Outsourcing the Drive-thru

Ever have trouble with the drive-thru? Joe Pesci in Lethal Weapon has a theory about drive-thrus, you may remember. The wisdom of Pesci lives on..

We can outsource and offshore just about every product or service, unfortunately, the drive-thru will probably always remain a bastion of inefficiency, regardless of improving staffing solutions.

Outsourcing and Economic Gains

Groups opposed to offshoring and outsourcing often riddle their rhetoric with economic untruths and propaganda designed to capitalize on the limited economic literacy of many Americans. Lee Conrad, national coordinator of Alliance@IBM, an affliliate of the Communications Workers of America union has suggested that offshoring efforts by IBM will result in inferior service to customers and harm U.S. workers.

"IBM has admitted that thousands of jobs are being sent offshore to India, China, Brazil and other countries, with plans to increase this outsourcing," Conrad said in a statement during a 2004 protest against IBM.

"This raises serious concerns about the long-term job prospects for workers in the US, and also about the need to ensure that customers have the quality service they expect to receive from IBM."

While it is important to consider the motivation of the union's attitude, the fundamental facts are much different. The "serious concerns" cited by Conrad suggest that the long-term job prospects for US workers will be reduced as a result of offshoring. This limited view fails to consider the economic gains that result from corporate cost reductions.

In a simplified, hypothetical example, if IBM can reduce costs by 40% that should reduce the costs of IBM products by a similar percentage. If an IBM ThinkPad computer cost $2000 before the savings, then the price will necessarily fall to roughly $1200 for the same product. If a consumer's budget for a new computer was $1500, then two benefits will arise from the savings. First, the consumer can now afford the computer, secondly, the remaining $300 allowed in the consumer's budget can then be used to purchase software or accesories for the new machine. So while previously, the consumer could not have purchased the computer, now the consumer will buy the computer and spend the savings on other products. This additional purchasing power will drive the economy, creating new demand for products and with it, new jobs. If a small business were purchasing fifty of these computers, the money saved could allow for capital expansion of the business which would include more jobs. Conversely, the money saved in the hypothetical computer purchase could be returned to shareholders who could then use the return to invest in new industries.

Conrad's argument about the long-term job prospects of US workers is innacurate. The long-term prospects of US workers will improve due to increased demand resulting from cost savings. In the short-term, it is likely that there might be a loss of US jobs, however the long-term will result in a net gain.

The other aspect that pundits neglect is the increase of worldwide purchasing power when industries outsource and offshore. The IT workers in India for example driving worldwide economic growth because they now have higher wages with which they can purchase products that they would not have been able to afford previously. This has created an increase of product demand in India and has resulted in an expansion of the Indian economy and resultingly, the economies of India's trading partners. The same situation has resulted in China. With the increase of foreign manufacturing in China, comes an increase of product demand within China. Outsourcing and Offshoring is creating a new middle-class where none had existed before.

The Nobel Prize-winning economist Simon Smith Kuznets' research has established that increases in real gross domestic product are almost always good for the poor. Kuznets' law states that increases in income inequality that occur in the early stages of industrialization are followed by increases in income equality. This law effectively explains the benefits of globalization. There will be inequalities, however as world economies approach equilibrium, income disparities will diminish.

The US and the Western world have gone through several stages of industrial and economic evolution. Globalization, and with it outsourcing and offshoring, represents a new frontier of economics. As with all revolutions, there will be some growing pains and no system will ever be perfect, however the reality of globalization is that the economies of all participating countries will improve in the long-run.

It is important to remember that economic policy should not be shortsighted. Don't let propaganda from specific groups influence policies in ways that will untimately harm the economy and the pocketbooks of everyone.

Globalization, Economics and Education

outsourcing -- the buying of parts of a product to be assembled elsewhere, as in purchasing cheap foreign parts rather than manufacturing them at home.

offshoring -- the practice of moving business processes or services to another country, esp. overseas, to reduce costs.

The hysteria raised by US and British groups over the migration of skilled "white collar" jobs to places such as India and Thailand is nothing new. It is in the best interest of companies (and ultimately everyone) to find the most efficient and low-cost methods of conducting business. On the surface, it seems that outsourcing and offshoring jobs will lead to increased unemployment in the countries from which those jobs migrated, however reality and history paint a different picture.

Industries such as IT and even financial journalism have established a thriving presence in cities such as Bangalore and Bangkok. While true, Western workers once performed many of these job functions, the offshoring process will ultimately benefit those economies from which those jobs came.

Throughout the history of Industrialism, modernization and outsourcing have altered job functions. When Henry Ford developed the assembly line for automobiles, scores of blacksmiths decried the development as a threat to their horseshoe business. In fact, workers that would have entered the economy as blacksmiths now had new industries to pursue such as tire production, oil exploration/ refinining, steel manufacturing and road construction. There was a net increase of jobs and economic strenghth from the mass production of autos. The blacksmiths were correct: horses would be replaced and their specific job function would become obsolete, however they were incorrect in suggesting that the auto would cause increased unemployement.
The fundamental rule of economics is to look at a policy effect on the whole rather than on a constituent parts. The blacksmiths were (rightly so) looking after their own self-interest; they can't be faulted for trying to preserve their industry. However, the critical element is that the government did not attempt to prevent the auto industry from expanding.

As former House Speaker Tip O'Neil once said, "All politics is local." As a result, politicians will attempt to fashion policies tailored toward their constiuencies. The result is that the rest of the economic picture falls victim to special interest dynamics. The US people as a whole benefited far more than the losses suffered by blacksmiths. As a result, the standard of living and employment increased overall. The auto industry also expanded the economy by creating new business where none existed before.

With outsourcing and offshoring, some jobs are leaving the US. However, there is a net gain of jobs and economic strenghth because of several reasons. First, businesses are becoming more efficient which leads to either lower costs or increased value to shareholders. This lower cost will allow more people to afford products they might not have afforded before. Even higher corporate profits benefit the economy and the individual. If shareholders are making more money, they will invest more capital in creating new business and thus new jobs. The Internet is a great example of this phenomenon. The web-development and e-commerce industry did not exist a generation ago. Yet, the expansion of the web (by mostly commercial interests) has led to jobs that did not even exist in concept years ago. So while Michael Moore loves to harp upon the decline of the auto industry in Michigan in the 1980s, the reality is that the closing of plants led to increased profits which allowed shareholder/ investors to create new companies in other industries, such as IT. The unemployeed auto-workers initially suffered from the transition, but a new category of employee emerged from the ashes of the plant shutdowns. The average American benefited from auto industry realignment, in the form of higher quality products at a lower cost and increased capital available to finance entirely new industries.

The hysteria of outsourcing and offshoring is unfounded. With increased globalization comes increased opportunity for everyone. With the migration of tech jobs to India, comes an increase of Indian purchasing power which will lead to an increase in overall product and service demand. China is another example. Workers are often paid extremely low wages in developing countries, however this low wage is more than they were receiving prior to increased globalization. This is now allowing the average Chinese to purchase goods that they could not purchase (or didn't exist) before. The number of cell phones in China now versus ten years ago is an example.

For the US and Western Europe to remain competitive, they must extract themselves from the politically expedient attitude of the blacksmiths. They must invest more capital in research, development and education. If the average US high school student cannot even find Nebraska on a map, how can the US expect to compete within the global economy? Rather than decrying globalization, the US should instead be condemming the educational system that sets up American students to fail on the world stage.

There are a few recommendations that would pay huge dividends for the US economy. First, comprehensive economic education should be integrated into junior and high school curriculums. Adults rarely use high-school chemistry in their life, but economic theory pervades almost every aspect of my life. An understanding of both is important. Topics such as supply and demand, foreign currency and taxes are essential learning for students to ensure that when they reach voting age, they understand the effects of economic policy on their future employment prospects. Traditional classes such as algebra should be redesigned to integrate practical applications such as banking, calculating loan interest and even fuel efficiency of a car. The entire math curriculum needs to become relevant. This will provide two benefits: students will learn the topics more thouroghly and students will be able to use the skill towards furthering their own career, regardless of field.

Secondly, their should be an emphasis placed on foreign cultures in the modern world. While history is essential, Americans are at a critical disadvantage when it comes to understanding cultural differences across the world and how they affect US market access. Cultural understanding is not about "tolerance," but about competitive advantage. Even topics suchs as the American civil rights movement can be integrated into an economic curriculum. There was a profound negative effect of slavery on the economic strenghth of the South, which most would argue led to the defeat of the Confederacy in the Civil War. The economic superiority and victory of the North had much to do with increased labor efficiency and industrial accumen. Robert E. Lee was a better General than Grant, but the South was hampered by inefficiencies caused by an antiquated labor system. Women's rights had a similarly important economic effect. The increase of women's rights led to an enourmous increase of US productivity through the addition of more women to the workplace. In Korea, students study Western culture primarily to increase their effectiveness as multi-national managers and for when they are negotiatiating with Western companies.

Finally, within the cultural education curriculum there should be dramatically increased foreign language education, especially in languages such as Korean, Russian, Thai and Chinese. Spanish and French are tired and dead for the most part on the global stage and serve very little in advancing the US economic health. The school systems should revamp their goals towards successful navigation of a world economy, not simply survival in a US-centric environment.

There is no excuse for failure, except perhaps apathy. Apathy is a far greater threat to American success than outsourcing or offshoring.

For futher reading:
Economics in One Lesson by Henry Hazlitt.
The Lexus and the Olive Tree by Thomas Friedman