The Economics of Outsourcing: How Should Policy Respond?

Thomas Palley Economics for Democratic & Open Societies [email protected]

www.thomaspalley.com

“A wild horse can do a lot of damage, but a bridled horse can be an invaluable asset.”

Posted by Proud UAW Member in response to “Politics of Globalization” at www.thomaspalley.com, December 27, 2005.

Understanding Outsourcing

(1) Outsourcing = critical element of globalization.

(2) Need to understand ECONOMICS OF OUTSOURCING to develop POLICY RESPONSE.

(3) Outsourcing = new form of COMPETITION (4) Needs policies that: a) enhance national competitiveness, b) establish new rules governing nature of global competition.

Pitfalls

• Outsourcing is facilitated by “technology.” • Outsourcing debate is NOT a debate about the benefits of technology.

• It is a debate about the

rules governing competition within & between countries.

Economics of Outsourcing - 1

• •

Evolutionary process 1950’s/60’s

emergence of MNC production.

• … but for local markets (Ford Europe, GM Europe).

1980’s/90s

MNC production increasingly for export back to the US …. NAFTA/Mexico, China.

Economics of Outsourcing - 2

• • •

Parallel competitive revolution in the retail sector

= Development of new “sourcing” model based on big box discount stores (exemplified by Wal-Mart).

Stage 1:

1960s & 1970s = National buying & national competition.

Stage 2:

1980s & 1990s = Global buying & global sourcing  introduction of the “China Price.”

Economics of Outsourcing - 3

Effects of “global sourcing”:

(1) Puts entire manufacturing sector in international competition, (2) Erodes manufacturing jobs & wages.

(3) Success forces everyone adopt (4) Delivers low prices…. But at a high cost.

Economics of Outsourcing - 4

•

Out-sourcing = application of retail sector’s global sourcing model to manufacturing

 manufacturers looking to source globally  meet the China Price… Auto-parts industry exemplifies (Visteon & Delphi).

•

Services

= next area prime for global sourcing.

• Even

retail

can be out-sourced (Amazon.com).

Economics of Outsourcing - 5

• •

Globalization combines pieces in synergistic system that operates in hyper-drive

(1) Changed competition (global sourcing model) + (2) Changed technological conditions & policy (MNC prod & trade liberalization) + (3) 2 billion new workers (dam of socialism) = downward wage & benefit pressures, rising income inequality.

When join two swimming pools, water level will equalize.

Macroeconomic Consequences

(1) Shift wage – profit share (2) Rising family income inequality (3) Hollows Northern manufacturing (4) Encourages Export-led growth & build-up of global financial imbalances (5) Hollowing of middle-class in North (N-S competition) (6) Difficult to raise wages & grow middle class in South (S-S competition).

Rediscovering Economics of American Institutionalists

• Globalization connects with early 20 th century economics of American institutionalists • Leading lights = John Commons, Thorsten Veblen, Wesley Mitchell.

• Emphasized (1) “nature of competition,” (2) problem of “destructive competition”  resonates with “race to the bottom.” • What appears to maximize well-being from an individual perspective is sub-optimal once “competitive inter-play” of actions taken into account.

Institutionalist Policy Challenge

• Notion of

“regimes of competition.”

• • Some regimes better than others.

Challenge

= design institutions that ensure for stable flows of demand & income (the Keynesian problem) while preserving incentives for economic action.

• 1930s = New Deal • 2000s = ?

Policy Responses

• •

New Deal

was a collection of policies that built a new acceptable regime of competition

Response to global sourcing

collection of policies  also requires a

NO SILVER BULLET.

(1) Labor standards internationally (2) Unions at home  labor law reform making right to organize real. (3) Tax competition (4) Exchange rates (5) Health care/job costs  national health plan (6) Education, Active labor market policies.

Political Challenges

(1) Need international rules, but lack effective international organizations.

(2) Need to regulate capital, but capital now far more powerful owing to mobility.

(3) Need a story of globalization that people can gather around 

economists tell stories & that is why economics is so important!

“A wild horse can do a lot of damage, but a bridled horse can be an invaluable asset.”

Posted by Proud UAW Member in response to “Politics of Globalization” at www.thomaspalley.com, December 27, 2005.