Deinonychus antirrhopus

It Never Ceases To Amaze Me

How when something in the economy changes, people always end up predicting the worst. In this case it is the outsourcing of variuos high-tech jobs. The people who have their panties in a knot? Armed Liberal at Winds of Change, and Kim du Toit.

The outsourcing of various jobs such as phone centers is not surprising. Many companies do it domesitically, so the next step is off-shore once there is country with a large enough percentage of the population speaking english at a certain level of proficiency. What about certain high-tech jobs? Sure, why not. For years the comment about exporting jobs was that they were low skilled jobs. High skilled jobs stayed because this is where the skilled workers are located. Now, that too is changing so naturally firms are moving what they can overseas to make a profit.

What is amazing to me though is the gloom-and-doom that goes with these kinds of developments. It always sells. First the Saudis were going to take over the world via their oil. Then the Japanese were going to conquer the U.S. commercially, something they failed at militarily. People eat this shit up time and time again. Its gonna get bad...real bad. Robert Reich, the perpetual curmudgeon writes,

"We have split brains," said Robert Reich, U.S. secretary of Labor under President Clinton and now a professor of economic and social policy at Brandeis University in Waltham, Mass. "Most of the time, the half of our brain that wants the best deal prevails." The connection may be lost on many, Reich said, but consumers' addiction to low prices is accelerating a shift toward a two-tiered U.S. economy, with a shrinking middle class and a growing pool of low-wage workers.

"Wal-Mart's prices may be lower," he said, "but that's small consolation to a lot of people who end up with less money to spend."

Others insist there is a net benefit whenever consumers can get more for less. "If you have lower real prices, you're saving money," said Arthur Laffer, a key advisor to President Reagan who is now an economic consultant in San Diego. "The prices' falling, in effect, raises the wages of everyone who buys their products."

All this economic theorizing is done by non-economists by the way. CalPundit, Kim du Toit, Armed Liberal, Robert Reich.

But lets go back a bit here. Kevin Drum (CalPundit) is in favor of raising the minimum wage to help with this problem. But the minimum wage increases unemployment (primarily for teens), and also makes the moving of low skilled-low wage jobs overseas more appealing. Kevin decries the problem of income inequality and income mobility, but wants to increase the tax burden. Granted, it is on those at the top, but with less money those at the top will spend less...at places that employ people. Granted the tax revenue will be spent, but the problem is that governments are notoriously bad about how they spend that money. Government does not respond to market forces. Price signals and cost changes are far less important to government than they are for a corporation. So government spending doesn't offer much hope as a way out. Giving the money as simple transfer payments has two effects. One it'll reduce the incentive to work. Two, it'll make it easier to export jobs. People wont be as willing to take a pay cut if they know they can get money from the government to live on. This will make wages sticky downwards, preventing the labor market from clearing and increasing unemployment.

Further, lets consider the basic idea here. You had a high-tech job, but it was out-sourced to India so your next stop is making pizzas? Or maybe laying bricks. There are no other options but to take a job where your high tech skills are completely worthless. You see, the country has to stratify itself into two tiers. Why? Because people like Robert Reich and Business Week said so. This is the same Robert Reich who argued that capital can move effortlessly across international borders (by capital I am not referring to what those working in financial markets call money, but capital--i.e., drill presses, lathes, and other such pieces of equipment). Personally I've never seen a drill press move anywhere unless somebody was expending resources to move it...but who knows I'm just an economics geek, Robert Reich is a lawyer.

As for the Business Week article I pronounce it a piece of crap. The article reports on the results of Jonathan Fisher and David Johnson and claim the results support the contention that income inequality and mobility are a problem. Well, I happen to know David Johnson, good guy. Unfortunately actually reading the article by Fisher and Johnson gives a quite different impression. From the conclusion of the paper,

We show that income and consumption mobility are similar during from 1984 to 1999 in the U.S. Finally, we link inequality, mobility, and growth using a social welfare function. For the social welfare function used here, the results suggest that income and consumption mobility more than offset the increases in inequality that occurred during the 1980s and 1990s.--emphasis added

Ooops. Darn it. Not quite what the author of that Business Week article was trying to get across now is it.

Further, the guy must not be able to read very well,

One other pattern is that mobility slightly decreased in the 1990s. For the Shorrocks index, 56 and 54 percent of households moved across the income and consumption distributions between 1984 and 1990, respectively. Between 1994 and 1999, only 52 or 49 percent moved across either the income or consumption distributions. The same pattern is seen for the Gini index of mobility.

The decrease isn't 2 percentage points as the Business Week article suggests, but about a 4 percentage point drop for income mobility and a 5 percentage point drop for consumption mobility. However, this looks at two subsets of years and one thing the research notes is that the longer the time span the greater the mobility. The mobility in consumption over the entire range of data is 65 percent. The 2 percentage point decrease (56% vs. 54%) is comparing income mobility to consumption mobility. The whole point of the Fisher and Johnson article was to look at consumption inequality and mobility, and that point apparently went right over this guys head.

Another problem with the article,

So, though the boom lifted pay rates for janitors and clerks by as much as 5% to 10% in the late 1990s, more of them remained janitors or clerks; fewer worked their way into better-paying positions.

Are we talking about income mobility or career mobility? income mobility means you income increases enough to move you from one group in the income distribution to another. There is nothing about going from being a janitor to being a financial analyst.

I see nothing yet that impresses me. Maybe next time if some of these guys tried something novel like using google to find some of research that supposedly backs up these dire claims.

Posted by Steve at January 3, 2004 01:54 PM