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Outsourcing, Costly for US Workers, an Issue in Election Year - 2004-02-07


A tame-sounding term "outsourcing" has become a red-hot election-year buzzword. To outsource is to lay off American workers earning salaries and fringe benefits and hire different workers, usually in other countries, for a fraction of the pay and no extra benefits. Dozens of large U.S. corporations have cut their labor costs by as much as half by moving functions like accounting and telephone customer service to low-cost centers overseas.

To slash labor costs, U.S. companies are moving not just assembly-line tasks but also, increasingly, service and back-office jobs like accounting, and high-tech functions like computer programming, to low-wage worker pools in places like China, India, and Indonesia. So long as the overseas staff speaks good English and does the job, the reasoning goes, U.S. customers don't much care whether the people who take their telephoned catalog orders are sitting in Boston or Bangkok or Bombay.

But the crushing effect of offshoring - as outsourcing is sometimes called - on those who've lost good-paying jobs is obvious. As The Economist magazine put it in an article last year: "America's pain, India's gain." Newsweek magazine asked, "Is Your Job Next?"

Little wonder offshoring has become a red-meat issue for angry trade unionists and their supporters. After his victory in the Iowa caucuses last month, Democratic presidential candidate John Kerry railed against federal tax incentives to companies that outsource jobs. "We are not going to give one benefit or one reward to any Benedict Arnold company or chief executive officer who take jobs and money overseas and stick you with the bill. That's over," he said. (The name of Benedict Arnold, a general in the American war for independence who switched his allegiance to the British, is a common epithet meaning traitor.)

Addressing a crowd of industrial union members in Washington recently, Tom Daschle, the Democratic leader in the U.S. Senate, blamed outsourcing for what's been called the jobless recovery from a recession of two years ago. During that time the U.S. stock market has rebounded, but two and one-half million manufacturing jobs have disappeared.

"George Bush says the economy is creating jobs. But let me tell ya," said Tom Daschle. "China is one long commute. And let me tell ya, I'm tired of watching jobs shift overseas."

But it's not just disgruntled Democrats who are worked up. In the generally conservative Farm Belt state of Indiana, Republican senator Jeffrey Drozda championed a bill that passed, 39 to 10, recently, that would prohibit the outsourcing of state contracts to overseas firms. Instead, Senator Drozda says, unemployed or under-employed Indianans should get the jobs.

"It does state in the bill that all work under the contract must be performed in the United States," he said. "And at least eight other states are looking at doing the very same thing because this is what I deem a national crisis."

The offshoring issue smoldered without exploding for years, Senator Drozda says, because it was always assumed blue-collar workers thrown out of work could retrain for sophisticated, highly paid technical and service jobs. Now many of those jobs are moving to India and Pakistan and China as well.

Just ask Laird Carmichael. He's executive vice president of a company called International Outsourcing Services. It has headquarters in Indiana, runs a large assembly operation on the Mexican border in Texas, and spreads $250 million in manufacturing and data-processing work each year to centers in Mexico, China, France, and Slovakia. Mr. Carmichael describes himself as a red-blooded American whose customers are doing what comes naturally in a capitalist system - outsourcing in order to keep costs down - however and wherever they can.

"I've watched companies that I've done work for in contract manufacturing that, had they not done some portion of manufacturing outsourcing to a lower wage base, would have gone out of business, given their competitors," said Mr. Carmichael. "All of this is coming down to providing businesses and consumers with lower-priced products. And I'm an optimist. I think people in the United States are continuing to change and evolve. Despite all the rhetoric you hear, nothing's black and white, and people are evolving into higher-paid jobs."

Economist Marvin Kosters at the American Enterprise Institute think tank agrees. When a company like Delta Air Lines can save $15 million a year by moving its basic reservations operation to India and the Philippines, he says, the result is a more efficient U.S. economy with greater output, lower prices, and satisfied customers. He says resourceful Americans will develop new kinds of jobs to replace even high-skills positions that are moving overseas.

"Ten years ago, we would never have dreamed that we would have so many people working in information technology, right? Ten years from now, we don't exactly know where the job expansion is going to occur," said Mr. Kosters.

But Phillip Bond, the U.S. undersecretary of Commerce for technology, ventures a guess. He argues that innovation in emerging fields like biotech and nanotechnology, fueled by double-digit increases in spending on research and development, is what he calls the seed corn for the future that will more than offset the loss of jobs to offshoring.

"We just need to make sure we're ready to get the breakthroughs out of the university and federal labs as fast as possible, commercialize them, and put our people to work," said Mr. Bond. "The model for the United States is pretty simple: We want to be the headquarters of innovation for the world. And if you go to Armonk, New York, to the headquarters of IBM; or Redmond, Washington, to the headquarters of Microsoft; or down in Austin, Texas, at Dell Computer, those headquarters towns are doing pretty well because they are the focal point of innovation. We want to be the innovation headquarters for the world."

Mr. Bond and economist Kosters argue that strengthening the economies of less-developed nations is not only the American ideal; it also helps make those countries better customers for U.S. goods. As Mr. Kosters puts it: "The moral case for outsourcing in that sense is [that it is] good for everybody involved."

Sixty percent of America's 1,000 largest corporations do not outsource. Some cite the difficulty of managing far-flung resources, fear of negative publicity, and security concerns. In one infamous incident, an overseas analyst handling U.S. medical records threatened to display them on the worldwide web if his pay dispute was not resolved.

Still, the Forrester independent research firm estimates that more than three million U.S. service and high-tech jobs and $136 billion in wages will move to India, China, Russia, the Philippines, and other overseas centers over the next 15 years. The Forrester study predicts that by decade's end, executive stature will be measured, not by the number of employees managed but by the number of contracts outsourced.