AS THE PACE OF JOB LOSSES ACCELERATES TO 1.2 million per year, global outsourcing has become the central issue in American politics. It is ironic that the cries for protectionism are getting louder, even as American companies are reaping the benefits of globalization; commanding a market capitalization of $15 trillion—about half of the global capitalization. More importantly, American economy continues to grow faster than the rest of the world; according to Morgan Stanley, America accounted for 96% of the cumulative increase in global GDP during 1995-2002.

The Logic of Global Outsourcing
The current hysteria around the projected job losses—200,000 per year—arising from global outsourcing of services is myopic. We should not lose perspective, and ignore the underlying strength of the American economy; a free-market system that has generated 3.5 million jobs per year, over the past decade. Focusing on job losses in America without recognizing the corresponding job gains is like managing a bank account by counting the withdrawals, and not the deposits.

Global outsourcing is good for American shareholders, consumers and workers alike. U.S. companies and their shareholders profit from the lower costs (50 to 70 percent savings), and the productivity improvements that result from outsourcing; they also profit from the related export of equipment and software to outsourcing destinations like China and India.

Global outsourcing creates value that far exceeds the disruption it brings to the lives of the displaced workers. A McKinsey study found that every dollar of labor cost outsourced offshore creates over $1.45 of value; 78 percent of this value is retained in America and only 22 percent of the value goes to outsourcing destinations like India. These economic benefits are passed on to millions of Americans who are as invisible as the services they consume. The disruption is concentrated and conspicuous; the benefits are widely dispersed and invisible.

Global outsourcing alone cannot replace enough jobs to avoid the imminent skill shortages and associated inflation. The educated workers in India have a comparative advantage in delivering low-skill services. They cheerfully perform repetitive jobs in calls centers and data centers at 15 percent of American pay. They are only a part of the solution to upgrade the jobs in America. Every job outsourced generates cost savings to be invested in a better job for an American.

The American economy is close to its full-employment level and the workforce is projected to peak at 160 million, leading to a labor shortage of 5.3 million by 2010. America will need to open its borders wider to outsourcing and immigration (more visas) to address this structural problem. Outsourcing low-skill jobs to other countries helps America solve its structural problem with minimal disruption. This is far less demanding on national resources than a massive inflow of immigrant workers.

Corporations like GE and American Express understand the macroeconomics of global outsourcing, and the structural issues. They outsource selectively and responsibly, and pass on billions of dollars in savings to American consumers and taxpayers. It is reported that GE adds about $340 million a year to its bottom line from its service centers in India. Knowing what to outsource is the ultimate core competency of a company. According to economists at MIT, if Chrysler had not outsourced manufacturing of automotive parts to partners around the world, it might have perished instead of becoming an appealing merger partner for Diamler-Benz. At American Express, a significant proportion of the recent improvement in earnings has been attributed to its cost-effective back-office operations in India.

The Dynamics of Disruptive Creation
Joseph Schumpeter propounded in 1942 that waves of destruction and creation would blow through all capitalistic economies from time to time, relentlessly renewing the economic structure from within. Adam Smith in The Wealth of Nations asserted two centuries ago that over the long run, productivity growth generates higher incomes, which then drive higher spending, and promote economic expansion. It is through these waves of disruptive creation that America has emerged as the wealthiest nation.

The American economy went through a Darwinian ‘disruptive creation’ in the Nineties. Based on Department of Labor data, during 1989-99 about 1.3 million jobs (net) were eliminated due to automation and business restructuring. Over a million manufacturing jobs went to lower cost destinations like Mexico, Canada and China. However, the American workforce continued to grow and the wages increased. Overall the economy created over 22 million jobs (net) during the Nineties. Both labor productivity and GDP grew by about 20% during this period. About 2.7 million people found jobs requiring an improved skill set, and getting higher pay.

America should learn from its past experiences as it goes through a new wave of disruptive creation, this time triggered by global outsourcing.

The Power of Now
The U.S. labor productivity improved by an astounding 4.8% in 2002, but in the short run productivity gains do not help create jobs. Corporations are meeting small increases in demand while still eliminating jobs. The U.S. is experiencing the most protracted job-market downturn in its recent history, despite the improvements in productivity.

Unlike the job destructions in the past, this wave has affected college-educated workers as well. Wall Street Journal reported that about 400,000 educated workers in the U.S. have been unemployed for six months or more.

America faces a dilemma—productivity or employment—both in manufacturing and services sectors. We cannot afford unproductive companies protected by barriers to automation or global trade. Protectionist measures would tax the same workers they seek to protect.

Robert McTeer, the far-sighted President of the Federal Reserve Bank of Dallas recently argued against protectionism. “Instead of counting jobs, we should make every job count... There will always be more work to do than people to work. We will occasionally hit a soft spot when we have a mismatch of supply and demand in the labor market. But that is temporary. Don’t become a Luddite and destroy the machinery, or become a protectionist and try to grow bananas in New York City.”

As Larry Summers, the former U.S. Treasury Secretary argued, the best social welfare program America can have is a dynamic economy where jobs are looking for people—as well as people looking for jobs. We need creative solutions to help workers directly affected by global outsourcing. Wage Insurance and Tax Credits are positive measures that align the incentives of employees and employers. Wage Insurance offers the dislocated workers half of the difference between the old wage and new wage. Tax credits are offered to employers who hire dislocated workers. Let us learn from the past, and reinvent the future.

Max P. Michaels is the Co-founder of CRYZTAL Capital, a Corporate Member of the U.S.-India Business Council. He is an alumnus of MIT, who has worked for McKinsey & Co. and Morgan Stanley in London and New York. He serves as the Chair of the CEO Council of TiE New York. He can be reached at mpm@CRYZTAL.com.