Sunday, April 20, 2008

Offshoring follies

I generally like the blog, Beat the Press, which is the product of Dean Baker. Baker is considered a "lefty" economist, but I find him to be at his best when he applies generally accepted economic principles to situations that call for clarity; it's difficult to see how people can argue with Baker on things like, "The argument from high-tech employers, that they simply can't get enough high tech workers in the United States is ridiculous on its face," but they do. And his argument comes directly from theory that pretty much all economists accept.

Or this recent post, in which Baker points out some ways in which health care is not currently anything close to being a free market, and how the consequences of making it so would lead in some obvious, but unacceptable, ways. For example, a true free market would drop many licensing barriers, and doctor salaries would fall. Another implication is that less money would flow to the drug and insurance companies. Baker's essential point, that John McCain is wrong in talking about bringing free market principles to health, is a little overtly political for my taste, McCain is not alone in saying that. But the basic logic is sound, and based on simple principles (greater supply of doctors without a sudden increase in demand would lower prices).

So I was a little surprised when Baker wrote today about outsourcing and, while I think it's good that he mentions it (we've heard almost nothing in the endless campaign), he draws a conclusion or two that I find problematic.

He's referring to an article in the New York Times by Louis Uchitelle, who is one of the few mainstream business writers who deals regularly with the topic of offshoring (his book, The Disposable American, is an excellent look at the problem; sadly, his proposed solutions are unrealistic and unlikely).

Uchitelle has come in for some criticism; for example, there is this 2005 screed from supply-sider Larry Kudlow, which, in retrospect, actually does more for Uchitelle than against (admittedly, the Kudlow article is three years old, but it is remarkable just how wrong he was about the long-term prospects for the economy).

Nevertheless, the Times article talks about the loss of the $20 an hour job, and is, on the whole, quite perceptive about how those jobs, traditionally the road to the middle class, are disappearing in our offshored, two-tiered, temp-jobbed economy. Most unusual is the mention of the commonly-stated magic bullet:
The nation’s political leaders — Democrats and Republicans alike — have argued that education and training are a route back to middle-class wages for those who have fallen out. But the demand isn’t sufficient to absorb all the workers that the leaders would educate. Even now, roughly 15 percent of college-educated workers find themselves in jobs for which they are overqualified, the Economic Policy Institute reports, and many of these jobs pay less than $20 an hour.
Where Baker finds a place to criticize is here:
Add outsourcing to the list, and the off-shoring of such middle-income work as computer programming and radiology.
However the article mistakenly lists the offshoring of high-paying jobs like radiology as part of the story explaining the loss of middle class security. In fact, radiologists would typically be in the top 1 percent of wage earners. They have been beneficiaries of the lower wages received by manufacturing workers. These lower wages have been largely passed on in lower prices.
Now I will grant that the inclusion of radiologists in the article was unnecessary and distracting. One survey of salaries suggests that, after five years, a radiologist is making more than $200,000 a year, and that sure isn't middle class. But I would also argue that these lower prices from which the radiologist is seeing benefit is minor, and it's not really all that much of an advantage.

Worse yet, Baker goes on to say:
Those who are upset about the wage losses of middle class workers should applaud the outsourcing of high-end jobs, like those of radiologists. This outsourcing will put downward pressure on the wages of these high-end workers, leading to lower prices, which will increase the real wages of autoworkers, retail clerks, custodians and other low and middle income workers.
I would question whether we'll actually see radiology costs come down, as the increasingly profit-motivated medical industry sees the tele-outsourcing of X-ray reading as a new profit center, rather than as a means to cut costs and pass that along to the consumer.

More importantly, Baker misses the aspirational quality of many in the middle class. That $20/hour job is a means to an end for a lot of people, allowing them to make a life for their children that permits them to go beyond and grab an upper-class job for themselves. If we take away the "high-end vocational" professions, it is not at all clear to me what we offer as the future. Without the middle, and much of the high end, what are people supposed to do?


Red Oak said...

Yeah, I like Baker's blog, too, but he does put way too much weight on what's really a minor, if interesting, point about guild protectionism. I was never quite sure if he was seriously arguing that "we'd all benefit economically if every job was subject to outsourcing competition", or just pointing out the hypocrisy in "free trade" supporters. I guess he always meant the former.

I agree that this is unlikely to result in lower health care prices, as our payment system now stands. I'm thoroughly unconvinced that "overpaid" physicians are a major source (or even *a* source) of skyrocketing medical costs. I'll agree, though, that pharmaceuticals have just gotten laughable. And I can say "laughable" only because I can survive without the non-generic prescriptions I'm supposed to be taking regularly. I'm not poor, and I do have insurance - but even so the prices of these common drugs for a common condition have reached phantasmagorical levels. I'd be more comfortable and healthier taking them, but at those prices I couldn't justify eating up the family budget to buy them for less than a life-or-death reason. (Fortunately, the drugs other family members can't do without have gone generic, whew!)

I'd also say that getting rid of licensing and certification barriers for medicine is just looney. (It's not as if foreign doctors can't get certified by American standards and practice here. They do.) One can argue against the artificial, too tight restriction of physician supply at the med school level, but there are good reasons for a society to make sure that medicine is a well-paid, prestigious profession. Frankly, I've never been able to understand why people think $150-200K salaries are so outrageous for an unarguably important and useful job, with great burdens of responsibility, that requires enormous investments of time and money to enter. Overpaid compared to whom? I guess in the new global economy, the only people who "deserve" to make good money are people who produce nothing and contribute nothing, but who are clever enough to figure out how to squeeze huge sums out of a corrupted financial system.

Androcass said...

For the most part, I agree with you, with a slight exception. I've seen some numbers on the year-to-year increases in compensation for physicians (though admittedly I can't put my hands on them now), and they have been well exceeding the rate of inflation the past few years.

So I would not argue that doctors, given the length and intensity of their training, do not deserve more than the average, but I would say that we need to look at the rate of increase and ask why.

As for training and licensing, my objection to the current system is that we really don't know what the "right" number of doctors to admit each year is. We certainly need to maintain high standards, but we also don't need to keep people out due to historical precedent.

The point with which I agree with Baker, then, is simply that we can't call medicine a "free" market, and we really shouldn't. And when you mix the two models, some free market and some control, you can get unpredictable results, and injecting more of the free into it without really understanding can create more havoc, not less.

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