DeLong Rethinks Outsourcing

Thinking About Outsourcing: Archive Entry From Brad DeLong's Webjournal

... As Paul Krugman puts it, free trade is a salable policy only if accompanied by a well-built social safety net and confidence in full employment. Our safety net is full of holes, and confidence right now that employment will be full is shaky. Preserving free trade in the 1970s and 1980s was a near-run thing, even though the magnitude of imports was not that great and the shock to America's distribution of income and employment not that large.

This is worth thinking hard about, for when "outsourcing" truly arrives--whether in one or two or three decades--it is likely to deliver a shock an order of magnitude larger to the American economy.

Consider: the income gaps in the case of "outsourcing" will be much greater than in the case of trade in manufactured goods. The income gap between Japan in and America in the 1970s was a matter of one-to-two. The income gap between India and America tomorrow will be one-to-ten. On the one hand, economists will say that the gains from trade will thereby be that much greater for the economy as a whole. On the other hand, the potential downward pressure on loser workers in rich countries will be that much greater as well.

Consider: trade in services potentially affects a much larger proportion of the labor force. Sectoral trade deficits in manufactured goods have rarely, rarely exceeded 3% of GDP. But what is the upper limit to the sectoral trade deficit in long-distance document-image pushing?

Consider: the assault by manufactured imports on American mass-production manufacturing in the 1970s and 1980s was something done to American workers and firms standing together. The process of outsourcing will look very different: it will be something done by internationalized American firms to American workers. The politics of GM, Ford, and UAW asking for help together to deal with foreign competition will be very different from the politics produced by workers vs. CEOs.

And, conversely, consider India. Put 10 million people in India to work at $26,000 a year providing white-collar services to the industrial core, and you have boosted India's standard of living by 50%. And you have displaced only 4% of the potential target industries, for there are 240 million service-sector workers in the First World today.

Because this is an economic transformation that is going to hit not in one shot next year but over the course of the next generation, we have plenty of time: time to build the social safety net, the education and retraining programs, the social and economic institutions needed to turn the coming of trade in white-collar services from a win-lose to a win-win affair for America and Americans; time to rebuild confidence that employment will be full and the duration of unemployment spells short. But we will need all this time, because the magnitude of the approaching economic trade shock will be much larger than anything in our historical memory.

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DeLong wrote a silly and quick blog entry on outsourcing. He was justly berated in the comments. This reads like a thoughtful response to his reader's comments.

He believes the impact from cognitive outsourcing will be relatively small over the next 1-3 years, but quite large 10 years from now. That's interesting, because on that timescale the great boomer die off will be starting, and there will be a great vacuum "at the top". He didn't consider the demographic trends, but I wonder if he's right about the timescale they may be a countervailing force.

Why the US can't separate benefits from employment

A recent post on Ron Paul and the anti-outsourcing movement reminded me of a host of past posts on outsourcing. Unsurprisingly this discussion was most active in the last election cycle. Back in February 2004 I even had something nice to say about Friedman. Emphases changed for this post:

Gordon's Notes: India and outsourcing: Friedman 1, Kristof 0

...Friedman wins this match. Great column. Reich's recommendations are mine as well, except I think wage insurance won't fly. I do think that the 401K and its equivalents need to become life-event rather than age driven, and all benefits need to be unrelated to employment. Employment should be wages, nothing else.

Friedman/Reich point out that outsourcing is a tax deductible business expense. The tax code should NOT be facilitating outsourcing. It shouldn't obstruct it, but neither should it encourage it. That can be changed.

The world needs China and India to be wealthy. These are two sources of extraordinary power and vigor, and the US is acting as a short-circuit between them. If we capture a fraction of that current we can share in the wealth, but we can't do it with our current social support network. We need another solution...

Protectionist measures, including trade and immigration restrictions, can make some jobs last longer than they otherwise would. The price is typically some complex mix of higher product costs, diminished economic productivity, and reduced value. Still, the cost may be worth paying to reduce extreme social disruption, as China's capital controls demonstrated in the Asian financial crisis of the 1990s.

A better approach, however, is to make it less painful to change employment or retrain by separating benefits, like healthcare and retirement savings, from employment. This is a true win-win, with both individual benefits and economic logic.

Except it ain't going to happen. The only serious move in this direction was a fake Bush proposal that turned out to have a poison core.

It hasn't come up since.

Why not?

I don't know the real confluence of special interests that ended the January 2007 discussion, but I can think of one good reason that employers might want to hold onto benefit control -- no matter what they cost.

It makes it very hard to employees to leave and ... do nothing.

My guess is there's a significant fraction of the US workforce that, if they had affordable guaranteed healthcare coverage, would stop working. Some would take early retirement. Some would go back to school. Some would take six months off and try something different.

Not everyone would want to do this, or could afford to do it. Those that would, however, would be disproportionately upper middle class, confident, and adventurous.

That's one hell of an expensive group to lose. It would be a hard hit for economic productivity, and in the near term there would be a sharp fall in economic productivity. Recession. Big time.

Sure, in the long run it might lead to increased economic productivity, and it could lead to increased happiness -- though happiness tends to be genetically determined except at the margins.

In the short term though, increased freedom could be very bad for business -- and for the global economy.

We're going to be in the employer-based benefits ankle chains for years to come ...

PS. I do note that we haven't done anything in the past four years to reduce the tax incentives that promote outsourcing of software development. I wonder why that is ...

New world: Outsourcing Your Crowdsourcing

I couldn't improve on the title of this O'Reilly essay. I think it's a fascinating story.

dSLR camera sensors are ridiculously prone to dust contamination. Most of us ignore the dust, but it's a problem for stock photos. The specks can be digitally removed, but the work is tedious and slow. On the other hand, it's not hard to do an adequate job -- just slow. A perfect outsourcing solution, but most photographers prefer to do their own dust cleansing. If the image is worth a lot of money it's worth the labor.

But, what if the image isn't worth much money? What if you're dumping images quickly to an online photo service that depends on "crowdsourcing" (millions of monkeys typing) to produce cheap, good-enough, stock photos?

Outsourcing Your Crowdsourcing - O'Reilly Digital Media Blog

... I recently read an interesting post over at AUPN about a company based in New Delhi, India that is doing post-production work for photographers via FTP. The company is called Differential Technologies and you can check them out yourself at their website — http://www.worldofdt.com

... I went and checked out Diferential’s website anyway, because I was interested to see if they might be able to help me with submitting photos to a micro-stock agency. A while back I wrote about my experiences in trying out the Aperture plugin for the micro-payment stock agency iStockPhoto.com. In the end I found that I really liked the plugin, but just couldn’t justify the amount of time that was necessary to prepare my images for upload.

The trick to iStockPhoto seems to be that one needs to submit as many photos as possible, the photos need to be fairly unique and appealing to a variety of markets, and they need to be well key-worded, and adjusted. They don’t, on the other hand, need to be from big budget photo shoots, shot with ultra-expensive cameras, or have hours and hours of post-production work put into them.

... The team at Differential set me up with a personal FTP account and I sent them an exported JPEG of the original Master image. I used the new Ubermind FTP plugin for Aperture to transmit the image, and selected a full resolution JPEG with the color space set to sRGB as my Export Preset.

About half an hour later I received an email from Differential explaining to me that the job was done and I could download the image from the same FTP account. The result is below. Differential’s email also explained to me that the charge for such an image would normally be $2.00 (USD) due to the excessive amount of dust on the sensor. The price, they say, ranges from $0.50 to about $2.00, so I guess I hit the max on this one....

... After I looked over the image, I wrote back to Differential inquiring about key-wording services. They said they would be happy to work something out with me. I think this could be the start of really great relationship.

On the Aperture side of things, the whole experience got me thinking about how I could optimize the process so that I would have to do the least amount of work, and keep things nicely organized. I really like the option of just having an “iStock” keyword on hand, perhaps in one of my Keyword Control bars, and a Smart Album set up to search on this keyword. I could continue using the Ubermind FTP plugin to send the images to Differential, and when they were finished, I could just import them into Aperture, and send them to iStock using the plugin.

The only work I would have to do would be to set the iStock categories for each image. Later, I could even go as far as to connect them with their corresponding Masters using the Stack tool...

Of course now that we're seeing high-quality online photo editing solutions, we will see Amazon 'Amazing Turk' services for similar post-production services. Home video editing is another obvious example. I'd be glad to send copies of my home videos out for video editing, though that's an example of only the outsourcing part of the equation. The wonder of this story is the clever combination of outsourcing and crowdsourcing. It's a fascinating parable for our times.

Google, privacy, and outsourcing Total Information Awareness

The NYT has an OpEd on Google's privacy policies. There are no surprises there; one should always assume anything done online is public knowledge. Only the very sophisticated have any privacy now, and even they may be tracked by textual analysis software that can match text to identity based on idiosyncracies of expression (and, presumably, of thought -- giving new meaning to the concept of "thought police").

In general, privacy is very 20th century. I tried to fight this, but eventually I realized this was a losing battle -- especially after 9/11. Humans lived most of our existence in small communities with very little privacy; that is the world we've returned to.

There was one slightly interesting point raised in the article, though in reality it has little to do with Google:

What Google Should Roll Out Next: A Privacy Upgrade - New York Times

The government can gain access to Google's data storehouse simply by presenting a valid warrant or subpoena. Under the Patriot Act, Google may not be able to tell users when it hands over their searches or e-mail messages. If the federal government announced plans to directly collect the sort of data Google does, there would be an uproar - in fact there was in 2003, when the Pentagon announced its Total Information Awareness program, which was quickly shut down.

This is not new, in fact even I've written about this over the past few years. The Feds discovered during the 90s that the best way to deal with inconvenient legislation was to route around it by outsourcing key functions; the FBI in particular outsourced many of their information gathering functions in the 90s. More recently, of course, our wonderous government has routed around inconvenient prohibitions by outsourcing torture. In the same manner Poindexter's "Total Information Awareness" didn't "disappear" (silly idea), it merely changed names and was outsourced.

Google isn't an outsourcing tool for the TIA project, but it the Patriot Act has made Google and other online services unwitting accomplices.

Will Americans' ever catch on? Not if the media continues to completely miss the real story. I'm saddened and amused to read of privacy legislation that targets government rather than corporations. Really, it's a total waste of paper.

If Americans did catch on, what could be done? We can't stop TIA now, privacy really is history. We could, however, make the corporations implementing TIA and other programs legally liable for errors. If we don't learn lessons of the utterly incompetent 'do not fly' list program, thousands of Americans will be injured by these outsourced program. We will then be living in Gilliam's Brazil.

India and outsourcing: Friedman 1, Kristof 0

NYT Friedman: Meet the Zippies

With 54 percent of India under the age of 25 — that's 555 million people — six out of 10 Indian households have at least one zippie, Outlook says. And a growing slice of them (most Indians are still poor village-dwellers) will be able to do your white-collar job as well as you for a fraction of the pay. Indian zippies are one reason outsourcing is becoming the hot issue in this year's U.S. presidential campaign.

About two weeks ago Kristof, one of my favorite columnists, wrote a very atypically dumb column on this topic. Kristof said then that America needs to invest in more college education to meet the new age. Duh.

Friedman wins this match. Great column. Reich's recommendations are mine as well, except I think wage insurance won't fly. I do think that the 401K and its equivalents need to become life-event rather than age driven, and all benefits need to be unrelated to employment. Employment should be wages, nothing else.

Friedman/Reich point out that outsourcing is a tax deductible business expense. The tax code should NOT be facilitating outsourcing. It shouldn't obstruct it, but neither should it encourage it. That can be changed.

The world needs China and India to be wealthy. These are two sources of extraordinary power and vigor, and the US is acting as a short-circuit between them. If we capture a fraction of that current we can share in the wealth, but we can't do it with our current social support network. We need another solution.

BTW, Robert Cringely is another writer who's got it.

Good for Friedman. Even if he is a Bush apologist.

Globalization and the Export of American Labor: Outsourcing non-IT knowledge work -- now it's the lawyers

Neal St. Anthony, Star Tribune, On business: Outsourcing hits legal services

First it was the apparel workers -- the working class -- who saw their $10-an-hour jobs go overseas.

More recently, the United States has started to export to India the $35,000-a-year customer-service center jobs from the likes of American Express Financial Advisors and $50,000 technical-support positions from IBM and ADC Telecommunications to India and elsewhere where educated, English-speaking workers are hired for a tenth of the cost to communicate with U.S. customers by phone and over the Internet.

Now, six-figure lawyers and legal support staffs are starting to sweat.

At West, the Eagan-based legal-publishing unit of Canada's Thomson Corp., there's a buzz over a small test office in Bombay, India, where Indian lawyers may one day interpret and synthesize U.S. court decisions for subscribers of Westlaw, the online legal network relied upon by thousands of practicing U.S. attorneys.

To date, this work has been the growing province of a group of 150-plus editor-lawyers in Eagan and elsewhere who review court decisions, synopsize them and write "headnotes" for each point of law. This work is then keyed into Westlaw's league-leading database, enabling lawyers to quickly review and cite decisions and other relevant case law in West's venerable classification system.

So far, just a few months into the quiet Indian pilot-office experience, the half-dozen or so Indian lawyers have been doing online interpretation and legal-classification of "unpublished decisions" of U.S. state and lower courts that are not considered big deals -- or "precedential" in legal parlance.

West editor-lawyers, who make up to $100,000 per year, continue to do the "published opinion" work and are editing the work of the Indian lawyers.

The Indian lawyers are trained in British Common Law, different than U.S. law. But they've been brought into West for in-house training, and more through West trainers in Bombay.

Their work so far has been good, and has the West editors "terrified" that the pilot program will blow into a wholesale operation, which would displace lawyers in Eagan and elsewhere making five or more times the Indian lawyers.

Kyle Christensen, a spokesman for the 6,000-employee West unit in Eagan, said the Eagan workforce has been expanded in recent years to accommodate case analysis and headnoting for Westlaw.

And, as part of its expansion to start giving the same treatment to unpublished opinion, West opened the Bombay office to "assess potential improvement in the product and how we might better use outside resources," Christensen said.

"None of the work, to this point, that has been completed in India has made it into any of our publications. It's a test. It's possible that some of the low-end support could work out. The analysis, headnoting, detailed classification will remain in Eagan." he said.

Referring to the Indian office, Christensen said: "They're not actually providing analysis. They're doing some review of how to assign key numbers to administrative law decisions. And they're doing some training on writing headnotes for unpublished decisions."

The West spokesman is quick to add that dozens of West lawyers also work in Minnesota to interpret the legal decisions of British, Spanish, Greek and other courts for lawyers in those countries.

Still, West's Indian office is a toehold in what once was considered an all-American business, immune from the foreign competitors that took manufacturing, and now services jobs, overseas.

The American Lawyer reported recently that General Electric and other U.S. behemoths are starting to use low-cost Indian lawyers to supplant some of the work formerly done by outside U.S. law firms.

A vice president of the Chicago-based outsourcing firm Mindcrest, which has an Indian subsidiary that handles legal work, told the American Lawyer that business is booming for basic research and low-rung work usually done by paralegals and junior lawyers for U.S. corporations and law firms.

Moreover, Forrester Research of Cambridge, Mass., the market research firm, predicts that by 2015, more than 489,000 U.S. lawyer jobs -- about 8 percent of the total, will shift to lower-cost countries.

Ironically, a Twin Cities personnel recruiter says the trend will grow because corporations and senior partners at law firms will have a financial incentive to farm out the less-costly boilerplate work now done by junior people.

Ron Kreps, the managing partner of the Minneapolis office of Fulbright & Jaworski, said: "West provides a great service, you bet they do. We can't just rely on a West editor and keynotes, but yes, they get you started. And it's very important that the keynotes are accurate.

"I don't care where the people sit who write them, but I do care that they know U.S. common law and the trends in the U.S. And that's different than British common law. The bigger question is: Can professional services be done offshore? That's the question a lot of professions are worried about."

Globalization, long the nightmare of displaced Minnesota taconite miners, electronics assemblers and North Carolina textile workers, takes on a different wrinkle when it starts to claim not just the job of Jane Lunchpail, but also threatens the jobs of those who were banking on country club memberships.

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Fascinating, an understated and very well written summary. Not surprising; I've been predicting this one for a couple of years. Nice to have confirmation though.

The synthesis and extension of existing "content" (industry term for this type of knowledge) has no regulatory barriers. It requires intellect and domain knowledge, it requires an ability to read but not speak or write English, it does not require physical presence. If the domain knowledge is costly in the US, but substantially less costly overseas, the work will move very quickly. In other words, the barrriers to migration of work in this instance are very low and the incentives are high.

I know of one corporation in the medical content domain who's essentially outsourcing some of their content management and development to a (relatively) "low wage" nation. (In this case English speaking and highly industrialized, but physician wages in many nations are a fraction of US physician wages. The same thing is true for lawyers.)

I think this globalization, which does put my own job at risk, is a great thing for the world. Insofar as we are a part of this world, it's a great thing for us. The challenge for a great leader is to find a way mitigate the great hurt it will do to many people in the US. Injuring the career prospects of lawyers is likely to lead to more change than unemploying blue collar workers and IT professionals. Lawyers are close to politicians, and politicians have the power. The danger is a stupid protectionist response, one that will harm us and the world. The other choice, however, is far too novel for our current administration to consider. One can only pray that a miracle occurs and Bush is displaced from power this year.

Secondary outsourcing

I think it was Gary Trudeau (Doonesbury) who first popularized a programmer covertly outsourcing his work to India. A similar thing is happening in schools (DeLong).

These students, when they go to work, will use the same techniques. DeLong is annoyed with the reporter's gullibility, but it's neat to see a widely predicted future happening. There's a generational gap here -- I lack the outsourcing skills these college kids will have. I have, however, long had ideas about other uses for this sort of resource network ...

PS. I think Vernor Vinge's Fast Times at Fairmount High is our best current guide to the world ahead.

Outsourcing and quality control: the Apple experience

MacInTouch Home Page

A particularly appalling story of Apple's repair program. For various reasons, I believe this story is true:

I have a customer who had a 12.1' iBook G3/600 which exhibited the classic logic board exchange out of warranty issue, which Apple has a special extension for. This means the unit displayed flake video and sometimes would black out entirely.

This customer is meticulous and his equipment shows it. The unit was immaculate when it got to me even though it had been purchased second-hand and was in use by a kid.

I spoke to Apple and they agreed that it was within the scope of the extended warranty repair program, even though the serial number wasn't within the range published.

We did the DHL ship to the repair depot, and a week later the machine was returned to me. It had a very noticeable scratch on the bezel surrounding the LCD, and the Airport didn't work. I called Apple again and we did ANOTHER round trip to the depot. They made a note about the scratch, but it wasn't so bad, so I figured we could live with it.

Upon the second return (13 days, but Christmas intervened, so understandable), the unit worked OK, but had a very noticeable misalignment of the case work and ANOTHER scratch in the front lower case (right where you would press the tabs to release the bottom case).

I contacted Apple again, and they offered to replace the plastics and repair the unit if I shipped it to them a third time. I told them it had taken too long already, and could they compensate me some other way and I would pay to have the case put together properly in town... The guy's name was Dean and was super nice and agreed to send me out a new battery, which this unit needs anyhow.

So, when I go to straighten out the case work, as soon as the bottom is removed, it becomes clear there are multiple screws and parts MISSING. The LED which signals sleep wasn't even reinstalled, and at lease one important screw is AWOL.

Whoever is doing the repairs for Apple on this program is doing a terrible, sloppy job and there is clearly NO quality control in place for this.

As an Apple stock holder this is really appalling, as it clearly is costing way more then a new iBook to get this squared away. Three round trips via DHL and two logic board exchanges, plus ...

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I don't think this is purely an Apple issue. It's really an outsourcing story. Apple outsources their services. That means they lose control over quality. Episodes like this one, especially when broadcast on the very influential Macintouch site, cost them a fortune.

Outsourcing is very tricky.

Secondary outsourcing - in Doonesbury

Doonesbury@Slate - Daily Dose

Hey! This was my business idea. This Nov 7/04 Doonesbury strip talks about an alternative to corporate outsourcing -- bringing outsourcing down to the level of the individual worker. I'd spent an hour or so last year thinking about how one could turn this into a business -- partnering US coders with covert overseas coders to enhance their productivity. I think it makes sense. Evidently, so does Gary Trudeau.

DeLong extends the traditional trade model of comparative advantage to cover outsourcing

Brad DeLong's Semi-Daily Journal (2004): a Weblog

... Let's try a finger exercise to evaluate the effects of expanded international trade via 'outsourcing' on an economy. We'll set up a simple model--not a realistic model, an unrealistic model, a model that has only the features we absolutely need to understand the principal impacts of expanded trade on an economy...

...Now we can evaluate this change in four ways:

(1) Let's look at the worst-off--the workers. Their real incomes have risen by 4,000 thalers a year. That's a good thing.

(2) Let's look at total national product. The 75% of the population of the workers have seen their incomes rise by $4,000 thalers a year; the 25% of the population who are yuppies have seen their real incomes fall by $10,000 thalers a year. That means that the average person's real income has risen by $500 thalers a year. That's a good thing.

(3) Let's assert the psychological law that no matter how rich or poor you are that equal percentage increments to your income have equal effects on your material well-being. 75% of the population has seen their real incomes rise by 10%. 25% of the population has seen their real incomes fall by 8.3%. The average proportional increase is 5.4%. That's a good thing.

(4) Let's look just at the rich yuppies, because they are the people we see on TV and who give big campaign contributions. Their incomes have fallen by 10%. Bummer.

David Ricardo is the justly famed 19th century theorist who demonstrated the power of comparative advantage -- the true underpinnings of trade liberalism. Here DeLong extends the classic simplified model to cover outsourcing.

It's a good essay. I'm persuaded -- and I was skeptical. I see what he means. DeLong argues for interventions to ease the pain of transition -- as have I.

Outsourcing the military: Another Bush/Cheney mind-boggler

Tim Spicer, a once notorious mercenary, commanded the second largest armed force in Iraq.

WIRED Blogs: Danger Room (quoting Vanity Fair)

But then, somehow, two months later, Spicer's company, known as Aegis Defence Services, landed a $293 million Pentagon contract to coordinate security for reconstruction projects, as well as support for other private military companies, in Iraq. This effectively put him in command of the second-largest foreign armed force in the country—behind America's but ahead of Britain's. These men aren't officially part of the Coalition of the Willing, because they're all paid contractors—the Coalition of the Billing, you might call it—but they're a crucial part of the coalition's forces nonetheless...

and in Vanity Fair

...As I walked back to Victoria Station, I couldn't help wondering how Spicer had ascended so quickly from notorious mercenary to corporate titan. What had he done to wangle that fat Iraq contract from the Pentagon? Serving 20 years with the British military in the toughest parts of the world was certainly one qualification. So was being smart, connected, and personable. But how had he overcome the taint of Sierra Leone and Papua New Guinea, two scandals indelibly attached to his name? Apparently the Pentagon had decided that an Africa hand could do in Iraq what the American military couldn't: subdue the most xenophobic and violent people in the Middle East...

...

Finding the right personnel can pose a problem. Hart Security, a private military company with roots in South Africa, recruited many of its contractors from the ranks of the apartheid-era South African army, among the most ruthless counter-insurgency forces ever known. One of Hart's men was Gray Branfield, a former covert South African operative who spent years assassinating leaders of the African National Congress. ..

The private military company Erinys also had a South Africa problem. In 2004 an Erinys subcontractor, François Strydom, was killed by Iraqi insurgents. It turned out that Strydom was a former member of the notorious Koevoet, an arm of apartheid South Africa's counter-insurgency campaign in what is now Namibia. There have been press reports of a link between Erinys Iraq and Ahmad Chalabi (the onetime head of the Iraqi National Congress, which was a conduit for the fabricated intelligence used to justify the Iraq war), which both Erinys Iraq and Chalabi deny. After securing an $80 million contract to guard Iraq's oil infrastructure in 2003, Erinys did hire many of the soldiers from Chalabi's U.S.-trained Free Iraqi Forces as guards. Chalabi himself eventually became acting oil minister. ..

...In an odd but lethal twist, it came out last November that the rogue K.G.B. agent Alexander V. Litvinenko had visited the London office of Erinys shortly before his death, by means of radiation poisoning, leaving behind traces of polonium 210...

It constantly amazes me what gets left out of the New York Times. This is the first I remember hearing of Spicer and his army. Bush/Cheney just love outsourcing (they outsourced Walter Reed apparently, with typical results), and they seem to have a fetish for men like Spicer.

Bush is such a multidimensional disaster. I'm sure he's a deep KGB plant.

Update 3/14/07: DynCorp is the US military in Somalia

The State Department has hired a major military contractor to help equip and provide logistical support to international peacekeepers in Somalia, giving the United States a significant role in the critical mission without assigning combat forces.

DynCorp International, which also has U.S. contracts in Iraq, Bosnia, Afghanistan and Iraq, will be paid $10 million to help the first peacekeeping mission in Somalia in more than 10 years.

This is so much like the Heinlein/Dickson(Dorsai) science fiction I read in high school that my Deja Vu has Deja Vu. Typing was one of my most important high school classes, and my trash reading was my best preparation for the future. Who knew?

The pernicious affects of taxes and accounting rules: crummy software and cubicle farms

Accounting rules for software capitalization are one of the reasons there's so much crummy software around. The rules favor "waterfall development", an expensive way to produce poor quality software. Incidentally, since waterfall development is very compatible with outsourcing, US tax law and accounting standards facilitate outsourcing software development.

It turns out tax laws also facilitate cubicle farms instead of pleasant work evironments:

Moveable walls - Joel on Software

... We're going to need a much bigger space now: on the order of 15,000 square feet. To build that much office space could cost a couple of million dollars. With the lack of deductability, your bank account goes down by three million dollars. The landlord will pay a fraction of that, but not enough to make it affordable.

There's a loophole. Office furniture can be depreciated much faster than leasehold improvements, over 7 years. So for $20 of office furniture you can deduct about $3 a year: better than nothing. Even better, office furniture is a real asset, so you can lease it. Now you're not out any cash, just a convenient monthly payment, which is 100% deductable.

This is why companies build cubicle farms instead of walls, even though the dollar cost is comparable...

Tax laws subsidize trailer parks in some states, and make them unaffordable in other states. Tax laws are why Tokyo once had rice paddies. The more convoluted the tax code becomes, the more unwanted side-effects occur ...

Post-industrial employment: adjusting to a new world

Six years ago I wrote a review of Robert Reich's book Reason. Reason was a reaction to the GOP's loony rule, but Reich was also very concerned about the fate of the middle class. He was worried that only knowledge workers were going to have work. His answer was better education.

I disagreed. I thought knowledge workers were very much at risk in a "winner take all" world, and I was skeptical that education was really a universal solution (emphases added now)...

... Reich is persisting in the 19th century belief that humans are fundamentally malleable -- at least when young.

Most of the research of the past 10-20 years points to a more complex picture...

... the evidence is strong that humans are not endlessly malleable. This is an increasing problem, because 21st century America rewards a fairly narrow range of workers. In the new-world, many of the old-middle class may not have a happy home -- no matter how hard they retrain. In a fundamental way, many Americans may be "disabled" for the modern workplace.

Reich should not be so quick to write-off redistributive solutions. We will need some creative thinking to produce a healthy American when the true "disability" rate starts to top 30%.

I think the world is coming around to my perspective. For example (undated articles are recent):

• The New Poor - In Job Market Shift, Some Workers are Left Behind - Catherine Rampell
• Plan B - Skip College - Jacques Steinberg - NYT
• The Way We Live Now - Students of the Great Recession - David Leonhardt - NYT
• Your Money - Another Debt Crisis Is Brewing, This One in Student Loans - Ron Lieber - NYT
• College Education, Good Jobs: Why Degrees Are Overrated - TIME (Feb 2010)
• The paradox of 21st century prosperity (Reich, 2009)
• Gordon's Notes: Why your daughters should be roofers -- not architects (3/23/2004)
• In the Basement of the Ivory Tower - The Atlantic (2008) - college as a waste of time for some
• Krugman on globalization: how to manage the losers - Krugman -NYT (2007)
• Where has the money gone? To the very American oligarchy - Krugman - NYT (2006)
• The day of the American engineer has passed (2005)
• Shaken and Stirred - DeLong and Cohen - The Atlantic (2005)
• The New Feudalism: Return of the Trades (2004)
• On redistribution (2004 - Baumol's Disease)
• Jared Bernstein & Brad DeLong on "Outsourcing": a dialog with interesting discussions (2004)

I hope you've taken the time to scan at least a few of the above (esp. Rampell, Steinberg and the discussion of Baumol's Disease). Taken together they reflect a consensus that's emerged over the past six years. I'd summarize it this way:

1. College has become insanely expensive. (The College Industry will be the next bubble to burst.)
2. There's a growing disconnect between the costs of college and the value delivered.
3. Many students would be better served by skills ("vocational") training rather than traditional scholarship.
4. Technology and globalization have eliminated large numbers of office jobs and made some old skills obsolete. Many of the middle-aged middle-class people who lost their jobs in the Great Recession won't work again.
5. In an age of outsourcing, knowledge work may be no more secure than factory work.

Ok, so the last isn't part of the consensus ... yet. It's still mostly a suspicion of mine.

So if we really are entering a world where many formerly middle-class adults won't be able to find stable employment, simply because they lack the skills for the jobs that do exist, what should we do?

College is probably not the answer. In 2007 and 2004 I suggested:

• universal health care (astoundingly, this might happen!)
• separate benefits from employment
• intelligent retraining programs - based on individual skills assessments and locally available employment
• As part of social security reform, eliminate the idea of age-specific retirement. Income has mandatory contributions to tax-deferred funds and non-work (study, vacation, job seeking, whatever) draws from those funds*.
• rethink the meaning of disability in a post-industrial society

The last will be the hardest, but I think we'll get to all of these in time. Civilization is stronger than we think. One way or another, we'll figure this one out - including finding a future for those who don't seem to have a place in the modern economy.

* I first proposed something like this in a 1977 Women's Studies course essay. I just remembered that ...

Update 6/2/10: Robert Reich on "Entrepreneur or Employed". Excellent summary. The modern 50+ knowledge worker is not "unemployed" s/he is "self-employed". S/he is a masterless, "Ronin" contract worker. Reich's recommendations are very close to what I wrote above. There's one in particular I like: "... Since they can no longer depend on tax-free corporate matches to their 401(k)’s or I.R.A.’s, they should be entitled to tax credits that match them". This is one measure Obama might be able to squeak by the GOP loons in Congress.

Why Joel Spolsky hates Microsoft Mesh -- and what this says about the peculiar course of software outsourcing

Spolasky thinks the Microsoft Live Mesh idea is dumb, that Microsoft is again trying to solve an insanely hard problem nobody cares about - synchronization. Ray Ozzie rewriting Notes/Agenda/Groove yet again and again. Spolsky makes a great analogy between Mesh and the nigh-incomprehensible Hailstorm.

Personally, I care a lot about synchronization and I believe it's a deeply hard problem. In addition to my personal PIM sync obsessions, synchronization technologies have a huge potential impact on healthcare interoperability. So I think Spolsky has a some good (albeit cruel) points about Architecture astronauts, but he's possibly undervaluing the synchronization problem.

On the other hand, his comments about Google and Microsoft's brain drain is really interesting ...

Architecture astronauts take over - Joel on Software

... Why I really care is that Microsoft is vacuuming up way too many programmers. Between Microsoft, with their shady recruiters making unethical exploding offers to unsuspecting college students, and Google (you're on my radar) paying untenable salaries to kids with more ultimate frisbee experience than Python, whose main job will be to play foosball in the googleplex and walk around trying to get someone...anyone...to come see the demo code they've just written with their "20% time," doing some kind of, let me guess, cloud-based synchronization... between Microsoft and Google the starting salary for a smart CS grad is inching dangerously close to six figures and these smart kids, the cream of our universities, are working on hopeless and useless architecture astronomy because these companies are like cancers, driven to grow at all cost, even though they can't think of a single useful thing to build for us, but they need another 3000-4000 comp sci grads next week. And dammit foosball doesn't play itself.

Whoa. Only a few years ago American software engineers were a doomed breed; all software design and invention would be outsourced. Now we read that starting salaries for novice, albeit very smart, CS grads are putting a crimp in Spolsky's business plans.

This fits with what I see in my corner of the industry. There's a new appreciation for the value of really smart people, and personnel costs are about to take an unexpected turn in the midst of a recession.

Outsourcing is taking a strange and unpredicted course.

Update 5/20/08: Microsoft Mesh sounds a lot like Microsoft FeedSync. Turns out FeedSync is an element of Mesh, which makes Mesh seem like a Microsoft marketing concept rather than a product concept. That's never happened before ... (joke)

Fraud and Globalization: Toy Story III

The NYT has 3 related globalization and fraud stories in their top 25 list today, and they are 1,2,3 in the business section rankings:

• Thomas the Tank Engine Toys Recalled Because of Lead Paint
• A Lesson That Thomas Could Teach
• As More Toys Are Recalled, Trail Ends in China
  

This is, of course, really a story about fraud. Buyers think they're buying one thing (safe toys), but they get another.

Some useful quotes:

China manufactured every one of the 24 kinds of toys recalled for safety reasons in the United States so far this year, including the enormously popular Thomas & Friends wooden train sets, a record that is causing alarm among consumer advocates, parents and regulators...

...Scott J. Wolfson, a second Consumer Product Safety Commission spokesman, would not say how long ago RC2 discovered the problem or when it first reported it to federal authorities.

In the last two years, the staff of the consumer product commission has been cut by more than 10 percent, leaving fewer regulators to monitor the safety of the growing flood of imports.

Some consumer advocates say that such staff cuts under the Bush administration have made the commission a lax regulator. The commission, for example, acknowledged in a recent budget document that “because of resource limitations,” it was planning next year to curtail its efforts aimed at preventing children from drowning in swimming pools and bathtubs. ..

and

... Over the last two decades or so, American companies have generally followed a two-pronged outsourcing strategy. First, the companies have tried to move as much of their manufacturing as possible to places where wages are just a fraction of what they are here. Second, the companies have distanced themselves from their overseas production. They usually don’t own the factories and refuse to say much about them.

The current issue of The Atlantic Monthly has a fascinating cover article by James Fallows taking readers on a tour of Shenzhen, a southeastern city of eight million people (stunningly, up from just 80,000 a generation ago) that isn’t far from the factories that make the Thomas trains. Many of the world’s best-known companies — like a company that Mr. Fallows describes as a “very famous” American retailer — get products from Shenzhen. But he didn’t get permission to connect any of the individual factories in his article with a specific brand.

“In decades of reporting on military matters, I have rarely encountered people as concerned about keeping secrets as the buyers and suppliers who meet in Shenzhen and similar cities,” he wrote.

This secrecy brings a number of advantages. It keeps competitors from finding out tricks of the trade. It keeps consumers from discovering that their $100 brand-name shirt comes from the same assembly line as a $40 generic version. And it prevents activists from criticizing a company for the working conditions in a factory where its products are made. The companies get the cost advantages of outsourcing without the publicity disadvantages.

In the days since the Thomas recall was announced, the company that owns the Thomas brand, HIT Entertainment, has stuck to this script. HIT is an English company that holds the rights to a number of popular characters, including Barney and Bob the Builder, and then licenses the toy manufacturing to companies like RC2.

Except for a small link on the Thomas Web site to RC2’s recall announcement, HIT has otherwise acted as if it has nothing to do with the situation. Its executives haven’t even said that they regret having been promoting toys with lead paint in them. They haven’t said anything publicly.

When I suggested to the company’s public relations agency, Bender/Helper Impact, that this might not be the smartest approach, the agency e-mailed me a two-sentence unsigned statement. It said that HIT appreciated the concerns of its customers and was working with RC2 on the recall, but that the recall was “clearly RC2’s responsibility.”

In effect, HIT has outsourced Thomas’s image, one of its most valuable assets, to RC2. And RC2 has offered a case study of how not to deal with a crisis, which is all the more amazing when you consider that the company also makes toys for giants like Disney, Nickelodeon and Sesame Street.

When it first announced the recall, RC2 said that its customers would have to cover shipping costs to mail back the trains. It reversed that decision after parents reacted angrily, but it is still going to wait about two months to send the postage refunds. Why? “Because finance is in another building,” as one customer service employee on RC2’s toll-free hotline told me.

Most important of all, the company hasn’t yet explained how the lead got into the trains or what it’s doing to avoid a repeat. Like their counterparts at HIT, the RC2 executives have stayed silent...

There's not much new in either story. The last ends with a feeble hope that consumers will "punish" companies with unsafe products. They could do this, for example, by not buying toys. Gee, maybe that would work food and medicine too. If we stop buying food, toys and medicine maybe things will get better ...

I don't have that much faith in our overwhelmed populace. I have much more faith in the hunger of our lawyers. If they can find a way to sue the British based HIT Entertainment then we might see some changes. Alternatively, they can in future sue Walmart (for example) for selling items that any reasonable person would expect to be unsafe. If Walmart starts to worry about being sued, I'm reasonably sure toys from China will become much safer ...

Outsourcing mainstream media jobs

Interesting variant on the ubiquitous outsourcing story...

Good Morning Silicon Valley: Not so much "thanks" as "whew!"

.... newspaper workers, including journalists, are seeing their jobs not just go away, but go overseas. Ad production jobs at our sister paper, the Contra Costa Times, are being outsourced to Express KCS, a firm that bills itself as “India’s leading media preparation business.” And the International Herald Tribune notes the growth in news organizations using inexpensive editorial help in India to write boilerplate Wall Street coverage... That's the way it goes when the giant semi of history get rolling; some people are going to get mowed down through no fault of their own. And if the truck misses you, you think about them as you count your blessings.

I'd love to outsource the presidency of the US. Surely there's a perfect candidate who could take on the real work. George could remain as the public face ...

Economics of outsourcing

This is so obvious, it's strange Joel on software had to teach me it. On the other hand, he claims someone else pointed it out to him...

The Development Abstraction Layer - Joel on Software

... if only 20% of your staff is programmers, and you can save 50% on salary by outsourcing programmers to India, well, how much of a competitive advantage are you really going to get out of that 10% savings?

Hmm.

Comparative advantage: a one line summary

Recently I gave a talk on outsourcing clinical content creation (hospital care plans, standardized order sets, etc) to a physician audience. I was able to work in a reference to Wikipedia and comparative advantage and to relate Ricardo's theory of comparative advantage to outsourcing. This basic economics works pretty well with a clinical audience; they especially liked my concise summary of Ricardo:

It's not that you can't do the work better than someone else, it's rather that you have better things to do ..

Jared Bernstein & Brad DeLong on "Outsourcing": a dialog with interesting discussions

Note: Jared Bernstein on "Outsourcing": Archive Entry From Brad DeLong's Webjournal

Very interesting posting from Bernstein. DeLong gives an uncharacteristically very weak response, but the comment threads are very interesting. Very much in line with what I've written about for years (mostly personal correspondences). Neo-feudalism beckons!

JK Galbraith junior has a related article in Salon pummeling the Economist. Alas, the Economist is not what it was 10 years ago. It's been infected by rejects from the WSJ.

It's good that we're starting on these topics. Again, I think we need to sever benefits from employment, have mandatory-contribution 529 like plans for use during periods of underemployment, subsidize education and retraining, initiate consumption taxation and estate taxes, etc. etc.

KRISTOF: Watching the Jobs Go By - his weakest column in years

Op-Ed Columnist: Watching the Jobs Go By

---

Subject: watching the jobs go by: not your best column
Date: February 11, 2004
To: nicholas@nytimes.com

Nicholas,

Get more math and science education -- so you can work for $10 a day?

The whole point of outsourcing is that it's easiest to do for jobs that require technical skills. In rural China, India, Latin American and Africa there are hundreds of thousands, probably millions, of people with IQs over 160. Given ubiquitous connectivity, most will be able to quickly learn english, mathematics, science and just about anything else that one can learn by reading. Sure, there are thousands of americans with the same gifts; but they'd be working at the high class sub-Saharan African wages.

The outsourcing of technical work is the greatest boon the world will ever see. It will also induce very great disruption to societies in which, historically, a university degree was a path to success.

You should have been advising our young to study roofing and plumbing. Much harder to outsource -- they need only compete with illegal aliens.

The real answer is to smooth the transition to a future society including:

1. Separate all benefits from employment so people easily move between work and non-work.
2. As part of social security reform, eliminate the idea of age-specific retirement. Income has mandatory contributions to tax-deferred funds and non-work (study, vacation, job seeking, whatever) draws from those funds.
3. Tax reform to reflect a future tax base.
4. Look to the Scandinavians for the rest.