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I want to thank the New America Foundation and the Electronic Industries Alliance for giving me this forum to talk about the outsourcing of American jobs overseas, and the larger challenge it represents to our economic future.
To meet that challenge, we first have to stop blaming others and face some hard facts. The American economy is failing to adapt to fundamental changes and to growing competition in the global economy. We are not just losing jobs – we may be losing critical parts of our innovation infrastructure, and with them, our competitive edge in the global marketplace. The offshore outsourcing of jobs is just the tip of an economic iceberg that America is sailing towards.
Here’s one measurement of the size of it. An analysis by the Institute of Business and Economic Research at UC Berkeley estimates that 14 million American jobs are at risk. If that’s right, our economic vitality and national security are in jeopardy. As the President’s Council of Advisors on Science and Technology concluded recently, “Maintenance of U.S. technical preeminence is not forever assured.” Carly Fiorina put it more succinctly and memorably: “There is no job that is America’s God given right anymore.”
Today I am releasing a white paper that my staff and I have worked on in the hope it will stimulate a better, broader response to the long-term implications of offshore outsourcing. The paper goes beyond the current debate to focus on the next wave of this challenge – not just manufacturing and entry-level service jobs, but high-end services and R&D research jobs, too. I argue in this paper that the offshore outsourcing challenge has not just grown quantitatively – threatening a broader range of American jobs – but also qualitatively – threatening America’s innovation infrastructure, the foundation of future job growth. I conclude that what we always believed was our nation’s ultimate competitive advantage – our high-end R&D and technological prowess – is at risk.
How do we reassert our world economic leadership and regain our innovation advantage in a more competitive world? And how do we do so without turning a blind eye to the very real pain that many American workers are feeling as a result of the churning in the global job market? These are the big questions we must answer together – private and public sectors, business and labor, even Democrats, Republicans, and Independents.
But first, we have to better understand what is occurring. Outsourcing is not new. It is really just a variation of the division of labor, a defining feature of capitalism. In a competitive marketplace, with its premium on efficiency, businesses naturally focus their limited resources on their most profitable operations while subcontracting – or outsourcing – functions that can be performed more efficiently and cheaply elsewhere. Jobs shift as a result.
What is new about outsourcing today is its global reach. Technological innovations in transportation and communication have erased geographic borders. Physical proximity to the point of sale is no longer the absolute economic necessity it used to be, particularly for service jobs.
We know that manufacturing jobs have been shifting overseas for some time. But now the services sector is being hit hard by offshore outsourcing – and that hurts. The services sector provides 83% of America’s jobs, employing 86 million people. It dominates our economy. Customer call centers and data entry facilities are being relocated to places where capable labor can be found at lower wage levels. High-speed digital technologies make a connection between Boston and Bangalore as fast as between Boston and Baltimore.
But offshoring is no longer limited to entry-level services jobs. Higher skilled professional jobs like computer chip design, information technology services, programming, architecture, engineering, consulting, automotive design and pharmaceutical research are beginning to go overseas. That is the bulk of the iceberg below the surface of the sea. The outsourcing of R&D is probably the most alarming illustration of this new problem. American companies now invest $17 billion in R&D abroad every year. IT multinationals have now established 223 R&D centers in China alone.
One study by Forrester Research estimates that over the next 15 years, 3.3 million U.S. service jobs and $136 billion in wages will move offshore. Another by McKinsey’s Global Institute suggests that the number of U.S. services jobs lost to offshoring will accelerate at an annual rate of 30 to 40 percent during the next five years.
Because the government collects no official data on offshore outsourcing in the services sector, we cannot be at all certain of these figures. But we can be certain that, although the offshore outsourcing problem in the high-end services sector may not be acute at the moment, it will be in the near future if current trends continue. If a software programmer in India earning $7,000 a year can do the same work as a software programmer in the United States making $64,000 a year, it is only a matter of time before more of those jobs relocate overseas.
The Washington response to offshore outsourcing has been predictable: politicians and policy makers jump to predetermined conclusions and finger the usual suspects.
On the one hand, we have the Do Nothings who profess an abiding and absolute faith in laissez faire capitalism, and see any government intervention as self-defeating. In fact, they argue that jobs flowing overseas are healthy, that they are evidence that the system is working, and that we have nothing to worry about.
The problem with this view, of course, is that we do have something to worry about. Not only does rising unemployment take a real human toll, it also eats away at our ability to create new jobs. Advanced production capabilities and research and development jobs are strategic assets that have defined our nation’s competitive advantage. While proximity to the point of sale is less critical, geography still matters in the innovation process. Countries and regions that cluster university and industry research, knowledge-based start-ups, capital for entrepreneurs support from larger firms, and advanced manufacturing – with the talent to support all of this – capture new industries.
As we lose jobs to foreign countries, especially high-skilled services jobs, we lose critical parts of our innovation infrastructure – labor, capital, knowledge, facilities, and technology – and with them, the engine of job creation. To cash in on our crops, we are moving the farm – and with it, the promise of future economic harvests.
On the other hand, you have the Do Anythings who will do anything that might save some jobs today, even if it means losing more tomorrow. Protectionism is their favorite tool – raising higher and higher trade barriers on the unproven argument that it will make it harder and harder for jobs to go overseas.
In their attempts to build a tall wall to stop offshore outsourcing, the Do Anythings are falling into a trap. Trying to keep jobs in our own borders through protectionist measures will only keep other jobs out. It will also invite retaliation from beyond our borders that will cost us many of the millions of American jobs that are based on exports.
The bottom line is that both the Do Nothings and the Do Anythings are wrong. Neither gets to the heart of the outsourcing problem – America’s failure to innovate. That’s what we all need to Do Something – the Right Thing – about.
To stop offshore outsourcing and preserve American jobs, America needs to rise to the international competition and grow again through innovation. There is no other way. Leaving it all to the markets won’t work. Hiding behind a wall won’t work. Attempting to rig the game won’t work. Only education, innovation, investment, trade, training and hard work will give us the growth and jobs we want and need.
In my white paper, I lay out a number of suggestions about how we can achieve this. Let me highlight a few.
First, we must encourage greater innovation and technology development. Basic research and development have been essential to creating the kind of technological breakthroughs that create jobs and reap profits. But the high costs and high risk associated with early stage R&D make the needed investments burdensome for many businesses. Federal funding is crucial here, but federal R&D spending as a percent of GDP has been in steady decline since the mid-1960’s – it is less than half of what it was then.
We need to reinvest in R&D. And we need to reorganize our innovation ecosystem to bring on innovations much faster. Tax incentives for R&D investment are one means of doing so. We should make the R&D tax credit permanent, and restructure it to spur collaborative research.
We also need to look at the kind of R&D we do. Although the United States is overwhelmingly a service economy, our federal and corporate R&D is geared to manufacturing. Corporate R&D is now 68% of the total national R&D expenditures – and 62% of that amount is still focused on manufacturing. But much of the offshore outsourcing challenge will hit our services sector. That’s why we must add a new services sector emphasis to our R&D investments. Government and industry should review their R&D portfolios and raise their investments in services research.
Second, we must recognize that no matter how much we innovate, some people are going to lose the jobs they have now. We need to shore up our safety nets to help those hurt by offshore outsourcing. We need, for example, to extend coverage of Trade Adjustment Assistance programs to support and retrain service workers who lose their jobs due to trade. We should also experiment with new concepts like wage loss insurance, offered as part of severance and paid for by a small percentage of the employer’s savings from offshoring.
Third, we need to strengthen our trade policies. America will prosper by selling high value goods and services to other nations, not by shutting ourselves off from competition and markets. We need to innovate new goods and services and lower trade barriers abroad to start to reverse our trade deficits, so trade becomes a net jobs insourcer – not a net outsourcer. Overseas markets for American exports are critical to our economic well-being, already directly supporting 12 million American jobs and indirectly many, many more. We can’t lose those jobs. We can and must add to them.
But pirates do prey in international economic waters, stealing American jobs by breaking trade rules or exploiting trade loopholes. We need to crackdown on cheating – and that will take strong government action. Our federal trade agencies are oriented to negotiating trade agreements; they focus less on the difficult implementation and enforcement of those agreements. We must do both.
Foreign currency manipulation and intellectual property theft are forms of piracy that also must be fought and stopped.
To illustrate the impact of unfair trade practices on American competitiveness, and what we can do about it, let me discuss one sector I have followed over the years – semiconductors, the highest end of U.S. manufacturing. In the 1980’s, America was close to losing this sector to Japan. But we battled back, and thanks to innovations that grew from a creative public-private partnership called Sematech, we secured our world semiconductor dominance. It provided a key boost to our growth rate and IT leadership in the 90’s.
But now, we are at risk of losing that dominance – this time to China. The Chinese government is using straight industrial subsidies to capture semiconductors: from value-added tax subsidies – which are in violation of WTO agreements – to plant subsidies, to worker subsidies. China’s currency manipulation further skews the competition.
After neglecting this issue for too long, the U.S. Trade Representative finally insisted in March on consultations with the Chinese on VAT subsidies for semiconductors. If these talks fail, we should not hesitate to bring a WTO case against China. The loss of most of our semiconductor industry will not only weaken our economy – it will threaten our national security. The U.S. Department of Defense needs to reenter the R&D field with industry and work to spur new semiconductor advances.
Fourth, our talent base is what ultimately sizes our economy, yet the number of U.S. graduates in engineering and physical science is dropping 1% a year. In China, 45% of all graduating students received their degree in engineering. In the United States, it’s only 5%. Education reforms are no longer a policy option for us. They are a necessity, from kindergarten through university diploma.
We also need a whole new approach to job training. This century, 60% of the new jobs will require skills held by only 20% of today’s workforce. That is one huge skills gap that we must fill fast if we want to remain competitive. One way to do so is to build stronger partnerships between companies and community colleges to ensure workers get the training they need. Increasing the number of graduates in science, technology, engineering and mathematics through incentive grants and special scholarships is another way to fill the skills gap.
Updating our methods of training to 21st century standards is also important. One way to do so is to train workers by using interactive internet gaming technology to foster better knowledge retention, promote continual skills updating, and even have fun. IT has transformed many sectors – it is time it got to training.
Finally, we need to get our federal fiscal house in order. Our staggering $550 billion current annual deficit, and the course we are on to add $10 trillion to the deficit in the next decade, will eventually raise interest rates. The Medicare Trustees told us last month that our unfunded liabilities are $72 trillion. That’s right – $72 trillion. Meanwhile, other nations are buying our debt and are acquiring too much influence over our future. Foreign nationals hold 46% of the U.S. national debt. China and Japan together hold $662 billion. We must get our fiscal house in order to stay strong, independent and competitive.
To begin to act on such proposals and meet the challenges of offshore outsourcing, we first need an injection of political will – bipartisan political will – and that’s not easy to find in Washington these days.
In the mid-1980’s, we faced a similar political deadlock on economic policy. We were in the midst of a recession and our two political parties were driven to the opposite poles of economic policy. Republicans favored deeper and deeper tax cuts to stimulate job growth while sending the deficit through the roof. Democrats pushed for more protectionism and an industrial policy. Neither side thought it could compromise without risking the support of its political base. It sounds familiar, doesn’t it?
The creation of a bipartisan commission that focused on the unemployment problem in a cool-headed, depoliticized way helped to break the deadlock. The President’s Commission on Industrial Competitiveness, known as the “Young Commission,” was proposed by President Reagan, supported by the Democratic Congress, and chaired by Helwett-Packard CEO John Young. It brought all sides to the table and forced each to acknowledge the hard facts that shaped the debate.
That Commission proposed the first generation of reforms that became a bipartisan competitiveness agenda. Public-private collaborations instead of industrial supports, R&D investments in information technology, became a foundation for the economic boom of the 90’s.
That is exactly the kind of initiative we need today: a new Young Commission, charged with analyzing the impact of global economic changes on the American economy, including the offshore outsourcing problem, and offering nonpartisan proposals to preserve our innovation infrastructure and create more high-wage American jobs.
We face a dramatically different set of economic competitors now than in the 80’s. We have a much more complex set of competitive problems. That’s why we need a new generation of competitive solutions if we are going to restore our economic leadership. Some of these solutions will look similar to the kinds I am proposing in my white paper today. Some may not. But regardless, a consensus must be built that would rule out the extremes and rule in the progressive course needed to meet the new foreign competition.
I will soon introduce legislation calling for a new Young Commission, with the hopes that our next President – be he John Kerry or George Bush – will make naming its members one of his first acts after Election Day.
At the beginning of the last century, America faced equally profound economic and social changes. In his inaugural address, President Theodore Roosevelt noted that, “Modern Life is both complex and intense. And the tremendous changes wrought by the extraordinary industrial development of the last half century are felt in every fiber of our social and political being.”
He went on to say that, “There is no good reason why we should fear the future. But there is every reason why we should face it seriously – neither hiding from ourselves the gravity of the problems before us, nor fearing to approach these problems with the unbending, unflinching purpose to solve them.”
To meet the challenge of offshore outsourcing, we need to summon up the same honesty, seriousness, and sense of national purpose that TR called for a century ago. If we do, I am confident we will prevail, the American economy will keep on growing, and the next generation of Americans will live better and better lives. Thank you.
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