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May 2004

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Offshoring the Middle Class

by Glen Emerson Morris

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The science historian James Burke commented in his book, "The Axemaker's Gift," that new technology is frequently a double-edged sword. It initially offers too many benefits to resist, but in the long term it can result in unintended and unpredicted consequences that are harmful to those who adopted it.

The use of the Internet to outsource American jobs is a classic example of this principle in action. The Internet initially made it easier for American workers to do many kinds of work. Now it's threatening the very jobs it once helped support.

The Internet has become the latest tool for American business managers who believe low wages are beneficial to their businesses, and should be rule, not the exception. This philosophy is so widely supported by Wall Street that stock prices tend to go down when government reports indicate that wages are up. The argument goes that high wages cause inflation and lower profits. While this may have been true at an earlier point in industrialization, now there are sound arguments high wages produce neither.

On the point that high wages cause inflation, in reality, that is, when inflation is defined by a dictionary rather than by a politician, inflation can only be caused by government presses printing more money than was previously in circulation. (As defined by Webster's 1913 Dictionary, inflation is " Undue expansion or increase, from overissue; -- said of currency.")

What high wages can bring about is in reality price escalation, though in a high technology economy, even that is questionable. The purchase of the computer by a majority of consumers has actually brought the price of computers down. Research and development has allowed hard drives not only to come down in price as their capacity skyrocketed, it has also allowed hard drives to require less and less metal to manufacture.

On the point that high wages cause lower profits, even some business publications disagree with that now.

Business Week recently ran an article that questioned both the concept and desirability of a low wage economy ("The Costco Way," April 12, 2004). The article compared the approach of Wal-Mart owned Sam's Club, noted for their low wages and harsh working conditions, with Costco, a company with a similar business model except that it pays better and offers better working conditions. The results were that Costco generated 34 billion dollars compared to Sam's 35 billion, but with only two thirds of the employees. It doesn't take a Cray computer to determine that Costco workers are able to spend much more buying products and services than Sam's Club employees.

While it may initially seem better for an American company's bottom line to ship work to India, the long term consequences of many companies doing that is a general and substantial reduction in the disposable income necessary to buy many American products. Money sent by American businesses to Indian workers is spent in India, primarily on products and services produced in India.

In March, 2004, the San Jose Mercury News ran a story which estimated that one in six jobs in Silicon Valley was vulnerable to offshoring. The figure was one in seven jobs for San Francisco, and one in ten jobs for the rest of the nation. Given that the jobs being offshored are higher paying than average, the annual total loss to the national economy could be in the hundreds of billions of dollars.

Offshoring advocates claim that offshored jobs will be replaced with comparable paying jobs, but they can't say where the jobs will come from. So far, statistics indicate the software engineers replaced by offshore Indians have been a having a tough time finding replacement jobs, of any kind. According to IEEE-USA, the U.S. wing of the Institute of Electrical and Electronics Engineers, the joblessness rate for electrical and electronics engineers rose in 2003 to a record 6.2 percent, compared with 4.2 percent in 2002.

The effect of offshoring in Silicon Valley has been highly noticeable and largely negative. Pay rates are substantially down, and work hours are substantially up. Accustomed to outrageously high rents, Silicon Valley landlords lowered rents only to about 1999 levels after the crash, while software development companies set the pay rates back to about 1995 levels. The result was devastating for local merchants. The Sunnyvale shopping mall, located within five miles of Apple, Sun, Intel, Texas Instruments, AMD, AOL, Yahoo! and Ariba, went bankrupt.

Like the Internet, offshoring is proving to be another double-edged sword. Initially, it offered rewards too irresistible to businesses, but in the long term offshoring may prove to be a disaster for America.

No one on Wall Street seems to be considering the consequences of offshoring, but it's not hard to see where it will lead, if one looks at the different phases offshoring has gone through.

In phase one, America imported tens of thousands Indian software engineers and effectively trained them in the techniques of developing world class software. In this phase, the Indians imported spent a good part of their salary in this country on rent, food, and other expenses. The profits earned by the software companies that employed them also stayed here.

In phase two, Indians software engineers were allowed to work from home, in this case India. Their salaries were spent in India, but the salaries of those who managed them were spent in America, as well as the software company's profits.

In phase three, the management duties were also exported to India, and even larger salaries were spent in India, though software companies' profits were still made and spent here.

In phase four, rapidly approaching, India will launch its own software industry, exporting world class software to America, Europe and Asia, undercutting American software prices and decimating the software industry America pioneered.

Ultimately, the question facing American businesses is not whether they should have low paid employees or high paid employees, but whether they want other businesses in America to have low paid employees or high paid employees. One company's employees are another company's customers.

To a degree, the offshoring of some jobs is unavoidable. But to base an economy on the practice in the long term is just not going to work. What is being offshored is not just jobs, but entire industries, and the American middle class. America can't afford to lose either.

Glen Emerson Morris has worked as a technology consultant for Network Associates, Yahoo!, Ariba, WebMD, Inktomi, Adobe, Apple and Radius, and is the developer of the Advertising & Marketing Review Data CD.

Copyright 1994 - 2010 by Glen Emerson Morris All Rights Reserved

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