March 3, 2004

When Economist Ray Fair wrote his book on using economic statistics to predict elections, he used the growth of per capita GDP instead of the growth of jobs to measure his economy.  If this election is much closer than Fairís model suggests, as most political pundits believe, then Dr. Fair may need to rethink that assumption. 

The economy is expanding but where are the jobs?  If they are not here, could they be somewhere else?

That latter thought has led to the conclusion that the American jobs that a U.S. recovery normally generates are becoming jobs in China, India, Vietnam or somewhere else.  The sales of our enterprises are growing but their jobs are shrinking. 

The latest wave of technology in communication and the internet has dramatically altered how resources are managed.  Global conferences can be conducted instantaneously from everyoneís normal work stations.  Goods and supplies can be plotted from the time they leave the factory until they arrive at their destination. 

Iím on the board of a restaurant company that knows what is being served and who is serving it at what stations within fifteen minutes whether the restaurant is in the town of the headquarters or in Iceland.  This information flow allows better deployment of workers, better knowledge of shifting consumer tastes, better inventory management, better monitoring of problems and role models. 

In short, companies can allocate resources better than ever before. 

Furthermore, some of the technology shifts burdens from employees to customers.  The desire to check into an airplane flight on line may be to avoid an airport wait, but it also reduces the number of agents needed to process each flight. 

As with all technological waves, we will concentrate on exploiting this oneís advantages before vigorously seeking the next big idea.  Therefore, the surge in productivity eventually will diminish.  In the meantime, even an economy growing 4 percent will not create jobs when productivity also is jumping 4 percent. 

Most economists believe the poor job picture is the result of this use of technology.  However, enough of those stories exist about programmers and diagnosticians being hired in India and manufacturing being outsourced to China and Vietnam that a backlash against outsourcing of jobs is growing. 

The argument is that if we can prevent this outsourcing, we would have more jobs and more purchasing power to support our domestic economy.  Of course, this is wrong, but it is appealing.

Moreover, it is only wrong in the long run. 

Because jobs are not being created, wages are being held down for those who are holding positions.  Before considering reduced tax liabilities, real earnings are flat from a year ago.  Once the tax liability reductions are over after the first half of this year, the household sector will not have the resources to maintain current spending growth.  Unless something else intervenes to create jobs, e.g. exports or capital spending, this expansion could be at risk. 

Stop the outflow of jobs, and this risk of slumping consumer activity will go away according to the argument. 

In the long run, there is a strong positive relationship between the productivity of workers and their wages.  The next boom will push up the wages of those who design these information processes, secure them, and keep them flowing.  It also will reward the managers who create more value for their companies by using these instruments.  Thus, the disconnect between wages and productivity will vanish. 

Moreover, if we stopped the outsourcing, what will Europe, Asia and South America do?  It is much better for our economy to outsource a portion of a company to remain competitive rather than have the entire company blown away by cheaper imports. 

Indeed, isnít the issue that there are talented people in India, China, and elsewhere who can create value at a much lower cost in some areas than we can.  Are we so arrogant that we should avoid these willing workers who seek their own advancement?  As their economies grow, they will buy more of our goods and services.  There is virtually no way that Chinaís production can expand as rapidly as its tastes once their people get jobs. 

So the outsourcing must continue.  To do otherwise is to consign American producers to a competitive disadvantage against the remainder of the world.  Our great value is our flexibility in adjusting to changing conditions.  The younger American generation already is doing so.

To be sure, the adjustments create pain, but failure to adjust will create even greater difficulties over time.  Instead of stopping the outsourcing, let us provide the retraining and labor information that will ease the burdens of those caught in this adjustment.


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