Wednesday, December 14, 2005

The Perils of Outsourcing

In an article for the forthcoming issue of The National Interest. Maurice R. "Hank" "Greenberg makes the following point: "We cannot survive as a nation of only service industries, of plumbers and electricians and other day-to-day jobs that cannot be outsourced." Yesterday, Harry Harding, Eurasia Group's director of research and analysis, was talking about the 200-mile radius rule--that if a good or service is offered to you beyond your need to reasonably go out and get it--it can be outsourced--because it doesn't matter to you whether it comes from 201 miles away or 2,001 miles away. Take health care. The person who takes your x-ray needs to be someone who is reasonably geograpically proximate to you--but given advances in telecommunications the person who analyzes the x-ray can be anywhere around the world.

So your doctor, car mechanic, gardener, barrista--these are people who need to be "close" to you--but everyone else is vulnerable. Even me--in theory, an editor can be anywhere in the world as long as you have a good computer and internet connection.

There are, of course, consequences. The first, as Harry pointed out, is that in the United States unions are increasingly focusing their efforts on those jobs and sectors that cannot be outsourced--health care, the universities, government. Interesting to speculate on the future of the labor movement as a result.

The second is that the United States, as Greenberg noted, cannot indefinitely continue its trade imbalance. The United States needs to reconcentrate its entrepreneurial energies and human capital on developing "the next generation" of goods and services. A point also raised by former Energy Secretary James Schlesinger--that the country that can break energy dependence on petroleum will have an immense technological advantage over other states.

Perhaps it is time for the U.S. to reconsider its stand on industrial policy? (See also our previous discussion on Challenging Orthodoxies).

Does the government do a better job than the private sector in directing investment? One can argue that the Manhattan Project or Project Apollo were highly inefficient and wasteful but would the private sector have built an A-bomb or gone to the moon? What the private sector was able to do was to spinoff so many other industries and products from the original government investment as to make it worthwhile.

Energy independence is a national security imperative. A government-led effort can produce the spinoffs that will create new U.S.-based industries and give us a new comparative advantage.
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