Outsourcing Economics Tutorial

Brad DeLong has explanations for all those worried about the US outsourcing away its future:

First of all, the number of jobs in the United States is not set by what happens on the sea lanes–on what exports and imports the container ships carry from port to port. The number of jobs is set in the Eccles Building, by the Federal Reserve, which tries to hit the sweet spot: high enough demand to produce effective full employment, without so much demand that vacancies become so abundant as to lead inflation to run away. Sometimes the Federal Reserve does a good job and is lucky, and we have full employment with price stability. Other times the Federal Reserve is unskillful or unlucky, and we have accelerating inflation or high unemployment. It is certainly true that what happens in international trade affects employment in America. But the Federal Reserve can and does offset and neutralize impacts of trade that push employment away from where the Federal Reserve thinks the sweet spot of full employment is.

So what, then, is the impact on the American economy when Singapore educates its people to become competent network developers, or India educates its people to become competent help-center technicians? It’s not that jobs leak away. Remember: trade balances. Indians want rupees, not dollars: they will only sell us as much as we can pay for in rupees, and the only way we get rupees is by selling things to Indians. The things we sell to Indians are either goods and services exports, or capital exports–Indians buying financial assets or real property in America, the sale of which is used to finance domestic investment spending. Either way (if the Federal Reserve does its job) Americans’ demand for imports made in other countries is recycled into foreign demand that employs Americans in industries that export goods, export services, make producers equipment, or build structures. This is a consequence of Say’s law–an economic principle which is usually true, sometimes false, but which it is the Federal Reserve’s business to make as true as possible as much of the time as possible. This means that nightmare scenarios–3.3 million high-tech jobs moving overseas–are beyond the bounds of short-run probability. The current account plus the capital account must balance: if the work that used to be done here by 3.3 million people is to be done there, that means that our export industries here must employ an extra 3.3 million people as well.

When foreign countries acquire the capability to make stuff, there are two impacts on the American economy. First, we can no longer sell the stuff we make abroad for such high prices as we did before: our exporters face more competition as they try to sell abroad. Second, our consumers and domestic businesses can buy things made abroad more cheaply: producers of import-competing goods and services find that they face more competition and must lower their prices, but other businesses find that their costs fall, and households find that their incomes buy more good stuff.

There is an article in the Economist on the same outsourcing to India theme discussing the twin challenges facing Indian BPO companies – growing resentment in the countries doing the outsourcing (as they face job losses) and the attrition rates among their own staff. As the Economist summarises: “These are all symptoms of a maturing industry now competing for market share against the global giants of IT consultancy on quality rather than just price. The challenge facing the rest of the outsourcing industry is to reach a similar plateau. Best-placed are those firms that have already moved upmarket: away from call-centres and towards the outsourcing of more sophisticated business processes.”

Published by

Rajesh Jain

An Entrepreneur based in Mumbai, India.