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With all the griping out information technology jobs migrating to India and elsewhere around the world, I've been thinking about basic economics lately. It to me seemed pretty clear that when a company saves money by redeploying work to a less-costly venue it frees up the money saved for reinvestment in new projects likely to require more intensive supervision in domestic job markets. Well it seems I had ignored the political dustup about comments made by Gregory Mankiw, President Bush's chief economic advisor. It appears he had the audacity to explain to members of Congress that when goods are produced more cheaply abroad it makes sense to import them. The same applies to services. The Washington Post put it elquently in a Feb. 13 editorial:

"Just as it makes sense to buy cell phones from Finland if they are cheap and excellent, it makes sense to buy call-center services or software programming from India if these are the best on the market. Not only is Mr. Mankiw right, but to argue otherwise is elitist and offensive. It would suggest that it's okay for blue-collar workers to lose jobs to foreign competition but not okay for white-collar folk to face the same competitive pressure."

Well now The Economist has weighed in with a more complete treatise on the issue. In "The great hollowing out myth" it points out that outsourcing labor to less costly markets is a very old idea known as the law of competitive advantage.

Remember all those lost jobs -- about 2.3 million of them -- for which critics blame the Bush Adminstration? Well it seems a good portion of them were simply "bubble" jobs created during the late 90s tech boom which drove the unemployment rate below the 5% "natural" unemployment rate considered healthy for keeping inflation under control.

Another interesting point: "Between 1980 and 2002, the U.S. population grew by 23.9%. The number of employed Americans, on the other hand, grew by 37.4%. Today in 138.6 million Americans are in work, a near-record, both in absolute terms and as a proportion of the population."

For American companies handling the politically delicate question of whether or not to send certain kinds of jobs overseas it comes down to this: Send the easy jobs overseas where you can pay someone less to do it. Then you can reallocate that money to pay someone a higher salary to take on more difficult and demanding domestically sourced jobs that require more skills and more direct supervision. The net effect over time is more domestic jobs, not fewer.

Remember companies want to grow and expand. They want to make more money. That means saving money where it makes sense and then reinvesting that money in building new products or services or expanding their geographic reach, and so on. This is what businesses do. And as painful as it may be in the short term for people losing jobs, its a basic force of economics that no presidential candidate of any party can hold back.

Posted 2/23/2004 05:27:00 PM

Now Hear This: Outsourcing is good for the economy