Asymmetrical Information

Something else that's bothered me about all these outsourcing quibbles - isn't it in our, and the world's, best interest to help create a growing, prosperous middle-class in the planet's second largest country?

My outsourcing story -- I'm getting some extra money on the side because of Indian outsourcing.

I live in NYC. I used to have an academic career but now am in business. Still, I've kept up my math education interests.

Due to my website, replete with c.v., I get an email from an Indian company. They want me to review and write math texts that are used in community colleges in America. The community college outsources the publication of a text that is custom-made to their curriculum. The Indian company has low overhead (I'm sure their editors are lower-paid than the textbook editors here in NYC). They find academics in North America, who understand teaching students here better than Indian writers would know, and pay us on a per-job basis.

I hooked up about 5 of my friends with this company to do contract jobs for them. We email the Word documents between each other, and confer through AIM, email, and internet phone. This kicks ass. So instead of wasting my time playing games on the internet, I've increased my productivity. Some people in India are enriched, and students get a text that's not the usual generic-market crap that's over-priced. Everybody wins! I love it!

Anyway, I think it's fabulous that a country like India is getting development like this. They've got lots of smart and well-educated people there, and being part of a worldwide free enterprise system can only stabilize their country more in years to come, and I hope that the wealth spreads around. Just like microlending, this is a way for sustained growth and prosperity. Foreign aid handouts are great for emergencies, but not for the long run.

matt, you must have not gotten the memo:

the 3rd world is only supposed to prosper on its own terms, with happy farmers and herders living lives of picturesque poverty that allows heroic liberals to provide development and medical aide, adding a dashing airr to their resumes and getting some tail on the side. don't you know anything? hehehe

plus, anything that helps the us is self-interested, greedy and imperialistic, and thuis by definition evil.. can't have that!

Thank you Jane, for insight I hadn't heard before but, in true internet fashion, will recycle. I'm especially impressed at the ninety minute 7km commute and the fact that so many concerns there provide their own electricity.

Meep: Way to go. I'd do the same thing, if I were into math education. (I admit a bit of numeralphobia)

That's a great story, meep. It is ridiculous how far behind the education industry has lagged in the productivity explosion taking place elsewhere. To be fair, some of the reasons it has are pretty tough nuts to crack, but increasing productivity in textbook publishing is a good place to start.

One of the other limitations that you didn't discuss was language barriers. Some companies are finding that English as a second language just doesn't cut it for customer satisfaction levels.

The countries that neatly fit both needs -- cheap labor and speak English fluently -- are the countries that will see the biggest increase in outsourcing in the next 10 years. Those two countries are Canada and Australia.

Last time I had a problem with our EMC (large disk storage device), my calls were routed to Melbourne. While the guy on the other end had a somewhat thick Aussie accent, I never had to ask him to repeat himself.

So the lack of English skills will act as a governor on outsourcing as well, and will definitely influence decision-making at high levels.

About 30% of America has a college education. Imo degree standards have dropped to credentalize the number of college grads the Universities currently churn out. The number of underemployed people has vastly increased in the last four years, yet the Bush jr job plan revolves entirely around education. I dont believe in unfettered free trade, talk about efficiency all you want, if US big business can get labor at a buck an hour in Mexico, plus no OSHA and no EPA regulations, thats were they will build there plants. Our politicians need to put the fair back into the concept of free but fair.

I know some of the last remaining workers in Pghs Steel Mills, and Bush had bought himself alot of goodwill way beyond those steelworkers, with the tarriffs on eastern European steel. The Slavs were selling rolled steel at about half the cost of materials, and the USX rolled steel was piled up along the rivers prior to those tariffs being enacted. Then Oneil quit or still wouldn't play ball, and the tarriffs were lifted. Last I talked to the guys I know that work at USX, they say they think that USX will have nothing but a few mini mills involved in the process of steel production within five years.

I think there are many reasons for government to subsidize parts of our manufactoring base. I dont think we should have a complete hands off, free market approach. We should steer some of these subsidies to the types of manufacturers that provide good jobs to the 70% of America with no advanced education.

I get it now. Conservatives love outsourcing, as long as it doesn't affect THEIR OWN JOBS. That's a lovely little concept. Sort of like the conservatives love of the Iraq War, where the non-investor class American troops are being killed and maimed, not to mention the inconsequential deaths of THOUSANDS of Iraqis.
Sounds like a good deal, huh?

--Cobra

I'm an engineer and I have nothing agaisnt outsourcing. So much for that straw man.

Di,

Are you a currently EMPLOYED engineer, or a DOWNSIZED engineer? I would think that may color your opinion somewhat, IMHO.

--Cobra

Jane,

Could you please point me to your reference to the productivity figures? Is this the productivity of the Indian economy as a whole or for the portion of it that comprises outsourcing industries? If the first, the comparison is neither surprising nor apt, US firms outsourcing to India couldn't care less what the productivity of Indian agriculture is, for example.

As for the latter, if the productivity of firms outsourcing to the US from India is indeed lower than the US, why ever would a US firm engage them? Trust me, they wouldn't. Day to day business doesn't care a whit about national economic productivity, except perhaps to the extent that increasing national productivity in the US seems to drive up market expectations of corporate profits and, therefore, share prices generally.

They aren't measuring the same thing. In the context of a business decision to outsource, productivity is a fairly simple measure of output to US salaries versus output to contracting fees or Indian salaries -- output being measured in whatever the business finds meaningful and measureable: revenues, profits, widgets, or service calls handled. All else being equal, if that ratio were favorable I trust anyone with a Chicago MBA would know to close the deal no matter what the national productivity rate was. Measures of productivity of an economy as a whole, made by economists, are rather more, er, complicated. Like really, really complicated. And they bear little on my business decision to set up or engage a call center in India.

US business, it turns out, takes its gravy straight up.

Hey Cobra,
Out of work or something? If so, I hear they're hiring in Bangalore. Go check it out and let us know how it goes.

"Are you a currently EMPLOYED engineer, or a DOWNSIZED engineer? I would think that may color your opinion somewhat, IMHO."

I've been both and I say protectionism is a bad idea.

I mean, if I got to spend my entire adult life not spending huge amounts of money on a shitty car thanks to competition from Japan, why should I turn around and complain that some software consumers are getting a deal from India?

If my livelihood depended on using the force of law to stop my customers from getting a better deal elsewhere, I certainly wouldn't be honestly earning my middle-class lifestyle - and I'd be reminded of it every time I walked into my middle class home I got by dishonest means.

Ken writes:

>>>If my livelihood depended on using the force of law to stop my customers from getting a better deal elsewhere, I certainly wouldn't be honestly earning my middle-class lifestyle - and I'd be reminded of it every time I walked into my middle class home I got by dishonest means.

Are you saying that anybody working for the steel industry (tarriffs) and the farming industry (subsidies to combat foreign competition), and the American drug manufacturers (Bush doesn't want old people getting those scary Canadian prescription drugs)have DISHONEST jobs?

--Cobra

Cobra:
Steel: Yes, if your job depends on import restrictions to stay in business (the huge old-line mills) rather than agility and quality (modern mini-mills).

Farming: If you're living off government subsidies, yes. (I grew up on a farm - but Dad had a paying job too.)

Pharmaceuticals: No. They definitely earn their profits by the extremely expensive and drawn-out process of finding new drugs and proving they work. The issue here isn't where the drugs are made. Drugs made HERE may cost less than half as much in Canada. It's that we allow socialist countries to free-ride off of us. They use government monopsonies to drive the development costs out of the price they pay. Americans wind up paying for all the development costs of drugs used all over the world.

This results in a severe market distortion, which in a free market is corrected by Americans shopping for drugs in cheaper markets. Without government interference (other governments), the situation wouldn't exist in the first place. If we can shop for drugs in other countries, then either the drug companies would have to raise the foreign prices and lower American prices, or they would have to limit the quantity shipped abroad to what the other countries should be using for their own patients - but the other countries would have trouble actually making sure the drugs went to their own people...

I can't account for why Bush wants to help keep the system tilted against Americans. He does a hell of a lot of stuff I disagree with - but the Democrats are far worse in nearly every case. In this case, Kerry would have taken away the profits that drug companies need to develop new drugs.

Another example: As a politically-connected ball team owner, Bush stole (via eminent domain) peoples' land, homes, and businesses to make a new stadium. That's bad. Democrats often won't allow you to build on your own land, and don't think that grabbing about 40% of your income every year is enough. That's worse.

Protectionism is a welcomed policy for an infant industry that needs to exist in the country.

For established industries, it's a invitation to continue inefficient work and be uncompetitive on the international scene.

I don't think the average American can maintain its current lead in quality of life. But it's an inevitability and the only way to prevent our quality of life from falling is to bring the rest of the world up. That method is best done through free trade.

begbee, it doesn't make sense that the Slavs were selling steel at 1/2 the cost of their (the Slavs) making it. I know the typical Polish businessman joke is "We'll make it for $2, sell it for a $1, and make it up on volume". (Maybe I should say zlotys?) That is a guarantee for disaster. Polish (and other Slav businessmen) are a LOT smarter than that.

Did you mean that the Slavs were selling the steel at 1/2 the cost of Americans manufacturing the steel?

Second, the WTO was about to smack our hands (again) on these tariffs. That would have cost different American manufacturers. (The WTO had smacked us with the extraterritorial income exclusion.)It was not the O Neill situation.

Third, when the price of steel goes up, the price of stuff manufactured with steel goes up. The steel tariffs hurt American car makers and other users of steel. It also would have caused the cost of the end product to go up -- so the consumer would have paid the price.

I don't buy into the line that "American's pay for the drug development for the whole world", unless you mean through government funded research. If Pfizer can't make a profit selling Viagra to Canadians they are free to just stop. My guess is that they just don't reap as much of a patent windfall as they do in the US, but they still are making money.

And with respect to Indian companies making their own electricity, according to free market theory wouldn't that make them more efficient? I mean, they aren't depending on some huge government monopoly for their electricity, so that makes them more agile. Or something.

Jeff-

It's very simple. A pill costs $800,000,000 in R&D, and 40 cents in materials. That R&D has to be paid down within the life of the relevant patents.

If Canadians pays $4/pill, and Americans pay $10/pill, they're paying 40 cents for materials and $3.60 for R&D, while we're paying 40 cents and $9.60, respectively. Therefore we're paying 300% more for R&D even though we're only 25% wealthier per capita.

Put another way, America is X% of the world's drug consumption, but pay 3X% of the pharmaceutical industry's R&D budget. Why is that? Frankly, Japan, Canada and Western Europe aren't so poor they can't afford to pay their fair share of the burden.

Europe is having the same problem we are, but instead of just two countries, they have 15.

http://open.imshealth.com/webshop2/IMSinclude/i_article_20021030.asp

Eventually the G8 or G20 is going to have to strike a deal where they all agree to pay the same price for any given drug, adjusted for PPP. It's the only fair way to spread the burden of R&D, seeing as how we all benefit the same from modern medicine. America and the UK (the only other nation to really kick in their share) will have to be willing to impose penalty tariffs on any nations who do not comply.

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