It was March 2004 and the ex Harvard professor, head of U.S. President George W. Bush's Council of Economic Advisers, Gregory Mankiw caused a political storm among Democrats and Republicans. Mankiw had the temerity to suggest "outsourcing [of U.S. jobs] is just a new way of doing international trade"... "a good thing"..."and there can't be any doubt about the fact that trade makes the economy stronger." Standard economic advice provoking a call for his immediate resignation [from a Republican] as well as the following responses:

Senate Minority Leader Tom Daschle, "If this is the administration's position, I think they owe an apology to every worker in America."

Speaker of the House of Representatives Dennis Hastert, "outsourcing can be a problem for American workers and the American economy." "An economy suffers when jobs disappear."

Hillary Clinton, "I don't know what reality the Bush administration is living in, but it's certainly not the reality I represent, from one end of New York to the other."

Democrat Presidential candidate John Kerry accused the Bush administration of wanting "to export more of our jobs overseas."

The U.S. economy was recovering from a brief recession in 2001, a recession often provokes histrionics against the open market, from politicians reflecting popular demands that the government "do something." Unfortunately, all too often the government has "done something." President Bush's tariffs on steel imports to "protect" workers in the U.S. steel industry from outside competition, resulted in between 45,000 and 75,000 job losses in those U.S. industries which use steel [and which employ approximately 40 times as many people.] 1 President Bush had also signed a bill preventing federal governments from outsourcing contracts overseas. A previous federal ban on outsourcing in Indiana resulted in taxpayers facing a total bill of $23 million for processing unemployment claims, an increase of 53 percent over outsourcing to India for $15 million. 2 When Robert McTeer the President of the Dallas Federal Reserve was asked about possible government policy toward outsourcing, he responded "If we are lucky, we can get through the year without doing something really, really stupid."

In 1992, a Presidential election year, the U.S. economy was again recovering from recession. Presidential candidate Ross Perot famously proclaimed the "North American Free Trade Agreement" would produce a "giant sucking sound" as U.S. jobs flowed South into Mexico. Fortunately, Perot lost the race to the White House and the U.S. economy proceeded to generate 17.8 million net private-sector jobs between 1993 and 2002. 3 NAFTA benefited both the U.S. and Mexico in terms of wealth, and in Mexico facilitated the transition to democracy and the strengthening of the rule of law. Nonetheless, in 2004 we heard in the candidacy of John Edwards for the Democrat Presidential nomination, that he wants to rewrite N.A.F.T.A. Billboards in the South Carolina Democratic primary asked "Lost your job to free trade or offshore outsourcing yet?" John Kerry, the victor of the Democrat nomination ranted "Benedict Arnold CEOs send American jobs overseas" [Mr and Mrs Kerry - formerly Tereza Heinz - invest in Heinz a company which outsources.] Senator Tom Daschle [again] "George Bush says the economy is creating jobs. But let me tell you, China is one long commute. And let me tell you, I'm tired of watching jobs shift overseas."

Senator Christopher Dodd [D-Conn.] and Representative Nancy Johnson [R-Conn.] are sponsoring the U.S.A. Jobs Protection Act to prevent U.S. companies from hiring foreign workers in positions for which American workers are supposedly available. In February, Senate Democrats announced their intentions to introduce the Jobs for America Act, requiring companies to give public notice three months in advance of any plan to outsource 15 or more jobs. In March, the Senate overwhelmingly approved a measure banning firms from federal contracts if they outsource any of the work overseas. In the past two years, more than 20 state legislatures have introduced bills designed to make various forms of offshore outsourcing illegal. 1

A recession is part of the business cycle: the U.S. economy grows strongly for about eight years and then contracts slightly for a couple. It is like a human that is productive for sixteen hours, and then sleeps for eight. Yet every time we forget the time before and the following recovery and instead imagine there is something drastically wrong with the economy, a potentially fatal disease.

The latest story is as follows:

Companies are exporting jobs, mainly I.T. jobs to India and manufacturing jobs to China where labor is much cheaper, allowing investors to reap profits whilst everyone else in the U.S. economy suffers. This allegedly explains the "jobless recovery" from the 2001 recession, investors profiting at the expense of U.S. jobs.

It is, of course, nonsense, because [as usual] it overlooks the effect of competition.

Outsourcing and Employment in the U.S.

The main effect of companies outsourcing is not increased profits but lower prices passed on to the consumer, which fuels demand for more products and thereby creates more jobs. Outsourcing raises productivity, raising the wealth and living standards of ordinary Americans. Demand for products is not some fixed quantity nor is the size of the labor force. As long as there is demand by workers for employment and demand by consumers for more products, the two will meet. Workers are consumers, the sole aim of labor is consumption, and increases in productivity benefit all workers beyond a very short-term. Total U.S. employment is overwhelmingly a function of the size of the labor force. U.S. employment has risen consistently on a par with increases in the size of the labor force since 1950. 3 Outsourcing, like trade, is not a zero-sum game. Net employment gains in one nation do not mean net losses in another.

There is no meaningful difference between jobs lost due to trade and outsourcing and jobs lost due to improving technologies and methods of production. They are how wealth is created and how living standards rise. U.S. citizens previously employed [who also benefit from cheaper products] then find other items to produce and this is how the economy grows.

wave after wave of labor-saving technological innovation, from containerization that replaced longshoremen to dial phones that replaced switchboard operators to factory-floor robots that replaced assembly-line workers to computers that replaced back-office clerks to automatic teller machines that replaced bank tellers to voice mail that replaced receptionists. Yet in the face of all this flux, no chronic shortage of jobs ever materialized. 3

A persistent complaint is a net loss of 2.6 million jobs since the start of the Bush administration. At the start of the Bush administration however, unemployment was at 4.2 percent well below the "natural" rate of 5 percent and investment in the economy was at a cyclical high. A 0.8 percent rise in unemployment accounts for two-thirds of the 2.6 million net job losses. 4

The U.S. economy is highly dynamic, every year huge numbers of jobs are lost, and in most years an even larger number of jobs are created. It is this dynamic energy, this cyclical destruction and creation that generates wealth.

The net increase of 17.8 million private-sector jobs between 1993 and 2002 resulted from a gross loss of 309.9 million jobs and gross creation of 327.7 million jobs. 3

In 2001 the number of gross trade-related redundancies peaked but amounted to only 0.6 percent of gross redundancies that year. 4

Almost 90 percent of jobs in the U.S. require geographic proximity. 1

Outsourcing of Manufacturing Employment

It is true that employment in manufacturing is decreasing. Employment in farming has fallen from 20% in 1940 to 5% today, and yet we are wealthier than ever. From 1983 to 2002, well paid managerial and skilled-professional jobs have increased from 23.4 percent to 31.1 percent of employment. With continual advances in robotics and automation it is inevitable that manufacturing will go the way of farming, where much of the reduction in employment was also due to technological and methodological advances. 3

Between 1960 and 2002 the manufacturing share of employment fell from 28.4 percent to 11.7 percent whilst the manufacturing share of G.D.P. fell from 27.0 percent to 13.9 percent. However, manufacturing output per hour increased by 103 percent between 1980 and 2002 whilst output of services increased by only 50 percent. 3 In other words, thanks to improving technology and technique manufactured goods have become cheaper relative to services whilst demand for manufactured goods had not increased apace. Lower manufacturing shares of employment and G.D.P. are indicators of U.S. manufacturing success. Like with agriculture, productivity gains outstripping demand have meant fewer people needed to produce. And this means cheaper food and cheaper manufactured goods. This has not resulted in net unemployment.

Net manufacturing job losses combined with a small recession produced a jobs scare, and as usual people of other nationalities were blamed. All the jobs are going overseas, particularly to China we are told, U.S. manufacturing cannot compete with cheap imports we are told.

Between 1995 and 2002, U.S. manufacturing employment fell by 11 percent. Yet 11 percent of manufacturing jobs were lost worldwide over the same period. In China, manufacturing employment fell by 15 percent. Meanwhile manufacturing output worldwide increased by 30 percent. 1

From the middle of 2000 to the middle of 2003, U.S. manufacturing employment fell by 16 percent. Manufacturing imports however rose only by 0.6 percent. 3

The picture is clear, U.S. and worldwide falling manufacturing employment is caused by improving productivity.

Imports are traded for exports. Increased imports mean increased exports. It is true that within manufacturing more goods are imported into the U.S. than are exported, but even if they were equal the manufacturing share of G.D.P. would only rise from 13.9 percent to 16.0 percent. Further, increased manufacturing imports over exports mean increased demand for U.S. exports in other sectors. 3

Yes, it is true the U.S. is running a trade [current account] deficit. Until 1980 the U.S. ran a trade surplus with the rest of the world. Australia has maintained a trade deficit since 1860. A trade deficit is net foreign investment. This comes in the form of a consumer loan [net imports of consumption goods] and production investment [net imports of production capital.] Three quarters of the U.S. deficit are production goods. Citizens of other nations are investing capital in U.S. production. And this is meant to be bad?! 5

Outsourcing of Information Technology Employment

Outsourcing occurs in 12 percent of U.S. I.T. companies. 3

Forrester Research has predicted in a widely cited study that 3.3 million white-collar job including 1.7 million back-office positions and 473,000 IT jobs will move overseas between 2000 and 2015. 3
That is 3.3 million gross over a 15 year period. But 7.7 million gross jobs are lost every 3 months! Total U.S. employment is 130 million and predicted by some to grow by around 20 million net in 6 years time [2010.] 1

Research on large financial organizations revealed 80 percent of workers who lost their jobs due to outsourcing were transferred to an alternative employment within the same company. 1

Employment outsourced is not necessarily employment "lost." Outsourcing allows companies to move to 24 hour operations.

Delta Airlines outsourced 1,000 call-center jobs to India in 2003, but the $25 million in savings allowed the firm to add 1,200 reservation and sales positions in the United States 1
Cost savings from outsourcing make U.S. companies more competitive. Companies which die do not employ anyone.

I.B.M. were criticized for outsourcing 3000 I.T. jobs yet at the same time they created 4,500 U.S. positions. Microsoft and Oracle have also both increased outsourcing and domestic employment.

Net job losses in I.T. are due to the dotcom collapse and the business cycle, not outsourcing. And even so the losses are not large. Mathematical and computer related employment grew by 6 percent from 1999 to 2003, and is 71 percent higher than in 1994 [peaking at 74% in 2000.] Net mathematical/computer related employment is expected to grow by a further 35 percent over the next 10 years. 3

Outsourcing means increased productivity, not just in the companies which outsource, but also the companies which use their products.

Offshore I.T. hardware production, for example Dell Computer factories in China, have contributed between 10 and 30 percent of a drop in hardware prices, allowing more sectors of the U.S. economy to take advantage of I.T. to increase productivity. This 10-30 percent drop has contributed approximately $230 billion to the U.S. economy from 1995 to 2002. 3

I.T. outsourcing will similarly contribute to drops in software prices, and better quality software with lowering customer service costs allowing higher research and development budgets, and better quality control with offshore companies specializing in testing code.

For every outsourced dollar sent to India the U.S. economy receives a between $1.12 and $1.14. 1

Outsourcing I.T. services increases global demand for U.S. produced I.T. hardware and software.

The final nail in the coffin of "outsourcing is devastating service jobs" is that the U.S. is a net exporter of services, overall the rest of the world outsourced $64.8 billion net to the U.S in 2002. 1 The U.S. trade surplus specifically in I.T. services increased from $2.1 billion p.a. in 1995 to $4.2 billion p.a. in 2002. 3

From 1983 to 2000 the number of jobs outsourced from the U.S. grew by 3.5 million, whilst the number of jobs outsourced from other nations into the U.S. grew by 4.0 million. 1

The jobless recovery

... is not jobless.

Between the end of the recession in November 2001 and March 2004, according to the Bureau of Labor Statistics there was a net decline of 700,000 jobs, whilst according to the Labor Department household survey, employment increased by 1.9 million. Which is more accurate? 6

The B.L.S. survey samples payroll figures from medium-large businesses.

It does not count the self-employed, agricultural workers, those employed in small businesses or contractual workers.

The household survey noted an increase of 650,000 self-employed workers. 6

In a recession companies restructure and replace employed work with contracted work [often the same person.]

If a person rapidly changes jobs they may find themselves on the payroll of two companies and therefore are double-counted by the B.L.S. survey. Following the end of the recession in 2002 and 2003 the total numbers of people losing and gaining employment fell by 1.2 percent, which lowered the B.L.S. survey by 1 million jobs. 6

The household survey samples over 60,000 households which is a lower sample size than used in the B.L.S. survey, but I think provides safer estimates.

the recent recession and current recovery are a more extreme version of the downturn and "jobless recovery" of the early 1990s -- which eventually produced the longest economic expansion of the post-World War II era. Once the structural adjustments of the current period are complete, job growth is expected to be robust. 1
Literally one hour before uploading this work I hear from C.N.N. that payroll figures are [surprise] up by 300,000 for March 2004, apparently this takes vital pressure off George Bush for the upcoming Presidential campaign.

I would like to end this piece by reproducing part of an article published in the Washington Post by George F. Will

It is difficult to say something perfectly, precisely false. But House Speaker Dennis Hastert did when participating in the bipartisan piling-on against the president's economic adviser, who imprudently said something sensible.

John Kerry and John Edwards, who are not speaking under oath and who know that economic illiteracy has never been a disqualification for high office, have led the scrum against the chairman of the president's Council of Economic Advisers, N. Gregory Mankiw, who said the arguments for free trade apply to trade in services as well as manufactured goods. But the prize for the pithiest nonsense went to Hastert: "An economy suffers when jobs disappear."

So the economy suffered when automobiles caused the disappearance of the jobs of most blacksmiths, buggy makers, operators of livery stables, etc.? The economy did not seem to be suffering in 1999, when 33 million jobs were wiped out -- by an economic dynamism that created 35.7 million jobs. How many of the 4,500 U.S. jobs that IBM is planning to create this year will be made possible by sending 3,000 jobs overseas?

Hastert's ideal economy, where jobs do not disappear, existed almost everywhere for almost everyone through almost all of human history. In, say, 12th-century France, the ox behind which a man plowed a field changed, but otherwise the plowman was doing what generations of his ancestors had done and what generations of his descendants were to do. Those were the good old days, before economic growth. 2

1 "The Outsourcing Bogeyman" by Daniel W. Drezner, http://www.foreignaffairs.org

2 "The Economics of Progress" by George F. Will, http://www.washingtonpost.com

3 "Job Losses and Trade A Reality Check" by Brink Lindsey, http://www.freetrade.org

4 "The great hollowing-out myth" http://www.economist.com

5 "The Division of Labor is World-Wide" by Sudha Shenoy, http:wwww.mises.org

6 "The Myth of a Jobless Recovery" by Tim Kane, http://www.heritage.org