Thoughts about the economics of offshoring

Dear Bob …

Not really an Advice Line issue, but I’d appreciate your thoughts:

Society is learning about economics and outsourcing. Lose high paying jobs, lose tax revenue, etc. The experiment continues and a few profit at the expense of the many. Of course, China is doing well right now, but at what cost?

I remember from an analysis of why Asian-American communities succeed, and African-American communities stay mired in poverty is that it’s because 9 out of 10 dollars spent in the Asian-American community stay within it, while 1 out of every 10 dollars spent in the African-American community stay within it. If such economics scale, then offshoring jobs and factories will not succeed in generating wealth for many but will have the opposite result.

What goods and services will be left? Half the graduates in my department were mainland Chinese. We drained the best minds from around the globe and only the top 10% could get funding as research scientists, and those were the ones without jobs waiting for them in China.

We are now offshoring computer programming and certain other highly skilled professions. Most of our manufacturing jobs that aren’t defense related are offshore. With computer hardware,  software, textile, shipbuilding, steel, and other industries offshore, what goods can we provide China to balance the trade imbalance except maybe aerospace?

Loral is no more because they sold defense aerospace secrets to China which will improve their ICBMs. That’s about the only thing they want from us now, and Russia gives them better deals if not always expertise. With more of our money going offshore and higher paying jobs migrating offshore to be replaced by lower wage jobs, I can’t see any good coming from it. Our cities and states lose tax revenue and a vicious cycle ensues.

Texas only builds tollways now. That’s the only way local and some state roads get built or maintained and revenue generated. It used to not be that way 20 years ago. The schools hold fund raisers to obtain funding for public school activities and projects.

College tuition has skyrocketed in Texas in spite of a huge oil funded multibillion dollar endowment. The state pays less and less for public education every year even though the endowments can only pay half the costs.

Maybe it’s me, though. I don’t always remember being so disillusioned and cynical. But I have to worry when oilmen start buying up water rights throughout the state.

– Concerned

Dear Concerned …

Whew! Okay, if everyone agrees that I’m just another citizen with no pretensions to specific expertise on any of the subjects you raised, here are some thoughts:

I’m not sure the how-much-money-stays-in-the-neighborhood analysis has parallels to the economics of offshoring. The difference is that by creating more wealth offshore, proponents claim it increases the size of the market for American goods and services. There is no such dynamic at work when the subject is small communities within the US.

The whole offshoring/wealth-creation issue is much more difficult than either globalization’s cheerleaders or its naysayers generally acknowledge. Not necessarily better or worse, but more complicated.

We have (as I might have pointed out before) two economies – the investment economy and the labor economy. So far as anyone can tell our investment economy is doing fine. It’s the labor economy that has trouble. Even manufacturing is doing well in the US. It’s simply that with the level of factory automation successful companies employ, manufacturing jobs are in decline with no reason to ever expect a recovery.

I agree that our trade deficit is probably the biggest economic worry we have. We still might find, though, that building better markets and more stable economies abroad ends up helping us in the long run.

There’s one other aspect of this to consider: We aren’t shipping jobs offshore. Companies in other countries are outcompeting us for the work. The solution is for American workers to make sure they provide better value than their Chinese and Indian competitors.

In that vein, a point I’ve also made before: In our industry, the most important step any manager can take who wants to preserve American jobs is to promote the use of iterative, high-involvement, collaborative software development and integration methodologies. Traditional waterfall methodologies are tailor-made for shipping work elsewhere.

When you enshrine requirements and software specifications in detailed documents which are supposed to be the primary (or sole) means for communicating what’s needed among participants, the location and time zone from which developers code is irrelevant.

When, on the other hand, you ask end-users and business managers to take a look at what you think might work a few times a day, there is no such thing as shipping the work to a remote location.

– Bob