Review & Outlook

 

January 6, 2004

"Creative Jobs Destruction"

 

Move over, China. The anti-globalization crowd is discovering a new threat: India. The transfer of U.S. information technology jobs to the Subcontinent has got even highly paid white-collar workers worried that their livelihood is under threat.

 

Companies such as the bankrupt Global Crossing created the cheap fiber-optic bandwidth that allows Indian programmers and call-center operators to serve the needs of companies multiple time zones away. So if high-tech and service work can now be done more cheaply in the Third World, the argument goes, won't standards of living in the U.S. inevitably fall? Even many serious people -- such as Intel Chairman Andrew Grove -- are raising new questions about the law of comparative advantage as the cost of communicating across continents shrinks to zero.

 

The "outsourcing" phenomenon is real enough. IBM recently said it will transfer almost 5,000 programming jobs overseas, mostly to India. The consulting firm Accenture, which handles outsourcing for other companies, plans to double its staff in India to 10,000 in the next year. Meanwhile, such Indian software companies as Wipro and Infosys are approaching $1 billion in annual revenue and growing staff by about 25% a year.

 

So at first glance this looks like a win-lose proposition, with India gaining jobs and the U.S. shedding them. Unemployment among U.S. software programmers is now above 7%, compared with 1.6% two years ago. Part of that is due to the aftermath of the dot-com bubble. But let's not shrink from the truth: Jobs are migrating to India.

 

What's important to understand, however, is that the labor market for programmers and software engineers is highly complex. You can't simply substitute one worker for another. At the bottom end, some coding has become comparable to semi-skilled labor; some training is required but not a lot of brain power. These are the jobs moving to India.

 

Western companies are still keeping their most crucial work close to home. Just as in manufacturing, U.S. companies will use the cost savings from job transfers to pursue the cutting-edge advances that produce the highest profit margins. A study by the McKinsey Global Institute found that U.S. companies save 58 cents for every dollar transferred in jobs offshore. That money is available for new investment, or to pay top dollar for Americans with world-leading skills.

 

In economic principle, all of this is little different from the "hollowing out" of low-skilled manufacturing jobs during the 1980s. Now it is happening in services. The result is another inevitable round of creative destruction, in Joseph Schumpeter's famous phrase, that will see some current jobs vanish while increasing productivity in ways that will assist companies in creating new jobs we often can't yet imagine.

 

Fed Chairman Alan Greenspan recently addressed the feeling of insecurity this causes: "We can usually identify somewhat in advance which tasks are most vulnerable to being displaced by foreign or domestic competition. But in economies on the forefront of technology, most new jobs are the consequence of innovation, which by its nature is not easily predictable." He nonetheless argued that trying to shut out foreign competition would damage the U.S. economy.

 

The challenge for America's business and political classes is how to respond. The wrong way is with anti-foreign bid-rigging that limits outsourcing. Indiana Governor Joe Kernan recently barred an Indian software company from a $15.2 million project it was awarded only two weeks earlier. A New York subsidiary of Tata Consultancy Services, India's biggest software company, had the lowest bid by some $8 million, according to the Indianapolis Star, so Hoosier taxpayers now will pay more for this protectionism.

 

Stuart Anderson of the National Foundation for American Policy reports that other states are seeking to restrict overseas "call centers." A New Jersey bill would require that the service operator identify who he is and where he's located. If the caller requests, that call must then be re-routed back to an American location. To raise just one objection: We doubt someone from South Dakota finds it any easier than someone from Delhi to understand a New Jersey accent.

 

Such political gestures are futile in any case. The trade here isn't in goods that can be blocked but in the ones and zeroes of digital information. Private companies will simply drop some services or relocate even more jobs if they are blocked by government from doing what it takes to stay competitive.

 

The alternative is to do what it takes for Americans to remain innovative and create the next wave of wealth-creating technology and ideas. Improve K-12 education, especially in the inner city, maintain an open immigration policy so the world's brains can live in the U.S., reform the tax code and fix the legal system. The goal isn't to steal jobs from one country or another but to help both the U.S. and the world get richer.