Sony television sets or automobiles, all of a sudden, we don't like that kind of economic development but it's part of our national policy to be in favor of economic--and it's in our interest.

Harley Shaiken: I would agree with Steve. I think he's got an important--up to a point--he's got an important issue here. We want an internationalist nation. The issue isn't that outsourcing in and of itself, is bad. It's why outsourcing has taken place and if it's taking place because a country is repressing labor or pushing down on wages…

Peter Robinson: Hold on. Listen to the Shaiken thesis here, okay. Harley's thesis, "There are times when wages are set more by the strong arm of the state than by the invisible hand of the market. When a country attracts investment by jailing union leaders or ignoring safety on the job, the net result isn't some natural form of comparative advantage but what amounts to a repression bonus." That's what's going on in China. They have no unions. You talk back to the government and talk for greater safety standards on the job. They throw you in jail. We shouldn't be doing business with those people. We shouldn't be permitting American corporations to set up factories over there.

Kenneth Judd: This is a political question. It's a moral question.

Peter Robinson: You're not going to make the economic argument that they're better off as a result of it.

Kenneth Judd: If they are being jailed for union activity and they're being repressed, I have a hard time agreeing that they're better off. There are two issues here. One is political repression and how do we deal with it? Do we have economic sanctions against China or against South Africa or against whatever regime we're talking about? Now when it comes to India, I don't think that's an issue. When talking about outsourcing, we're also talking about India. It's not just China we're talking--we're talking about India and other countries where these political issues are not as severe. And we're talking about fairly open regimes.

Peter Robinson: Okay.

Kenneth Judd: And on the job issue, I want to say that, you know, I think we're talking too much about jobs in the United States. What's important is how much money are people taking home…

Peter Robinson: In the United States?

Kenneth Judd: In the United States. And even though we're seeing these losses of jobs and jobs going offshore for one reason or another for the last twenty, thirty, forty years in various industries, the question is what's happening to the standard of living in the United States for the typical worker. And that's going up generally on average over the last twenty, thirty years.

Peter Robinson: Ken says the standard of living for U.S. workers is going up but that's not true for all workers, is it?

Title: Are You Being Served?

Peter Robinson: Former Secretary of Labor, Robert Reich, "The pay of most personal service workers in the United States," Reich has an argument whereby anybody who's involved--he calls them symbolic workers--people who work with their minds are doing just fine. But there's a second category and he calls them personal service workers, "their pay in the United States is stagnant or declining. That's because the supply of such workers is growing quickly as more and more people who'd otherwise have factory or other jobs join their ranks." In other words, restaurant workers, cabbies, security guards, retail workers, are all finding their wages held down largely because of outsourcing. It's not just jobs lost. It's wages depressed. Steve?

Stephen Haber: There are two issues here. One is whether or not there really is stagnant wage growth for people in what Reich wants to call service jobs. And I think…

Harley Shaiken: 2003, absolutely. Statistically, there's no issue.

Stephen Haber: Right. And I was going to say that that is--that the--if you look at the median family income in the United States since the 1980's, the median has not grown very much. It's been fairly flat. Now there's another issue which is an issue raised by Ken and it's an important one because when we talk about people's standard of living, outsourcing in a way, helps it although we rarely think about it. One of the reasons why people shop at Wal-Mart…

Peter Robinson: You keep talking but I'm going to watch Harley's face during…

Stephen Haber: Okay. One of the reasons why people shop at Wal-Mart is because the prices are low. Why are the prices low? Because those goods are produced overseas more efficiently…

Harley Shaiken: We could make them even lower by repealing the Occupational Safety and Health Act in the U.S., not to have any health standards or minimum wages.

Peter Robinson: Doing away with OSHA, don't tempt us.

Harley Shaiken: It's a devil's bargain.

Stephen Haber: But what I'm say--the argument I'm simply making is that you can't have it both ways. All right and you have to recognize that a lot of the--that outsourcing actually generates benefits for the United States. There's a really interesting article recently by Kris Mitchener at Santa Clara University. It's about the United States has been outsourcing for over a hundred years from state to state. Net what's been the affect on the standard of living in the United States? It's improved.

Peter Robinson: You going to go with that?

Harley Shaiken: Oh, absolutely.

Kenneth Judd: There's no question that…

Harley Shaiken: United States, sure.

Kenneth Judd: There's no question that over long periods of time countries that practice free trade policies have higher standards of living, that the United States is a great example of a free trade union. Europe is a good example…

Peter Robinson: You accept that as well?

Harley Shaiken: I accept that in the U.S., the outsourcing from state to state…

Peter Robinson: No, no, no, the larger argument.

Harley Shaiken: I think free trade is a wonderful possibility and I think free trade can bring broad-based benefits. But the rules of the game is what's critical here. And I think the issue when it comes to outsourcing, when it comes to Wal-Mart, for example, Wal-Mart accounts for ten percent of total U.S. imports from China last year, twelve billion dollars. If we get that based on repression and the denial of rights in Beijing, we're going to have that same denial of rights sooner or later in the same labor market in East Moline, Illinois or in Fresno, California.

Peter Robinson: You go with that?

Stephen Haber: If, in fact, wages are set in China and I don't know if it's true. But if wages are set through a kind of repressive labor system, right, then that clearly is a problem.

Kenneth Judd: Certainly, with certain American workers if they're competing with Chinese workers or Indian workers or Malaysian workers that get thirty cents an hour to forty cents an hour, whatever, that's going to hurt. They're competing with those and that's going to hurt their wages that they can get in this country.

Peter Robinson: So if you're supplying tires or antenna assemblies to Ford or GM, you're either going to meet the Chinese price or you're out of business. And that's going to hurt…

Kenneth Judd: Yes, but in the United States, when that's happened, these workers lose their jobs for a while; go back into the job market. Maybe they have to spend six months, nine months, twelve months finding a job but they typically do. And maybe not at first it's not as good as the old job they had but a couple years down the road, they'll get back--basically back up to their old standard of living.

Peter Robinson: Next, does economic theory need to catch up to the changing conditions of free trade in the real world?

Title: Anything You Can Do I Can Do Better

Peter Robinson: Economists tend to support free trade for the reasons that David Ricardo laid out two hundred years ago and that is the law of comparative advantage which you will now express in television terms, briefly and understandably.

Kenneth Judd: We're all better off if people do what they--do well what they can do well and then trade with other people or other countries.

Peter Robinson: Okay. So if you grow coffee in Guatemala and cotton in Egypt and they're both best at that, that's what they should be doing.

Kenneth Judd: Instead--yeah. Egypt should not be growing coffee and Guatemala should not be growing cotton.

Harley Shaiken: I agree with…

Peter Robinson: Hold on. Hold on. Now listen to the economist Paul Craig Roberts, "In the traditional free trade model, countries have different endowments. Different climates give different advantages to the production of different crops, different histories and inclinations result in different advantages in finance, skills and manufacturing. But if there are no given endowments because business know-how, capital and technology are globally mobile, the advantage lies with countries with untapped pools of educated and skilled low-wage labor." The assertion here is that conditions are fundamentally different and that economists who still believe in unexamined free trade policies simply haven't taken into account the changed conditions of the high technology world. Dr. Judd?

Kenneth Judd: Well, endowments are important but the key endowment for the United States is not mobile. The key endowment in the United States is that we have a couple hundred million highly skilled, educated workers that are integrated into the world economy and are flexible and move from task to task when economic opportunities present themselves.

Peter Robinson: Hold on.

Kenneth Judd: And this is not true in other countries.

Harley Shaiken: Common sense…

Peter Robinson: Hold on, hold on, hold on. I'll get back to you in a moment, Harley. Just hold him down, would you please? All right, Paul Craig Roberts once again. This is for you, Steve. "The enormous untapped labor pools in China, India, Indonesia and the Philippines exceed in size the United States' population. They are sufficiently large to hold down living standards and wages in those countries until all U.S. manufacturing and information technology jobs have been outsourced in order to boost corporate profits." In other words, in principle, there's no reason this shouldn't keep going until every factory is shipped overseas and every computer and customer service job is shipped overseas.

Stephen Haber: At the time that America signed a NAFTA agreement, an argument was made that all of American manufacturing jobs were going to move to Mexico because wages in Mexico…

Peter Robinson: Ross Perot's giant sucking sound.

Harley Shaiken: That argument was flawed then...

Peter Robinson: You'll get--I promise you you'll get a chance, Harley.

Stephen Haber: So in effect, net, we didn't lose jobs because of NAFTA.

Peter Robinson: Net?

Stephen Haber: Net. No, some jobs moved to Mexico and some industries actually did better because they had better access to the Mexican market. And some industries were able to continue--parts of them could continue to exist in the United States precisely because you could produce part of the product in Mexico. So one of the arguments that's often made like this is it's a kind of all or nothing. Either you have all these jobs or none of these jobs and people don't consider the counterfactual. If you don't take part of the production platform and move it elsewhere, you're likely to lose the whole industry. NAFTA's an example of a phenomena where you kept parts of industries in the United States particularly design and engineering and you moved some of the production to Mexico. You might have lost the whole thing otherwise.

Peter Robinson: You get an answer but please make it quick because…

Harley Shaiken: Let me reiterate what the basis of this is, why things are so different today. We have a situation where the most sophisticated, advanced kinds of work are subject to outsourcing not because of more competitive educational systems, not because of more entrepreneurial people but because of labor repression in many of the countries where wages are lowest.

Kenneth Judd: Where is the labor repression in India? This outsourcing, for example, you get service on Dell computer…

Peter Robinson: So your argument--if an American worker finds his wages depressed because he's competing with Indian workers, that's okay with you because in India there's…

Harley Shaiken: No.

Kenneth Judd: And that's the high tech outsourcing is Indian workers.Where's the repression in India?

Harley Shaiken: Eighty-four percent--last year eighty-four percent of all foreign direct investment in developing countries went to China. That's why I'm emphasizing China so much.

Peter Robinson: On to some practical advice for George W. Bush and John F. Kerry.

Title: You (Tax) Break It, You Own It

Peter Robinson: Harley, what should John Kerry do about the problems that you see?

Harley Shaiken: I think there are several things that John Kerry should do all within the internationalist vision that he has laid out. Embrace trade but the current situation squanders the possibility of trade. So he should specifically ask for the kind of tax revisions that he has recently proposed where corporations would not get tax breaks for shipping work overseas. He should also embed labor and environmental standards into trade agreements to establish the kind of rules of the game that caused our domestic economy to prosper with outsourcing between states and he should have adjustment issues for those who are negatively affected in the U.S. We should…

Peter Robinson: Wal-Mart isn't allowed to import toys and textiles from China unless the workers who produce those toys are completely free to form unions, work in factories that meet American or close to American standards for safety.

Harley Shaiken: No, no…

Peter Robinson: Is that what you're after?

Harley Shaiken: No. The workers in China ought to have the right to form unions if they choose. If they don't want unions, that should be their decision but they should have certain basic rights that allow Chinese workers to share in development and growth.

Peter Robinson: But you're asking John Forbes Kerry to institute a trade policy that overturns the political regime in China.

Harley Shaiken: Not whatsoever. This is all possible within the context of what China could do as a development strategy.

Peter Robinson: Okay, Stephen, what should George W. Bush do?

Stephen Haber: Well, I'd rather advise John Kerry but since you've given me the task of advising Bush…

Peter Robinson: You're stuck with it, Buster.

Stephen Haber: Yeah, well…

Peter Robinson: You and Carl Rowe.

Peter Robinson: All right.

Stephen Haber: I really now want to…

Peter Robinson: Go ahead.

Stephen Haber: I would tell him to be very careful when people make arguments about outsourcing and quickly point to China as the problem. A lot of outsourcing is high tech jobs. And the reason people are upset about it, I would tell him, is because these tend to be very high paying skilled jobs that we thought--tended to think of as American jobs. But they're going to places like India and they're going to places like India because India's been building a comparative advantage in those industries. It is an Amer…

Peter Robinson: Because India pays a lot of attention to education.

Stephen Haber: …Education, right. I would also tell him that it is in America's interest that the other countries with whom we are engaged around the world should be prosperous, not poor. And they should have well-paying jobs in those countries. And that is, in fact, the best thing we can do for American national security is have prosperous partners. If you want a prosperous America, then what you want to do is not tinker with the tax code. What you want to do is invest in human capital in the United States.

Kenneth Judd: Now if there are tax--elements in the current tax code which encourage American companies to have--hire foreign workers instead of American workers, then those should be changed. I don't think there's any dispute on that--that the tax code should not have a bias against American workers.

Peter Robinson: Does it?

Harley Shaiken: Absolutely.

Peter Robinson: In what ways?

Harley Shaiken: Right now if you invest abroad, you can reinvest the profits without them being taxed at U.S. rates as long as you keep investing abroad.

Kenneth Judd: How does that affect employment in the U.S. on the part of those corporations?

Harley Shaiken: It creates a built-in tax advantage to continuing to invest abroad not for sales abroad…but for export back to the U.S.

Kenneth Judd: You're only talking about one source of earnings and that's internal cash. And the fact is that American corporations have plenty of cash on hand typically--mature corporations--have plenty of cash on hand to hire new workers and expand capacity in the U.S. They don't need the cash that's abroad. The fact that it stays abroad is not having much if any impact on employment decisions here in the United States because they've got plenty of cash in their pockets.

Peter Robinson: Do you object to Kerry's…

Harley Shaiken: If it's not important there should be no problem in terms of repealing it as Senator Kerry suggests.

Peter Robinson: Yes that's a problem. Would you object to Kerry's proposal which is to say--close what he calls a loophole and lower the overall corporate tax rate from 35 to 33 ¼ percent? Do you object to that?

Kenneth Judd: Probably so. The fact that the money is abroad making lots of good investments just means that American corporations are more profitable in the long run and rebounds back to having benefits for American investors in those companies.

Peter Robinson: Finally, some closing predictions.

Title: Out of Many, One Percent

Peter Robinson: According to a consulting firm called Forrester Research, by 2015, some 3.3 million American jobs will have been moved overseas. That is just one percent of the jobs that will have been destroyed through the usual churning process. One percent, barely significant. Does that sound about right to you? Higher, what do you think?

Kenneth Judd: About right.

Peter Robinson: About right. So we're not at the beginning of some enormous--you're not going to be hearing a giant sucking sound to quote Ross Perot?

Kenneth Judd: No, no.

Peter Robinson: You don't buy it? Steve?

Stephen Haber: No giant sucking sound. We didn't see it with NAFTA.

Harley Shaiken: Those are just white collar jobs that Forrester's talking about, not the manufacturing job. If you combine it, to paraphrase the former Senator Everett Dirksen, a million jobs here, a million jobs there; pretty soon we're talking about real jobs.

Peter Robinson: Last question. Let me set it up with a quotation from Tom Sowell, economist Thomas Sowell, "Since the economic recovery has not yet reached the stage when new jobs are being created to the extent expected and hoped, the idea that American jobs are being sent overseas has political mileage whether or not it has much economic substance." This time next year with the presidential election behind us, will outsourcing remain an issue of any importance? Steve?

Stephen Haber: Outsourcing's going to be a major social issue in the United States because--and a major political issue for some time because for the--one of the recent things that's happened in outsourcing is it's not just manufacturing jobs. It is now jobs that used to be considered white collar, sort of semi-permanent jobs particularly in engineering.

Peter Robinson: So this is a big one and it's going to stay?

Stephen Haber: And those people vote and they're politically sophisticated. And so this will continue to be an issue.

Peter Robinson: You'd agree with that?

Harley Shaiken: Absolutely. This is an issue because it's about the kind of globalization we want to see. Do we want to see a broadly shared prosperity globally where nations trade increasingly based on commonly accepted rules or do we want to say those rules are only good enough for patents and intellectual properties.

Peter Robinson: Alas, my skeptical hard-headed friend, this is an issue which has just been puffed up by the current political moment and will blow away?

Kenneth Judd: No trade issues have been going on for decades. And with international trade, there are always some losers. Maybe they have a different identity than they used to but there's always been losers. And typically they find some way to express that politically but over time, we generally find a way for the winners to help the losers…

Peter Robinson: But as an issue…

Kenneth Judd: …through their temporary losses and then we move on and have a free trade policy.

Harley Shaiken: What we're doing now is winners are profiting off the losers, that's what's wrong.

Peter Robinson: Oh stop. I'm wrapping up the show. You can't launch new arguments. As an issue, outsourcing is here to stay?

Kenneth Judd: International trade issues will always be whatever the name is--the name may change but they'll always be here.

Peter Robinson: Ken Judd, Steve Haber, and Harley Shaiken, thank you very much.

Peter Robinson: I'm Peter Robinson for Uncommon Knowledge, thanks for joining us.