More and Better Jobs Gained by ‘Insourcing’ than are Lost to ‘Outsourcing’

  N. Gregory Mankiw, former chair of W.’s Council of Economic Advisors. The media, most Democrats, and some Republicans, skewered Mankiw in 2004 for simply and clearly stating the truth about outsourcing. Source of photo:  online version of the NYT article cited below.

 

In December 2005, the McKinsey Global Institute predicted that 1.4 million jobs would be outsourced overseas from 2004 to 2008, or about 280,000 a year.  That’s a drop in the bucket.  In July, there were 135.35 million payroll jobs in the United States, according to the Bureau of Labor Statistics.  Thanks to the forces of creative destruction, more jobs are created and lost in a few months than will be outsourced in a year.  Diana Farrell, director of the McKinsey Global Institute, notes that in May 2005 alone, 4.7 million Americans started new jobs with new employers.

What’s more, the threat of outsourcing varies widely by industry.  Lots of services require face-to-face interaction for people to do their jobs.  That is particularly true for the biggest sectors, retail and health care.  As a result, according to a McKinsey study, only 3 percent of retail jobs and 8 percent of health care jobs can possibly be outsourced.  By contrast, McKinsey found that nearly half the jobs in packaged software and information technology services could be done offshore.  But those sectors account for only about 2 percent of total employment.  The upshot:  “Only 11 percent of all U.S. services job could theoretically be performed offshore,” Ms. Farrell says.

Economists have also found that jobs or sectors susceptible to outsourcing aren’t disappearing.  Quite the opposite.  Last fall, J. Bradford Jensen, deputy director at the International Institute of Economics, based in Washington, and Lori G. Kletzer, professor of economics at the University of California, Santa Cruz, documented the degree to which various service sectors and jobs were “tradable,” ranging from computer and mathematical occupations (100 percent) to food preparation (4 percent).

Not surprisingly, Mr. Jensen and Professor Kletzer found that in recent years there has been greater job insecurity in the tradable job categories.  But they also concluded that jobs in those industries paid higher wages, and that tradable industries had grown faster than nontradable industries.  “That could mean that this is our competitive advantage,” Mr. Jensen says.  “In other words, what the U.S. does well is the highly skilled, higher-paid jobs within those tradable services.”

There is evidence that within sectors, lower-paying jobs are being outsourced while the more skilled ones are being kept here.  In a 2005 study, Catherine L. Mann, senior fellow at the Institute for International Economics, found that from 1999 to 2003, when outsourcing was picking up pace, the United States lost 125,000 programming jobs but added 425,000 jobs for higher-skilled software engineers and analysts.

 

For the full commentary, see:

DANIEL GROSS. "Economic View; Why ‘Outsourcing’ May Lose Its Power as a Scare Word." The New York Times, Section 3 (Sun., August 13, 2006):  5. 

U.S. Economy Can Prosper, Even if G.M. Does Not

The fragility of success for large corporations is documented in the early chapters of the Foster and Kaplan book that is mentioned below. 

(p. 1)  THE announcement last week that General Motors would cut 25,000 jobs and close several factories is yet another blow to the Goliath of automakers and its workers.  But only if you work for G.M. is the company’s decline a worry.  For consumers, the decline can be seen as a symbol of healthy competition.

G.M.’s sales, market share and work force have all been falling for a generation, even as the quality of its vehicles has gone up.  Why?  Because its competitors’ products have improved even more.  Today’s auto buyers enjoy an unprecedented array of well-built, well-equipped, reasonably priced vehicles offered by many manufacturers.

. . .

(p. 3)  . . .  even if a new generation is drawn to G.M.’s products, recovery of its former position seems unlikely.  Other brands have improved, too:  J.D. Power estimates that for the auto industry overall, manufacturing defects declined 32 percent since 1998 alone.

There is also great pressure to hold prices down, which is bad for companies like G.M. with vast amounts of overhead.  According to the consumer price index, new cars and light trucks today cost less in real-dollar terms than in 1982, despite having air bags, antilock brakes, CD players, power windows and other features either unavailable or considered luxury options back then.

This means that during the very period that General Motors has declined, American car buyers have become better off.  Competition can have the effect of ”creative destruction,” in the economist Joseph Schumpeter’s famous term, harming workers in some places, while everyone else comes out ahead.

. . .

As it continues to shrink, G.M. may serve as an exemplar of what the world economy will do in many arenas — knock off established leaders, while improving quality and cutting prices.  In their 2001 book ”Creative Destruction,” Richard Foster and Sarah Kaplan, analysts at McKinsey & Company, documented how even powerhouse companies that are ”built to last” usually succumb to competition.

Competition can be a utilitarian force that brings the greatest good to the greatest number.  Someday when the remaining divisions of General Motors are bought by some start-up company that doesn’t even exist yet, try to keep that in mind.

 

For the full commentary, see: 

GREGG EASTERBROOK.  "What’s Bad for G.M. Is . . ."  The New York Times, Section 4  (Sunday, June 12, 2005):  1 & 3.

(Note:  the ellipsis in the title is in the original title; the ellipses in the article, were added.)

 

The full reference to the Foster and Kaplan book, is:

Foster, Richard and Sarah Kaplan.  Creative Destruction:  Why Companies that Are Built to Last Underperform the Market—and How to Successfully Transform Them.  New York:  Currency Books, 2001.

 

Static Assumptions Undermine Economic Policy Analysis


Over 50 years ago, Schumpeter emphasized that static models of capitalism miss what is most important in capitalism.  Yet static analysis still dominates most policy discussions.  But there is hope:


(p. A14) A bit of background:  Most official analysis of tax policy is based on what economists call "static assumptions."  While many microeconomic behavioral responses are included, the future path of macroeconomic variables such as the capital stock and GNP are assumed to stay the same, regardless of tax policy.  This approach is not realistic, but it has been the tradition in tax analysis mainly because it is simple and convenient.

In his 2007 budget, President Bush directed the Treasury staff to develop a dynamic analysis of tax policy, and we are now reaping the fruits of those efforts.  The staff uses a model that does not consider the short-run effects of tax policy on the business cycle, but instead focuses on its longer run effects on economic growth through the incentives to work, save and invest, and to allocate capital among competing uses.

 

For the full story, see:

ROBERT CARROLL and N. GREGORY MANKIW.  "Dynamic Analysis."  The Wall Street Journal  (Weds., July 26, 2006):  A14.


Life Has Improved; And Can Continue to Improve

 Source of graphic:  online version of the NYT article cited below. 

 

(p. 1)  New research from around the world has begun to reveal a picture of humans today that is so different from what it was in the past that scientists say they are startled.  Over the past 100 years, says one researcher, Robert W. Fogel of the University of Chicago, humans in the industrialized world have undergone “a form of evolution that is unique not only to humankind, but unique among the 7,000 or so generations of humans who have ever inhabited the earth.”

. . .

(p. 19)  . . .  stressful occupations added to the burden on the body.

People would work until they died or were so disabled that they could not continue, Dr. Fogel said. “In 1890, nearly everyone died on the job, and if they lived long enough not to die on the job, the average age of retirement was 85,” he said. Now the average age is 62.

A century ago, most people were farmers, laborers or artisans who were exposed constantly to dust and fumes, Dr. Costa said. “I think there is just this long-term scarring.”

 

For the full story, see:

Health1860s1994.gif Source of graphic:  online version of the NYT article cited above. 

HealthCivilWarAndNow.gif EscapeFromHungerAndPrematureDeath1700-2100BK.jpg  Source of graphic:  online version of the NYT article cited above.  Source of book image:  http://www.cambridge.org/us/catalogue/catalogue.asp?isbn=0521808782

 

Fogel’s book is a primary academic source for much of what is interesting in the New York Times article.  Fogel predicts that if we don’t screw things up, half of today’s college students will live to be 100.  He shows that academics in the past have consistently and significantly underestimated the maximum lifespans that would be attainable in the future.

The full reference for the Fogel book is:

Fogel, Robert William. The Escape from Hunger and Premature Death, 1700-2100, Cambridge Studies in Population, Economy and Society in Past Time. Cambridge, UK: Cambridge University Press, 2004.

 

Current Workplace Revolution Benefits Labor

(p. 8)  Would you change places with your grandfather?  Would you want to work 11 brutal hours a day… in yesterday’s Bethlehem Steel mill, a Ford Motor Company factory circa 1935?  Not me.  Nor would I change places with my father … who labored in a whilte-collar sweatshop, at the same company, in the same building, for 41 l-o-n-g years.

A workplace revolution is under way.  No sensible person expects to spend a lifetime in a single corporation anymore.  Some call this shift the "end of corporate responsibility."  I call it … the Beginning of Renewed Individual Responsibility.  An extraordinary opportunity to take charge of our own lives.

 

Source of passage:

Peters, Tom.  Re-imagine!  London: DK, 2003.

(Note:  all of the ellipses in the above passage, appear in the original.)

Intense Competition in Chip Duopoly

IntelAMDWar.gif

Phil Hester, apparently a chip hotshot, joined A.M.D. ten months ago as its technology chief, to "help lead its battle against Intel."  (Hector Ruis, mentioned below, is the C.E.O. of A.M.D.)

Mr. Hester and other A.M.D. executives say that the technology in its laboratories gives them plenty of reason for optimism, and that in some product categories Intel is just catching up to advances A.M.D. pioneered.  Just next month, for example, A.M.D. is expected to introduce improvements to Opteron, and both companies are designing chips to run cooler and consume less energy.

Much like Intel, A.M.D. is working to increase the number of processors on each chip from two to four, and the company says it will introduce new designs for servers and desktop systems that will be released in mid-2007, followed later in the year by a new design for notebooks.  Many analysts are also expecting the company to counter Intel’s pricing moves with price cuts of its own.  At A.M.D.’s annual conference for analysts last month, Mr. Hester also disclosed an unusual plan to let other manufacturers build chips that work closely with its own chips, indicating an openness and flexibility that has not been seen before in the company’s strategy.

With that effort, referred to as Torrenza, A.M.D. is licensing some of its chip specifications to other technology developers so they can add specialized functions, like advanced graphics and math processing.

“We want to open up our technology and unleash a completely new wave of innovation,” Mr. Ruiz told analysts at the conference.

Advanced Micro has picked up about five percentage points of market share over the past year, nearly all of that from Intel, according to Mercury Research.  Today, A.M.D.’s overall share is about 21 percent, to Intel’s 74 percent, and at the analyst meeting Mr. Ruiz said the goal was to have a 30 percent share by 2008.

Mr. Hester said A.M.D.’s road map for new products had not changed much since his arrival.  Mostly he has focused on improving the way employees manage projects and pushing them to develop multiple designs at one time.  He said he also emphasized cooperation inside development teams, rather than having teams compete for attention.

The competitive situation has helped with this.  “Being the underdog creates a culture of cooperation,” Mr. Hester said.

 

For the full story, see: 

LAURIE J. FLYNN.  "Jumping at the Chance to Fire Away in the Chip War."  The New York Times (Weds., July 19, 2006):  C7. 

 

(Note:  the online version of the article has a different title, viz., "A.M.D. Seeks to Gain in Its Rivalry With Intel.")

Tom Peters: Over-the-Top Schumpeterian


Source of book image:  http://www.amazon.com/gp/product/customer-reviews/078949647X/ref=cm_cr_dp_2_1/104-2835260-2878345?ie=UTF8&customer-reviews.sort%5Fby=-SubmissionDate&n=283155

 

Tom Peters became famous as the co-author of the business classic In Search of Excellence (1982).  His Re-imagine! is exuberant, optimistic, exaggerated, and stylistically over-the-top.  I find it fun, bracing, entertaining, and sometimes edifying.  If you like the prose of The Cluetrain Manifesto and Gilder’s Telecosm, then you may also like Re-imagine!

Here is an early, very brief passage: 


(p. 9)  My overall vision, in brief:  Business is cool. It’s about Creativity and Invention and Growth and Service.  It’s about Adam Smith’s "hidden hand."  And Nobel laureate Frederick Hayek’s "spontaneous discovery process."  And economist Joseph Schumpeter’s "gales of creative destruction."  At its best, it’s about building things that make life less burdensome than it was in medieval times.  About getting us beyond—far, far, far beyond—the quasi-slavery of the Middle Ages, the indentured servitude of the first 150 years of the Industrial Revolution, and the cubicle slavery of the last three-quarters of a century. 

Yes, business is cool.

(Or at least it can be.)

 

The citation to the book is:

Peters, Tom. Re-Imagine! London: DK, 2003.

(Note:  the italics in the above passage appears that way in the original.)


Job Hopping May Aid Technological Experimentation

When employees jump from company to company, they take their knowledge with them.  ”The innovation from one firm will tend to bleed over into other firms,” Professor Rebitzer explained.  For a given company, ”it’s hard to capture the returns on your innovation,” he went on.  ”From an economics perspective, that should hamper innovation.”

He found a possible answer to the puzzle in the work of two management scholars, Carliss Y. Baldwin and Kim B. Clark.  In their book ”Design Rules:  The Power of Modularity” (MIT Press, 2000), they argued that when there is a lot of technological uncertainty, the fastest way to find the best solution is to permit lots of independent experiments.  That requires modular designs rather than tightly integrated systems.

”By having a lot of modular experimenters, you can take the best, which will be a lot better than the average,” Professor Rebitzer said.  Employee mobility may encourage productive innovation, as people quickly move to whichever company comes up with the best new technology.

. . .

To Professor Rebitzer’s surprise (though not his co-authors’), it turns out that Silicon Valley employees really do move around more often than other people.  The researchers looked at job changes by male college graduates from 1994 to 2001.  During that period, an average of 2.41 percent of respondents changed jobs in any given month.

But, they write, ”living in Silicon Valley increases the rate of employer-to-employer job change by 0.8 percentage point.”

”This effect is both statistically and behaviorally significant — suggesting employer-to-employer mobility rates are 40 percent higher than the sample average.”

 

For the full commentary, see: 

VIRGINIA POSTREL.  "ECONOMIC SCENE; In Silicon Valley, Job Hopping Contributes to Innovation."  The New York Times  (Thursday, December 1, 2005):  C4.

 

A PDF of the paper by Rebitzer and colleagues is downloadable at:    http://www.federalreserve.gov/Pubs/feds/2005/200511/200511abs.html

 

The book Postrel praises, is:

Source of book image:  http://www.amazon.com/gp/product/customer-reviews/0262024667/104-2835260-2878345?redirect=true

Russians Try to Steal Rocker’s Vacuum Tube Factory

Mike Matthews holding one of the vacuum tubes produced in the Russian factory he owns.  Source of photo:  online version of the NYT article cited below.

 

(p. C1)  SARATOV, Russia — Mike Matthews, a sound-effects designer and one-time promoter of Jimi Hendrix, bought an unusual Russian factory making vacuum tubes for guitar amplifiers.  Now he has encountered a problem increasingly common here: someone is trying to steal his company.

Sharp-elbowed personalities in Russia’s business world are threatening this factory in a case that features accusations of bribery and dark hints of involvement by the agency that used to be the K.G.B.

Though similar to hundreds of such disputes across Russia, this one is resonating around the world, particularly in circles of musicians and fans of high-end audio equipment.

Russia is one of only three countries still making vacuum tubes for use in reproducing music, an aging technology that nonetheless "warms up" the sound of electronic music in audio equipment.

"It’s rock ‘n’ roll versus the mob," Mr. Matthews, 64, said in a telephone interview from New York, where he manages his business distributing the Russian vacuum tubes.  "I will not give in to racketeers."

Yet the hostile takeover under way here is not strictly mob-related.  It is a dispute peculiar to a country where property rights — whether for large oil companies, car dealerships or this midsize factory — seem always open to renegotiation.  It provides a view of the wobbly understanding of ownership that still prevails.

. . .

(p. C4)  If the tube factory dies, so will the future of a rock ‘n’ roll sound dating back half a century, the rich grumble of a guitar tube amplifier — think of Jimi Hendrix’s version of "The Star-Spangled Banner" — that musicians say cannot be replicated with modern technology.

"It’s nice and sweet and just pleasing sounding," Peter Stroud, the guitarist for Sheryl Crow, said in a telephone interview from Atlanta.  "It’s a smooth, crunchy distortion that just sounds good.  It just feels good to play on a tube amp."

He added:  "It would be a catastrophe for the music industry if something happened to that plant."

 

For the full story, see: 

ANDREW E. KRAMER.  "From Russia, With Dread; American Faces a Truly Hostile Takeover Attempt at His Factory."  The New York Times   (Tuesday, May 16, 2006):  C1 & C4.

 

The transistor disrupted the vacuum tube, a case that would usually be described as an episode of creative destruction.  One secondary lesson from the story above is that there may be a previously unremarked symmetry to the process of disruption.  A disruptive technology typically appeals only to a niche in the market, while the incumbent technology dominates the mainstream.  But after the disruptive technology improves sufficiently to capture much of the mainstream market, maybe there often will remain a niche market that still prefers the older disruptive technology?

To use Danny DeVito’s example in "Other People’s Money," the car may have disrupted horse-and-buggies.  But for some nostalgic "jobs" the horse-and-buggy may still be the better product, so there will likely remain some demand for buggy whips.

To the extent that this phenomenon is significant, it might serve to ease the labor market transition when one technology leapfrogs another.

 

VacuumTubeBox.jpg A vacuum tube used in guitar amplifiers, that was produced in the factory that Mike Matthews owned.  Source of photo:  online version of the NYT article cited above.

Entrepreneur Risks His Money; Government Risks Yours


KaiserGeorgeB.jpg George B. Kaiser.  Source of photo: http://www.forbes.com/finance/lists/10/2003/LIR.jhtml?passListId=10&passYear=2003&passListType=Person&uniqueId=OXNB&datatype=Person

 

(p. A1)  In 2002, Kathleen Eisbrenner, then an executive at El Paso Corp., spent months trying in vain to find a buyer for the company’s novel technology for importing natural gas.

In February 2003, she left for a vacation in Cancun, convinced that El Paso would be forced to abandon the project.  As she sat on the beach one afternoon, she got a call on her cellphone.  A colleague had a message from an intermediary, who said he had an "interested buyer," identified only as a "Midwest billionaire."

"It’s Warren Buffett calling," she recalls telling her husband as they clinked pina colada glasses together in celebration.  "I was absolutely sure."

But it wasn’t Mr. Buffett.  It was another billionaire named George B. Kaiser. 

 . . .

(p. A6)  . . . , Ms. Eisbrenner called Nicolas Saverys, the chief executive of Belgium-based Exmar NV.  Exmar was building two of the new-style LNG vessels.  Ms. Eisbrenner gushed that there was a wealthy buyer.  Mr. Saverys was initially skeptical.  He changed his mind in late February 2003 after meeting Mr. Kaiser in New York.  "At last, I was talking to someone who was putting his own money at stake," he says.

Mr. Saverys sealed the relationship by presenting Mr. Kaiser with a box of pralines from Belgian chocolatier Pierre Marcolini at their second meeting.  Mr. Kaiser, an avowed chocoholic, returned the favor a couple of weeks later in Tulsa, giving Mr. Saverys a box of candy made by Christine Joseph, a Tulsa chocolatier who also was born in Belgium.

Convinced that Energy Bridge could work, Mr. Kaiser agreed to take over the business, closing the deal last December.  El Paso paid him $75 million; in return, he assumed a $120 million obligation to Exmar.  El Paso also agreed to pay to install the underwater pipeline connection that carries the gas from the ship to existing pipelines in the Gulf of Mexico.

The bulk of the $660 million Mr. Kaiser invested went to modify three specially equipped tankers and to charter them for 20 years.  If Energy Bridge opens on time in January, it will be at least two and a half years ahead of any new terminals being developed by other energy companies.  In addition, civic leaders in Massachusetts and Rhode Island, eager to keep LNG terminals and tankers far from the mainland, are encouraging Mr. Kaiser to build an offshore tanker-based project along the Atlantic coast of the U.S.

Mr. Kaiser, who declined requests for an interview but answered some questions by e-mail, concedes he doesn’t like "taking a risk on an undemonstrated technology."  But he says that the chance to import natural gas quickly was "such an obvious and alluring business opportunity" that he felt compelled to get Energy Bridge into operation.  He’s betting that new LNG-export facilities expected to come online next year in Egypt, Trinidad and Nigeria will create enough extra supply to provide him with ample LNG.

 . . .

He says he acquired Energy Bridge as a challenge.  "I don’t gain much pleasure from personal expenditure or recognition," he wrote in an e-mail.  "And any gains I make from the enterprise will accrue to charity.  But I enjoy problem solving and I want to keep my brain active to forestall (or at least diminish) atrophy."

 

For the full story, see:  

Russell Gold.   "Liquid Assets: A Billionaire Takes a Gamble To Fix Natural-Gas Shortage; Mr. Kaiser Plans to Shift Processing Onto Tankers, Avoiding Terrorism Fears; A Deal Sealed With Sweets."  The Wall Street Journal  (Fri., July 23, 2004):   A1 & A6.

(Note: ellipses added.)

Precariousness: In France it is Sought and it is Feared

Coombs and VanderHam on the April 3, 2006 extreme ski run, in which they both died.  Source of caption information, and of photo:  online version of the first NYT article cited below.

 

Some seem to seek risk:

(p. A1)  ”La Grave goes from tranquil to frightening and mad, and it’s so exhilarating to be in those moods,” Mrs. Coombs said in a telephone interview last week.  Her husband, she said, ”never found anything more perfect.”

Last month, Mr. Coombs slipped off a cliff and fell 490 feet to his death.  He was 48. He was trying to rescue Chad VanderHam, his 31-year-old protégé and skiing partner from the United States.  Mr. VanderHam had gone over the same cliff moments earlier.  He also died.

Their accident, during a recreational outing, has focused attention on extreme skiing and on this remote destination, high in the Alps about 50 miles east of Grenoble.

For the full story, see:

NATHANIEL VINTON.  "Skiing Beyond Safety’s Edge Once Too Often."  The New York Times (Wednesday, May 17, 2006):   A1 & C23.

 

Others seem to fear risk:

PARIS, April 8 – Standing amid the chaos of the protests here this week, Omar Sylla, 22, tried to explain why the French are so angry about what seems to many people like such a small thing: the French government’s attempt to loosen labor laws a bit by allowing employers the right to fire young workers without cause during a trial period on the job.

Even after President Jacques Chirac promised to shorten the period to one year from two, the protests continued, and French students and unions have vowed to keep demonstrating until the law is repealed.

”We need less precariousness, not more,” said Mr. Sylla, the son of immigrants from Ivory Coast, who still lives with his parents in a government-subsidized apartment in a working-class suburb of Paris.

Mr. Sylla said he had searched for years for a job before finding work about a month ago as a baggage handler at Charles de Gaulle International Airport.  Even then, he said, he only got the job because his sister works at the airport and pulled strings on his behalf.

For the full story, see:

CRAIG S. SMITH. "French Unrest Reflects Old Faith in Quasi-Socialist Ideals." The New York Times, Section 1  (Sunday, April 9, 2006):   8.

 

Economists have long puzzled at how the same person can both buy insurance and gamble in a casino.  The first seems an act of risk-aversion, and the second of risk-seeking.  (Milton Friedman, and others, have tried to explain the paradox.)

But I am puzzled by something else.  When risks are taken, why are they so often taken in arenas such as rioting in the streets, or extreme skiing, where they achieve no noble purpose?  Whatever risks one is going to take, why not take them in the arena of innovation and entrepreneurship, where the potential benefits to the innovator and to human progress, are huge?