Middle class near death experience?

The article circulated last week, “The Digital Death Rattle of the American Middle Class: A Cautionary Tale,” really cranked-up the alarm about the possibility of the economic underpinnings of US society being knocked out by low cost information labor in countries around the world. I mean, death of the middle class? That’s the most dire and dour interpretation I’ve seen yet.

The death rattle article points out we’ve had a couple of previous alarms. I went into high school two years after the Soviets launched Sputnik, and that alarm sent the country into a panic about being outperformed by the Soviet Union. Every boy was rammed into math and science curriculum. (The girls still got home-ec; this was the ‘50s after all.) No regrets. This was the strongest education.

Then in the ‘80s when the Japanese were tearing up the world economy and buying up property in Hawaii and downtown LA, there was another emergency to save the semiconductor and computer industries from being dominated by the Japanese the way they’d made inroads in TV and auto manufacturing. Initiatives were set up to improve US semiconductor competitiveness.

The death rattle article is a decidedly left-leaning viewpoint from people not enthusiastic about capitalism in general. I’d say the perspective presented there is the worst-case scenario. However, less doctrinaire people are beginning to get that high-pitched tone of anxiety about the extent of the economic implications of what’s going on. I urge everyone to listen to the broadcast from the Brookings Institute I mentioned earlier. (Go to C-SPAN.com and search on “trade policy.”)

One place the “cautionary tale” resonates is its observation about how government typically reacts to budget shortfalls by raising college tuition fees. Here in CA where our budget problems have been aired nationwide, that’s exactly what’s in store. The UC regents are meeting this week to discuss raising fees again. If CA voters don’t adopt a ballot initiative in March to borrow $15 billion there is talk of closing one of the UC campuses. The result: 5,000 students won’t be able to get a UC education. Other cuts throughout the whole higher educational system are contemplated. Just when we need more well-educated people for the state’s economy, we’re going to create even greater barriers. We’ve got our foot in our sights and our finger on the trigger.

Seems to me the impact of worldwide redistribution of wealth related to a large supply of educated workers could fall along a continuum of possible outcomes. The “death rattle of the middle class” is at one end of possible results and the Pollyannaish, “don’t worry, this is just business as usual,” is at the other. The real outcome will likely be somewhere in between. But even if the impact is not worst-case, the dislocation could be substantial.

It’s not for nothing that broadband networking has been called a “disruptive” technology. Doing keyboard work from offshore has been discussed and practiced for more than a decade. What’s been a shock is its impact on high-level professions like computer programming. One recent study I cited in an earlier post maintains that 14 million jobs in America have the characteristics that expose them to the potential for educated people anywhere on the global grid to compete to do the work. Today it’s IT, tomorrow it’s about anything that’s back office. Just this morning a letter to the editor in my local paper said:

I work in the design industry, which uses electronic AutoCAD programs for all their drawing work. This work is being shipped overseas, which is displacing Americans’ jobs at an alarming rate.

The writer concludes:

There’s more to domestic terrorism than a bomb can deliver. The threat of losing our livelihoods to foreign countries should be at the top of the list for Homeland Security.

Offshore workers are terrorists?!

People who discuss this development emphasize two main contributing factors: one, the availability of a lot of educated people in the huge nations of India, China and the Asian Pacific; and, two, cheap broadband. But it seems to me that there is a third development that is just as important: the evolution of a whole industry of enablers who have come into existence to facilitate sourcing low cost labor (it’s only “outsourcing” from the US and European perspectives). While many multi-national corporations are handling sourcing for themselves, other companies are buying pre-packaged talent. The conduit companies clearly see the opportunity to make money from working the labor cost disparity. They’re kind of human resource miners. They are becoming more sophisticated as they go about organizing, managing and problem-solving offshore projects. They supply the management that goes along with the increasingly sophisticated technology infrastructure.

I’m not an economist, but I don’t see how this can fail to have a big overall economic impact in the US. This seems to be pretty straightforward economics of supply and demand—Econ. 101 so-to-speak. Bandwidth will only get more plentiful and cheaper. There’s something like 6.4 billion inhabitants of planet Earth right now and that number is expected to reach about 8.8 billion around 2050. Over the next decades it seems to me inevitable that the global economy will be constantly seeking new equilibria.

That’s not to say it’s a slam-dunk. The Japanese experience shows how economic and social factors in a surging country can bring an end to a good run. The countries providing the competition now are not free of big problems. In fact, the sudden wealth of some portion of the population in places like China and India is creating its own economic disequilibrium that exacerbates existing social friction.

It doesn’t seem to me it’s going to take long to find out if the effect on the US economy is for real or not. Some are suggesting that the IT supply is already exerting downward pressure on salaries in that field. A recent study said:

Overall, the premium paid for IT workers with specific skills was 23 percent lower in 2003 than in 2001, and the pay for certification in particular skills dropped 11 percent, Foote Partners LLC said. The New Canaan, Conn., firm found that while the general economic downturn contributed to salary deflation, outsourcing pushed compensation down even further. In a yearlong study of 400 Fortune 1000 companies, researchers found that by 2006, the organizations expected from 35 percent to 45 percent of their current full-time IT jobs to go to workers overseas, David Foote, president and chief research officer for Foote Partners, said.

There may be more evidence that there are fewer jobs or that jobs created are of lower wage than during the recovery in 2004 and later.

The fundamental question seems to be: Does this constitute a true change in the conditions of economics worldwide? My opinion would be: yes.

The other question is: How will this affect the ACS? More about that later.