Cadalyst MCAD Tech News #121 (May 20, 2004)

19 May, 2004 By: Joe Greco

There has been a lot in the news lately about outsourcing, particularly when it involves jobs going overseas. I had been thinking about chipping my two cents in, so I started doing some research. So when a colleague recently recommended that I read an article on outsourcing in the March 1st, 2004 issue of Business Week, it motivated me to write this piece, the first of two on outsourcing. The Business Week article, entitled "Outsourcing Isn't a 'Zero-Sum Game,'" is an interview with Marc Andreessen, a cofounder of Netscape Communications who now heads a company called Opsware.

Asked what's driving companies to send tech jobs offshore, Andreessen replies: "You can get three or four programmers for the price of can do everything from routing phone calls to transferring digital images and financial records to doing e-mail, collaboration, and conferencing. Whether the guy is here or in India doesn't really matter that much."

Well, it does matter much, especially if you are a programmer in an industrialized region like the United States or European Union who just lost your job. You lost your job not because you were incapable, but because of the extremely low wages in certain countries.

Later on, asked if outsourcing bothers him, Andreessen says: "I firmly believe that new jobs are getting created and will continue to get created that are better jobs."

This was the theory behind NAFTA, the infamous "free trade" agreement, which promised that better jobs would be created in the United States as lower-wage jobs moved overseas. It hasn't worked for the United States or the country that was supposed to benefit the most, Mexico. Back in 1993, when the NAFTA debate was in full gear, an economist named James Stanford studied the models that generated positive NAFTA projections. He found these models assumed all or some of the following: capital (hence the means of production) is immobile, labor costs are always the same in different countries, Americans will buy more expensive U.S.-made goods, and U.S. imports will be balanced by exports, thus creating new export industries that result in full employment.

However, production facilities and the capital needed to relocate them are indeed mobile, making it easy for manufacturers to find the lowest wages, because, as we all know, labor costs are not the same between countries. We also know that Americans don't usually buy the more expensive U.S.-made goods (instead, we go to Wal-Mart), and that is why U.S. imports are not balanced by exports. In fact, when NATFA was enacted, the U.S. had a $1.7-billion-a-year trade surplus with Mexico; in 2003 the trade deficit hit $40.6 billion. And what did we get for that deficit? American jobs have gone to Mexico while real wages in that country have decreased.

For Americans displaced when jobs migrate, Andreessen suggests retraining: "We have the world's best higher-education system. People come from all over the world to study at American universities. So let's take that strength and keep extending it with government programs and private enterprise to reach out and do a lot more continuing education and retraining. Tax credits, subsidies, private investment, severance benefits -- some combination of those things should work. The cost of that is low compared to the benefits of being in a dynamic economy."

These are good points, but think about the source of government programs, tax credits, and subsidies (I assume from the government). Why does the government (read: taxpayers) have to pay for retaining, when it's the multinational corporations moving jobs overseas in order to enhance their profits?

If taxpayers do have to pay for retraining, the question is how? With more jobs going overseas, less tax revenue is collected by the federal government, which also loses out on corporate taxes when multinationals move their token "headquarters" to countries that are tax safe havens. Combined with tax cuts, this means less revenue is coming into the Treasury. In the United States, almost 70% of the federal budget is committed to mandatory spending in five areas (defense, Medicaid, Medicare, Social Security, and interest on the debt), and that percentage is going up. This means fewer and fewer funds for social programs like retraining.

In fact, according to a report published by the Workforce Alliance, the U.S. Department of Labor decreased its inflation-adjusted investments in worker training by 29% between 1985 and 2003. Although the FY2005 federal budget promises $250 million in grants to community colleges to help train workers with new skills, cuts in other federal job programs threaten to balance out any positive effects of these grants.

In addition, retraining isn't the cure-all, as the 2002 and 2003 numbers from the Labor Department show that those who have been retrained earn, on average, only 73% of what they made at their old jobs, and that number is going down.

A further question is what new skills should displaced workers learn? What jobs will replace those going overseas? Andreessen says that initially as support and maintenance jobs move offshore, American programmers will be freed for more creative work such as building new applications and systems. New industries will also arise, Andreessen predicts, but can't give examples because they don't yet exist: "This is where people get tripped up. It requires a leap of faith. In 500 years of Western history, there has always been something new. Always always always always always."

The idea of maintenance- and support-related jobs going overseas is already old news. We also know about the high-tech jobs lost in computer programming and manufacturing, but jobs are also disappearing in engineering, architecture, science and other areas. Other well-paying, nontechnical jobs in fields such as health care, accounting, and investing are also going offshore.

Andreessen?s faith in American programmers to create new stuff is great, but outsourcing is causing many technology and engineering undergraduates in U.S. universities to abandon their studies. As a result, enrollment in those fields is down. Ironically, the same issue of Business Week recounts the career uncertainties of a young U.S. software engineering student, faced with global job competition, who wonders whether he'd be better off getting an MBA.

While Andreessen can't name examples of new industries, I agree that there will be something new. And in the "500 years of Western history," most of the time the next great invention came from the United States or Europe. However, Andreessen doesn't address what people are supposed to do for income while they wait for these new industries to rise up. In addition, because technology, good education, capital, and the means of production are just as accessible to, for lack of a better term, the non-Western world, what if the next great innovation comes from that area? From my perspective, there's nothing wrong with that as long as a level playing field exists, but it doesn't. In addition to unequal wages, labor and environmental standards in other countries are also lower, which helps to reduce production costs. In short, Andreessen seems to build his economic model on something that is hardly a certainty.

Also, what if the next great innovation does indeed come out of the industrialized world, but its production, hence the jobs it creates, quickly move overseas? This is entirely possible because fewer and fewer innovations are the intellectual property of individuals - there aren't many Thomas Edisons inventing on their own anymore. More and more inventions are the intellectual property of multinational corporations. As we know, they tend to move production to where it's cheapest. So the next great invention may make some multinational corporation richer, but not create any good jobs in industrialized countries.

In expanding his answer on new jobs, Andreessen goes on to say:
"...Look at Seattle. In the early 1990s, Boeing was having a tough time as defense spending was shrinking...But look at what happened: Microsoft, Nordstrom,, REI, Starbucks, Nintendo. Six big new businesses."

I'm sure that ex-Boeing aerospace engineer is just loving his job making coffee at Starbucks or selling skirts at Nordstrom. This gets to the issue of underemployment. The average engineering or manufacturing job in the US pays anywhere between 10% and 50% more than service or retail positions (go to and input some criteria). By the way, Nordstrom first opened a store in Seattle in 1901, REI goes back to 1938, Nintendo has been headquartered near Seattle (Redmond) for more than 20 years, and Microsoft moved there in 1986.

Speaking of Microsoft, you could make the argument that those new jobs there are just as well-paying, or better, than the old Boeing jobs. That's probably true, but it's not the ex-Boeing workers who are now at Microsoft, but rather graduates just a few years out of college. Though college graduates making good money is a positive thing, Andreessen seems to miss the reality that we are talking about humans and not numbers. I get the impression that, in his mind, a certain set of high-paid workers at Boeing simply and painlessly made a horizontal move over to Microsoft where they were given new high-paying positions. In a spreadsheet, one cancels out the other and the bottom line looks good. But in the real world, there was a lot of turmoil in the lives of those laid-off Boeing workers - and also in those individuals who managed to hang on during the cuts.

I understand that economies do evolve and when this happens, high-paying jobs shift from one profession to another. But the way Andreessen looks at it shows how many CEOs view their workers - almost like disposable pieces of a puzzle (for more of this rant, see my concluding thoughts).

One outsourcing "benefit" that Andreessen didn't talk about is the idea that moving jobs overseas is good because it leads to lower prices over here. Of course, that's good news only if you have a job over here. In addition, the New York Times, CNN, and US News and World Report all recently did stories on how the cost of raw materials to make things like steel is going up because countries like China are suddenly consuming so much. The reports went on to say that companies such as GE are still trying to hold down the price of their goods. Does that mean they will trim other costs by laying off their high-wage workers, like those in the United States?

It should also be pointed out that Andreessen's new company, Opsware, facilitates the movement of jobs overseas by automating data centers so it is easier for companies to manage operations worldwide. In the September 15th, 2003 issue of Fortune magazine, his wealth was estimated at $218 million .

Cutting corners to help your business is certainly part of doing business. However, when companies announce healthy profits and then move manufacturing operations overseas so their bottom lines will be even greater, that's where I have a problem.

It's time to face the facts: most, although not all, overseas outsourcing is the result of the extreme greed of large multinational corporations. What's good for the corporation has been placed ahead of what's good for the individual, under the guise of "if the company does well, the individual will do well." With corporate profits and CEO salaries at record highs, the truth is that only a select few individuals have done well -very well - while others are left looking for work.

When a company lays off hundreds of people, that should be considered a bad economic event, but more often than not, that company's stock soars. Yet not much is said about those people forced out of work and the stress, arguments, depression, divorces, miscarriages, and more that these actions cause. To put it back in monetary terms - what is the damage that all this does to the national economy (and think about who really bears those costs)?

In the next newsletter, I'll look into many of the overlooked reasons why overseas outsourcing is bad for your company, and the ways that you can still compete without outsourcing.