Cheers for outsourcing

Two pieces on why we should welcome, not fear, the outsourcing trend. First from WSJ.com - The Way We Live Now. Excerpt:

The most critical problem facing the U.S. -- and all developed countries -- is the aging of the population, which impacts not only our trade balance but also the viability of Social Security and Medicare. Aging will also influence the value of all our assets, including stocks, bonds and real estate. A self-sufficient economy needs enough workers to produce goods that will be consumed not only by the workers and their families, but also by all the elderly. Historically this has never been a problem, since the young have always greatly outnumbered the old. But the demographic picture is now different. In 1950 there were seven workers per retiree in the U.S., a number now down to five. Starting in 2010, when baby boomers begin to retire, this ratio will plummet. By 2030, it will fall below three.

It was once necessary to build factories in the U.S. and bring workers here to produce output. Now factories can be built anywhere and products shipped world-wide. As a result of the communications revolution, service industries such as consulting, research and customer service can operate as efficiently abroad as from the U.S. These are major developments. Productivity cannot be increased fast enough in the U.S. to solve the population problem. But productivity can be increased at a rapid rate in China, India and the rest of the developing world.

And from Kevin Maney in USA Today, a basic discussion of the economic theory underlying it all. Excerpt:

India's schools churn out loads of programmers, but the country has little venture capital and other infrastructure to help drive innovation. So even though India can do both for less than we can, inside India, the cost of doing programming is relatively little while the cost of starting companies is relatively high. India is "most best" — to use the language of economists and many 3-year-olds — at programming.

In the USA, we pay programmers very well. We also have a well-oiled, technology-creating innovation machine. Inside our country, it has become relatively expensive to our society to do programming; and relatively cheap to innovate in technology. Our "most best" is innovation.

Now here's where it gets funky: Ricardo would say that the USA should innovate in technology and stop programming, and India should do the programming and stop innovating. If we each concentrate on our "most best" and then trade, more of both get produced for less — the very essence of increased productivity.

Of course, the "most bests" change over time, and that changes the equation. The genius of U.S. capitalism is that it continues to create "most bests" that are of higher value than everybody else's "most bests." Next up will be industries like biotech and nanotech.

Anyway, if productivity goes up, people have more of everything. Standards of living rise in both countries. "This is absolutely not a zero-sum game," says Stanford University economist Paul Romer.