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Thursday, March 25, 2004

More on Outsourcing 

Daniel Drezner's new piece in Foreign Affairs explains well exactly why the current fascination with overseas outsourcing of information technology jobs is just old protectionist thinking in fancy new clothes. The short version is this: outsourcing is just another way of conducting international trade, where what's being imported is just one aspect of the production process (be it customer support or computer programming or what-have-you), instead of a finished product. There's no analytical difference between one kind of importing and the other. If you buy the case for free trade (efficient allocation of resources means a bigger economic pie for the world), you shouldn't have a problem with outsourcing.

Furthermore, the piece quite convincingly pooh-poohs some of the more alarmist talk being bandied about by CNN's Lou Dobbs and others suggesting that enormous numbers of existing jobs are at risk or that the Bush Economy's sad job growth record should be blamed on outsourcers.

Drezner also calls attention to the fact that for those individuals who lose their jobs, the rosy long-term picture painted above is small comfort, and makes some noises about the desirability of assistance (portable health insurance, retraining) to those finding themselves out of work because of outsourcing.

All in all, it's a good piece, and I highly recommend it.

One quibble: Drezner makes one very curious claim, or at least fails to explain adequately what he's talking about.

Drezner explains that
Offshore outsourcing adds two additional political pressures...

The second pressure is that the Internet has greatly facilitated political organization, making it much easier for those who blame outsourcing for their troubles to rally together. In recent years, countless organizations -- with names such as Rescue American Jobs, Save U.S. Jobs, and the Coalition for National Sovereignty and Economic Patriotism -- have sprouted up. Such groups have disproportionately focused on white-collar tech workers, even though the manufacturing sector has been much harder hit by the recent economic turndown.

I don't doubt that there are lots of internet-based anti-offshoring groups trying to influence policy. But the vast bulk of political-economy thinking about protectionist politics suggests that making it easier across the board for groups to organize, if it has any effect at all, should lessen protectionist pressures. As a political scientist himself, Drezner should be aware of this.

Before getting into the specifics, let me point out that what's good for the protectionists is good for the free-traders: we do see consumer's-rights and pro-free-trade groups organizing on the Internet (although your guess is as good as mine as to how deep or extensive their support actually is, especially compared to the anti-offshoring brigade's web groups).

So shouldn't the Internet's effect just be a wash when it comes to trade policy? Yes, probably. But if it isn't, the benefit should go to pro-free-traders. Let me try to explain.

First, you may remember from Econ 101 that throwing up barriers to trade means that uncompetive industries are better off (nobody gets fired, no factories get shut down), but that it also means higher prices on imported goods or services. The clincher here is that the losses outweigh the gains: protectionism is a net loser for society.

So why do we still see protectionist policies like tariffs or anti-outsourcing laws being considered? Remember that there are a few people and industries who are really, really hurt by trade. If you're afraid of losing your job or your business, you are quite likely to spend some time and money attempting to change your prospects. On the other hand, while the savings to consumers produced by free trade are very high across the whole economy, for any given person buying any specific good or service, the savings might be quite small. Hopefully you'll agree that the incentive to write your Congressman to protest a small increase in the price of most things you buy is less than the incentive to write him about losing your job.

In situations like this it’s a lot easier for the smaller group facing the higher individual costs to get together and act collectively. The big, diffuse-costs group faces a much bigger free-rider problem, where each individual basically just hopes that others will do his share of the work, resulting in a level of collective effort below what anybody actually wants. And this is one very widely-held explanation for why protectionists have been so successful historically in getting their agenda enacted.

Getting back to the Internet, one would think that lowering the trouble it takes to organize for everybody equally would either do nothing to advantage protectionists or would lower the costs of collective action just enough that consumers could finally start getting together and lobbying as a group. Unless Drezner knows something I'm missing here, I think this one point of his just isn't correct.


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