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Outlook: Outsourcing America's Future

Jodie Allen
Managing Editor, US News & World Report
Monday, March 8, 2004; 11:00 AM

Imagine a world economy where the only work Americans do involves music, movies, microcode (software), and high-speed pizza delivery. That was the premise of a science fiction book written a few years ago, but it's a vision that seems all too real these days amid a largely jobless economic recovery. In a piece in Sunday's Outlook section, journalist Jodie Allen says that economists are far too rosy about how the U.S. economy will adapt to the outsourcing of jobs to other countries. Even if the United States comes up with jobs to replace those going abroad, what sort of jobs will they be? What will these trends do to American society? Sure, consumer prices will come down if companies save money by outsourcing to other countries. But, she says, there are many things -- from safe neighborhoods, good schools, open spaces, clean air and pure water to national security itself-that you still can't buy at Wal-Mart.

Allen, managing editor of U.S. News & World Report and editor of the Outlook section from 1990 to 1996, discussed her article, Maybe We Could All Deliver Pizza, Monday, March 8 at 11 a.m. ET.

Outlook
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Outlook Section


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Laurel, Md.: If there really is a "two-tier" economy, aren't most Americans moving into the higher tier?

Even with a low-paying job, most Americans can afford today's $40 DVD player whereas the $100 DVD player of two years ago was out of reach to many.

Jodie Allen: That, unfortunately, is not what the income distribution data show. Yes, the top tiers of U.S. society have higher income and more wealth than ever, but the middle and lower tiers have lagged farther and farther behind and in some cases have actually lost income. But no question that consumer goods have become ever cheaper as more and more are imported from low-wage countries. That's the trade-off.

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Welcome to Capitalism people.: Americans have rabidly supported policies specifically designed to create this outcome for over 20 years, and they're getting what they deserve. Anti-union, anti-living wage, anti-regulation, anti-lawsuit, anti-worker, anti-tax, anti-government, anti-self interest.

Markets are supposed to function best when all parties pursue their own self interest. When one side (the workers) rolls over, the system breaks down.

Folks, you knew it was a snake when you picked it up. Capitalism is nice in theory, but it simply does not work without strong governmental oversight to keep it honest.

Jodie Allen: You raise an interesting question that pro-free marketers, which basically I am, need to address more forthrightly. Every one agrees that capitalism--and indeed democracy itself--only work to promote the general welfare when they are required to play within the rules. But in recent decades regulation has become a dirty word and it was only with the revelation of the Enron, Tyco, Adelphia,
WorldCom and other huge scandals that politicians began to accept the need for reestablishing government controls--and even now I'm not sure their hearts are really in the job.

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Alexandria, Va.: Are there solid numbers, rather than just surveys, regarding the number of jobs that have moved overseas in the last few years?

Also, how much of the offshoring phenomenon is being mitigated by overseas jobs moving here?

Jodie Allen: I don't know of any solid numbers on either the outgoing or incoming sides. Obviously it's not easy to get a good estimate given feedback and productivity effects, but Mark Zandi, chief economist of Economy.com estimates that just since the start of the 2001 recession, perhaps as many as 35 percent of jobs lost--or nearly 1 million--have been exported. Clearly the continuing drain on lower-skill manufacturing jobs is largely an offshoring phenomenon, but the Japanese, under pressure from US trade officials, moved a lot of auto assembly jobs here in the last decade even though much of their components are imported. And the need to service US accounts directly has brought sales and other white collar jobs here from big exporting countries.

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Santa Fe, N.M.: As the U.S. military stretches its reach across the globe, (Afghanistan, Iraq, Iran, Haiti, Africa, etc.) is there a measurable growth of non-military defense jobs that may perhaps offset some losses to private sector outsourcing? If not, do you see a possibility here, grim as it may be?

Jodie Allen: No question that defense --both civilian and military jobs--has been a godsend for the US defense market. In fact, what is known in the trade as "military keynesianism"--deficit spending in the name of defense--is probably this administration's main job stimulating program. But since it's hard to market the Pentagon as the new WPA, they don't talk about it much.

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Ann Arbor, Mich.: Your recommendation that our leaders take note of things "you still can't buy at Wal-Mart," like safe neighborhoods and good schools, made me wonder about the impact of outsourcing on the tax revenues that pay for law enforcement, education, and other public sector services.

If people whose jobs are outsourced remain unemployed, they pay little to no tax. If they find new jobs, but earn less than they did before, they will pay less tax.

Either way, won't strapped state budgets have to make do with even lower revenues, and won't the federal budget, which is already showing the largest deficit in history, sink further into the red?

Jodie Allen: The answer to your question is, simply, yes. At the federal level, where revenues have declined far more than economic models--even the supply-side type--predicted, the answer is simply running a huge deficits. But states and localities can't do that which is why most of them have been cutting services and/or raising taxes. In California, Gov. Schwarzenegger has persuaded voters to follow the Bush administration path and borrow another $15 billion -- though he promises never to do it again.

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Portland, Maine: Great story on a very important topic.

Is is just me, or is the 800-pound gorilla that nobody wants to talk about health care? As you say, even when companies do not ship jobs overseas, they reduce their work-force to part-time in order to pay benefits. Couldn't we fix the outsourcing problem almost overnight if we went for a single-payer system as is the case in most countries?

Jodie Allen: I don't know that it would fix the whole problem but it would surely help a lot as the US auto companies--among others-- have been pointing out. I just read a good article on this over the weekend but, alas, I can't remember where. Might have been the NY Times.

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Kansas City, Mo.: I've read that some conservative economists say the unemployment numbers don't reflect people starting their own businesses and that the household survey(?) is a more accurate report. Does tax return data support this argument?

Jodie Allen: True, the payroll numbers that show the biggest job losses--while they are considered far more reliable than the household survey--don't take account of the self-employed. But it is the household survey from which the unemployment rate is tallied and the newest numbers for February released last week showed an actual drop in the number of those employed. In this case it was the payroll survey that showed the small 21,000 job gain, ALL OF IT, incidentally, accounted for by an increase in government jobs!

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Austin, Tex.: 1. Are other wealthy countries (e.g., in western Europe) having this problem to the same extent? How are they dealing with it? (After all, many of them have higher taxes and more restrictive labor markets than we do.)

2. Are the countries where outsourced jobs wind up really going to benefit? Arguably the maquiladoras in Mexico were an early case of outsourcing, and it's not clear they have brought Mexico much besides pollution and social tensions. On the other hand, if the broad populations of these countries really do stand to benefit, this could be a good thing for us as well. We've all seen some of the things bored, frustrated young men with no future and no stake in their societies can do.

Jodie Allen: 1. Western Europe, thanks in large part to the factors you note, has long had sluggish job growth. It doesn't cause as much outcry as it does here both because those countries also have more generous social benefits and because Europeans traditionally have a stronger preference for non-market goods, like leisure, security etc. Still it's a growing problem.
2. No doubt the countries receiving the off-shored jobs benefit, though in many the corporate elites who control the means of production benefit disproportionately. But I do think that those countries, from Mexico to China to India would benefit far more in the long run if they invested more of their profits in the well-being of workers and their families including better wages, education and environmental controls.

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Laurel, Md.: Your article mentions $1.5 trillion that foreign interests hold in American public and private debt. Is that amount a problem or a boost to America?

Since the public debt is mostly U.S. securities payable at very low rates of interest, is this portion of the debt somehow harmful to us?

And the private component of the debt simply represents a windfall investment in our companies which can be used for purposes exceeding the value of the interest payments, correct?

Jodie Allen: No question that foreign investment has been invaluable to us in keeping the dollar high--so we can buy imports cheaply--and both US companies and the government afloat. The only problem will be if their taste for US securities diminishes further over time--the substantial drop in the dollar over the last year or so is a warning sign but so far it has been pretty painless. but should things change, watch out!

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Washington, D.C.: Ms. Allen,
I enjoyed your article in yesterday's Post. Do you not believe that it is actually far too early to sound alarm bells? Of course, this topic will be hot in an election year. I think of Pittsburgh in the early 70s when the steel mills literally disappeared over a three year period. Our history is to find a way to survive if not prosper. Why should it be any different at present?

Jodie Allen: that is precisely the argument made by the great majority of economists including, as I noted, the president's chief economic adviser, a much respected Harvard economist.

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Laurel, Md.: If the economy is in such bad shape, why did we recently have a record quarter of economic growth?

Jodie Allen: But, as I note in my article, the economy overall has been growing nicely over the last few quarters, helped by deficit spending and tax cuts. The problem is that that growth hasn't yet translated into jobs or higher wages as is usually the case in a recovery.

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Laurel, Md.: Your article did not mention the unemployment rate, but isn't it moderate (rather than high) compared to historic rates? And isn't it MUCH lower than European unemployment rates?

Jodie Allen: yes, on both counts

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Laurel, Md.: How would the "crass protectionism" remedy you refer to help the economy?

Jodie Allen: My use of the word "crass" suggests that I have doubts that it would do much to halt the trend.

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Alexandria, Va.: "Money's to be made in biz intel, for the rest of us think construction." Jodie, could you expand on that? What kind of construction? And where?

Jodie Allen: Construction has been booming in the home building sector though that does seem to be cooling off some. Then there's highways (though that's government money) and bases and schools and malls etc etc. Our population is growing much faster than that of other industrialized countries and though that has its problems it does boost the demand for local construction, which is one thing you can't do overseas--though I suppose you could import the machinery to do it.

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Falls Church, Va.: The outrage over outsourcing seems misplaced. Outsourcing has been happening in the U.S. economy for decades; it's just a political issue now because a different demographic -- affluent, suburban, white -- of people are seeing their jobs outsourced. Don't you think Americans simply need to find that entrepreneurial spirit again and adapt, the way we have throughout the country's history? Hasn't history proven that protectionism is dangerous, not only to the economy but to national security?

Jodie Allen: As I say, that is the standard economic argument and in time it may prove to be still true. For the moment though the standard economic models are predicting job creation that hasn't happened.

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New York, N.Y.: Why couldn't we become fully isolationist? Or at the most trade with only a few equal countries. I hear all kind of dire scenarios, that wouldn't scare me. Jobs and a just society is as important as profits.

Jodie Allen: We could--though it would mean paying much higher prices, and perhaps settle for lower quality-- for the consumer goods we cherish. And we would still have to import things we can't produce--most notably oil.

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Laurel, Md.: Why is it bad news that unemployment DECLINED in the report you quoted? If outsourcing caused job losses here why didn't even private sector employment decline?

Jodie Allen: did I make a typing error. Employment--not unemployment--overall declined in the Labor Department household survey. Private sector employment also declined in the payroll survey, but government hiring more than made up the loss.

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Fort Wayne, Ind.: I'd like to know how employers can justify outsourcing based solely on bottom line profitability and stockholder allegiance.

Don't they grasp the concept that if a majority of Americans isn't working, a minimal number will be able to afford their product/service, ultimately leading to profit loss?

Jodie Allen: At some point if present trends continue, which they may not, they will have to consider that. But at the moment people are still buying and their profits are up.

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Washington, D.C.: To what extent do you think that this an election year issue that will simply fade in December although the realities will linger? After all, the trend is nothing particularly new.

Jodie Allen: If the trend fades, as it has in the past, the issue will fade either before or after the election. If things really are different from what the economic models predict, the argument about the future of the country will, I would guess, only intensify.

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Orlando, Fla.: Are there any economic models for what is happening? I feel that this is new economic ground and previous theories of adaptation will not hold.

What are your feelings?

Jodie Allen: So far, surely, the economic models have been way off target in translating general economic growth into jobs--which is why even some mainline economists are at least expressing curiosity about it if not outright concern. I would feel more sanguine if at least a few of them could tell me what all these new high-brain jobs are going to be, and why we, rather than the newly trained "above the neck" workers won't dominate them as well. As I say, I dont think the economy as we know it it at an end, but I can imagine a future in which inequality grows, with all the political and economic instability that entails. Think South America.

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Parkville, Md.: Ms. Allen,

Could you expand upon your comment about Japanese auto manufacturers bringing jobs to the U.S. "under pressure" from U.S. trade authorities? I'd always thought they did that for market based reasons, and pro-free trade advocates are always pointing to the jobs that Honda has created in the U.S. to continue promoting a laissez faire trade policy. But if the Japanese only brought assembly plants to the U.S. under pressure from trade regulators, that would seem to undercut the free marketer's arguments, would it not?

Jodie Allen: I think it does--and certainly there was a lot of pressure put on Japan to do that.

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Harrisburg, Pa.: In the prequel to this discussion, there is mention of U.S. citizens writing "microcode."

As an unemployed computer programmer I must take issue with this. This field may have been one of the first to be outsourced overseas.

And it doesn't appear that it will change until a devastating action such as "hidden microcode" in software developed by outsourcing concerns is unleashed upon the American I/T infrastructure by some politically motivated saboteurs in their employ. Sound far-fetched and just plain nutty? We also never believed terrorists would use suicide tactics on our airliners.

Just a thought.

Jodie Allen: that is a scary thought indeed.

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San Francisco, Calif.: There has been a lot of focus lately on the loss of American jobs owing to offshore outsourcing, and yet, far more jobs are lost to the importation of foreign labor, by way of both legal work visas and illegal immigration. As jobs are lost to imported labor, downward pressure is exerted on wages and benefits, virtually across the board and tax payers pick up the tab to subsidize these low wage workers.

Despite repeated polls that indicate a majority of Americans are opposed to the continued importation of labor, both political parties continue to support high levels of importation and amnesties for illegal immigrants. Why is the continuing importation of labor for American jobs not a central issue in the job-loss debate and what can be done to bring the issue to the fore?

Jodie Allen: That's an interesting question. And I did note that a recent (2/23) Wall STreet Journal article showing that Latinos, especially recent male immigrants both legal and illegal, have taken a disproportionate share of new jobs since the US economy began to recover, especially in two faster growth sectors--construction and services. Interestingly Pres. Bush's initiative to open up immigration from Mexico further has set off a lively, and generally negative debate in conservative circles (articles in the National Review, Weekly Standard etc). Polls show most Americans, including many Latinos, favoring tighter controls. But employers like the cheap labor (both on the job and in their homes) and given the large number of recent immigrants already here, many of them voters, it's a tricky issue for both parties in a general election. So, like many other important but touchy questions, it's not likely to get any real discussion.

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Miami, Fla.: We Americans have to realize that we have to start "tightening our belts now," learn to live without economic growth for the next 10 years and accept the fact that we are -- in many areas -- a Third World country.

Manufacturing has to stay and be brought back to this country.

Jodie Allen: A lot of people agree with you--until you actually ask them to tighten their belts in any way.

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Ann Arbor, Mich.: Dear Jodie,

Your recommendation that our leaders take note of things "you still can't buy at Wal-Mart," like safe neighborhoods and good schools, made me wonder about the impact of outsourcing on the tax revenues that pay for law enforcement, education, and other public sector services.

If people whose jobs are outsourced remain unemployed, they pay little to no tax. If they find new jobs, but earn less than they did before, they will pay less tax.

Either way, won't strapped state budgets have to make do with even lower revenues, and won't the federal budget, which is already showing the largest deficit in history, sink further into the red?

The federal government is trying to address this problem by forbidding the outsourcing of federal jobs and forbidding the use of federal funds for state contracts performed outside the U.S., but it seems to me that will only partially offset outsourcing's impact on tax receipts and the public services they fund.

Jodie Allen: The answer to your question is yes. But we as a nation don't like to make choices without strong leadership showing us the necessity.

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Greenbelt, Md.: Why is there so much xenophobia around the outsourcing of jobs abroad? America is the most innovative nation in the world that continuously has an influx of job creation every economic cycle. Do people not realize that we are benefitting from the low cost provided to us by the workers in China, India, Thailand, etc.? Also much of this to me has been due to the election year -- your thoughts would help especially on the xenophobia. Thanks.

Jodie Allen: I don't think most people are xenophobic. they are just worried about their jobs and I think they would be even if it weren't an election year.

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Harrisburg, Pa.: We in Pennsylvania are being told not to worry about job losses that are being outsourced to other countries because the total number of Americans jobs eventually will increase. As I told a reporter once, I will suggest you do the same: take a survey of 10 people at U.S. News and ask them whether they all would be willing to lose their jobs if they knew that 15 new jobs would emerge elsewhere in the country? My question: why isn't more done on economic conversion policies to help with the specific jobs that are lost?

Jodie Allen: I think we both know what the answer to your survey would be--altruism is no more alive at US News than anywhere else: like everyone else we have families to feed. For decades there have been lots of "trade adjustment assistance programs" that try to retrain and relocate displaced workers and their record is poor. The problem, I think, is that the only kind of training with a solid payoff record is on-the-job training and that means that the initiative has to come from companies creating jobs. and that's very hard for government to stimulate. sorry I have to go now so this will be the last question. I really enjoyed answering all your good and thoughtful questions and thanks for reading Outlook. jodie

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