Outsourcing/"Nearshoring" Updates

1. Caribbean Call Centers Booming: "In a global search for low-cost customer service, AOL considered call centers in India and other hotspots - then settled on the tiny island of St. Lucia.

In choosing the Caribbean island, AOL - a unit of Time Warner Inc. - joined other U.S. companies that have made the region a new global hub for call centers.

Plunging communication costs, workers who relate easily to American customers and the region's famed hospitality are attracting American corporations, boosting the work force in the "nearshore" service industry in the Caribbean.

Note: Typical wage in Jamaica, one of the leaders of Caribbean "nearshoring," with about 14,000 employees in the sector: $2.75 to $3.20 an hour.

2. Outsourcing Britain's elderly to India: "First jobs were outsourced from Britain to India. Next it was healthcare, with hundreds of Britons travelling to leading hospitals in Indian cities for surgical operations and other medical procedures. Now another aspect of healthcare may be outsourced to India — that of looking after some of Britain's elderly or disabled.
The reason is the same — costs are much lower in India."

(Thanks to Sanil Kori)

Wages and Rupee Rising in India, Prices Up in China

1. NEW DELHI - Rising salaries for Indian software professionals will add to margin pressures at technology outsourcing companies in India, according to a survey released on Tuesday that showed wages rose an average of 18.7% this year.

The average annual salary for a software worker in India has risen to Rs620,000 ($15,500). The rise is slightly above the 18.3% salary increases recorded last year.

While salaries are still low compared with those of developed countries, margins at India’s information technology companies are also being squeezed by the appreciation of the rupee against the dollar. India’s biggest IT outsourcing firms generate most of their revenue from software exports to the US.

2. BEIJING - CONSUMERS in China's cities have had it good for an unusually long time. During most of the past few years of double-digit economic growth, inflation—at least according to official figures—has been barely detectable. But data published this week show the biggest monthly rise in consumer prices for over ten years.

The latest figures were higher than many had expected. The National Bureau of Statistics said that consumer prices rose 6.5% in August compared with a year earlier, up from 5.6% in July.

London: Most Expensive City for Restaurant Meals

According to a recent Zagat Survey, restaurants in London, Paris and Tokyo are about twice as expensive on average as New York and Los Angeles (see chart above), read about it here.

Thanks to Sanil Kori.

Biomedicine Revolution, Motivated By Profits

Last night on 20/20, Michael Moore praised government-controlled health care systems in Canada and Europe. He then called for "the elimination of all private profit-making companies in the health care industry" and suggests turning over all health-care spending in the U.S. to the government to provide "free" health care to everyone.

Before turning over the entire profit-making pharmaceutical industry to the government, consider this fact:

"Looking at a broad range of pharmaceuticals, scholars at Tufts University examined all 284 new medicines approved in the U.S. in the 1990s. They found that 93% originated from the pharmaceutical industry, with 7% split between government and academic or nonprofit sources."

In other words, it was the profit-making private sector that developed 264 out of 284 new medicines in the 1990s, and many are saving lives today. Without the profit motive, most of those drugs probably wouldn't exist today.

And what can we expect in the future from the profit-making pharmaceutical industry?

Looking to the future, one can see the tremendous potential for the flow of pharmaceutical innovation to expand and accelerate. In terms of the science, we are now in the early stages of a revolution in biomedicine, an explosion of new knowledge that will translate into a whole host of new and better medicines. Yet, the business of finding these new medicines is risky and costly. No one is guaranteed to achieve the financial returns that encourage investment in pharmaceutical R&D. However, two important principles guarantee that such a return is possible: a market-based system of pricing, and intellectual property protection.

I don't think Michael Moore understands the "invisible hand."

99.9% of All Species Have Already Gone Extinct

From The Economist: "More species are under threat than ever before according to the World Conservation Union (see chart above). Its “Red List” gives warning that 16,306 species are now under threat of extinction, nearly 200 more than in 2005. This number has risen steadily since the first report in 1996."

Before you get too concerned, consider this: "Since life first appeared on Earth some 3.8 billion years ago, it has been estimated that more than 99.9% of all species have gone extinct. Billions of species have gone extinct throughout geologic history. Many of these went extinct during mass extinction events, the most famous and well documented of which took place some sixty-four million years ago at the end of the Mesozoic Era. This mass extinction event marked the end of the reign of dinosaurs."

And consider this from The Economist: "Nobody knows how many species occupy the planet. Most experts think 10 million is roughly correct, though they have only formally noted 1.4 million."

Suppose that half of the 16,000 threatened species went extinct, a highly, highly unlikely event. That would be less than a 1/10 of 1% extinction rate, meaning that more than 99.9% of all existing species would surve.

Question 1: Wouldn't a 0% extinction rate (100% survival rate) be undesirable because it would be too costly?

Question 2: Isn't is true that the optimal number of extinct species is probably NOT zero, assuming that it is costly to save some species; just like the optimal amount of pollution is NOT zero, the optimal amount of traffics deaths is NOT zero, etc.?

I would say Yes to both. Like all other decisions, we need to weigh the costs and the benefits.

Michael Moore vs. John Stossel

Watch a 5-minute preview of 20/20's special tonight, a 5-minute debate between Michael Moore and John Stossel about Cuba's health care system.

Note: When Moore compares life expectancy and infant mortality in Cuba to the U.S., he uses statistics provided by the Cuban government, and not subject to independent verification. It reminds me of the story about how the Soviet Union used to export wheat, but after the farms were collectived they reported 50 straight years of bad weather to explain why they stopped exporting....

(Thanks to Drew Suder.)

John Stossel On Health Care: 20/20 and WSJ

On 20/20 tomorrow (Friday, Sept 14) night at 10 p.m. EST, John Stossel presents: "Whose Body Is It, Anyway?! Sick in America." American Health Care in Critical Condition: The Case for Putting Individuals, Not Employers or Government, in Control of Health Care.

In today's Wall Street Journal John Stossell writes: "Michael Moore thinks that profit is the enemy and government is the answer. The opposite is true. Profit is what has created the amazing scientific innovations that the U.S. offers to the world. If government takes over, innovation slows, health care is rationed, and spending is controlled by politicians more influenced by the sob story of the moment than by medical science."

It's True: The Fed Has Already Cut Fed Funds to 5%

Greg Mankiw reports today on the Fed's s "secret rate cut" to 5%, via Robert Barro. The graph above reflects the "effective daily Fed Funds rate" from the Federal Reserve and confirms what Barro is saying.

As Mankiw points out, the Fed was able to hit its target rate of 5.25% in every month since the Fed Funds target was increased from 5% to 5.25% on June 29, 2006. But in August, the average daily Fed Funds rate fell to 5.02% and so far this month the average is 4.99%. In fact, the effective Fed Funds rate has been below 5% on 8 out of the last 11 days, and has been below 4.9% on 3 out of the last 4 days.

Overwhelming Evidence IV: Good Old Days Are Now

The top graph was featured in yesterday's WSJ (thanks to Cafe Hayek), showing the 50% increase in median size of a new single-family home in the last 25 years, from 1500 sq. ft. in 1982 to 2,250 square feet today.

And not only is the typical new house larger today by 50% vs. 1980, the percentage of homes with features like dishwashers, garages, central heat and air, 2 or more bathrooms, fireplaces, and garbage disposals has increased significantly as well since 1970 (see middle chart above, from the Federal Reserve of Dallas).

Question: But don't today's larger homes with significantly more features cost more than the smaller homes in the past? Not really, at least not when measured by "hours of work at the average hourly wage per square foot."

For example, in 1920 the typical cost a new home was $4,700, which was 7.8 hours of work at the average wage, per square foot. In 1956, the typical home cost of $14,500 represented 6.5 hours of work per square foot, and by 1996, the cost fell to 5.6 hours per square foot (see bottom chart above).

Bottom Line: Today's homes are larger, have significantly more features, and yet cost less per square foot on an inflation-adjusted basis than the homes of our parents and grandparents. On a personal note, most of the homes I lived in as a child had only 1 bathroom, and we had a family of 8 (6 kids)!

See previous posts on this topic here, here, here, here, and here.

Smartest College Kids Are Rushing to Economics

From The American, via Marginal Revolution, about how "the smartest college kids are rushing to major in economics."

Recent enrollment figures are ominous. The number of smart kids studying computer science peaked a few years ago and has dropped dramatically since. The number of new computer science majors today has fallen by half since 2000, according to the Higher Education Research Institute at UCLA. Merrilea Mayo, director of the Government-University-Industry Research Roundtable at the National Academies, says the drop-off was particularly pronounced among women.

Meanwhile, elite schools are reporting that the number of economics majors is exploding. For the 2003–2004 academic year, the number of economics degrees granted by U.S. colleges and universities increased 40 percent from five years previously. Economics is seen by bright undergraduates as the path to a high-paying job on Wall Street or at a major corporation.

See top chart above, it's true that economics majors have increased by more than 45% from 1996-2003 (most recent year for which data are available), and by 40% from 1998 to 2003, according to data from the National Center for Education Statistics.

However, the annual number of Ph.D. graduates in economics decreased by more than 7% between 1996 and 2003, which raises the question: Will there be enough economics professors to teaching the increasing number of economics students?

Farming: The Most Pampered, Protected and Subsidized Industry in America

The farm legislation proceeding through Congress symbolizes much of what's wrong with Washington. It's government by inertia. We do today what we did yesterday, because politicians draw their power from distributing benefits and various interest groups feel entitled to receive them -- even if they serve no defensible public purpose. Our extravagant farm programs capture the absurdity as well as any other.

Farming has become the economy's most pampered, protected and subsidized sector. Mandates for ethanol, which raise demand for corn but save little crude oil, are the latest unjustified promotion. That's in addition to the subsidies in the farm bill: easily $50 billion from 2008 to 2012 in the bill passed by the House. The Senate will soon debate its version.

~Robert Samuelson, writing in today's Washington Post

Autoworkers Seek Jobs in Health Care: The Very Industry That Is Bleeding The Big 3

From yesterday's WSJ article: "NURSING AMBITIONS: In Shift, Auto Workers Flee to Health-Care Jobs; Many Seek New Starts In Field That Bled Big 3; Detroit's Next Migration:"

Bad News 1: Health care has long been a huge budget item for Detroit's auto makers. Last year, health care cost the three more than $10 billion combined, more than they spent on steel for their cars and trucks. The manufacturers figure that over coming decades, they will be obligated to pay about $95 billion in retiree health-care costs for current workers, retirees and their spouses (see top chart above).

Bad News 2: GM spends about $1600 per vehicle on health care costs, about 10 times the amount Toyota spends per vehicle (see middle chart above).

Bad News 3: UAW membership has declined by 126,000 since 2003, as workers have early retirements or lump-sum buyouts.

Good News 1: The American Association of College Nursing estimates the U.S. currently has 126,000 nursing vacancies. By 2014, the U.S. will require 1.2 million new and replacement nurses, as many of the nation's 2.9 million nurses retire and aging baby boomers need increasing amounts of care.

Good News 2: In Michigan, health care is the only industry in demand across the state, says Andy Levin, the deputy director of the state's department of labor and economic growth. Michigan projects a shortage of 18,000 nurses by 2015. "Every hospital in Michigan needs nurses, and every school has a nursing waiting list," he says. "The health-care industry is a growth sector we want to foster."

Solution: Last year, Ford began offering a buyout package that covers schooling, following an internal 2005 study that showed many of its younger workers would leave if given a chance to attend college. Under this plan, Ford agrees to pay former workers half of their annual pay for four years -- typically $25,000 to $30,000 annually -- plus health-care benefits and up to $15,000 each year for school. Workers surrender retiree health benefits but retain whatever Ford pensions they've earned.

Ford says 40% of its former workers who are going to school are studying in medical fields -- more than half specializing in nursing, followed by radiology, dental hygiene and pharmacology. "Health care is where the jobs are," says Marty Mulloy, Ford's head of labor relations, who helped develop Ford's education buyout plan and is handling this summer's UAW contract talks.

Good News 3: Former auto workers say they are drawn to health care because the jobs pay well and are less vulnerable to being outsourced. Registered nurses currently have an annual mean salary of nearly $60,000, the Bureau of Labor Statistics says. Dental hygienists earn about $62,000. By comparison, auto-manufacturing jobs currently pay about $54,000.

Conclusion 1: The Big Three have almost $100 billion in health care obligations, and some of that money will be spent in the future to employ the autoworkers who have left the auto industry and gone into health care. In other words, Ford's buyout packages will help train the nurses and other medical professionals necessary to provide essentially unlimited lifetime health care for 721,000 current and retired UAW workers. The very industry (health care) that could eventually bankrupt GM and Ford, is nevertheless currently providing many jobs for former UAW workers.

Conclusion 2: Many UAW workers will be better off in the medical field than in the auto industry, and could have greater job stability and higher wages.

Every Civics Teacher's Worst Nightmare

In an article about low voter turnout in today's Baltimore Sun, I'm described as "an economist, blogger and every civics teacher's worst nightmare."

"The only time your vote counts is if it's a dead tie and you're the last person to vote," says Perry, a professor at the University of Michigan in Flint.

The Baltimore Sun reporter contacted me after reading this post from last November on "The Case for Low Voter Turnout," where I wrote that "I like low voter turnout, because the election results are almost always exactly same as for high voter turnout, and low voter turnout saves and conserves our most precious non-renewable resource: our time, and therefore it is socially more efficient than high voter turnout."

Bottom Line: Increasing voter turnout is very easy: lower the cost of voting.

Starbucks Opens in Moscow, Finally!

MOSCOW, Russia: With the hiss of an espresso machine and a note in Russian explaining the meaning of tall, grande and vente, Starbucks opened its first coffee shop in Russia on Thursday in a mall outside Moscow.

The long-awaited opening sealed a victory for the chain, which is based in Seattle, in a fight with a Russian trademark squatter who had barred Starbucks's entry into this market for more than three years, just as a coffeehouse culture burst onto the scene in Russia. Starbucks refused to pay the squatter and eventually won its case in court.

With the opening of the first Russian café, Starbucks now operates in 43 countries, and the company plans to open a flagship Russian shop on Old Arbat Street, an iconic address in central Moscow, later this year.

(HT: Sanil Kori)

Farmers Have A Permanent Place at Public Trough

Milton Friedman once said that "Nothing is so permanent as a temporary government program." Nothing more clearly illustrates Friedman's insight than farm subsidies. From today's Kansas City Star:

It’s astonishing when you think back on how this got started. It was 1933. It was another “temporary” program to deal with an emergency. It was supposed to help impoverished farm families.

Now the lion’s share of these payments goes to only 10% of the farmers, and since payments are based on per-acre production the recipients are those running the biggest farms.

Not all of them, mind you. Production of fruit, vegetables, beef and poultry — about two-thirds of farm output — remains largely unsubsidized. It makes you wonder why producers of the major subsidized crops — wheat, corn, soybeans, rice and cotton — couldn’t somehow also survive without federal handouts.

New Zealand and Australia have largely done away with farm subsidies. Yet in this country there’s not much stomach in Washington for real reform. Since farm states are often swing states politically, subsidizing agriculture is a bipartisan effort.

Today, farmers constitute only about 1% of the population, yet farmers have carved out a seemingly permanent place at the public trough.

International Unemployment Rates, 2007

The chart above reflects international unemployment data released today by the BLS here and here. As the data show, the U.S. unemployment rate of 4.5% for 2007 and the labor market look pretty good in comparison to other advanaced economies, despite what some considered to be a "dismal employment report" last Friday. For example the U.S. jobless rate is 2.6% below the EU average of 7.1%, more than 4% below France, Germany and Greece, more than 3% below Portugal, Spain and Belgium.

In fact, even our state with the highest unemployment rate for 2007, Michigan at 6.9%, is below the EU average of 7.1%. In other words, the U.S. state with the worst economy and labor market conditions, is still better than the average European country, in terms of jobless rates.

The UAW's Choking Health Care Burden

ANN ARBOR - "Detroit's automakers have a total of 180,681 hourly workers represented by the UAW. There is a staggering number of 721,025 UAW retirees and surviving spouses who are entitled to retiree health benefits (see chart above, click to enlarge).

The automakers have proposed establishing "voluntary employee benefit associations,'' or VEBAs, to fund retiree benefits.

Automakers might contribute as much as $80 billion to the funds, which would be run by the UAW. The union would invest the money to ensure it had enough money to meet retiree health care obligations.

VEBAs would take the choking obligation to fund retiree benefits off automakers' books, which could help improve their competitiveness.

MP: What company could possibly be competitive and survive when it is obligated to pay health care benefits for 5 workers per employee, one who is currently working, and 4 additional workers who are retired? Ford, GM and Chrysler are paying health care benefits for 900,000 workers, but only 180,000 are actually current workers! Is it any surprise that the Big Three have asked the UAW to take over the obligation for unlimited lifetime health care benefits for its members?

What's Next?

For the first time in history, sandals with a built-in bottle opener! What a country, who say's things aren't getting better all the time?

More on the Pay Gap, From the U.K.

Like in the U.S., the pay gap is a controversial issue in the U.K. English Blogger Tim Worstall has a link to an interesting article in the U.K.'s Sunday Times that reports that Britain's Minister for Women Harriet Harman is "pressing forward with the government’s commitment to reduce the pay gap between men and women,” currently 12.2%, up from 11.8% last year. From the article:

However, what is not recognised in this age-old debate is the fact that many women are happy to be paid less in order to work less and thus spend more time with their families.

Well, not “happy” necessarily, but “able to live with what is an essential compromise”. That sounds like an incredibly old-fashioned, borderline sexist thing to say, but it is in fact an entirely modern and realistic one.

The truth of the matter is that recent generations have produced an awful lot of women who crash through the glass ceiling only to stand triumphantly among the broken shards and think: “Hmm, you know what? I’d rather be home for the baby’s bathtime.”

Men are, with a handful of exceptions, unwilling to compromise an iota on the work/ family front: work comes first and will always come first.

Faced with the choice of their children having two spectacularly absent parents, most women compromise and cut their hours. Or work from home a day or two a week, or leave at 5.30 on the dot, no matter how much they’re needed at work.

Their salary takes a commensurate dip, as often does their popularity or what is perceived as their reliability. It’s not fair because if women didn’t do this then family life would be even more endangered and confused than it already is, but nobody said commerce and domesticity made great bed partners - and women are keener on their children finding them reliable than on being available to their boss at all hours.

MP: As the graph above shows for the U.S. using BLS data, the average weekly hours for women has been gradually increasing, but men still work almost 6 more hours per week, or 16% more hours on average. At least part of any observed pay gap in the U.S. can certainly be explained by a 16% difference in the "hours worked gap." I don't have UK data, but I'm assuming there is an "hours gap" as well in the U.K., and the article seems to support that assumption.

Like in the U.S., cases of unequal pay for equal work is illegal in the U.K., and can be prosecuted. However, we should always allow for the fact that some differences in pay are based on personal choices made voluntarily, reflecting the tradeoffs between work and family. The article does a nice job of pointing out these tradeoffs.

Green Guilt and The Selling of Eco-Indulgences

From the LA Times article last week "Can You Buy a Greener Conscience?":

The race to save the planet from global warming has spawned a budding industry of middlemen selling environmental salvation at bargain prices.

The companies take millions of dollars collected from their customers and funnel them into carbon-cutting projects, such as tree farms in Ecuador, windmills in Minnesota and no-till fields in Iowa.

In return, customers get to claim the reductions, known as voluntary carbon offsets, as their own. For less than $100 a year, even a Hummer can be pollution-free -- at least on paper.

Driven by guilt, public relations or genuine concern over global warming, tens of thousands of people have purchased offsets to zero out their carbon impact on the planet.

Beneath the feel-good simplicity of buying your way to carbon neutrality is a growing concern that the idea is more hype than solution.

In this related commentary "Carbon Offsets: Eco-Extortion, Green Guilt, and the Selling of Indulgences," Frank Pastore writes:

The selling of “voluntary carbon offsets”—eco-indulgences—is a $55 million per year industry, involving over three dozen companies worldwide. Total sales are anticipated to double both this year and next, and entrepreneurs are clamoring all over themselves for a piece of the action.

And it’s all a scam.

Yes, the money is very real, but the alleged benefits to the environment are fake.

Paying someone to plant a tree to “offset” the carbon footprint of your SUV is just plain silly. Yet there are thousands of people spending real money on these kind of indulgences every day.

Why? The answer is that it’s part green guilt, part eco-extortion, and part just plain novelty.

MP: Both articles point out this part of the scam: Native Energy and other companies selling eco-indulgences often contribute only 1% of the total cost of windmill projects and alternative energy plants, yet they claim and sell 100% of the carbon reductions.