“If all economists were laid end to end, they would not reach a conclusion.” — George Bernard Shaw
Offshore outsourcing is rapidly falling out of favor.
Not the business practice. That continues to gain momentum. It’s the phrase. “Offshore outsourcing” is now “global sourcing.” Sounds less pejorative, don’t you think?
To be fair, it’s a more accurate term, since the biggest and most successful offshore providers have U.S. operations to provide client-facing services. Since Keep the Joint Running is a fully buzzword compliant (FBC) publication, offshore outsourcing is out, global sourcing is in.
In a recent article extolling the economic benefits of global sourcing, then, I read a peculiar statistic: Every U.S. dollar spent abroad brings $1.12 back to the U.S. While I’m hesitant to criticize practitioners of disciplines, such as economics, that I don’t understand all that well, let me stick my neck out here and suggest that the author of this statistic should refrain from drinking any more absinthe.
For those of us whose blood chemistry doesn’t include essence of wormwood, the United States hasn’t experienced a trade surplus in decades. If every dollar spent abroad brings back $1.12, something isn’t adding up.
Despite the critiques and concerns expressed in this column in recent weeks, global sourcing probably is good for the U.S. economy. Except for one small problem: There is no such thing as the U.S. economy. We’ve always had not one economy but two.
One is the capital economy, based on the compensation received by those who invest in various enterprises. The other is the labor economy, based on the compensation received by those who invest their time and effort in enterprises owned by others. The Dow Jones Industrial Average and other market indices measure the state of the capital economy. So does the Gross Domestic Product — our standard measure of economic health. That the capital economy benefits from global sourcing is true beyond a reasonable doubt.
Until recently, the capital and labor economies were coupled closely enough that keeping separate track was unnecessary: If the capital economy benefited from something or other, the labor economy benefited as well, at least in the aggregate. But with the advent of a global economy and extensive automation, they’ve come unglued. So we need a useful measure of the labor economy. Those we have are worse than worthless. They’re misleading.
The unemployment rate, for example, doesn’t include those who have given up and aren’t looking for work. Job creation numbers are no better. For example, last month’s ballyhooed figure of 301,000 new jobs included more part-time than full-time positions and was silent on whether the individuals who found full-time employment gained or lost wages compared to their previous positions.
What we need is an aggregate measure that tells us something useful about the health of the labor economy — perhaps “Average Wage Earned” (AWE)? From all reports, it isn’t very healthy: While earnings from investments have been growing at an average rate of about 11% per year, wages have been worse than flat. In 2003, those who work for a living and had jobs actually lost ground to inflation. Statistics that average in the $0 per month salaries of those who lost their jobs aren’t available. They certainly wouldn’t improve America’s overall level of AWE, and global sourcing can only reduce it further. The most basic rule of economics, the law of supply and demand, rules this domain, and the whole point of global sourcing is to increase the labor supply relative to demand.
Does this make protectionism a good idea after all? Of course not, although those who decry protectionism often have highly selective vision. It’s well-known, for example, that American agribusiness receives huge government subsidies, which is protectionism just as much as a high import tariff.
What we need is more basic: A national dialog on the subject of global sourcing rooted in clarity rather than obfuscation. And that requires an end to the current practice of argument from personal advantage on the part of those who promote global sourcing.
Whether the subject is public policy or employee relations, managing the impact of global sourcing begins with the recognition that those who set strategic direction live in the capital economy while those who live with the consequences live in the labor economy.
This recognition doesn’t lead to any easy solutions, either for your business or for the national economy. It does, however, take the first step. Because as with any difficult problem, the first step in finding a solution is recognizing that there is no simple solution.
Or, more accurately, that there is no simple solution that works.