Outsourcing

20 February 2004; Updates: 6 April 2004, 7 April 2004, 26 April 2004; Re-written on 13 January 2005.

Take a close look at the comments section of this blog post by Brad DeLong way back in February of 2004. The main post is just a link to an article in the magazine Wired on the phenomenon of software outsourcing, without any commentary (except for the lead-off statement that it is an excellent article). Evidently, so many people (more than 100 at last count!) went to the article in Wired, came back to DeLong's blog, and decided to rant!

As many pundits, bloggers and editorialists have pointed out, outsourcing is essentially an economic issue, in which there are winners and there are losers. What we expect from the society (the Government, the Big Brother, the Party) is to choose those policies that lead to more winners than losers.

The losers in the present wave of outsourcing, clearly, are not liking it. Fair enough. However, two recurring themes in the comments section are worth pointing out.

The first is that many feel that their Government must intervene. Some have suggested making it more difficult for firms to outsource; some others have gone even further by strongly advocating an outright ban on outsourcing. From an American point of view, a ban is probably a bad deal, since it would hamper their companies, while their competitors in other countries would not face such hurdles: think Oracle vs. SAP. What would you rather want: an Oracle which survives with outsourcing, or an Oracle which is gobbled up by SAP?

The second interesting thread is that many commenters have asked for things which they would oppose (quite strongly, I would presume) if a different part of the society is affected by a similar, largely economic, phenomenon. Take the case of outsourcing of manufacturing, a wave that hit the US in the seventies and eighties and led to sharp job losses in many sectors of the American economy. Clearly, not many people (certainly not those in the software industry) cared much for the people who lost out in that wave. As one of the ommenters pointed out, the winners -- and there were so many of them -- were very happy to be consumers of high-quality and low-cost cars and other gizmos from the East Asian nations (notably, Japan).

If only the US were a welfare state (like much of Europe), the pain from outsourcing would not have been so bad and so sharp. The largely white collar software people are ruing now.

The sharp rightward turn of the US Government has almost become, since the recent elections, a near U-turn that could take that country all the way back to the early part of the twentieth century, an era that has been termed the Gilded Age by Paul Krugman, a Princeton economist and NY Times columnist. This near U-turn implies two things: (a) issues that the rich want (and they want outsourcing) will be preferred over what the poor (or the 'relatively less well off) want, and (b) welfare protections that would mitigate the hardships will be further dented, making life more difficult for the less well off.

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Some updates from April 2004:

1. Stephen Cohen and Brad DeLong have "a first rough cut on what we think about outsourcing" . In particular, they say that the political debate will die soon (within a year or so), but the economic "problem", though small right at this moment, will continue to grow. A time will come when the US will have to deal with the big Outsourcing Problem; according to them, this eventuality is is still sometime away. In other words, there is time for the US to "...build the social safety net, the education and retraining programs...". As usual, don't forget to check out the comments section. It too contains some interesting links.

2. Brad DeLong plays class warfare! In this post , he presents a cute little economic model that shows (admittedly in a limited way) why he is right in asserting in an earlier post that "outsourcing [is] more benign if it put downward pressure on the incomes of the yuppie rich than if it put downward pressure on the incomes of the working class". As usual, don't forget to read the comments.

3. Brink Lindsey of Cato Institute has an article on outsourcing. Hat tip, once again, to Brad DeLong.