Even as offshore outsourcing increasingly becomes "the new way of doing international trade", the debate over whether offshore outsourcing is a boon or bane for US continues, even now. As opinions flare on both sides, here is a flashback, to throw more light on the matter. In the 2004 political season, offshore outsourcing --- the practice of hiring lower-paid service workers in places like India to carry out tasks previously done by higher-paid American workers was an important issue.
The debate flared after the annual Economic Report of the President was issued in February 2004, just as the Democratic presidential primaries were heating up and payroll job growth was sluggish. Answering reporters' questions about a section of the report on trade, N. Gregory Mankiw, then the chairman of the White House's Council of Economic Advisers, made a statement that would be utterly unobjectionable if uttered in a classroom at Harvard, where he taught before joining the Bush administration and to which he has returned.
The crux of it was this: "outsourcing is just a new way of doing international trade."
The phrase was translated into headlines, as well as politically motivated press releases, that accused Mr. Mankiw, and hence President Bush, of supporting the wholesale export of jobs from Bangor to Bangalore. Democrats and Republicans hastened to condemn the remark, which Mr. Mankiw hastened to clarify.
For Mr. Mankiw, the episode, which he recounts in a recent working paper that he wrote with Philip L. Swagel, former chief of staff at the council, stands as a case study of what happens when an academic economist is tossed into the meat grinder of the news cycle --- and of the public's general lack of economic education. "This is the sort of stuff I talk about in the first week of my introductory economics class," he said.
Outsourcing has yet to make a significant appearance in this year's political campaign. The furor surrounding the practice seems to have subsided quickly once the ballots were tallied in November 2004.
Mr. Mankiw and Mr. Swagel found that the number of references to "outsourcing" in four major newspapers spiked from about 300 in 2003 to 1,000 in 2004, but has since fallen. As the number of jobs has risen steadily --- albeit not impressively --- politicians now seem preoccupied with other issues, like Iraq and energy.
But it's also possible that, considered in its macroeconomic context, outsourcing just isn't that big a deal right now. In the years since Mr. Mankiw's encounter with the buzz machine, economists have been crunching data on short-term trends in outsourcing in the vast service sector, which accounts for about 80 percent of domestic jobs. While there are some exceptions, they generally find more reason for concern than alarm.
In December 2005, the McKinsey Global Institute predicted that 1.4 million jobs would be outsourced overseas from 2004 to 2008, or about 280,000 a year. That's a drop in the bucket. In July, there were 135.35 million payroll jobs in the United States, according to the Bureau of Labor Statistics. Thanks to the forces of creative destruction, more jobs are created and lost in a few months than will be outsourced in a year. Diana Farrell, director of the McKinsey Global Institute, notes that in May 2005 alone, 4.7 million Americans started new jobs with new employers.
What's more, the threat of outsourcing varies widely by industry. Lots of services require face-to-face interaction for people to do their jobs. That is particularly true for the biggest sectors, retail and health care. As a result, according to a McKinsey study, only 3 percent of retail jobs and 8 percent of health care jobs can possibly be outsourced. By contrast, McKinsey found that nearly half the jobs in packaged software and information technology services could be done offshore. But those sectors account for only about 2 percent of total employment. The upshot: "Only 11 percent of all U.S. services job could theoretically be performed offshore," Ms. Farrell says.
Economists have also found that jobs or sectors susceptible to outsourcing aren't disappearing. Quite the opposite. Last fall, J. Bradford Jensen, deputy director at the International Institute of Economics, based in Washington, and Lori G. Kletzer, professor of economics at the University of California, Santa Cruz, documented the degree to which various service sectors and jobs were "tradable," ranging from computer and mathematical occupations (100 percent) to food preparation (4 percent).
Not surprisingly, Mr. Jensen and Professor Kletzer found that in recent years there has been greater job insecurity in the tradable job categories. But they also concluded that jobs in those industries paid higher wages, and that tradable industries had grown faster than nontradable industries. "That could mean that this is our competitive advantage," Mr. Jensen says. "In other words, what the U.S. does well is the highly skilled, higher-paid jobs within those tradable services."
There is evidence that within sectors, lower-paying jobs are being outsourced while the more skilled ones are being kept here. In a 2005 study, Catherine L. Mann, senior fellow at the Institute for International Economics, found that from 1999 to 2003, when outsourcing was picking up pace, the United States lost 125,000 programming jobs but added 425,000 jobs for higher-skilled software engineers and analysts.
Economists also point out that jobs and services that are tradable won't necessarily move to lower-cost places. Ms. Farrell of McKinsey said that despite their huge populations, China and India lack enough university graduates with the specific skills and experience to meet the staffing needs of Fortune 500 companies.
In addition, labor costs are only one of many factors that companies consider. Executives have to worry about reliable power supplies and the proximity of vendors and customers. Here, again, the United States has significant advantages over countries like India and China. As a result, only a small portion of the jobs that could be outsourced will be outsourced; Ms. Farrell believes that by 2008, outsourcing will affect less than 2 percent of all service jobs.
Still, these projections aren't universally accepted. Alan S. Blinder, former vice chairman of the board of governors at the Federal Reserve and an economics professor at Princeton, says they are too optimistic because they don't take into account likely developments in the global economy.
"As the technology improves, and as the quality and experience of offshore work forces improves, the capacity to deliver services electronically will rise," he says. Professor Blinder says that over the long term, far more than 2 percent of all service workers may be in danger of having their jobs outsourced overseas.
So while the debate about outsourcing has declined, "we shouldn't be deluded that this has subsided as an issue," Professor Blinder concludes. Should Mr. Mankiw decide to return to Washington to work for this administration, or a future one, he would be well advised to think twice before speaking about outsourcing.