>AT WHAT POINT DO YOU RECOGNIZE THE LOWER COSTS HURT US ???
INCOMES ARE GENERATED IN FOREIGN COUNTRIES, NOT HERE>
All I see around me is this. To earn a revenue of $1 million, an offshore software company first spends about a quarter to half a million dollars in computer and telecomm equipment made by north american companies (Intel, microsoft, Cisco, Avaya, Nortel). In fact 5 such companies spend that kind of money and discover that only one of them has $1 million of contracts. So one million dollars of offshore work first sends a larger amount of money to the US companies.
Also, of the remaining half a million dollars paid to employees of offshore companies, a portion ends up in buying home computers, cell phones, and other goodies that contribute back to US and other developed world economies. Their kids eat at Pizza hut, KFC and Mcdonalds. They drink more Pepsi and Coke. They play video games. Watch Disney movies. Watch CNN, HBO, And ESPN.
If their standards of living rises, they spend money on more sophisticated technologies. They visit hospitals that buy MRI machines made by GE. They use ATMs that use Diebold's machines. They get credit cards and pay foreign banks the high interests. They fly instead of taking the train resulting in a greater demand for aircraft made by Boeing. They generally use more power and electricity, buying heavy capital equipment from GE, Emerson electric and others.
It is not a zero sum game. When one job is replaced in the US, it probably creates 5 new consumers in the offshore country. So 5 new consumers want a computer, a cell phone, washing machine, Disney, McDonalds etc. The demands of those 5 new consumers help expand the US company's output and employment, and that one job that seemed to have gone away, returns.
Company output = 100
Company profit = 10
Cost of labor = 20
No of US jobs = 10
Job replaced = 1
cost per job= 2
Consumers created offshore = 5
Company'e new Output = 105
Company's profit= Old profit+extra output+wages associated with lost job = 10+5+2
No of additional people company can hire in US = additional profit/cost of labor = 7/2=3.5
So 1 job offshored gives the company a chance to hire 3.5 new employees in the US with the savings.
-Arun |
