I wrote version 1.0 of this article on November 26, 2006. 16 months later, it is time for version 2.0 to provide more historical context on how misplaced the hype over some fashionable issues eventually turns out to be, and why what once appeared to be a harbinger of doom is now all but forgotten.
In the 2001-03 economic downturn, the aftermath of the technology bust resulted in hundreds of thousands of software engineers and assorted high-tech workers losing their jobs. A jittery public was vulnerable to influence from isolationist politicians, with the likes of Lou Dobbs and Pat Buchanan fanning the flames in the media. As a result, the simple business practice of moving certain components of daily operations to a lower-cost location, if only to keep up with competitors already doing the same, became a dirty word - 'outsourcing'.
The cover story of Wired Magazine's February 2004 issue was on the outsourcing of software jobs to India. Within the article, a core theme was the supposedly tremendous hardships that white-collar Americans were about to experience due to a 'giant sucking sound' of jobs going to India. In the same month, then Presidential candidate John Kerry screamed about the practicies of "Benedict Arnold CEOs" who outsource American jobs to India, hoping to gain the support of isolationists and the economically ignorant. Elsewhere, very uncharitable things were said by leftists about brown-skinned Indians, due to their rapid adoption of capitalism and globalization at the expense of the leftist plantation where Indians were required to symbolize Gandhian non-violence, zen spirituality, yoga, curries, and the glorification of poverty.
Let's call February 2004 as time when the bubble of 'outsourcing' fears reached a fevered peak. Now, what happens whenever a bubble of psychology reaches a peak?
A quick glance at a few economic indicators from the Bureau of Labor Statistics in the 4 years since then reveals the following :
So 7.5 million jobs were created in this short time, the unemployment rate is lower than it has been for 33 of the last 37 years, and wages have risen while real GDP has grown at a 3.2% clip. There is thus no evidence of job losses, wage erosion, or underemployment over this period. Take that, Lou Dobbs, Pat Buchanan, John Kerry, Dennis Kucinich, and other assorted demagogues, who have no ability whatsoever to truly grasp the trends that shape our world.
India, in the meantime, has benefited greatly as well. GDP growth has averaged 8% a year over this same period, pulling 100 million people out of poverty. Political ties with the US have strengthened in a manner unlike any previous episode in the last 50 years. The faster these ties broaden, the better the world will become. A prosperous India is a critical component to the US achieving favorable outcomes in both the War on Terror and with China, as seen from where India resides on this particular map. Anti-Americans become apoplectic when they learn that India is the most pro-US country in the world.
What does the future of outsourcing hold? Is there still a risk of jobs vanishing from the US at a rate faster than they can be produced, as pessimists still maintain? Unlikely, even though Internet backbone bandwidth has quintupled in the last 4 years, and many more people in India have PCs and Broadband connections today than in early 2004. This is because aggregate demand growth has saturated even India's vast labor pool. Salaries in India have been rising at over 12% a year due to labor shortages, causing their cost advantage to erode. The Wired article from 2004 stated that the average salary of an Indian programmer was $8000 a year; today, it is closer to $15,000 a year in US dollars. India itself has started outsourcing to Bangladesh and Eastern Europe, which are much smaller labor pools and will also saturate quickly. Indeed, the trends favor more job creation in America and India.
Now that we are in another recession, phony issues like this one emerge again. Democrats are still speaking in protectionist tones, bashing NAFTA and opposing free-trade agreements with Columbia. But other than a few pessimists, socialists, and racists, it is unlikely to gain much traction, as Americans have seen that the benefits have outweighed the costs by a handsome margin. BusinessWeek also had an article from 4/24/07, six months after version 1.0 of this article was post, on how misrepresented the outsourcing issue is.
Thus, the bubble of fashionable pessimism has moved to the next topic, which happens to be the decline of the dollar. This, too, will turn out to be a passing concern that the economy adjusts to after a brief period of pain. Among other things, a competitively priced dollar has led to Europe outsourcing jobs to the US, and is also working towards reducing US dependence on oil. A debunking of the 'weak dollar' fad will be posted on another day.