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The problem with outsourcing

THE PEOPLE who insist that outsourcing is a trivial problem are wrong -- but so are those who tell you that there is an easy solution.

The basic dilemma has several parts. First, the productivity of workers in poor countries is running far ahead of the wages they receive. That means Mexican autoworkers, unlike their American counterparts, can't afford to buy the cars they build.

This reality is unprecedented. There has always been a lot of trade between rich countries and poor ones. But the ability of the world's lowest-paid workers to work with advanced production technology, the dropping of barriers to trade, and the integration of a global information economy are all relatively new.

The analogy to trade within large countries is entirely false. Imagine that Massachusetts was paying an average wage of $15 an hour and Connecticut was paying $1. An awful lot of jobs would eventually go to Connecticut. The United States has always had regional disparities in pay levels -- that's why New England's textile industry went south. But these were never anything like today's global disparities. And the United States, at least since the 1930s, has had nationwide minimum wage laws, followed by national laws on labor rights, workplace health and safety, and pollution standards. Not so the global economy. So the low-road countries are magnets for outsourcing.

It's surprising that a lot of economists dispute this. One of the most fundamental laws of economics is the law of one price. If Exxon is selling gas for $1.60 a gallon and Gulf tries to sell it for $2.60, everyone will go to Exxon. The technical term for this is "factor-price equalization." Wages are a price, and in an economy with free commerce, they will tend to converge. So unless wages rise in the Third World, global wages will tend to converge downward and American wages will move in the direction of Mexican and Indian wages.

As it happens, the outsourcing problem is occurring while three other factors are compounding the problem -- productivity, the trade deficit, and deregulation. Rising productivity means workers are being replaced by machines. In the long run, this is a good thing; it makes the society wealthier. But who gets the increased wealth, and what does everyone do for a living?

A century ago, when people came off the farms and into factories and then into service work, the problem took care of itself. But where will today's displaced workers go if so many jobs are being drained overseas? In principle, as long as foreign countries buy from us as much as we sell them, their purchases will create a lot of American jobs. But a third factor, America's huge structural trade imbalance, keeps this from occurring.

Finally, these events are playing out in an era of deregulation. That means that even domestic jobs that could well pay higher wages are being battered down by businesses' new power to play off workers against each other.

A generation ago, industries such as telephones, gas and electric utilities, broadcasting, airlines, and hospitals were highly regulated. Prices were pegged and returns assured, so there was no competition between companies based on who could batter down wages. These industries had good, secure, middle-class jobs, blue collar as well as white.

This was also the era when basic industry, such as autos and steel, were largely sheltered from foreign competitors. Thanks to strong unions, they were spared wage competition, too. Deregulation of financial markets has also fostered a climate in which insiders can award themselves astronomical salaries and stock benefits.

In the 1960s, the ratio of chief executive pay to average worker pay was about 70 to 1. Today it's around 700 to 1.

There is no reason why a company has to pay $50 million to get a talented chief executive. People would line up to take the job for a paltry million. The reason for this shift is simply a shift in political power. Insiders grab these astronomical salaries because they can. Workers fail to defend their wages because they can't.

Another myth is that "it's all about skills." Some of the most highly skilled people in the economy, from computer programmers to brain surgeons, are suffering income declines.

The good news is that we do have the means to restore a high-wage economy. The remedy has several dimensions. All have more to do with the political power to make the right choices than with laws of economics. I'll have

details in next week's column.

Robert Kuttner's is co-editor of The American Prospect. His column appears regularly in the Globe. 

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