IBM Outsources...

The spread of outsourcing continues:

Another blue chip changes color - Managing Globalization - Blogs - International Herald Tribune: Daniel Altman, the IHT's global economics correspondent, offers a look at the day's economic news with an eye to how individuals, companies and governments are coping with the challenges of globalization.

IBM announced Tuesday that it would invest $6 billion in India over the next three years. That is a stunning amount of money, almost enough to raise India's gross domestic product by a full percentage point. And as the article linked above tells us, IBM has hired 34,000 people in India in just the last two years.

Soon quite a few American household names may have more employees outside the 50 states than inside. Gillette already does, as I wrote last week. So who will be left working for IBM in the United States?

The answer probably consists of executives, marketing specialists and a bunch of tax lawyers. Yet this might not be such a bad thing for Americans. Just as India is a target for the outsourcing of customer service, programming and manufacturing, the United States could be the world's outsourcing destination for management expertise. In some ways, it already is - witness mammoth consulting firms like McKinsey and Accenture. As those guys know, there's nothing wrong with being an outsourced worker... when you're getting paid so handsomely.

So what will the U.S.'s comparative advantage be? And how will it use that comparative advantage as a base to keep upgrading the productivity of America's workers?

Comments

[shlomo]

American comparative advantage is going to be in denying health care to American workers.

[Hedley Lamarr]

Comparative advantage will accrue in the low-benefits services sector, where we will lead the world in Wal-Mart employees.

[Bill Turner]

Brad,

You have hit upon what I've long asked when just about every other economist claims that the outsourcing is a good thing, "What comparative advantage?". I've heard only one answer, that being our large, well-educated workforce. That is questionable for two reasons. 1) Our students are routinely trounced in educational measures by other students in the world. And, 2) if only 20% of India's population are college graduates, that equates to virtually everyone in the US being a college graduate. It doesn't take very sophisticated analysis to see that they will soon, if they have not already, bypassed in the total number of well-educated workers, the vast majority of which will work for a fraction of what a US (and European and Japanese) worker is currently receiving. If we have no comparative advantage, those management jobs will follow to the new industrial leaders (they will, anyway). And, as the good paying manufacturing, computer programming and similar jobs disappear, so will go the incomes to purchase products, thus then the end of the marketing jobs. Wouldn't those jobs, too, follow the money? It is so silly, but this has happenned before. Think Britain. Those who fail to study history are condemned to repeat. Those that know the history and are in a position to do so, are taking advantage while they can.

[Charles]

We excel at lying and warfare.

Is there an industry that could be based on that?

(Sorry to be sour, but the news that the Republicans are ginning up a propaganda campaign to convince the nation that *Democrats* are stealing elections makes me even more pessimistic about the future of this country. I mean, why bother to have elections when the people with all the money, all the power, all the media, and all of the key officials in a position to actually tamper with ballots can just make this crap up?)

[anne]

http://www.nytimes.com/2006/06/05/technology/05ibm.html?ex=1307160000&en=0fd2cdd639e15c72&ei=5090&partner=rssuserland&emc=rss

June 5, 2006

India Becoming a Crucial Cog in the Machine at I.B.M.
By SARITHA RAI

BANGALORE, India — The world's biggest computer services company could not have chosen a more appropriate setting to lay out its strategy for staying on top.

On Tuesday, on the expansive grounds of the Bangalore Palace, a colonial-era mansion once inhabited by a maharajah, the chairman and chief executive of I.B.M., Samuel J. Palmisano, will address 10,000 Indian employees. He will share the stage with A. P. J. Abdul Kalam, India's president, and Sunil Mittal, chairman of the country's largest cellular services provider, Bharti Tele-Ventures. An additional 6,500 employees will look in on the town hall-style meeting by satellite from other Indian cities.

On the same day, Mr. Palmisano and other top executives will meet here with investment analysts and local customers to showcase I.B.M.'s global integration capabilities in a briefing customarily held in New York. During the week, the company will lead the 50 analysts on a tour of its Indian operations.

The meetings are more than an exercise in public and investor relations. They are an acknowledgment of India's critical role in I.B.M.'s strategy, providing it with its fastest-growing market and a crucial base for delivering services to much of the world.

"A significant part of any large project that we do worldwide is today being delivered out of here," said Shanker Annaswamy, I.B.M.'s managing director for India, who presides over what is now the company's second-largest worldwide operation. In the last few years, even as the company has laid off thousands of workers in the United States and Europe, the growth in I.B.M.'s work force in India has been remarkable. From 9,000 employees in early 2004, the number has grown to 43,000 (out of 329,000 worldwide), making I.B.M. the country's largest multinational employer.

Some of the growth has been through acquisition. In a deal valued at about $160 million in 2004, I.B.M. bought Daksh eServices of New Delhi, India's third-largest back-office outsourcing firm with 6,000 workers. Since then, that operation alone has grown to 20,000 employees.

"Now that companies such as Infosys Technologies and Cognizant have clearly demonstrated that the services marketplace is not impregnable, the new battle is for talent," said N. Lakshmi Narayanan, president and chief executive of Cognizant Technology Solutions of Teaneck, N.J. Cognizant is one of I.B.M.'s competitors; it is incorporated in the United States but has the bulk of its 28,000 employees in India.

I.B.M. is growing not only in size by adding new hires, but also in revenue. The company's business in India grew 61 percent in the first quarter of this year, 55 percent in 2005 and 45 percent the year before.

That growth has not come just from taking advantage of the country's pool of low-cost talent. In recent months, the technology hub of Bangalore has become the center of I.B.M.'s efforts to combine high-value, cutting-edge services with its low-cost model....

[Charlie Stross]

I'm British. I live in the UK. The parallels between the USAs current situation and the UK in, oh, 1906, are striking.

The good news is, the UK survived. The bad news is, there were some very unpleasant times (we came within weeks of bankruptcy in 1945; food rationing during the war didn't end until 1951: and so on), we can't pretend to be a front-rank superpower any more, and part of the picture for survival was a hefty dose of socialism (free healthcare is essential if your workforce can't afford to buy it, and that's going to be the case if you're teetering on the edge of bankruptcy).

As for the warfare thing ... the USA only excels at certain types of war. And they're not the ones the current leadership are interested in starting, for some reason. Can't think why ...

[Charles]

Bill Turner, our students aren't getting trounced. This is a fiction that originated with Reagan II and has taken on a life of its own.

1. America brings into school kids that would be excluded in other countries: autistic kids, emotionally-troubled kids, immigrants, kids with serious medical problems, etc. This brings down test averages.

2. We send a larger proportion of kids to college and grad school than other countries. So, our average graduate may not be as skilled, but the few who are compare favorably.

3. On the bad side of the ledger, the decline of our manufacturing base has bad consequences for applied science and engineering students.

4. Our professional class has also been demoralized by constant downsizing and outsourcing, political pogroms directed against college professors, etc.

Other countries value their smaller treasuries of human resources more than we do.

[anne]

Brad DeLong:

"So what will the U.S.'s comparative advantage be? And how will it use that comparative advantage as a base to keep upgrading the productivity of America's workers?"

Brilliantly asked. I would like to have had the question answered by pointing to the advantage we have in infrastructure from broad and deep education to a base for environmental innovation and protection. Imagine a federal-state revenue sharing plan that would make our public university system far less costly for students and offer more facility. Imagine what can be done as a leader in environmental protection, as well.

[christofay]

Quietly overseas is where all the Fortune 500 investing has gone that Anne keeps asking about. If these large companies aren't investing at home, it must be because in their managerial opinion there aren't worthwhile additional opportunities.

IBM itself might be in an America at peril job wise situation. McNealy at Sun, another one time golden executive now on the outs, said services is where once proud tech companies go to die, and IBM is throwing people at the wall in services. The Indian hires probably are mostly services. How can IBM integrate tens of thousands of new employees with that time frame? It might not, and with the next economic hick-up IBM might be smaller too.

[Matt]

Computer tech is an increasingly automated and commodity business. Our comparative advantage is our continuing efforts to make it practically free with cost declining standards, more open systems, intelligent information sharing, and a telecommunications network. I would not want to be in India's shoes when the next few waves of cost declines hit that market.

The future seems to be biofuels, we are a temperate climate in a globally warming earth.

[Ginger Yellow]

"So what will the U.S.'s comparative advantage be? And how will it use that comparative advantage as a base to keep upgrading the productivity of America's workers?"

I don't know about the productivity side, but I would imagine the main comparative advantage would be expertise in the US consumer market. Hence the lawyers (familiarity with the tax code, the regulatory environment and US contract law), marketing specialists (familiarity with the American consumer) and executives (close to the ground for responsive decision making). Whether or not that results in a sustainable domestic economy is beyond my expertise, although it seems doubtful. On the other hand, as Charlie says, Britain hasn't had much of a domestic agriculture or manufacturing industry for ages and we're getting along OK.

[Doctor Jay]

The conventional wisdom in Silicon Valley (where I am a senior engineer) is that the Indian and especially the Chinese avoid risks, and don't have a lot of creativity or leadership. I see no inherent reason that this must be so, but for now, I agree that it is so, in a statistical way.

It's probably due to social/educational differences.

Computing in general is in a serious commoditization phase. Risk-taking, creativity and initiative are less useful now, where as the ability to work long hours for less pay is more useful.

We can't kid ourselves, though. Looking at proportions, 9 out of every 10 engineers in the world will be non-american in time. But there are still British engineers and projects. So I'm cautiously optimistic.

We have the best graduate schools in the world. We speak English natively. Only those American students who are really passionate about science and engineering take it up, which means that they will find a way to do what they want to do. There will be lots of small companies that are successful. That's where the greatest growth is, anyway. There will be more than one "next big thing" in all likelyhood. And it might not be in Si Valley, but I wouldn't count us out.

[Cassius Chaerea]

"The United States could be the world's outsourcing destination for management expertise".

In other words, the wogs are going to let us be in charge. Not bloody likely.

If you have an obnoxious, stupid neighbor with something that you want, you're going to flatter him until he's no longer in a position to harm you.

[Blissex]

«So what will the U.S.'s comparative advantage be? And how will it use that comparative advantage as a base to keep upgrading the productivity of America's workers?»

Well, so far the USA's comparative advantages seem to have been:

* Virtually free land and very cheap capital.

* Yankee ingenuity as to industrial and business organization.

* A large integrated market with a mostly unified political system.

* Far from most threats and wars.

Tocqueville in 1830 made virtually the same points...

Now these advantages still exist, but they work entirely in favour of capital, as capital is becoming scarcer relative to labour.

«I've heard only one answer, that being our large, well-educated workforce.»

Nahh, thats not particularly an advantage or unique. I would rather say that an abundance of unskilled, poor immigrants is a comparative advantage.

«if only 20% of India's population are college graduates,»

Well over over half of India's population is functionally illiterate. Much lower percentage in China, but 20% college graduate is way off the mark.

«I would imagine the main comparative advantage would be expertise in the US consumer market.»

Yes, this is part of having a large integrated market. But unfortunately it look like that the Japanese are at least as good at knowing the american market :-).

However an interesting side: the USA market has an unusually high number of wealthy enterpreneurs and rentiers as consumers.

«We excel at lying and warfare.»

Nahh, there are much better liars, even if the corporations and the administration try hard. As to warfare, thats interesting.

In a cult scifi book, "Snowcrash", it is predicted that in the USA the comparative advantages will be rapid pizza delivery and warfare :-).

«Bill Turner, our students aren't getting trounced. [ ... ] 1. America brings into school kids that would be excluded in other countries: autistic kids, emotionally-troubled kids, immigrants, kids with serious medical problems, etc. This brings down test averages.»

This is bullshit, but said another way it is realistic: the USA have a two-layer society, and the bottom layer (blackskinned, redskinned, brownskinned, ...) statistics are awful under almost any criteria. Other societies are more integrated. If you strip out the permanently excluded underclass, which most ''americans'' dont really feel belongs with them, yes, things look a lot better.

«The conventional wisdom in Silicon Valley (where I am a senior engineer) is that the Indian and especially the Chinese avoid risks, and don't have a lot of creativity or leadership.»

Hahahahahahaha! Totally blindsided. Perhaps offshore contract ''bulk headcount'' know how to keep their head down when talking with their employers (well used to do so with their bureaucrats), but this runs contrary to centuries of indians and chinese enterpreneurship (and hypochrisy). Check out the relevant chapters in Landes' "The wealth and poverty of nations". Or Clissold's "Mr China", who reports:

«I think we just completely underestimated how wild business can be in China, and totally underestimated how far people would go in defending their economic interest.»

«But there are still British engineers and projects.»

That is a very optimistic dream that rather exaggerates some small if good residuals. First nearly all the native UK computer industry is offshored to the USA, and then most of the UK computer service industry to India and China. Other branches of engineering have not fared better.

«We have the best graduate schools in the world.»

This is very optimistic: I would say ''the most prestigious'' in the world, and ''those able to pay the highest prices for already successful researchers from other places''.

[Blissex]

Some apposite quotes recycled from another set of comments that I have typed in from Landes' great "The wealth and poverty of nations":

«Unlike Europe, America made little resistance to this advance of deskilling and routinizing technique. In a country of continuing revolution old ways had little leverage. Listen to an official visitor to the Springfield armory in 1841:

... the skills of the armorer is but little needed: his "occupation's gone". A boy does as well as a man. Indeed, from possessing greater activity of body, he does better. The difficulty of finding good armorers no longer exists; they abound in every machine shop and manufactory throughout the country. The skill of the eye and the hand, acquired by practice alone, is no longer indispensable; and if every operative were at once discharged from the Springfield armory, their places could be supplied with competent hands within a week.»

«But listen to this account of a cotton mill superintendent at the turn of the century:

The mule spinners are a tough crowd to deal with. A few years ago they were giving trouble at this mill, so one Saturday afternoon, after they had gone home, we started right in and smashed up a room-full of mules with sledge hammers. When the men came back on Monday morning, they were astonished to find that there was no work for them. That room is now full of ring frames run by girls»

«That Dutch towns did not shrink more was because rents and food prices fell and some poor relief was available; this was a matter of public order if not of charity. Besides, Dutch wages still topped those in surrounding lands, in large part owing to the resistance of craft guilds, and this gap drew cheap labour from abroad to compete with the newly unemployed. Increasing hostility and conflict found an outlet in strikes, until nothing was left to strike about.
Some of this may remind readers of the conditions in the United States in the last quarter of the twentieth century. As branches of manufacturing have shrunk before foreign competition, enterprises have discharged redundant labour or moved to lower-wage areas. New workers cost less than old, as the airlines know only too well. Poor immigrants have kept coming. Unions have struck, sometimes only hastening plant closings or transfer of orders to cheaper suppliers. (Mutatis mutandis, one finds similar developments today in western Europe.)
So on Holland two centuries ago. The United Provinces pared and trimmed to meet the competition, but the best they could do was run in place. Many businessmen gave up the fight and retired to the country and to a life of passive investment. Incomes polarized between the rich few and the poor many, with a diminishing middle between them. Tax returns show that by the late 1700s, most wealthy Dutch were big landowners, high state officials, or rentiers. Gone were the prosperous enterprises of the "golden age": employers were not confined to the middle and lower ranks.
In the process, the United Provinces abdicated as world leader in trade and went into a postindustrial mode. Italy had gone that way before.»

«More persuasive the argument from catch-up and convergence: other centers, advantaged by lower wages, learned to make the textiles and other manufactures that had been a mainstay of Dutch exports and shipping, and having learned, shut their doors against imports. In a world of mercantilist rivalry, navigation acts and protectionism were killing the old workshop and the chief middleman. No wonder the Dutch exported capital: they could get more for it abroad than at home.»

«The annals of competition show entire national branches dragging and withering -- not this and that enterprise, but the whole industry. Sometimes, having learned their lesson, the last members of the branch move away, generally to cheaper labor; that is smart, but also easy, and evidence more of rationality than enterprise. An sometimes, as in Britain and Holland earlier, enterpreneurs retire to a life of interest, dividends, rents, and ease.»

«Today's comparative advantage, we have seen, may not be tomorrow's.»

«Comparative advantage is not fixed, and it can move for or against.»

[Blissex]

As to the comparative advantage of the USA I have just read an interesting and very relevant article about Microsoft investing, against trend, into creating a huge facility in Texas, near San Antonio:
http://SeattlePI.NWSource.com/business/272987_msfttexas07.html

«Microsoft Corp. is considering San Antonio for a $600 million data center that would bring the tech industry's best-recognized name to the city and generate up to 100 jobs, two local officials close to the negotiations said.»

«Microsoft has asked the city and Bexar County for 10-year tax abatements for the planned 470,000-square-foot center, according to the two people familiar with negotiations.»

Fascinating numbers because it is stunningly obvious that data center will employ a lot more than 100 people, and all those people will be in India or China, running it remotely, and those «up to 100 jobs» will be cheap immigrant cleaners, electricians, security guards, and a handful of operators to do the few physical activities required (rebooting, changing broken parts), over 3 shifts to ensure 24/7 coverage.

Why then build it in Texas? Well, bandwidth, electricity and land in Texas are much cheaper than in most other countries, especially countries like India or China which have poor or terrible infrastructure which is at capacity or beyond (the same applies to California BTW, even if its infrastructure is not quite as awful as India's, and is better than China, which also is note quite as awful as India's).

Also, land is extremely expensive in India (and in China), at least the land near semi-decent infrastructure, like in Bangalore or Shanghai (less so in Shanghai).

There may be also some cases where the servers and their data have to be, or sell better if can be described as being, nominally within the USA.

The jurisdiction also matters: putting an asset worth $600m in the same country as the people working ''in'' it makes that asset a potential hostage. Putting that asset in a friendly jurisdiction is another matter, out of the reach of those indians and chinese and the politicians they elect.

It is very different when hiring indians or chinese: their paychecks and their politicians' goodwill are hostages to Microsoft's benevolence.

If those indians or chinese or their politicians ever get uppity, they stop receiving their paychecks, and a bunch of bulgarians and filipinoes get hired, and all has to change is the routing of the connections.

What could the indians and the chinese do? Picket a plant in San Antonio?

Separating *physically* by several thousand miles the workers from the means of production brings the marxian concept of alienation to new and wondrous heights...

The big story is that capital is relatively plentiful in the USA, and especially after years of extremely cheap money and enormous retained profits, it is much cheaper than elsewhere, and land is still far more abundant than in most of Europe or Japan.

Anyhow, a lot of this capital is physical capital, basic infrastructure like electricity, telcom wires, water, roads, land, all of which are plentiful in most of the USA (poor California!), not so much in India or China (even if China is trying hard to upgrade).

Thats why Microsoft is putting $600m worth of plant (the ''means of production'') in the USA and the workers everywhere but.

Also, Microsoft surely has the cash on hand to fund that $600m investment, but for another corporation it would be much easier to borrow it in the USA than China or India, and locating the asset within USA jurisdiction would also look a lot better to lenders.

[save the rustbelt]

I hope to hell lawyers and marketing flacks do not become the foundation of our economy.

I think 100 years from now this will all be sorted out. I worry about my children and grandchildren.

[Derek]

"IBM announced Tuesday that it would invest $6 billion in India over the next three years. That is a stunning amount of money, almost enough to raise India's gross domestic product by a full percentage point."

India has a $3.5 trillion economy. How does a $2billion/year infussion raise the GDP almost 1%?

Heck of a multiplier....

[Ginger Yellow]

There are still British engineers and projects, but they are vastly more expensive than construction projects in other European countries, let alone the US or Asia. The only thing people overseas hire British engineers for is prestige projects where cost is not an object. It's starting to be a serious drag on the economy, too. Some of this is a shortage of land and of labour, it's true, but even with an influx of cheap semi-skilled labour from the EU accession countries there's a lot of inefficiency. It seems that like in many other parts of the economy, people have become used to paying over the odds and there is little or no pressure to keep costs down and even less competent project management. Whereas the French built their new national stadium on time and on budget for £250m, Britain chose to offshore it to an Australian firm that had never built anything in the UK, at a budgeted cost of £760m, and it's now overdue and over budget.

[Maynard Handley]

"
Just as India is a target for the outsourcing of customer service, programming and manufacturing, the United States could be the world's outsourcing destination for management expertise. In some ways, it already is - witness mammoth consulting firms like McKinsey and Accenture. As those guys know, there's nothing wrong with being an outsourced worker... when you're getting paid so handsomely.
"

Hypothesis: The world of management consulting, like the world of CEO hiring, is based not on merit, proven ability and cost competition, but on chumminess, shared class, being school buddies, playing golf together and so on.

Assuming this is true, McKinsey, Accenture and friends may be in for quite a shock in fifteen or twenty years time. They'll be competing with Tata Consulting, and when the CEO of Intel India thinks about what consultancy to go with, his first thought will be of his room mate at the Indian Institute of Technology ten years ago, not of some white guy in New York who went to Groton and Harvard.

McKinsey and Accenture claim that their competence, unmatched in the world, is in "management" and "consulting". I see little evidence of this, and plenty of evidence that their core competence is in "networking" and "having met the right people at school". Unfortunately for them this second set of competences is of very little interest to the rest of the world.

[a different chris]

>Microsoft has asked the city and Bexar County for 10-year tax abatements

But of course. Taxes are for the little people.

[Paul]

The Indians and Chinese are ridiculously cheap in the pre-dollar crash US. We’ll see how much they cost in the post-dollar crash US eventually.

My guess, they’ll get a lot more expensive.

How much does the dollar have to fall to bring the trade deficit to 0??? Maybe enough to make a 12k a year Indian cost 120k?

[Maynard Handley]

Blissex says
"Well over over half of India's population is functionally illiterate. Much lower percentage in China, but 20% college graduate is way off the mark."

Hmm: http://www.csmonitor.com/2005/0729/p01s01-woap.html
"By 2010, Chinese officials estimate, at least 20 percent of high school grads will be enrolled in some form of higher education; that number is expected to rise to 50 percent by 2050. China currently has about 20 million students pursuing higher education."

A talk I listened to (and for which I have no supporting URL, sorry) made essentially the same point. The talk was about a study of education performed in a Chinese province. The study started with a wealthy man who wanted to build a number of public libraries in the province and was persuaded to bankroll an initial study of the situation to see where such libraries would be most effective. The study found, among other things, 30% of the relevant age-group going on to college (this was a province wealthier than Chinese average), and that girls were not being mistreated educationally; that in fact in families and across villages, if a particular child, whether boy or girl, showed promise, it was that child on which all the attention was nourished and who sent out to the world to be educated.

Of course there are a tremendous number of problems with China, and of course we can all think of ways in which it can all come tumbling down. But the reverence for education is legit, as is the massive investment around education.

I'd also put in a few words about the supposed Chinese avoidance of risks. If avoiding risks means avoiding business plans that are based on the theory that you have to spend money very rapidly and publicly to generate buzz, then sure, the Chinese avoid risks. (Most people would call this avoiding stupidity.) If "avoiding risks" means the Chinese aren't interested in entrepreneurship, taking on existing western competitors, trying new processes etc --- well grow up. Go find yourself some Chinese friends and start to learn about the real world.

[Frank Dean]

Yes, as the rest of the world becomes more skilled and educated, there's more competition for all US labour, not just the unskilled. But we live in the age of cheap capital: machines are extremely cheap. Cheaper than ever. Better than ever. Capital is not scarce! What is scarce is land in nice locations, and what might be becoming relatively scarce is raw materials. Capital is desperately trying to keep "intellectual property" scarce.

This is why Americans increasingly live in bad locations with excellent manufactured goods and overpriced drugs and medical services.

The technical progress in manufacturing over the past couple of decades is quite simply mind-boggling.

The problem areas are where markets don't work (health care) and where markets are legally prevented from working ("intellectual property" in general) to create false scarcity. Somewhere on the planet I think these problems will be solved; probably not in the USA.

[T.R. Elliott]

I'm going to second Doctor Jay's remark. I worked for a communications company that involved me with games and other applications on cell phones. I worked with engineers in India and China and Thailand. I was very impressed with the capabilities in all three countries.

A few observations:

1. Computer applications like games tend to be very culturally specific. It's not just marketing that is specific to the culture. It's much more. Games developed in India aren't popular here and vice-versa. Same goes with China and Japan. It's more than just the language. This is not an absolute, but this mismatch plays a role that must be considered.

2. Many gaming companies create the first version of a game here in the US. But--and this is often the problem for US developers--once the game has been developed for one platform, porting to other platforms is very straightforward. There are issues to consider, e.g. screen size and depth, etc--but the porting is often outsourced to India. That implies fewer more mundane yet still nicely paying jobs for US software engineers.

3. My impression is that people are much less willing to take risks in other countries. There is a certain air of rebellion--libertarian anarchistic tendencies--in the US that pushes software engineers, for example, to drive themselves into the ground to make something work, to do something new, and to do it with little or no authorization from the powers that be. I suspect that attitude is developing overseas, and I may be wrong in making that judgement, but I have the impression that there is a much stronger tendency to head out the door at 5pm and to do what the boss says.

I think there continues and will always be a role for cutting edge development work here in the US in a variety of technological areas. That implies good jobs for a few, but even those few are in many cases H1B Visa holders or Green card holders. Hence, without looking at the data, I'm of the opinion that we will continue to see downward pressure on wages in the US excepting those in the higher paid, more creative roles.

I would really love to see a nice analysis of comparative advantage as it applies to a global and globally connected workforce as we have today. When the issue of comparative advantage is raised, free marketeers point out the pedagogical country A and B make X and Y examples--snore, which is a lot like a physics 1A student telling me he can easily send a rocket to the moon because he learned F=MA.

With global energy supplies tightening, the rest of the world catching up, and willing to accept a much lower standard of living, I'm hard pressed to think globalization for the US means a lower standard of living.

[A. Zarkov]

“So who will be left working for IBM in the United States?

The answer probably consists of executives, marketing specialists and a bunch of tax lawyers. Yet this might not be such a bad thing for Americans. Just as India is a target for the outsourcing of customer service, programming and manufacturing, the United States could be the world's outsourcing destination for management expertise.”

The key sentence here is: “... the United States could be the world's outsourcing destination for management expertise.” because it perpetuates the myth that Americans will simply move up the food chain to better jobs than the one’s being outsourced. False. Think it through. How can you manage a software project with having the appropriate base of experience? How do you get that experience without having first worked a number of years as a programmer, at a job, which is no longer available? Technical managers don’t just spring into being from nothing. Those higher level, higher paying management jobs are going to get created in India, not the US because India will have the cadre technical workers gaining the appropriate experience. It’s India that going to end up as “world's outsourcing destination for management expertise.” The economics professors and financial journalists seem to miss this point. But DeLong and some other academic types want wealth transfer from the US to places like India, China and Mexico. He even says so.

[Aniruddha G. Kulkarni]

IBM has beeln little slow in realizing India's potential. IBM's earlier Chairman hardly mentioned India in his speeches until he retired after 2000.

It re-entered India in 1992 after being thrown out in 70's. If it had moved with urgency in mid 90's, it would have been first or second biggest player in India IT space- as big as TCS and probably bigger than Infy and Wipro.

IBM's catching up process proves that today's business environment offers almost no incentive to first-mover. Might is right.

IBM in India is rarely mentioned by any leading Indian tech/mgmt school grads as their first choice of work. IBM almost does not take part in third-party surveys to choose best employer etc.

[Fazal Majid]

Given the recurring pattern of fraud and sleaze in America's kleptocratic boardrooms, with CEOs awarding themselves huge raises seldom correlated with performance or shareholder interests, executive management ought to be one of the first areas to be outsourced. Of course, I'm not holding my breath.

[julia]

"By 2010, Chinese officials estimate, at least 20 percent of high school grads will be enrolled in some form of higher education; that number is expected to rise to 50 percent by 2050. China currently has about 20 million students pursuing higher education."

Ah, these Chinese officials must have gratuated from the same School of Future Projections as DeLong.

2050?? Try 100%.

[remo williams]

[quartz]

Actually the major thing the U.S. has going for it is good infrastructure, which provides U.S. has a comparative advantage in manufacturing. Manufacturing output is srong, but so is productivity growth in manufacturing which is increasingly high tech, so no real growth in manufacturing.. it is going the way the agricuture, where a small number of people produce huge quantities. But India at least has serious power shortages, and very poor transport infrastructure, labor is the only thing that is cheap--other inputs are expensive, and the labor input in manufacturing shrinks, those other items are a growing share of costs. Plus all those Indian and Chinese employees become consumers as they move into the middle class and create new demand, which absorb both doemstic and some international labor. Just as their growth has driven up global demand for commodities, it will drive up demand for other things as well.

[reason]

A. Zarkov has it right.

But everybody is missing the real issue - why do they assume that India and China will not eventually run out of graduates available to do jobs for foreigners. There exchange rates will appreciate (one way or another) and there will be more domestic uses for graduates. I'm not sure how long this process will take, but it didn't take that long in Japan or Korea.

But it is going to be sure tough in the meantime and a real test of the economics profession to work out some adjustment strategies. I see the basic problem as this - neo-classical economics is based on partial equilibrium analysis - what we need now is a global disequilibrium analysis and the theory is just not good enough.

[anne]

"IBM announced Tuesday that it would invest $6 billion in India over the next three years. That is a stunning amount of money, almost enough to raise India's gross domestic product by a full percentage point."

Derek:

"India has a $3.5 trillion economy. How does a $2 billion a year infussion raise the GDP 1%?"

Fine question, and I too would ask, why is an investment of $6 billion over 3 years "stunning" and how could it have such a large impact on Indian growth?

[Navin]

"Derek:

"India has a $3.5 trillion economy. How does a $2 billion a year infussion raise the GDP 1%?""

BANG ON.

So much for American PRESS. They are the most stupid of all I guess.

[Rex Momus]

Brad -

Stephenson answered this question back in 1992.

"When it gets down to it - talking trade balances here - once we've brain-drained all our technology into other countries, once things have evened out, they're making cars in Bolivia and microwave ovens in Tadzhikistan and selling them here - once our edge in natural resources has been made irreelvant by giant Hong Kong ships and dirigibles that can ship North Dakota all the way to New Zealand for a nickel - once the Invisible Hand has taken all htose historical inequities and smeared them out into a broad global layer of what a Pakistani brickmaker would consider to be propserity -y'know what? There's only four things we do better than anyone else
music
movies
microcode (software)
high-speed pizza delivery"
-- Neal Stephenson, SNOW CRASH.

Okay, so maybe he was wrong about microcode. We've still got music, movies and pizza delivery.

[Barry]

Blissex: "In a cult scifi book, "Snowcrash", it is predicted that in the USA the comparative advantages will be rapid pizza delivery and warfare :-)."

IIRC, it was rapid pizza delivery and 'microcode', meaning PC software. Looks like that's another SF book which is out of date.

[save the rustbelt]

Hey, maybe the workers being dumped by GM, Ford, Chrysler, Delphi and etc. can become management consultants and work for Accenture and McKinsey.

Nah.

1) They don't have MBAs
2) they do have common sense
3) they are used to doing something of value before they get paid

Won"t work!

[save the rustbelt]

Has anyone noticed the Google ads for outsourcing popping up on the right side border?

We are toast.

[dilbert dogbert]

Watch out! Here comes Bollyuwod (music and movies). Also watchout here comes the pizza wallah (high speed pizza delivery). Microcode has bitten the dust and shortly there will be nothing that we do better than India. Maybe they also do corruption better?

[camille roy]

In my opinion the big issue is that this country hates its youth. Reducing taxes on the rich while burdening students with loans is the result. This system worked *before* the surge in India and China, because the lack of low paid competition meant that good students could *afford* to study computer science (for example). They could anticipate a career in which they could repay their loans. That is no longer true.

Until we change this attitude, which must be attacked straight on, we will be doomed to fall behind.

China and India and every sensible developed country provides free or highly subsidized education for the very gifted. Hello! The very gifted are a national resource. Letting your petty Republican resentment of free-thinking academia result in a campaign to make higher education less accessible is not only bad policy, it is a traitorous policy.

There, I said it. The thugs who undermine access to higher education in this country are TRAITORS.

[me]

"the United States could be the world's outsourcing destination for management expertise."

Experts like Palmisanno at IBM? Let's see, right now the stock is $77.55, far below when he took over IBM and far below it's price 5 years ago. Every analyst has a super buy on IBM and the stock still goes down. There is a reason Steve Jobs bailed out of India and Palmisanno will eventually get.

India is his "hail mary" because he is going to get fired soon if he doesn't grow the business.

All of you that think prospects are so bright in the US have to ask yourself how much has he invested in the US. Not 6 cents unless you count $17 Billion in stock buybacks trying to shore up the price of the stock.

[derek]

Brad just allows Derek and not Remo to post...now we are both confused....

remo williams

[Doctor Jay]

Hahahahahahaha! Totally blindsided. Perhaps offshore contract ''bulk headcount'' know how to keep their head down when talking with their employers (well used to do so with their bureaucrats), but this runs contrary to centuries of indians and chinese enterpreneurship (and hypochrisy). Check out the relevant chapters in Landes' "The wealth and poverty of nations". Or Clissold's "Mr China", who reports:

I'm making a more sophisticated argument than I think you realize, though I'm probably guilty of some elitism, too.

The kinds of jobs that I see going to India are not the kind of jobs I'd want to take, personally, or that I would ever have wanted to work on. Furthermore, they are the kind of jobs that immigrant workers, often Indian or Chinese, would take here in Silicon Valley.

On my recent visit to China, I was very impressed by how thoroughly the Chinese understood commerce. I'm not talking about commerce. "Keeping their heads down" is definitely what they do, 24-7. Not just the offshored ones, the ones that are here too.

So I'm totally on board with there being plenty of "entrepreneurship" offshore. But that's not the same as the engineering culture. I'm not talking about the company presidents, I'm talking about rank and file engineers. I'm talking about how we interact with each other and with authority figures.

In the way we do engineering in Silicon Valley, the engineers who don't keep their heads down are the ones that are valuable. Management from outside the valley finds this incredibly irritating, by the way.

At the same time, this process ensures that no assumption goes unchallenged. This is of extraordinary benefit. As I say, there's no fundamental reason why this should remain so, though.

I happen to think our technical grad schools have a lot more going for them than prestige, but bear in mind that even prestige is a sustainable comparative advantage. Look at Harvard undergrad. It can be shown that the value-add of Harvard is entirely in prestige, from getting into Harvard, not in the actual education you receive. And they've sustained that for about 100 years.

[Randall]

Brad Delong removes destructive posts. Remo Williams is a vicious insane troll.

[derek]

Randall,
DeLong removes posts that somehow state an opposing view. Period. Anyone who posts here has seen him take down perfectly reasonable posts on currency movements, minimum wage, etc.

It is his blog. He can delete whatever he wants.

[Randall]

No; every line you post is filled with crazy attacks and that is why "you" are deleted.

[Blissex]

As to BDL removing posts, he is perfectly entitled to do so at whim, but I find he courts distrust by just making them disappear, instead of just replacing their text with something like "[ ... removed by the editor ... ]", that at least documents the removal.

[Charles]

Blissey says, "This [Americans are not being outdone by other countries in education] is bullshit...If you strip out the permanently excluded underclass, which most ''americans'' dont really feel belongs with them, yes, things look a lot better."

Blissey, when you accuse someone of spreading "bulls--t," courtesy requires that you supply a source.

Now, I don't doubt you can find a source to claim that US education is awful. The right-wing has poured many millions of dollars into trashing it. But at least produce something to refute rather than throw out ad hominem.

The following is something you might want to be aware of as you select that source:

www.weac.org/resource/may96/myths.htm

[Charles]

Sorry, "BlisseX," not "BlisseY."

[Maynard Handley]

"
In the way we do engineering in Silicon Valley, the engineers who don't keep their heads down are the ones that are valuable. Management from outside the valley finds this incredibly irritating, by the way.
"

The world of engineering is larger than Silicon Valley and software.
If India and China don't feel comfortable running things the Silicon Valley way, heck, maybe they can make aircraft, autos, or pharma, all of which follow more traditional engineering roles. Perhaps you want to share with us your insights into how GM is famed for its innovative approach to auto engineering and how it has encouraged its engineers to pursue disruptive but innovative ways of doing things? Oh heck, sorry, did I say GM? I guess I meant to say Toyota.

[Blissex]

«The kinds of jobs that I see going to India are not the kind of jobs I'd want to take, personally, or that I would ever have wanted to work on.»

Exactly! They are the kind of jobs that only losers would take to make end meets, and who cares about losers? This economy is for winners who can pick and choose the cool jobs that they fancy among the several offered to them. As to to the other jobs, the cheapest hired help can take them:

«Furthermore, they are the kind of jobs that immigrant workers, often Indian or Chinese, would take here in Silicon Valley.»

Right on the mark, even if, curse the H1B restrictions, good hired help to do the tedious legwork is still too hard to find cheaply onshore...

«In the way we do engineering in Silicon Valley, the engineers who don't keep their heads down are the ones that are valuable.»

Indeed, CMU/Stanford/MIT graduations confer a level of job security that makes people much freer to express their genius in whatever way they choose. Fortunately all those indian/chinese offshore or inshore workers know better than to try and emulate their superiors.

«Management from outside the valley finds this incredibly irritating, by the way.»

Perhaps it is management that is unused to grant the deference they owe to people from the Ivy League or Oxbridge? Perhaps they have been too used to deal with the «cheerful docility» of Chico or Miami ''bulk headcount''?

Silly arrogant management! At least the indian and chinese immigrants or offshorers who are allowed contribute by performing the menial jobs their betters would not touch know their station, unlike those uppity managers, and keep their head down.

:-)

[Blissex]

«Blissey says, "This [Americans are not being outdone by other countries in education] is bullshit...»

I see this as a shameless misquote, because my comment was actually on this quite repulsive bit of bullshit:

«Bill Turner, our students aren't getting trounced. [ ... ] 1. America brings into school kids that would be excluded in other countries: autistic kids, emotionally-troubled kids, immigrants, kids with serious medical problems, etc. This brings down test averages.»

To be explicit, the vile bullshit here is the argument is that «autistic kids, emotionally-troubled kids, immigrants, kids with serious medical problems, etc.» should not be considered as «our students»; and now I realize that this argument is based on a further bullshit, that the number of these in the tests is large enough to skew the result downward.

«Blissey, when you accuse someone of spreading "bulls--t,"»

This looks to me like another shameful paraphrase. I have not «accused someone of spreading bullshit» (if you think so, please where I named someone as «spreading bullshit»), I have just commented on a particular turd of bullshit, the argument that the poor and unlucky children somehow are not «our students».

«courtesy requires that you supply a source.»

Doesn't honesty require that people paraphrase other people correctly or quote them properly? However, the source that yourself provide seems good to me:

«The following is something you might want to be aware of as you select that source:
www.weac.org/resource/may96/myths.htm»

This source states very clearly that 80% of american students exit highschool/college with poor or bad results, like the middle-high 40% where «some need remediation in writing or science or mathematics», and the lowest 40% are hopeless:

«Since then, a variety of research reports have revealed that much of the criticism has been simplistic and has distorted and misrepresented the conditions of public education.
This is not to suggest that all is well in American public schools or that improvement in student achievement is not to be desired. Harold Hodgkinson, director of the Center for Demographic Policy, offers these observations:
* The top 20% of American high school graduates are world class and getting better. They graduate from colleges and universities in unprecedented numbers and write 40% of all research articles in the world.
* The next 40% of high school graduates are mostly capable of graduating from college; some need remediation in writing or science or mathematics but they can and do make it.
* The lowest 40% of our students is in bad shape. Although most stay in school, they are not very successful there or after they leave school (p.622-623)»

Now, I am not sure about those percentages and assessments, because there is nothing but handwaving here, but since you provided this source, I shall take what it says for granted for the sake of argument.

Note: Even if I am a bit troubled by the jump from «top 20% of American high school graduates are world class and getting better» to «They [ ... ] write 40% of all research articles in the world», as even if I can believe that american university researchers write 40% of all academic papers, I suspect that a significant percentage of those papers are authored by immigrants or those privileged by a private education...

However I don't particularly blame the schools for the terrible performance quoted above; but rather because I think that ''middle class'' america does not count as ''us'' the ''underclass'':

«This is bullshit, but said another way it is realistic: the USA have a two-layer society, and the bottom layer (blackskinned, redskinned, brownskinned, ...) statistics are awful under almost any criteria. Other societies are more integrated. If you strip out the permanently excluded underclass, which most ''americans'' dont really feel belongs with them, yes, things look a lot better.»

While the other (bullshit!) argument is that «autistic kids, emotionally-troubled kids, immigrants, kids with serious medical problems, etc.» should not be considered as «our students», my argument is that rather more people think that the whole underclass is not ''us'', and it is those that drag down the averages, because there are so many of them.

Is it plausible that the «40% of our students is in bad shape» refers to «autistic kids, emotionally-troubled kids, immigrants, kids with serious medical problems, etc.»?

Should one think that 40% of the school population are not «our students», whatever the reasons for their «bad shape» is?

I rather think that there is a 40% of poor, often colored underclass students in ill-funded school districts, living in bad neighborhoods, and with poor, unhelpful and poorly educated parents struggling every day to work on minimum wage...

And even if you strip our the bottom 40% as not being «our students»'', of the remaining ones two thirds are only «mostly capable of graduating from college» (a beautiful euphemism for ''can't really make the grade'') because they need remedial education.

But «our students», if that is that 20% who are most likely the offspring of well to do whiteskinned parents are doing well... :-)

[Blissex]

«Watch out! Here comes Bollyuwod (music and movies). Also watchout here comes the pizza wallah (high speed pizza delivery). Microcode has bitten the dust and shortly there will be nothing that we do better than India.»

First of all, «we do better» means that you are talking about competitive, not comparative advantage.

Comparative advantage is about making money doing something that someone else does better, but they are already too busy doing something that they do much better.

So for example perhaps Silicon Valley would be much better than Chile for growing apricots and oranges, but still it is Chile grows them and makes money exporting them to Silicon Valley because Silicon Valley makes more money with chips.

Perhaps between India and China they can do everything better/cheaper than the USA, including movies and pizza delivery, but maybe since they can do software a lot better than movies, they end up doing that and americans do the movies.

«Maybe they also do corruption better?»

As to that sleaze in India and China is by leaps and bound better than in the USA, thanks to several thousand years headstart, even if the USA have been trying hard to catch up...

[Thomas]

The U.S. advantage was, is, and probably will remain agriculture and ag processing. Currently, U.S. farms are some of the most efficient in the world, with only Australia, Canada and Argentina being serious rivals, and Brazil coming on strong.

Even though agriculture is seriously screwed up by subsidies and government policies, the U.S. has always been strong in this area. For example, throughout the 19th and 20th centuries U.S. grain fed much of Europe. In the late 20th century, free trade agreements like NAFTA sucked the life out of the Mexican ag sector - in part contributing to the large migration of Mexicans to the U.S.

Our advantages here come from cheap land, good infrastructure, a decent level of precipitation and temperate climate through much of the country, and redundant growing regions for similar crops, so that a disaster in one area doesn't wipe out the nation's entire supply.

Don't sneer at ag production either. This sector can produce some very high value-added products - like alcoholic beverages or pharmaceuticals. Furthermore, because it's easier to turn bulk commodities into finished goods near the production site and then export the finished product those jobs are much less likely to go overseas.

[Movie Guy]

Thomas,

Your points about U.S. ag production are well taken, but you didn't explain the rest of the story.

The U.S. is a net ag products importer, not exporter today.

[Blissex]

«Your points about U.S. ag production are well taken, but you didn't explain the rest of the story.
The U.S. is a net ag products importer, not exporter today.»

Thats because of comparative advantage: Santa Clara has a wonderful climate for growing high value fresh fruit, but it is better to import it because much higher value chips (used to) ''grow'' better still in the same area.

The real problem with agriculture is that it is so productive that employs a very small proportion of the workforce.

Perhaps the increasing relative abundance of labour to capital will mean that the mix of labour and capital on USA farms will change and much of the USA workforce will find employment as cotton pickers or corn threshers :-).

[Blissex]

«When the issue of comparative advantage is raised, free marketeers point out the pedagogical country A and B make X and Y examples»

As to this the issue is that the examples are really valid: things really work out that way (mostly, because otherwise one gets into a Say Law style position).

Country A usually ends up making X and country B making Y even if A has a competitive advantage in both, that does happen, eventually.

The real problem with that however is what the paid advocates do not say: that X may have a lot more value added than Y, and the anyhow the adjustment can take a long time.

So it *does* matter which comparative advantage you have, because some tradeables are a lot more profitable than others.

As I was pointing out in other comments, Santa Clara county is ideally suitable for growing apricots and oranges, probably more suitable than the places from which Wholefoods in Silicon Valley now sources apricots and oranges...

The story of comparative advantage and the different and changing worth of one versus another is well explained in Landes' "The wealth and poverty of nations", already quoted in other comments.

[Cranky Observer]

Interesting article over at Slashdot
http://it.slashdot.org/article.pl?sid=06/06/10/0828228
discussing how Bank of American technology employees in San Francisco are being told to train their Indian replacements or they will not get any severence payment when they are laid off at the end of the year. Those severence checks really keeps the US economy growing!

Cranky

[Blissex]

«technology employees in San Francisco are being told to train their Indian replacements or they will not get any severence payment»

If these people had a union, they could all decide not to train their replacements, and their collective refusal would mean that their employer would have to reconsider, or offer rather more money.

But since each of them is afraid that the others will take severance and her/his own refusal will not have any effect other than a loss, all of them will do as the bank wants.

[Charles]

Blissex, ad hominem does not substitute for facts.

You have alleged that a statement that I made *why* statistics quoted to indicate Americans are doing poorly in education are misleading.on was "bullshit." In paraphrasing that previous post, I pared down this longer statementto a few words. You now call this "a shameless misquote."

You further twist what I said in this manner: :"the vile bullshit here is the argument is that «autistic kids, emotionally-troubled kids, immigrants, kids with serious medical problems, etc.» should not be considered as «our students»; "

Have I ever claimed that children who test poorly are not ours? No. This is pure fiction. I have said that many foreign countries don't test such students, so their statistics look better.

Remarkably, I managed to do that without using foul language or accusing you of wrongdoing.

When you finally get around to dealing in facts, you discover that my source is "good," but only because you are able to extract a few nuggets to support the contention that American education is not doing well. Even there, you have to contort the data into positions a yoga master would find challenging. The report is about myths on public education. Among the points it makes are that:

"Between 1960 and 1985, approximately half of the decline in SAT scores can be attributed to a more diverse population of some one million test takers. The real decline in [SAT] scores is about 5% which, according to researchers at the Sandia National Laboratory, is due primarily to the changing sample mix." It adds, summarizing all test measures, "The data on student achievement present two challenges.
They do not support the public perception of public school decline or failure as defined by that data."

In other words, this "good" report substantiates the main point I made, that education is not declining. Now, as to explaining why official scores have declined while actual achievement has not, one has to look at the expanded population of students taking tests. And there, one simply has to know what one is talking about to realize that since the 1960s, the population included in the public schools has been increased dramatically to include children who would have been kept at home previously. While these include immigrant children, of which the US has a larger fraction than most countries, it also includes autistic, emotionally-troubled (etc.) children.

Now, you have brought no new facts to the table, just abusive language and unsupported opinion. That does not recommend you as a conversation partner.