The New Yorker does outsourcing

I got a lot of e-mail requests to discuss John Cassidy’s New Yorker story from last week on offshore outsourcing. I resisted them because Cassidy’s essay was not on the New Yorker website, so it seemed like it would have been weird. But the e-mails kept coming. So here goes: What’s weird about the piece is that it reads like Cassidy wrote it back in April and then put it in a desk until The New Yorker had some pages to fill. For example, the estimate Cassidy cites from Forrester Research on the number of jobs that will be outsourced was revised upwards in May — which would bolster Cassidy’s point — but the older figure is used. This paragraph is emblematic of the problems with the story:

While outsourcing isn’t the only reason that business are so reluctant to hire American workers — rising productivity and a lack of faith in the recovery are others — it is certainly playing some role, a fact that corporate executives are much more willing to admit than economists are. Moreover, economists tend to overstate the theoretical case for outsourcing, arguing that trade liberalization is always and everywhere beneficial, which simply isn’t true.

OK, let’s skip over the fact that 70% of those corporate execs have said they have no immediate or future plans to outsource. What’s important is that Cassidy’s small caveat about productivity gains allows him to commit a major fudge, blaming outsourcing for the larger, lackluster employment picture. This simultaneously ignores the importance of productivity and conveniently ignores the fact that the employment data doesn’t back Cassidy up. Don’t take my word for it, though — Charles L. Schultze has more on this in a Brookings Institution policy brief. Schultze makes important caveats about the official data, but nevertheless concludes:

If the disappointing employment growth of the past several years came about because America’s production needs were being met to an increasing degree by production from foreign rather than American workers, as Americans increased the share of consumer and capital goods they bought from abroad, or as domestic firms expanded the share of their operations located abroad, this should show up as a rise in the inflation-adjusted value of imports relative to GDP. During the 1990s the import share rose steadily, but apart from some short-term fluctuations the share leveled off thereafter. It is difficult from this data to see how changes in the combination of import substitution and offshoring could have played a major role in explaining America’s job performance in recent years. The estimates on imports of goods come from relatively comprehensive U.S. customs data. Conceivably, the surveys of business firms used by the Department of Commerce to collect data on service imports may be missing some of the increase attributable to offshoring…. But the absolute size of any such errors in the import data cannot realistically be anywhere near large enough to alter the earlier conclusion that the speedup in productivity growth was by far the dominant factor behind the disappointing job growth. (emphasis added)

Both Schultze and Cassidy state that outsourcing and productivity gains can cause the gross destruction of jobs. However, Cassidy wants the reader to believe that outsourcing is the real villain — Schultze shows that it isn’t. Cassidy closes with the following paragraph:

If the United States is to meet the challenge posed by a truly global economy, it will have to insure that its scientists are the most creative, its business leaders the most innovative, and its workers the most highly skilled — not easy when other nations are seeking the same goals. A truly enlightened trade policy would involve increasing federal support for science at all levels of the education system; creating financial incentives for firms to pursue technological innovation; building up pre-school and mentoring initiatives to reduce dropout rates; expanding scholarships and visas to attract able foreign students and entrepreneurs to these shores; and encouraging the development of the arts. In short, insuring our prosperity involves investing in our human, social, and cultural capital. But don’t expect to see that slogan on a campaign bumper sticker anytime soon.

Brad DeLong has his own problems with this closing. For me — beyond the dubious linkage between arts funding and outsourcing — what’s missing from the Cassidy piece is a recognition of American strengths in innovation for the future. Hell, even the Progressive Policy Institute — in a policy brief on offshoring by Richard Atkinson that reads like Cassidy’s wish list no less — recognizes this fact:

The next wave [of innovations] is not just about technology. It is also about innovative new business models, which the United States is particularly well positioned to develop because of its unique combination of information technology (IT) talent, entrepreneurial energy, and flexible capital markets. India boasts high-level computer programmers, but innovative companies that combine IT with creative business models, such as Yahoo!, Amazon.com, Akami, and Google, were all developed in the United States.

When the Progressive Policy Institute agrees with the former head of the McKinsey Global Institute, it does suggest that this is kind of important. Also on this point, Tammy Joyner has a long Atlanta Journal-Constitution story on the hidden costs that can come from offshoring — in large part due to the infrastructure deficiencies that Cassidy elides in his essay. Two other offshoring stories worth checking out: 1) Bruce Bartlett has a policy brief on insourcing vs. outsourcing. 2) William Bulkeley has a Wall Street Journal story on how IBM is adopting new policies to reduce layoffs due to offshore outsourcing. Key line: “IBM is increasing employment for the first time in three years. Earlier this year it said it expected to boost world-wide employment by 15,000 to 330,000 in 2004, including a net U.S. employment boost of up to 2,000, despite offshoring.”