How to bring offshored jobs back to the US
Friday March 12, 2004   News Forge
Topics: Money , Government , News and Trends , Business
By: Robin 'Roblimo' Miller

Complaints about offshoring IT jobs reverberate daily through the halls of America's software development community. The complaints are not markedly different from those once made by manufacturing workers, except that manufacturing workers were urged to upgrade their skills and move into the IT industry, and now that "skilled work" is leaving the US, there is no clear career upgrade path left for most of us. But there is a way we can bring "lost" jobs back to the U.S. without any direct legislation, and the Bush administration has already taken the first steps to implement this program, even though it may be doing it by accident.

Before we begin, let's lay down four basic postulates:

  • Top-end Indian, Chinese, and Filipino knowledge workers are just as smart as top-end American knowledge workers
  • Average knowledge workers the world over are ... average
  • The Internet gives everyone access to the same pool of knowledge
  • Multinational companies have no geographic loyalty

In other words, we're all dogs no matter which pack we belong to, and we are expected to eat each other willingly to maintain our positions because that's the kind of world we live in.

Right now the Indian, Chinese, and Filipino dogs are eating the American dogs, with Russian, Pakistani, and other packs sniffing around the edges, trying to get a bite or two for themselves.

The big advantage Indian dogs have over American dogs right now is that they can live on a lot less money, because living costs in India are far lower than in the U.S. And Chinese dogs can live on less than Indian dogs, so in the long term work may go there rather than India, which scares the Indians no end.

The problem is that all these dogs are trying to eat from the American trough, and if foreign dogs eat from it but American dogs have no jobs and can't keep replenishing that trough, soon it will be empty for everyone.

In formal economic terms, we're talking about the U.S. trade deficit, which grows every year. It's nice for Americans to be able to buy $300 PCs and $39 cordless phones because the people who make those items in China and elsewhere are paid below-starvation wages by US standards, but the flip side of this is that the money U.S. residents currently use to buy those phones and PCs is going out of the U.S. much faster than money is coming into the U.S., so the current world trade system's dependence on a strong U.S. economy can't go on forever.

Putting inflation in the bank

The US government and most of its corporate and individual residents are accumulating more debt every year. This puts short-term smiles on the faces of all the workers around the world whose products and services are sold to U.S. markets, because they are the ones getting the borrowed money. Many of them don't seem to realize that most of the products and services they supply to the U.S. are not essential; that sooner or later U.S. residents (and the U.S. government) will need to pay back some of their debts, and that when they are using their income to pay off loans they will be forced to keep their old computers and cordless phones and stereos longer instead of buying new ones whenever they want.

Average hourly wages for American workers are not going up. The only way we are able to maintain our current standard of living is by working more hours per family than people in most of the world. Two-income households have become our norm, not an exception. Two-income households, with one of the producers often working 60 to 80 hours per week, can afford houses with four bedrooms and two bathrooms, can buy a new car every two years (on credit), and load shopping carts at discount stores with clothes, toys, digital cameras, appliances, and other goods every week or two (as long as their credit cards aren't maxed out).

Now take away one of those two jobs -- or replace it with a job that pays less -- in 20% of American families. Suddenly sales of non-essential goods drop, not only among the families that have lost some of their income, but among families that know others whose incomes have dropped and are afraid to spend because they're worried that one of their jobs may also disappear (or be replaced by a new job that doesn't pay as much as the old one).

People will keep buying food, but may buy fewer "convenience" foods such as microwavable meals, and will spend less in fast-food outlets and restaurants. They'll tend to keep clothes until they wear out instead of buying new ones to keep up with fashion trends. They'll be less likely to buy four-bedroom, two-bath houses -- and may even try to sell the ones they already own and buy more humble dwellings -- thereby slowing the housing market, which will cut sales of building supplies and construction tools, and cause layoffs among construction workers.

Just as the US economy is supposedly in "jobless recovery" mode at the moment, it could easily slip back into "no-job-loss recession mode" and severely cut imports.

The reason job losses in a new recession might not show up strongly in official statistics is that officialdom only counts people actively looking for work as "unemployed," and if half a couple decides to stay home with the kids instead of looking for work, that person is not "unemployed" in any way our government currently notices -- nor is the person who is laid off from a programming job and takes a job as a bus driver for half his former salary.

Everything I've just described is starting to happen in the U.S., a little at a time. And our government has decided to cut taxes without a corresponding cut in spending, which means it's borrowing more than it ever has, just as U.S. residents have been spending borrowed money.

Governments usually pay back excessive debt through either repudiation or inflation. Repudiation usually takes a coup first, so the new leaders can say, "We didn't run up the debts. They aren't our problem. If you want to collect, go after the old leaders, who probably stole most of the money anyway." A coup or other violent change of regime is unlikely in the U.S., so we'll almost certainly end up taking the inflation route. At some point, when government debt gets high enough, it's politically irresistible to cut the value of a country's currency so that old debts can be paid off at a substantial discount. This route is especially attractive to the U.S., because most of our foreign debt is in dollars, not in another currency, so we can get away with discounting our currency more easily than most countries.

The funny thing is, the U.S. is seeing its currency lose value against other major currencies already, and this trend is likely to increase without any government action. When a government borrows massive quantities of money to keep inflation in check, it doesn't really stop inflation but just puts it off. It puts inflation in the bank, so to speak. And sooner or later that inflation will be withdrawn from the bank -- with interest -- by overseas creditors. Indeed, this has already started. Look at the multi-year downward trend in these charts that track the dollar as a commodity, and the trend is obvious.

A weaker dollar means more U.S. jobs

At the moment this was written, the "mid-market" rupee:dollar (Rs:$) exchange rate was about 45:1. Let's imagine the dollar dropping to the point where that ratio is 30:1. Suddenly an Indian programmer who is paid $12,000 in US dollars gets a 50% "raise" to $18,000 -- without improving his skills or working harder. His standard of living won't go up 50% because the whole population of India has gotten the same "raise," including the programmer's $35/month live-in maid, who now gets $52.50/week. But both programmer and maid will be able to buy more goods from the U.S., and from countries whose currencies are "tied" to the dollar in some way, so their standard of living will still go up at least a little bit.

The only problem with this rosy scenario (for the Indians) is that the Indian programmer is suddenly less competitive with an American one. If he's working for a typical offshore contractor, his services are being marked up by a considerable amount, and the actual user of his services is probably now paying at least $24,000 per year for his time -- plus benefits. Suddenly he's not much of a bargain to an American company. In much of the U.S., $24,000 is a living wage. It won't buy a new car every two years and a four-bedroom, two-bath home, but it will buy a used car every three years and a three-bedroom, one-bath house trailer, and generally support a family of four that cooks from scratch instead of living on prepared meals and fast-food junk, doesn't need a fancy wardrobe, and is otherwise thrifty. Add a second income to that household -- even a part-time Wal-Mart one worth $6,000 per year -- and this theoretical programmer's family is getting by okay, possibly even putting a few dollars away every month.

Meanwhile, the Indian programmer is out of work. So is his maid.

This scenario is somewhat melodramatic. Large countries' currency shifts aren't usually that abrupt. But over a 10 year span a 30% or even 50% less valuable dollar is entirely plausible, even likely. This will give U.S. auto manufacturers an almost unbeatable price advantage over foreign competitors. Suddenly it might not pay to assemble computers in Korea instead of Kansas or to make microprocessors in Taiwan instead of Texas, and it will make some of our big exporters' products more palatable than their foreign competitors' in world markets. (Boeing vs. Airbus is a prime example.)

The downside is that the made-in-China blender that now costs $15 at the discount store will cost $30, the low-end laptop will cost $1,499, not $799, the "$9.95 Shoe Store" will need to change its sign to read "$19.95," and a Hyundai will cost as much as a Cadillac.

A cheaper dollar, in a general sense, means we trade low-cost imports for a more competitive stance for our home-grown products and services both here and abroad. Vacationing in Europe will cost us more than going to New York, so we'll be more likely to spend money there than to spend it in Paris, which will make New York hotel and restaurant employees cheer while Parisian tourist industry workers sulk -- and deepen their sulks when they find that Europeans who otherwise might have vacationed in Paris have decided instead to take advantage of a discounted America by going to Florida instead.

But oil prices will shoot up. With a cheaper dollar we will not be able to keep driving our Hummers and 200-horsepower sportfishing boats. Right now oil is internationally priced in dollars, but if the dollar becomes "unstable" either by conscious choice of the U.S. government or because of international currency fluctuations, oil pricing could shift to euros instead. This could mark the end of the dollar as the world's dominant currency, the one to which most others are pegged, and that could lead to higher interest rates for U.S. government bonds, and higher interest rates in general, which means plenty of inflation.

Inflation means higher interest rates

Imagine 10% inflation. To net 5% banks and other lends need to charge 15%, and to net the 20% some of the less honorable credit card lenders like to see, they'd charge 30% -- or even more. Home values would plunge as the average monthly payment per thousand dollars of mortgage rose, which would nearly kill new construction. Maybe slowing our current trend toward ever-larger, more-expensive dwelling units would be good, and there is no question that plenty of existing four-bedroom, two-bath suburban houses would make perfectly serviceable duplex apartments. But then you need to deal with all the construction workers who suddenly have no jobs, and if McDonald's and other traditional employers of unskilled workers aren't hiring, they are going to be unemployed until or unless our manufacturing sector cranks up to take advantage of the dollar devaluation that will make it less expensive to produce physical goods in America than elsewhere. You can be assured, though, that a combination of a lower dollar and higher interest rates will lead to plenty of "painful readjustment" for workers in some industries.

Inflation benefits those who own houses or other real estates and have fixed-rate mortgages (or no mortgages); their housing costs only go up a little as property taxes rise, while renters and owners with adjustable-rate mortgages see annual increases that mirror the inflation rate. Salaries will go up with inflation, no doubt, but they never quite seem to catch up, and people on fixed incomes -- think Social Security -- will be in rough shape unless their payments are "indexed" to the rate of inflation, which is going to be very hard to pull off as the "baby boom" crowd starts retiring and the ratio of social security recipients to workers grows.

Inflation also leads to social instability. People who save get antsy as they watch the value of their savings drop. People who invest get angry as they pay taxes on their investment income even if that "income" is barely keeping pace with inflation. Politicians get blamed, and a "throw the bums out" mentality becomes common. Some countries react with riots, some with military coups -- and for the first time in U.S. history, we have an all-volunteer military that is large and well-armed enough to do a government takeover if it wanted to. (Before the Cold War, our "peacetime" military was generally small and underfunded. Back then we were an essentially isolationist nation that tried to stay out of foreign entanglements as much as possible, aside from the odd Marine invasion of a wayward Latin American country whose leaders irritated us, and when we "went to war" we relied on draftees -- and demobilized most of our servicemen and women after the war was over.)

Are you sure you'd rather "protect American programmers' jobs," considering the alternatives?

Most protectionist economic scenarios will lead to some or all of the dollar devaluation and inflation problems I've outlined. Whether they are "problems" may be open to debate. Perhaps a well-managed "soft landing" for the dollar on international currency markets would help make the U.S. economy more vital and more self-sufficient, and turn our country into a net exporter again.

Workers in easily-moved service industries, like programmers and other IT personnel, would be some of a dollar devaluation's first and most obvious beneficiaries.

But the phrases "well-managed" and "soft landing" are what make this concept dubious. Our government does not have a very good track record when it comes to economic manipulation or even economic prediction. Indeed, no one does! Economics is one of the fields where, for every world-renowned expert you can find who will state a position absolutely and positively, you can find another, equally-renowned practitioner who will call the first economist a liar. (Or, in the current jargon, accuse him or her of "choosing ideology over facts.")

The big news on the IT offshoring front, though, is that the U.S. government has already set in motion the currency devaluation and inflation that are the most potent ways to to reverse this trend without meaning to -- by increasing its borrowing to unprecedented levels at the same time it is cutting the percentage of taxes it takes in from the only people in America whose incomes are steadily rising -- the rich -- and placing a higher percentage of its tax burden (and therefore its ability to pay back debt) on the backs of working Americans whose incomes are either staying level or falling.

Currency traders and investment professionals are responding to this tactic by showing less faith in the US dollar than at any time in the last decade. Super-investor Warren Buffett is "loading up on foreign currency" because he doubts that current US government tax policies are healthy in the long run.

Me? I just stand on the sidelines and observe. I expect that as U.S. currency drops in value, I'll watch some of my programmer friends find their value increasing, at least a little bit, and we'll see at least a few more manufacturing jobs. This is good. But I am worried about some of the other, longer-term effects our current government's economic policies may have on American workers -- and just as worried about what might happen if, come November, we find ourselves with a "pro-worker" administration that makes moves that would be just as bad for us in the long run.

Meanwhile, on a personal level, I suppose all the traditional career advice still holds: Stay flexible, look for opportunities in emerging fields, and make sure your skills are always up to date. These basics are the long-term keys to success in the IT field whether you're in New Haven or New Delhi; in Athens, Greece or Athens, Georgia; and whether you're a CIO at the peak of your career or a new grad working at a help desk, hoping to get your first "real" programming job before long.

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