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  • Drezner on Outsourcing

    Posted by Chicago Boyz Archive on May 8th, 2004 (All posts by )

    This topic has become a hardy perennial amongst the Boyz, and has generated much heated commentary. In “The Outsourcing Bogeyman,” Drezner does a nice job of shedding the light of common sense into this often smoke-shrouded topic. Drezner provides authorities and a bibliography (found here). This material is good if you want to dig into this topic even further.

    Without minimizing the hardship of individuals who are losing their jobs, policy has to be made on behalf of the country as a whole. Drezner points out that the total number of jobs lost is relatively small:

    As for the jobs that can be sent offshore, even if the most dire-sounding forecasts come true, the impact on the economy will be negligible. The Forrester prediction of 3.3 million lost jobs, for example, is spread across 15 years. That would mean 220,000 jobs displaced per year by offshore outsourcing — a number that sounds impressive until one considers that total employment in the United States is roughly 130 million, and that about 22 million new jobs are expected to be added between now and 2010. Annually, outsourcing would affect less than .2 percent of employed Americans.

    What is really going on is politicians are using foreigners as convenient scapegoats for apparently sluggish job creation. But Drezner sees a silver lining here, which I think he is correct to perceive:

    If offshore outsourcing is not the cause of sluggish job growth, what is? A study by the Federal Reserve Bank of New York suggests that the economy is undergoing a structural transformation: jobs are disappearing from old sectors (such as manufacturing) and being created in new ones (such as mortgage brokering). In all such transformations, the creation of new jobs lags behind the destruction of old ones. In other words, the recent recession and current recovery are a more extreme version of the downturn and “jobless recovery” of the early 1990s — which eventually produced the longest economic expansion of the post-World War II era. Once the structural adjustments of the current period are complete, job growth is expected to be robust. (And indeed, current indicators are encouraging: there has been a net increase in payroll jobs and in small business employment since 2003 and a spike in IT entrepreneurial activity.)

    (I hope to write about this structural transformation business at some point.)

    Moreover, Drezner points out that “insourcing” exceeds outsourcing.

    Finally, the benefits of “insourcing” should not be overlooked. Just as U.S. firms outsource positions to developing countries, firms in other countries outsource positions to the United States. According to the Bureau of Labor Statistics, the number of outsourced jobs increased from 6.5 million in 1983 to 10 million in 2000. The number of insourced jobs increased even more in the same period, from 2.5 million to 6.5 million.

    Drezner correctly concludes that it requires political will and political courage to continue to defend a free and open system under current circumstances. “Until robust job growth returns, the debate over outsourcing will not go away — the political temptation to scapegoat foreigners is simply too great. ”

    The struggle for free markets and free trade is never over. This struggle has to be waged over and over. Adam Smith knew this. So did John Bright. There is no reason to think it will be easy in our day.