The GAO’s Rorshach test on offshore outsourcing

Over a year ago, U.S. Representative Adam Smith (D., Wash.) asked the GAO (which used to be called the General Accounting Office, but has since been renamed the Government Accountability Office) to study “issues related to offshore IT services outsourcing.” As the offshore outsourcing brouhaha heated up, more and more congressman dogpiled on top of this request, expanding the GAO’s mandate beyond just the IT sector. The first part of that report has been released today. It’s essentially a literature review of available government data on the magnitude and impact of offshore outsourcing. There are two themes that come out from this: 1) the government data on this phenomenon is incomplete and imperfect; 2) what data exists suggests that offshore outsourcing is not quite the tsunami it’s been made out to be. This is from the Results in Brief (p. 3):

Federal statistics provide limited information about the effects of offshoring IT and other services on the U.S. labor force and the economy overall. The Department of Labor’s Mass Layoff Survey (MLS) shows that layoffs attributable to overseas relocation have increased since 1999, but these layoffs represent a small fraction of workers laid off—of 1.5 million layoffs reported in the 2003 MLS, 13,000 (0.9 percent) were reportedly due to overseas relocation. The data also show that most of these layoffs were in the manufacturing sector.

And this is from p. 15:

U.S. government data provide some insight into the trends in offshoring of services by the private sector, but they do not provide a complete picture of the business transactions that the term offshoring can encompass. In particular, they do not identify U.S. imports of services previously produced by U.S. employees. Similarly, federal procurement data on purchases of IT and other services provide some insights, but it can be difficult to determine where such work is performed. The available data indicate that the trend in offshoring show little change over the past 5 years. (emphasis added)

This is consistent with my own back-of-the envelope-calculations from earlier this year. Now, what’s interesting is the responses to this report. This is a snippet from the press release by two Seattle-based labor unions, SPEEA-IFPTE and WashTech:

“This study is a good first step,” said Charles Bofferding, executive director of SPEEA. “It recognizes that outsourcing is growing and a troubling trend for our workers and our country.” “The GAO has clearly stated in this report that outsourcing of U.S. jobs abroad can not be ignored, and the government needs to act in order to address the issue in terms of data collection and policy solutions,” said Marcus Courtney, WashTech president. Released in Washington, D.C., the study was made at the request of Washington state Reps. Adam Smith (D-9th District) and Jay Inslee (D-1st District). The congressmen were prompted to make the request by the Society of Professional Engineering Employees in Aerospace (SPEEA), IFPTE Local 2001 and the Washington Alliance of Technical Workers (WashTech), CWA Local 37083. (emphasis added)

Now let’s go to what Representative Adam Smith has to say about the report in his press release:

The extent of outsourcing is probably less than they [the GAO] had expected going into the study. Also, at least by using the metrics available, they were unable to separate out the impact of outsourcing on the economy versus other “meta” factors such as the burst of the technology bubble and the hangover from the pre-Y2K tech buildup. Services are still a relatively small part of the US imports. “This study shows us that we have the opportunity to address the growing trend of offshore outsourcing with positive and aggressive solutions,” said Smith. “We should increase investment in research and development, improve math and science education in K-12, enhance training and professional development for workers, open markets for American goods and renew the government’s focus on promoting innovation. By doing so, we can make sure that our economy remains the most vibrant and competitive one in the world.” Smith continued, “We are at a relatively early state in the offshore outsourcing trend. We must get the facts straight and have a serious and educated policy dialogue on outsourcing. It’s my hope that this study will help “kick off” that process and move the discussion in a positive way that is focused on real issues and solutions. I am committed to continuing my work on identifying real solutions to this potentially growing problem for the American people.” (emphasis added)

A tip of the cap from everyone here at danieldrezner.com to U.S. Representative Adam Smith. Beyond the unbelievably cool-sounding name, Smith has acted like a responsible grown-up on the offshore outsourcing issue. His one op-ed on the subject didn’t demagogue the issue, and offered an eminently sensible, constructive request — expanding coverage of Trade Adjustment Assistance to include service sector workers. No hysterical claims that offshoring was destoying the American economy, or even his district. Just a sensible policy proposal and an appropriate request for more information. Also, in contrast to the aforementioned unions, it appeared he’s actually read the GAO report. A politician who seems reasonably well-informed and resists scapegoating a non-issue. Damn, that’s refreshing. Oh, and for those who just can’t get enough of offshore outsourcing, the United Nations Conference on Trade and Development (UNCTAD) has just released its 2004 World Investment Report. If you download Chapter IV, there’s a nice overview of the offshoring phenomenon. UPDATE: Brier Dudley and Marilyn Geewax have dueling stories at the Seattle Times and Seattle Post-Intelligencer respectively. One data point that captures attention is the fact that “the number of business, technical and professional services, flowing into the United States, however is rising, from $21.2 billion in 1997 to $37.5 billion in 2002,” as reported by Geewax (this is CNN’s lead as well). That’s an increase of 76.9%, which sounds really bad. But it’s only half of the picture. What about exports of business, technical and professional services? Those precise figures weren’t in the GAO report, so I e-mailed their staff to see if they knew — and they promptly replied. As it turns out, during the same period, exports of these services rose from $44 billion in 1997 to $64.5 billion in 2002 (This is from the Bureau of Economic Analysis’s Survey of Current Business, October 2003, p.65, Table E). So in other words, between 1997 and 2002, when offshore outsourcing is supposedly taking off, the balance of trade in the services likely to be offshored went from a $22.8 billion surplus to a…. $27.0 billion surplus. My heart be still. FINAL UPDATE: In fairness, see this erudite comment below by an IT consultant. I certainly won’t deny that offshoring can have a hard affect on indivudual workers — I just don’t think it warrants the hysteria that, say, this comment epitomizes.