Ron Hira, Rochester Institute of Technology professor and author of Outsourcing America, talks about the broad consequences of offshoring.
As a serious researcher of the outsourcing phenomenon, you have taken to warning that outsourcing has grave implications for the well-being of the nation. Could you elaborate? Standard economic theory tells us that offshoring could be good or it could be bad for the American economy and standard of living. It is ambiguous at the macro level, but there's good reason to believe that it will be bad. When a country outsources what it is good at, building up the capabilities of the country it trades with, it can be worse off. I think that's precisely what's going on right now with software and engineering offshoring. And companies are even offshoring innovation and R&D, something that would have been unthinkable even a few years ago. By doing so, America is undercutting its technological and economic future.
Standard theory also tells us that many American workers will be much worse off from offshoring, as their jobs move overseas and they face major wage competition from workers in low-cost countries. This isn't going to hit just a small segment of workers. Princeton economist Alan Blinder estimates that as many as 40 million jobs are newly offshorable, including nearly all science and engineering jobs. While not all of those jobs will be lost overseas, those workers will face wage pressures. We're already seeing it -- Hewlett-Packard has asked many of its EDS employees to take 50% pay cuts.
There's no disputing this negative effect on American workers. Even the most pro-offshoring report, written by McKinsey Global Institute's Diana Farrell, which asserted that the U.S. will be better off with offshoring, concedes that American workers will experience major losses in wages and jobs.
Offshoring is a major structural shift in the way the economy works. Alan Blinder has called it a shift equivalent to the industrial revolution. Ponder that!
Of course, the well-being of the nation is not something that business leaders are expected to take into account. They answer to their shareholders. What needs to change so that companies reject outsourcing options that make economic sense for them? This is a very important observation, one that is lost on most politicians. When John Kerry was running for president, he called the CEOs who outsource "Benedict Arnolds." This was silly, because there's no point in trying to appeal to their patriotism. These are global companies, and the CEOs are not compensated by how many American workers they employ or even how the U.S. economy performs. They can and do lobby for public policies that benefit their companies, even if it is bad for the economy and America. They act rationally in their self-interest, and there's nothing wrong with that. The problem, though, is that there is no interest group representing the American national interest or American workers to counterbalance the business lobbyists. Think about it. Who is representing your readers in Washington?
The solution is for the government to approach this with both carrots and sticks. But the first step is for the government to take this issue seriously. Unfortunately, President Obama named Farrell, who is the leading offshoring evangelist, to the No. 2 post in his National Economic Council. Farrell has done more than anyone else to spread the gospel of offshoring, so it's hard to believe that Obama takes his own rhetoric about Buffalo vs. Bangalore seriously.
So, there's no movement toward changing the incentives through government action? Unfortunately, not yet. The Obama administration has been worse than disappointing on the issue of offshoring, practicing a bait-and-switch approach. By using the issue for political advantage, Obama has given a false sense to the public that he is taking action on offshoring. His only policy action to date is to try to close the tax loophole that encourages offshoring. It is highly unlikely he will have the political support to close the loophole, even though it should be a no-brainer.
No other country in the world gives tax breaks to companies that offshore work! Why do we do it? It's a prime example of the strength of the business lobby. And of course, the Obama administration has done nothing to close the loopholes in the H-1B and L-1 visa programs that spur offshoring.
This story, "Career Watch: A challenge to the wisdom on offshoring" was originally published by Computerworld.