Any public policy discussion of a stimulus must understand how offshoring will shape the outcomes of public investments.
By Ron Hira
Assistant Professor of Public Policy, Rochester Institute of Technology
In introducing Bill Richardson as his Administration's Commerce Secretary, President-elect Barack Obama declared that Richardson would lead the charge to "create millions of new jobs that can never be outsourced." This kind of rhetoric shouldn't surprise anyone since Mr. Obama criticized the practice of companies moving jobs offshore often during the campaign and used it to his political advantage.
Alas, the reality is that Mr. Obama has not backed up his rhetoric with a plan to create and retain jobs here. His proposals on tax deferment and a 1% tax credit for so-called "Patriot Employers" would have an insignificant impact on what is a major structural shift in how the economy operates. And early indications are that Mr. Obama is not going to make either of these proposals, which would face fierce political opposition from companies, a priority. There are no other specific proposals from Mr. Obama that address outsourcing, and it's doubtful that any are forthcoming. His economic advisors are either involved in shipping jobs overseas as CEOs or have supported the practice in policy, think tank or academic positions.
America is about to embark on a massive spending spree to stimulate the flagging economy. The rationale for the stimulus is to soak up the idle American workers to get the economy going. Congressional leaders have pointed out that this spending won't simply be a make-work jobs program, instead it will be a sophisticated package to create jobs now and make the economy more productive. They plan on accomplishing this by spending on infrastructure and technologies -- clean energy, broadband, etc. But absent in all of the frenzy of "the greatest financial crisis since the Great Depression" and massive bailouts, is any discussion about how to ensure that taxpayer spending creates jobs here rather than offshore. How do we ensure these jobs are geographically sticky and do not leak out?
The very recent past provides us some answers. The issue of offshoring wasn't raised by a single elected official or the press during the "debate" to spend $700 billion to bailout financial firms that gambled and lost. There is some irony here. Wall Street has played three critical roles in the offshoring saga. First, it has hammered any company that doesn't aggressively replace its US workforce with low-cost labor overseas or here with imported guestworkers. Second, the financial services sector itself is offshoring massive amounts of work by building up huge facilities and headcount in low-cost countries and farming out work to vendors. In fact, US financial services companies are the largest customers for the offshore outsourcing industry. The offshore outsourcing firms are licking their chops at the bailout as they expect it, coupled with cost cutting measures, will increase their business. Third, Wall Street has played a key role in shaping the public policy discussion on offshoring by funding junk science studies through their various think tanks and academics. And of course their influence goes much deeper through their campaign contributions and appointments to key government posts.
Yet only one member of the media, Patrick Thibodeau of technology trade magazine ComputerWorld, actually asked the question of whether Congress would require some quid pro quo on offshoring from the industry if they were gifted hundreds of billions of dollars of US taxpayer money. Certainly it wasn't raised by either presidential candidate. Congress failed to enact any quid pro quo and the results are already very apparent. Major banks getting billions in bailouts are concurrently signing massive contracts with offshore outsourcing vendors to move more of their operations to low-cost countries. Citigroup, which has received unprecedented amounts of taxpayer dollars, recently signed a $2.5 billion contract with Tata Consultancy Services to offshore more of its work. Robert Rubin, uber-advisor to the Obama Administration, is essentially the head of Citigroup. And his protégés permeate official positions within the Administration.
So, why would anyone think that a stimulus package in "green technology" would have a different result? Some argue that these jobs will be geographically stickier because these are new, so-called sunrise, industries, and that much of the investment is in innovation. And the conventional wisdom is that innovation is something that must be done in the US. But these folks are fooling themselves because they don't understand that the nature of the US innovation system has morphed. These major structural and institutional changes include shifts in employment relations and the rise of the globally integrated enterprise; the ability of low-cost countries like India and China to attract R&D and innovation work and facilities; the internationalization of U.S. universities; and the uncertainty of the U.S. science and engineering labor market.
I will focus on the first because it is the most important and least understood. During the past two decades there has been a significant shift in the employment relations between U.S. employers and their American scientists and engineers. Corporate decisions are increasingly being made with little regard to how it affects workers. IBM's human resource policies demonstrate how radically these practices have changed over the past 20 years. As recently as 1992 IBM never laid off an employee, but since 2002 it has policies in place that force its U.S. workers to train foreign replacements as a condition of severance and unemployment insurance. These practices have become quite widespread in the American technology sector. An American software engineer working at a major semiconductor company put it this way:
"The basic plan where I worked was to hire H-1Bs [foreign workers in the United States on temporary work permits], train them, and use them as a way to outsource and transfer technology to China. I trained my replacement who was here on an H-1B visa from India." When asked if he would tell his story publicly, he demurred saying, "The company I worked for required I sign a several page agreement stating I would not discuss company information. My human resources representative and manager both made it clear that the company has never lost any challenge and has gone out of its way to destroy the lives of the people who have caused issues. They tell everybody this, not just me. They would brag about cases."
At the same time that this American engineer was training his foreign replacement, the CEO of his company was publicly complaining to Washington policy makers about a shortage of U.S. engineers. This isn't an isolated incident. We see this same story playing out right now in New London, CT, where Pfizer is replacing its American information technology contractors with foreign workers through offshore outsourcing vendors, forcing the US workers to train their replacements.
Corporate leaders themselves have pointed out their new strategies. In a 2006 article in Foreign Affairs magazine, IBM CEO Sam Palmisano gave the eulogy for the multinational corporation, and introduced in its place the globally integrated enterprise. Palmisano said, "Many parties to the globalization debate mistakenly project into the future a picture of corporations that is unchanged from that of today or yesterday.... But businesses are changing in fundamental ways -- structurally, operationally, culturally -- in response to the imperatives of globalization and new technology." The multinational corporation model in which firms replicated their organization in each country where they sold goods, is now giving way to the globally integrated enterprise model, where firms geographically separate their production from the markets in which they sell.
The fruits of technological innovation, whether funded by US public investments in R&D or procurement or tax breaks, are taken to the market by private firms. Since these innovations are often embodied in new tools and technologies, it should be no surprise that these firms will take the latest tools and technologies to the lowest-cost labor. The result is that the downstream benefits of the development and production jobs generated by the innovations will leak out rapidly to countries with lower labor costs and the technological capacity (human and infrastructure) to absorb those jobs.
Any public policy discussion of a stimulus must understand how offshoring will shape the outcomes of public investments. We need some innovative thinking about how to shape policies that generate geographically sticky benefits and jobs.
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Ron Hira is an assistant professor of public policy at Rochester Institute of Technology and author of Outsourcing America (AMACOM 2008). He's testified before Congress multiple times on offshoring.
Thanks for giving the uses of outsourcing....
Posted by: SBL at December 19, 2008 7:18 AMRegards,
SBL