Jim Moore’s blog: Innovation, Strategy, Public Policy

Outsourcing is reducing the
standard of living enjoyed by middle class Americans,
and increasing the standard of living in India and China and other
developing areas of the world.  This is not a short-term
effect.  It is a long-term effect of global development. As I will
explain below, the
magnitude of the change is currently being masked from middle class
Americans.  The worst is yet to come for most Americans, when
measured in declines in jobs, pay rates, and personal wealth. 
This is the dirty secret that the Bush administration and economists
like Greenspan are conspiring to hide.

The only way that the current trend is good for Americans is if in the
broadest sense outsourcing yields a worldwide redistribution of wealth that in turn enables high
levels of social stability and environmental responsibility.  
Outsourcing is helping to
economically develop the wider world–and if that creates world-wide peace and spreads
middle class values, perhaps the bargain is worth it for Americans.  But no
American politician, and few economists, are exploring the topic this way. 

Indeed, conservative politicians, economists, and corporate CEOs are
working overtime to distract us with theoretical arguments for free
trade based on
outdated ideas introduced in 1817!  See the BusinessWeek article excerpted below for a clear debunking of these arguments.

The most important trend in the world economy today is that Americans are borrowing
against their homes and credit cards to buy cheap goods made in developing counties.  At the same time, American
businesses are working with the Indians and the Chinese and others to
move jobs, technology, business processes, and capital to these
countries.  The net effect of this very large transfer of consumer purchases and corporate resources is to
increase employment and standards of living in the developing
world.  This is arguably good for international development. 
As some observers have pointed out, this process  is “the new foreign aid” and
is greatly appreciated by those living in the third world.

On the other hand, when jobs, technology, business processes and
capital move to China and India and other low-wage countries, these
resources are lost here in the
United States,  US citizens lose their jobs or must accept lower
wages in order to
compete with their counterparts in third world companies.  This is
not the stuff of fiction.  From Detroit to Cambridge, jobs and
wages are declining. 

Thus as
the standard of living is raised in China and India, it is lowered in
the United States.  US workers don’t yet feel the full effect of
this shift, because as they lose earning power they are funding their
current lifestyles with borrowed money–from homes, primarily–supplied
at interest rates artificially-maintained by the (very political and
pro-Bush) Federal Reserve Bank.

The standard of living of US workers is converging with those of
China and India and the developing world.  We are moving toward a
new world-wide
middle class standard of living.  The new standard of living will
be lower than that currently enjoyed in the United States, and higher
than that of today’s India and China, at least from a material point of
view.

My sense is that few United States workers understand or would favor
this convergence scenario, at least in its current unmanaged, runaway
form.  On the other hand, corporate leaders understand it clearly,
and are profiting from paying lower wages overseas and selling the
resulting products in the United States.

It is this “understanding gap” that must be filled in this election year.

The long-term possible positive effect of global development and middle
class convergence may be to force
us to innovate to create enjoyable lives based on less resources. 
It can only be so, for the material of the world is
finite.  There is only so much oil, land, biosphere and
climate.  Ecologist Edward Wilson estimates that it will require
the resources of five earths for every person to have an American
middle class standard of living.  One future scenario is to deny
others a reasonable standard of living–but this would probably
increase worldwide strife and terrorism and migration, taking all down
with it.  Alternatively, we can all learn to live with less
material and more intelligence.

How can we live with more brains and less brawn, and share the largess
with the rest of the world?  This is the politically unpalatable
but important discussion lurking behind arguments over outsourcing.

It states that, even if a country is a high-cost
producer of most things, it can still enjoy an advantage, since it will
produce some goods at lower relative cost than its trading partners.

Today’s economists can’t identify what the new industries and
occupations might be that will replace those that are lost, but they’re
certain that those jobs and sectors are out there somewhere. What does
not occur to them is that the same incentive that causes the loss of
one tradable good or service — cheap, skilled foreign labor — applies
to all tradable goods and services. There is no reason that the
“replacement” industry or job, if it exists, won’t follow its
predecessor offshore.

For comparative advantage to work, a country’s labor, capital, and
technology must not move offshore. This international immobility is
necessary to prevent a business from seeking an absolute advantage by
going abroad. The internal cost ratios that determine comparative
advantage reflect the quantity and quality of the country’s technology
and capital. If these factors move abroad to where cheap labor makes
them more productive, absolute advantage takes over from comparative
advantage…

…When Ricardo developed the doctrine of comparative advantage, climate
and geography were important variables in the economy. The assumption
that factors of production were immobile internationally was realistic.
Since there were inherent differences in climate and geography, the
assumption that different countries would have different relative costs
of producing tradable goods was also realistic.

Today, acquired knowledge is the basis for most tradable goods and
services, making the Ricardian assumptions unrealistic. Indeed, it is
not clear where there is a basis for comparative advantage when
production rests on acquired knowledge. Modern production functions
operate the same way regardless of their locations. There is no
necessary reason for the relative costs of producing manufactured goods
to vary from one country to another. Yet without different internal
cost ratios, there is no basis for comparative advantage.