Another Phony Study From the Cheap-Labor Lobby

The Information Technology Association of America (ITAA) has just released a study, "The Comprehensive Impact of Offshore IT Software and Services Outsourcing on the U.S. Economy and the IT Industry," that claims to show that outsourcing is good for America. The ITAA and its collaborators have a long history of releasing manipulated and phony studies to "prove" that whatever government policies will bring them cheaper labor are good. A partial list:

A report from the General Accounting Office refuting an ITAA report claiming a tech labor shortage.

A study from U.C. Berkeley refuting an ITAA report claiming a tech labor shortage.

US Senate testimony of the Urban Institute's Dr. Robert Lerman against ITAA's claimed tech labor shortage.

AEA critique of ITAA report claiming a tech labor shortage, by Norman Matloff, UC Davis

Given this long record of dishonesty, there is little reason to take this study seriously as economics. This is paid propaganda produced by an economic-research firm that is paid to produce whatever conclusions it is told to.

The general public is insufficiently aware of the degree to which economic research like this is driven not by hard data, particularly when it claims to predict the future, but by unprovable assumptions, unsubstantiated guesses, numbers that proxy for other numbers, unstated premises, masaged definitions, outdated data and sheer ideology. The appearance of an intellectually-sophisticated analysis largely serves to intimidate the layman and create thickets of complexity within which manipulation of data can take place unnoticed.

Below are a few examples of the dubious reasoning in this report:

Factual Errors

The US trade surplus in services is not (p.2) "rapidly growing." In fact, it shrank 14% last year, according to the Dept. of Commerce, and will probably continue to shrink as foreign nations grow in economic sophistication and acquire the ability to perform services for themselves that they now import from us. If India can export computer and accounting services to the US, what nations still need to import them from us?

Logical Errors

1. The report asserts (p.2) that outsourcing is not a problem because "10% of all IT software and services jobs in the U.S. have disappeared since 2000, but only 2.8% of the total IT software and services jobs were lost because of offshore ITO." In other words, outsourcing is a problem but we should ignore it because other things also cause the same problem.

2. The report asserts (p.3) that "offshore IT spending lowers costs." While it is true that there are few jobs around that cannot be performed more cheaply by a foreigner somewhere than by an American, it is illogical to measure only the cost savings of having the job done abroad without netting this out against the cost of the lost American purchasing power due to the job's migration abroad.

Ideology

1. This report presumes that the case in favor of free trade as a general economic strategy is a proven fact. Free trade is a debatable ideological position, not a basic truth like the law of gravity.

2. The ITAA claims to espouse a free-market and limited-government philosophy, and yet we see the report calling (p.9) for an expansion of the welfare state: "Make information technology and other service sector workers eligible for government assistance when their jobs are displaced by foreign operations... and in appropriate circumstances, transportation, childcare and healthcare assistance." Not only is this ideologically hypocritical, it makes clear how even the ITAA is forced to admit the social costs of outsourcing and expects the taxpayer to foot the bill while industry collects the cost savings of cheaper foreign labor.

Unproven Assumptions

The report asserts (p.2) that "The use of offshore resources lowers costs [and] frees domestic resources to pursue other productive ends," but this presupposes that workers unemployed due to outsourcing will migrate to higher value-added activities. This is a dogmatic assumption for which the report provides no evidence. If thousands of $50,000/yr computer programmers are laid off, what better-paying jobs are they supposed to migrate to? Especially since the professional and business-services sector that the report touts (p.7) as an absorber of laid-off IT workers is itself under presure from outsourcing of jobs in accounting and other fields.

Conflation of Issues

The report deliberates conflates related issues in order to conceal the negative effects of outsourcing. For example, it asserts (p.3) that, "The key reasons for going offshore now and in the foreseeable future are cost savings, software quality, access to global markets and talent, and labor productivity gains." Of the items listed, the only legitimate argument is "access to global markets," given that much work needs to be done close to the customer for business reasons and foreign nations no more want to lose jobs to us than we do to them. All the other items are just euphemisms for cheaper labor, given that "talent" and "quality" are market commodities available in the US to companies prepared to pay the market price for them.

Contradictory Positions

The report advocates a number of things while advocating policies that militate against these things. For example, it urges (p.9) that America "preserve American leadership in innovation. Support basic research and development programs to help insure continuing U.S. leadership in innovation based on advanced science and technology," but at the same time supports the outsourcing that bleeds the technological base upon which such things depend. How are we supposed to get talented young people to go into technology fields if they observe that jobs in such fields will have been moved abroad by the time they enter the job market?

Outdated Data

The report's econometric projections assume that lower IT costs due to outsourcing will cause business expansion in the industries enjoying the cost reduction. However, its numbers assume that this expansion will translate into jobs in America at a rate based upon historical data which have been refuted by the ongoing jobless recovery, which has shown that the job growth from business expansion now largely leaks abroad.

Irrelevant Points

1. Inflation: The report asserts (p.4) that oursourcing will reduce US inflation. First, it must be noted that inflation is currently at a low and is thus not an appropriate object of concern. Second, many commentators, including the Fed, have worried that in fact the US is facing deflationary pressures of various kinds, which would lead to a whole set of economic problems not seen since the last bouts of deflation in the 1930's and 1890's. Third, even if inflation were an issue today, the study itself admits that IT outsourcing would be a very minor palliative: less than half a percent per year, an effect whose magnitude would be dwarfed by other determinants of inflation, like monetary policy, the business cycle, and the price of oil. Fourth, given that outsourcing drives up the trade deficit, and this pushes the dollar down and thus increases the price of imports, it is unclear that IT outsourcing is really a reducer of inflation in the long run.

2. Non-IT Job Creation. In answer to the allegation that outsourcing costs America jobs, the report asserts (p.6) that, "As the economy expands, several broad sectors lead the way in terms of net new job creation. These include Education and Health Services, Transportation and Utilities, and Construction." All this is saying is that if IT jobs are outsourced, there will continue to be jobs in other sectors of the US economy. This is obviously true, but it is not a good reason to sacrifice IT jobs, and it is very revealing that the ITAA has to resort to this argument.

Admitting the Truth and Burying It

This report cannot avoid admitting certain obvious truths, and its strategy for dealing with them is to admit them and then fail to draw their obvious implications. For example, the report asserts (p.7) that, "Most of the displaced IT software and services jobs are expected to occur in two sectors: Publishing, Software and Communications and Professional and Business services sectors. In the Publishing, Software and Communications sector, the new jobs created while substantial do not offset the number of displaced IT software and services jobs, resulting in a net decrease by 2008." This is exactly what the anti-outsourcing lobby has been contenting: outsourcing costs America jobs.

Summary

In sum, this report admits that outsourcing causes enormous problems and then offers unsubstantiated smoke-and-mirrors benefits to balance these costs. At best, it is asking America to take a gigantic risk, based on shaky speculative arguments, with no recourse if these benefits do not materialize. And this report does absolutely nothing, not even in pretense, to address the core argument against outsourcing: this is nothing but the pursuit of cheap labor at the expense of American workers.

Further Info

This analysis was prepared by Ian Fletcher, VP for Government Relations of the American Engineering Association, who may be reached at ianfletcher@aea.org.

AEA's position on this issue is supported by the following: AFL-CIO Coalition for Trade Sanity & Industrial Union Council, MADe in the USA, Manufacturing Alliance of Connecticut, Manufacturers for Fair Trade, PACE International Union, Pennsylvania Manufacturers Association, Rescue American Jobs Foundation, Save American Manufacturing, Organization for the Rights of American Workers, United Steelworkers of America, Institute of Electrical and Electronic Engineers, HireAmericanCitizens.org, National Society of Black Engineers, Society of Hispanic Professional Engineers, Society of Women Engineer, Jobs & Trade Network, US Business & Industry Council and TradeAlert.com.

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