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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.

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|In: Industry Commentary|Last Updated:

In this presidential campaign (presidential as in “for the office of president,” not “of a caliber deserving of the office”), “spin” is the label applied to the most accurate statements candidates make. Complete fabrication is a polite label for the other end of the spectrum. (Don’t believe me? Check www.factcheck.org — an outstanding and completely non-partisan website whose name is well-deserved.)

Business speech isn’t far behind. Take as a recent example a report, published by the ITAA — the Information Technology Association of America, on offshore outsourcing’s impact on the U.S. economy (the ITAA calls it “global sourcing”).

According to the ITAA, offshore outsourcing is good for the U.S. economy. In this, it isn’t alone, of course, and the point of this column isn’t to debate that issue. It’s to debate whether the ITAA is offering real evidence, or just more spin than you’d find in an average pulsar. Take, for example, this statement:

“In the software and services area, the economy will create 516,000 jobs over the next five years in an environment with global sourcing but only 490,000 without it. Of these 516,000 new jobs, 272,000 will go offshore and 244,000 will remain onshore. Thus the U.S. IT workforce will continue to grow.”

Sounds great, doesn’t it? But look more closely. The ITAA predicts that with global sourcing, the U.S. economy will create 244,000 domestic jobs; without it, 490,000 domestic jobs.

It didn’t read like that, did it?

Another quote from the ITAA report:

“While global IT software and service outsourcing displaces some IT workers, total employment in the United States increases as the benefits ripple through the economy. The incremental economic activity that follows offshore IT outsourcing created over 90,000 net new jobs in 2003 and is expected to create 317,000 net new jobs in 2008.”

90,000 net new jobs spread throughout the U.S. economy sounds great. But are they full-time jobs or part-time? The ITAA doesn’t say, nor does it provide an estimate of the average wage of these marvelous employment opportunities. Want to place a bet?

Then there’s this:

“Workers are expected to enjoy a bump up in real wages. Offshore IT software and services outsourcing actually increases average real wages of U.S. workers. With lower inflation and higher productivity, real wages were 0.13% higher in 2003 and are expected to be 0.44% higher in 2008.”

So if you are still employed in the technology sector, the ITAA says you made an extra hundred bucks in 2003 because of global sourcing. Don’t spend it all in one place. Oh, that’s right — you can’t, because you don’t have the time anymore. “Higher productivity” is EconomistSpeak for “employees work more hours without getting more pay.”

One more:

“Demand for U.S. exports is expected to increase due to relatively lower prices of U.S. produced goods and services and higher incomes in the offshore outsourcing destinations. Real exports were $2.3 billion higher in 2003 and are expected to be $9 billion higher by 2008.”

Now that sounds sensational, doesn’t it? We all know the U.S. has had a net trade deficit for decades. Global sourcing is going to reduce it, suggests the ITAA. The unstated reality is just a wee bit different: Sending work offshore is the economic equivalent of importing trade goods, and the U.S. dollars that flowed offshore in 2003 as a result of global sourcing — $11.3 billion — resulted in a net increase in the trade deficit of $9 billion.

And did you notice how much bigger all benefits will be in 2008 than they are right now? This sounds familiar. The ITAA estimates closely resemble those published by the IT research firms during the dot.com era: Tiny markets now, huge sales in five years. And we all know how often those forecasts came true.

Since the ITAA’s members have a considerable stake in promoting offshore outsourcing, its findings were a foregone conclusion. What’s sad is the extent to which the business press reported these findings as fact, with little or no analysis and few attempts to discover dissenting opinions.

Or maybe the problem was a typographic error: Where they said global sourcing is better for the U.S., they meant to say, “Global sourcing is better for us.”

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