Presentation by Rep' Jim Kolbe

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Presentation by Rep. Jim Kolbe

• ENTR 573 -001
• Outsourcing of Professional Activities Analysis
  of Strategic, Technical, Organizational, and
  Economic Aspects
• Instructor  Amar Gupta, Ph.D          

March 21st, 2005
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Every generation seems to have a new job-killing
monster.

• In the 1960s, the new job-killing monster was
  automation
• Rapidly replacing human labor experts feared
  that there would be few jobs for humans to
  perform.
• In the 1980s, it was Japan Inc.
• Certain economist feared that its economy was so
  disciplined and invulnerable that it would either
  out-compete us or buy us out or both
  destroying American workers opportunity for a
  rewarding blue-collar career.
• Japan today is working its way out of nearly a
  decade of slow to no growth with enormous
  structural debt.
• And then theres todays job-killer outsourcing.

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Outsourcing is the new bogeyman, this
generations job-killer.

• It has become one of the hottest policy issues
  and, as a result has inspired new protectionist
  proposals and political grandstanding.
• Witness the Exporting America series on CNNs
  Lou Dobbs Tonight,
• one-sided reporting and relentless demands for
  restraints on free trade and immigration.

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Congressionally Driven Protectionist Measures

• The USA Jobs Protection Act and The Jobs for
  America Act
• Legislation introduced in the 108th Congress
• Aiming to stop what Senator John Kerry calls the
  Benedict Arnolds who send American jobs
  overseas.
• These efforts to erect new protectionist barriers
  are part of a long political tradition of
  attempting to address complex challenges with
  simple solutions.

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So What Nation Has Been The Giant Sucking Sound?

• Generally, I would argue that the jobs have not
  to China or Mexico but to a nation called
  Productivity.
• Over the past three years, the number of
  manufacturing sector jobs in the United States
  has fallen sharply.
• Manufacturing sector employment dropped from 17.3
  million in the third quarter of 2000 to 14.6
  million in the third quarter of 2003.
• Productivity improvement has been the principal
  cause of the decline in manufacturing employment.
  
• Nearly two-thirds of the jobs lost did not 'go'
  anywhere they simply disappeared as more
  efficient production processes reduced the labor
  needed to produce a given amount of goods.

• DAILY FINANCIAL MARKET COMMENT 11/25/03 Goldman
  Sachs Economics

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America has become more productive.

• Since 1979 the productivity of manufacturing
  workers has grown at an average rate of 3.3,
• This is significantly faster than the 2
  productivity growth achieved in the economy
  overall (CBO).
• Output has doubled from 800 billion to 1.5
  trillion in the past two decades.

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Examples of Productivity Impact

• A quarter of a century ago it took General Motors
  454,000 workers to build 5 million cars and
  trucks.
• Today it takes 118,000 workers to make the same
  number of vehicles.
• In 1970, the telecommunications industry employed
  420,000 switchboard operators when Americans made
  9.8 billion long-distance calls.
• Today, 78,000 operators handle 98 billion calls.

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Productivity Increases Have Contributed To
Structural Change
70
Services
60
50
40
of Total Employment
30
Manufacturing
20
10
Agriculture
0
1870
2000
1880
1890
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
Source IBM
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The US Is Not Alone

• Japan, Brazil and the European Union have also
  lost manufacturing jobs like the US.
• A study by Alliance Capital Management found that
  rising productivity is driving down manufacturing
  employment worldwide.
• The typical country lost 11 percent of its
  factory jobs
• Some countries suffered even more than we did.

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Not All Job Losses Due To More Productivity

• Over the last 3 years, about 1 million of the 2.7
  million jobs lost have been relocated to
  countries with lower labor costs.
• 300,000-500,000 represented off-shoring by
  multinational firms to their own subsidiaries.
• The remainder was contracted out to unaffiliated
  foreign producers.

DAILY FINANCIAL MARKET COMMENT 11/25/03 Goldman
Sachs Economics
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While outsourcing is a real occurrence, it is
important to overlay some context.

• Lets think about the following five points

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Point 1

• More Americans are working today than at any time
  in history.

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• US Government household survey shows more than
  139 million Americans are working today -- the
  highest number ever recorded.
• Unemployment rate is holding steady at a
  relatively low 5.5 percent, even as our
  population increases.

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Point 2

• Outsourcing Amounts To A Small Fraction of Total
  Employment

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• What is alarming for many people are the
  projections that inflate job losses to
  frightening levels.
• In 2003, Forrester Research made the now-famous
  estimate that 3.3 million white-collar jobs could
  go overseas by 2015.
• Yet under any estimate, it amounts to a small
  fraction of nations total employment.

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Put these numbers into a bigger economic picture.

• Begin with the overall size of our labor force,
  more than 138 million jobs.
• Then consider that the American economy churns
  nearly 30 million jobs each year.
• Then theres the fact that we live in a country
  that created 22 million net new jobs in the last
  decade and can expect a similar number in the
  current decade.

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Point 3

• Lets Not Overlook The Value Of In-Sourcing

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A single dimensional focus on outsourcing ignores
the value of in-sourcing.

• What is in-sourcing?
• Foreign direct investment (FDI) that leads to
  foreign companies sourcing production in the US
  for domestic consumption export.
• US exports of services
• Foreign companies or consumers choosing to source
  consumption or value adding activity in the US
  economy.

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FDI in the US doubled in 2003.

• It now exceeds 487 billion and supports 5.4
  million jobs in the United States.
• To illustrate, lets look at how foreign companies
  generate value in the US economy through
  in-sourcing.

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U.S. subsidiaries.

• Support an annual payroll of 307 billion and
  pay, on average, 31 more than all U.S.
  companies.
• Heavily invest in the American manufacturing
  sector.
• 34 of the jobs at U.S. subsidiaries are in
  manufacturing -- more than double the proportion
  of manufacturing at all U.S. companies.
• Account for over 20 of all U.S. exports.

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Magnitude of US services trade is
under-appreciated.

• US Service Exports 338 billion in 2004.
• Our services exports are more than 40 of the
  value of our goods exports, and are growing
  rapidly.
• When it comes to trade in services, foreign
  in-sourcing beats outsourcing.
• The US ran a healthy surplus of 48.5 billion in
  services trade last year, partially offsetting
  our goods trade deficit.

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Point 4

• Americas knowledge workers continue to do well.

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• The unemployment rate among Americans with a
  four-year college degree is just 2.9.
• The number of people in managerial and
  professional positions has risen by 1.5 million
  since 2000 to more than 47 million.

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Lets Remember.

• The U.S. employs more than 10 million Americans
  in technology jobs (and millions more in jobs
  requiring the use of technology).
• India employs 650,000, about 6 of the U.S.
  industry.
• Many white-collar job losses in high-tech
  industries in the past three years resulted from
  the unsustainable high-tech bubble not
  outsourcing.

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Point 5

• By 2010, we will not have a shortage of jobs, but
  rather a shortage of workers.

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US Department of Labor Projects

• The U.S. labor pool will shrink substantially by
  2010.
• The number of jobs exceeding the number of
  available workers will be an estimated 3.5
  million.

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Several Tech Employment Demands Are Increasing by
2012
Bureau of Labor Statistics projects

• Network systems and data communications analysts
  will increase by 57,
• Computer software engineers by 46, and
• Database administrators by 44.

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Outsourcing, Trade, The Global Economy
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Former Treasury Secretary Robert Rubin
During the recent Presidential campaign, he was
asked the following question by an ABC
interviewer

• One of the hottest issues in the presidential
  campaign this year is the issue of outsourcing.
  Senator Kerry has said that he would take away
  the tax break that allows companies to not pay
  taxes as long as they keep the income overseas.
  Will that stop the outsourcing problem?

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His answer was

• No, I think that outsourcing is part of a much
  larger issue. ... I don't think outsourcing's a
  phenomenon unto itself,
• I think outsourcing is part of a much larger
  phenomenon, and the much larger phenomenon is
  trade liberalization,
• And I think trade liberalization has been good
  for our economy and I think trade liberalization
  will continue to be good for our economy.

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It is critical that America remain open to the
worldwide economy.

• While we import more than any other nation, we
  sell more goods and services abroad than any
  other nation.
• U.S. exports will exceed 1 trillion this year.

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• Trade as a share of US GDP has grown dramatically
  since the 1960s.
• At that time, imports exports as a percentage
  of GDP was in the neighborhood of 10.

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US Benefits From The Global Economy

• Trade has accounted for more than one-quarter of
  domestic economic growth.
• In the past decade, under trade agreements such
  as NAFTA and GATT, 13 million new jobs have been
  created.
• Trade agreements have increased the standard of
  living for a family of four by as much as 2,000
  through the combined effects of higher wages and
  lower consumer prices.

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Less visible benefits from the global economy
include..

• The 41 million foreign visitors bring an
  estimated 82 billion to our communities and one
  of our most vital industries, travel and tourism.
  
• The more than 500,000 foreign students who attend
  classes at colleges and universities across the
  nation, paying tuitions and infusing our higher
  education system with billions of dollars per
  year

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Alan Greenspans View of Protectionism

• We erect walls to foreign trade and even
  discourage job-displacing innovation.
• But time and again through our history, we have
  discovered that merely to preserve the
  comfortable features of the present, rather than
  reaching for new levels of prosperity, is a sure
  path to stagnation.

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We Should Feel Fortunate That US Economy Is
Performing Well

• Lets do a quick review of key indicators
• GDP Growth Rates
• Business Activity
• Deficit Projections
• Inflation

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Real GDP Growth and Blue Chip Outlook
Percent
BLUE CHIP OUTLOOK
2000
2001
2002
2003
2004
2005
Source Bureau of Economic Analysis and Blue
Chip Economic Indicators
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Stock Market Is ReboundingDow-Jones Industrial
Average
Index
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Despite These Good Indicators Action Is Needed
Some Disturbing Trends

• Of manufacturing workers displaced by trade in
  1979-1999,
• Only 36 found equal or better jobs,
• 31 were not fully re-employed,
• 25 saw pay cuts of 30 or more.
• Current job resurgence is not as great as those
  in prior post recession periods.

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Job Growth During Economic Recoveries
8
Average of Previous Cycles
7
Change
6
5
4
Early 1990s
3
2
1
0
Current
-1
-12
-9
-6
-3
3
6
9
12
15
18
21
24
27
30
Trough
Months
Source BLS, Federal Reserve New York 2003
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The US Needs To Adopt The Following Effort
Priorities
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Effort Priority 1

• Remove domestic impediments to job creation.

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• Instead of making it more expensive to source
  work overseas, policymakers should be making it
  less expensive to create and keep jobs here.
• One study found that American businesses are at
  an 18 competitive disadvantage as compared to
  our nine largest trading partnersbased on cost
  factors such as

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• Double-digit price increases for health insurance
  and other employee benefits.
• Spiraling costs for natural gas and uncertainty
  about future energy supplies.
• The highest corporate tax rates among our major
  competitors.
• High legal and regulatory costs.

Manufacturers Alliance Study
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Effort Priority 2

• Provide greater and more effective trade
  adjustment assistance

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• Growing recognition that workers displaced by
  structural changes in economy need training and
  assistance.
• Trade Adjustment Assistance (TAA) provides former
  manufacturing workers with income support, job
  training and health benefits.
• 150 different programs supplying training alone
  and expenditures on these programs are
  significant.

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Effort Priority 3

• Spur Innovation and Basic Research.

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• The American economy has always performed
  extra-ordinarily well following periods of
  economic transition because of our leadership in
  innovation.
• Public investment in RD has helped spur nearly
  every major technological innovation developed in
  the past half century
• from transistors and semiconductors, to aviation
  design, to the Internet and the human genome.
• Policy makers should evaluate ways to encourage
  basic research, particularly because of the
  following

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Federal RD Funding Focused on Life Sciences
Broad Field of SE
Life Sciences
20,000
15,000
FY00 million
10,000
Engineering
5,000
Physical Sciences
Enviro Sciences
Other Sciences
0
Sources National Science Foundation Rand
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Effort Priority 4

• Reform and expand education and training.

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• As some jobs are sourced worldwide, we must make
  sure that US workers are positioned with the
  right education, training, and retraining.
• The business community, which spends more than
  60 billion per year on training, must be invited
  to play an integral part in government-funded job
  training programs at the local, state and federal
  levels.

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Effort Priority 5

• Open Markets and Level the Playing Field.

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• We have the most open markets in the world. We
  must continue to convince other nations to open
  theirs.
• We should negotiate more Free Trade Agreements.
  The U.S. is far behind in this regard.
• The European Union has 32 free trade agreements
  in force we have less than a dozen.
• On average U.S. tariffs amount to less than 3 on
  imported products versus our exports, which
  encounter tariffs in the 7, 8, 10, 12 and higher
  in some countries.

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Effort Priority 6

• Reform our immigration rules.

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• With a shrinking pool of available workers and
  impending workers shortages, legal immigration
  should be expanded.
• The overwhelming number of undocumented
  immigrants are coming to find a job and work hard
  not commit crimes.
• According to Border Patrol apprehension
  statistics, 1 of people apprehended are
  criminals.

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A Temporary Worker Program Would Provide A Number
of Benefits

• A temporary worker program would shift 99 of the
  illegal crossings from anywhere along the 6,000
  mile land borders to a few Ports of Entry where
  we can manage it.
• Directorate of Border and Transportation Security
  can focus on the flow of criminals and terrorists
  drastically improving the security of our nation.

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Effort Priority 7

• Modernize health and retirement programs,
  particularly federal entitlement programs.

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Without reform, the security of Americans will
continue to erode.

• Our health care delivery system must be
  modernized.
• Emphasis on incentives and assistance for
  individuals to purchase their own coverage and
  carry it with them throughout their working
  lives.
• Public and private pension reform is essential
  due to demographic shifts.
• The price of inaction will be devastating to the
  U.S. economy and the social fabric of our nation.

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Let me close with a key concept

• Joseph Schumpeter, the originator of the idea
  Creative Destruction, once noted,
• Capitalism, then, is by nature a form or method
  of economic change and not only never is but
  never can be stationary.
• Outsourcing has to be looked against the backdrop
  of the larger job market in the US economy.
• America typically loses 7-8 of its jobs every
  year, but job creation usually adds 8 of total
  employment.
• Source Global Insight, October 2003 U.S. Dept.
  of Labor

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• As we embrace capitalism, we need to make sure
  that all parts of our society are able to
  participate in it.
• That means that politicians, corporate CEOS
  managers, as well as civil society actors must
  resolve to get the incentives right and help
  provide the tools for all workers to remain
  active and socially mobile.
• Both political leadership corporate social
  responsibility are critical.

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Thank You

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