Special Report

Outsourcing Is Out of Sight

Thanks to the president’s economic adviser, the cat is out of the bag: Free trade is good.

By 2.18.04

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Once questions about President Bush's military record and Senator John Kerry's romances fade, we'll start getting down to real issues -- like outsourcing.

"Outsourcing is a good thing," said N. Gregory Mankiw, chairman of Bush's Council of Economic Advisors last week after issuing a report on the benefits of sending both blue-collar and white-collar jobs abroad. "More things are tradable than were tradable in the past. This is just another way of doing international trade."

Such things are often whispered among economists at cocktail parties, but you're not supposed to say them in public. Now the cat is out of the bag. Free trade is good. Old John Kerry is having a time with that. He called CEO's who send jobs abroad "traitors" and "Benedict Arnolds." That must be the kind of language he learned in Vietnam.

The most comic reaction has come from Democratic officials around the country who want to pass laws saying governments can't outsource their programming chores to Singapore or India. That's a great idea! Let's make government more expensive and inefficient. Then we can all pay more in taxes.

ALL THIS WOULD BE JUST another dismal squall about free trade if New York Senator Charles Schumer and former Reagan supply-sider Paul Craig Roberts hadn't tried to put flesh on these arguments in a recent New York Times op-ed. This odd couple lamented the following alarming developments: (1) "a major New York securities firm plans to replace its team of 800 American software engineers, who each earns about $150,000 per year, with an equally competent team in India earning an average of only $20,000," and (2) "within five years the number of radiologists in this country is expected to decline significantly because M.R. I. Data can be sent over the Internet to Asian radiologists capable of diagnosing the problem at a small fraction of the cost."

So how is this different from growing beef cattle in Argentina or making cars in Japan? Well, these people aren't just a bunch of farmers or autoworkers. These are my friends and constituents! It's different when white-collar people are affected.

In order to put a patina of intellectual respectability on this argument, Schumer and Roberts trotted out 19th century apostle of free trade David Ricardo and accuse him of not knowing the score on computers. "When Ricardo proposed his theory in the early 1800s, major factors of production -- soil, climate, geography and even most workers -- could not be moved to other countries. But today's vital factors of production -- capital, technology and ideas -- can be moved around the world at the push of a button. They are as easy to export as cars. This is a very different world than Ricardo envisioned."

Did you follow that? It's like saying force may not equal mass times acceleration anymore because Isaac Newton didn't envision automobiles.

Ricardo never argued or even imagined that soil, climate and geography would or wouldn't be moved from country to country. His point was that the factors of production could be duplicated. Ricardo's main subject was food. The British had always fed themselves by growing their own "corn." Other countries had as much soil and water, however -- often better -- and could grow food more cheaply.

The great national debate of the early 19th century was whether to repeal the "Corn Laws" and open British markets to cheap foreign food. Corn law supporters wailed that farmers would be hurt and England would become dangerously dependent on foreign food. Ricardo argued that repealing the Corn Laws would: (1) free labor and capital for tasks in which the British would have a "comparative advantage," and (2) make everybody more prosperous in the process. Parliament finally repealed the Corn Laws in 1846 and Britain became the richest and most well-fed nation in the world.

SO HOW IS THIS any different from outsourcing computer programming tasks? It isn't.

The evolution of jobs in digital technology has followed the exact same pattern as agriculture, manufacturing, and everything else before it. Ten years ago, HTML coding was a mysterious craft practiced by a few cognoscenti who could charge hundreds of dollars an hour. Building a simple website cost you at least $25,000. Five years ago -- as Tom Libscomb, head of the Center for the Digital Future, once put it -- "you could hire teenagers to build websites for pizza." Today you can go on Yahoo! and build a sophisticated e-commerce website complete with a shopping cart and major credit card authorization for absolutely nothing! Were we better off when website building was an esoteric art? Or does its demystification (and the consequent drop in wages) just mean more people can engage in e-commerce?

Who cares if radiograms are being read in China or call centers manned in Canada or India? This just makes life cheaper and easier in the United States. As Richard Grossman, professor of economics at Wesleyan University, wrote in response to Schumer and Roberts, "Perhaps I'm just an old-fashioned economist or a consumer fed up with annual increases in my health insurance, but shouldn't American consumers be applauding anything that brings down the skyrocketing costs of health care?"

There is one danger lurking in all this, of course, and this is that competition from India and China will expose America's glaring weaknesses in public education. Over the past half-century we have grown comfortable thinking of most of Asia as the "Third World," a benighted backwards region where you would have trouble finding a flush toilet. In fact, both India and China are ancient civilizations with proud traditions that have unfortunately become encrusted by bureaucracy. (Until ten years ago, it took the permission of a cabinet minister to start a corporation in India.) It is my sense that people who do religion well can also do computers. The same kind of self-discipline and logical thinking is required. Orientals, Indians, even the Russians are proving to be very talented at these tasks. As these formerly stagnant societies shed outworn traditions, they are becoming dynamic and productive trading partners.

AMERICANS, MEANWHILE, ARE RESTING on their laurels. There is a core of brilliant people in the country -- the brightest in the world -- and most of the advances in technology still occur here. But the average American is falling behind. American education is a joke -- a monopoly controlled by people least capable of educating the next generation. We lead the world only in self-esteem. It remains an idle curiosity that we rank only 19th in math and science (just behind Latvia), but someday this is all going to come home to roost.

Putting up trade barriers, however, will only make things worse. What we need is to move forward. The model that is working best is to combine university-based research with commercial enterprises for the creation of new industries and new jobs. North Carolina's Research Triangle Park, built in the 1950s around three major universities, has become the hub of the regional economy, moving the former "tobacco state" from the bottom of the economic ladder to the upper tier -- even as the old textiles mills were leaving.

Almost every state is now imitating this pattern. Albany has become the chip-manufacturing capital of the world by marrying the SUNY Albany Nanotechnology Center to IBM. Even North Dakota recently became a new technology center by landing a branch of the Army High Performance Computing Research Center at the University of North Dakota. Matthew Goldstein, chancellor of New York's City University and an accomplished mathematician, is proposing a similar facility for the abandoned Coast Guard center on Governors Island in New York Harbor.

These are the kind of efforts that will move the country forward, creating new jobs and a high value for American labor. If people such as Senator Schumer, Paul Craig Roberts, and even Senator Kerry would get behind such imaginative projects, they wouldn't have to look back over their shoulders, fretting every time some perfect-English-speaking voice picks up an 800 line in Bombay.

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About the Author
William Tucker is news editor for RealClearEnergy.org.