Dan Spillane: Outsourcing - The "Divider Effect"

-US housing and homeowners ultimate victim of outsourcing
-Outsourcing negates immigration--but US mortgages banking on
immigration
-Later outsourcing predictions make earlier immigration projections
obsolete
-Mortgage debt is increasing proportional to increased outsourcing, due to
peculiar interest rate relationship

(SEATTLE) 03/31/04 - A long-proven axiom in economics is known as the "multiplier effect." Specifically, it is an established fact that each US job generated or kept, multiple other jobs are generated. This is particularly true of higher-paying white-collar jobs. The evidence for the multiplier is manifest all over the United States, where new communities have sprung up around successful businesses.

Unfortunately, the reverse also holds true, a single US job lost leads to multiple job losses, not to mention-multiple losses of US tax revenue, leading to a larger US deficit. In effect, outsourcing leads to the opposite of the multiplier-effectively, a "divider effect." Despite experts conjecturing otherwise, actual evidence shows outsourcing leads to this very thing: as both blue collar and white collar jobs are being lost due to outsourcing, a domino effect is produced in the job market. Such explains the current economic situation entirely--as outsourcing picks up, net job gains aren't there. In other words, a little bit of outsourcing goes a long way towards US unemployment.

While there is clearly a divide in America surrounding outsourcing, there seems to be no disagreement that the trend has been on the rise for over a decade. Yet of late, outsourcing has picked up as companies seek to increase profits (without cooking balance sheets), and also, as companies have to avoid the costs associated with recent dramatic rises in US inflation. This rise, by almost every inflation measure that applies to producers, is brought on by low interest rates, a weak dollar, and marked consumption related to real estate development. The resultant high inflation and low employment growth is somewhat different than many expected. Indeed, in such an environment, major companies are now accelerating outsourcing, rather than hiring in the US. Astonishingly, several Federal Reserve members appear to be denying the reality, leading to a loss of credibility among both conservative and liberal Americans.

But there is no ambiguity as to what is going on. Manufacturing companies such as General Motors have experienced huge leaps in the price of such items as steel, aluminum, and nickel, due to pressures from domestic and international industries. Voracious consumers include US homebuilders, as well as existing production of US multinationals already abroad (China is effectively the " factory floor" of US manufacturing). Since the US tax structure favors outsourcing, accelerating the movement of jobs offers the path of least resistance to higher profits. The trend is so successful, that more recently, an acceleration of movement of white-collar jobs has occurred.

But the question is not only the pain of the individual unemployed. Rather, the bigger question is the probable result of the movement of both white and blue collar jobs at the same time. In this respect, the US situation is entirely new. In the past, it was possible to "move up" and re-train from blue collar to white collar jobs, or move from one white collar job to another. Now, such a choice is severely limited at best--because new job skills learned at expense to a worker may also be found elsewhere by employers, at a lower cost. In other words, the problem isn't a matter of poor US worker skills, as many suggest. Rather, the problem is a matter of a new kind of corporate monopoly, which can largely evade the pricing power of US workers, regardless of skill. Hence, the Federal Reserve's interest rate actions matter little, except inasmuch as they generate inflation related to non-staffing costs, which companies can offset with cheaper offshore work.

Arguments that outsourcing will "create" US jobs are weak. While it's true that a management job or two may be created for some larger number of jobs shipped offshore, such a scenario acts to narrow, rather than to expand the US economy. The multiplier effect has in the past led to sustainable, and broad-based expansion of the economy. For example, prior to the outsourcing boom, companies such as Microsoft and others used to bring in immigrants from other countries for high-paying white-collar jobs. Neighborhoods east of Seattle sprung up with wide-ranging businesses. And the core of those neighborhoods was, not unexpectedly, a wealth of new houses, often occupied by immigrants, including Indians or Asians.

Thus, it is not surprising that subsequent to a 2000 census projection, a number of planners projected a healthy US housing market for many years to come, justifying increased growth driven by the influx of immigrants. These planners include those at mortgage giants Fannie Mae and Freddie Mac, as well as at various homebuilders, who (until recently) have stated their projections publicly and repeatedly.

But now the immigration model has been thrown into reverse by outsourcing--forget about immigration, there are even reports of skilled immigrants leaving the US. Now the employee doesn' have to have a house at all. While non-skilled, low wage workers may remain in the US, a few very important people are being kept up at night with good reason--and it isn't those at Freddie and Fannie. Namely, a certain person who--as luck would have it--happened to testify and praise both housing and outsourcing (in sequence). That is, none other than Alan Greenspan. And yet, confounding many, Greenspan followed up his praises with a seemingly unrelated warning about the potential collapse of the US mortgage system.

Perhaps the Greenspan comments weren't as unrelated as it seems. Observers will note Congress, at this very moment, is working on the rules for " receivership" (collapse) of the US mortgage giants. Meanwhile, US citizens are borrowing and buying unaware.

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