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The newspaper of The Johns Hopkins University October 4, 2004 | Vol. 34 No. 6
Thinking Out Loud

William R. Brody

By William R. Brody

Outsourcing — Let's Treat the Disease, Not the Symptoms

It has become great public sport these days to bash outsourcing as one of America's major problems. And certainly, there is no denying that a number of jobs have been shifted offshore from America to Asian and even to European countries as corporations attempt to become more efficient, raise productivity and compete with countries that have much lower wages.

Harry Truman, when asked the difference between recession and depression, once said "a recession is when your neighbor is out of work; a depression is when you are out of work." For those many tens of thousands of displaced U.S. workers, it certainly seems like a depression out there. It is more than understandable that they lash out against the corporate CEOs who are shifting their jobs offshore.

Economists fervently debate the advantages and disadvantages of outsourcing to the American economy. I will not throw myself in the middle of this fracas. However, I am concerned that in our attempt to find a scapegoat and a quick fix for outsourcing, Americans are likely to be treating the symptoms of a disease rather than the disease itself. Let me explain.

Over the past several decades, some subtle and some not-so-subtle changes have occurred in our country that have been gradually choking American companies and their ability to compete. There are a myriad of factors at play, more than there is room to discuss here. But I can outline several key factors, and explore a few:

1. Structural barriers to long-term investment in research and development

2. Dwindling numbers of U.S. students going into the study of science and engineering disciplines

3. Increasing regulatory burdens

4. Excessively costly and unwarranted litigation

5. Lack of a coherent immigration policy to attract highly skilled workers

6. Skyrocketing health insurance costs borne largely by employers

Wall Street pressures corporations for quarterly earnings performance to such an extent that many companies, faced with the prospect of making an investment in R&D that might pay off in three to 10 years but would impact their short-term earnings, choose not to make that investment. Bringing back the R&D tax credit and lengthening the holding period for capital gains to five years or more (as an incentive for investors to hold stock for the long term) are just two simple ideas that would promote more R&D by American companies.

The continuing decline in the number of U.S. college students other than premeds studying science and engineering contrasts sharply with most Asian countries, where the top students typically go into high-tech disciplines. In America, increasing numbers of students are going to business school, or to law school. But when corporations like Intel look for a place to locate a new semiconductor plant, they find a site where they can hire skilled technical talent. Increasingly, they are finding that talent offshore. It's not so much the cost of the labor force but the issue of its quality that is at stake.

An over-regulated environment that tries to assure the impossible — a zero risk society — goes hand-in-glove with a tort system that is out of control. Not simply malpractice but frivolous shareholder lawsuits, for example, grind up resources in a most unproductive fashion. Yes, we need to manage risk in our society, but risk has to be managed with regard to the cost burden. In many cases, like the accounting reform Sarbanes-Oxley Act of 2002, the costs of compliance are tremendously high, but many knowledgeable people are not convinced that the regulations will successfully prevent the kinds of misdeeds that occurred at Enron, WorldCom et al.

For decades, the United States has been winning the global talent search by recruiting some of the top minds in the world to study in our research universities. However, we then make it exceedingly difficult for these people to stay and work here when they graduate. Not only that, we are now, post 9/11, making it harder and harder for foreign students even to come to study in the first place. Yes, a number of our foreign graduates go back to their home country and perhaps compete with us, but not always by their own choice. In many cases, we are victims of our own devices. A more coherent and simplified immigration policy could change much of that.

When you tally up how the U.S. compares with other countries, we are significantly disadvantaged in many areas that overshadow, in my view, the direct labor costs that are so glibly being blamed for outsourcing. After the heat of the elections subsides, I hope we can begin to look past distressing symptoms to begin thinking seriously about treating the underlying illness that is causing them.


William R. Brody is president of The Johns Hopkins University.


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