Sunday, September 05, 2004

Outsourcing and the concentration of wealth

Title: Outsourcing CEOs Get Big Pay Hikes
Source: Forbes
Date: August 31, 2004

From the article:
    U.S. companies that outsourced the most jobs in 2003 also offered well-above average pay increases to their chief executives, according to a new study released this morning. Companies that made outsized political contributions to either the Democratic or the Republican parties also paid their CEOs unusually well, the study finds.

    The average CEO compensation at the 50 firms outsourcing the most service jobs increased by 46% in 2003.
    Companies that gave large sums to political parties also tended to give outsize rewards to the boss. CEOs of the 69 companies that sponsored this summer's Democratic and Republican National Conventions saw their pay rise by 52% in 2003, far outpacing their fellow CEOs. (Elections laws generally bar corporations from giving money to candidates, though they may sponsor conventions.) Similarly, the 38 CEOs who have personally raised at least $100,000 for either the George W. Bush or John Kerry presidential campaigns (the list is heavily weighted for Bush) earned an average of $15.2 million in 2003, 88% more than the average large company CEO, the study says.
Title: For CEOs, offshoring pays
Source: CNET
Date: August 31, 2004

This article offers specific examples:
    The report lists a more dramatic increase in pay for Stephen Bennett, CEO of Intuit, which makes personal-finance software. Bennett got a 425 percent pay increase in 2003 to $22.3 million while sending call center jobs to India, the study says.
    The ratio of CEO pay to worker pay reached 301:1 in 2003, up from 282:1 in 2002. If the minimum wage had increased as quickly as CEO pay since 1990, it would be $15.76 per hour, rather than the current $5.15 per hour, according to the study.
See What if we doubled the minimum wage? for a perspective on the latter statistic.

Companies that outsource jobs lower their costs. For example, imagine a company that outsources 1,000 programming jobs. 1,000 U.S. employees might cost an average of $100,000 per employee per year. The same 1,000 employees in India might cost $20,000 per year. That's a savings of $80 million per year.

From a concentration of wealth perspective, the question is, "What should happen with that $80 million reduction in cost?" The money could:
  • Go to consumers in the form of price reductions.
  • Go to existing employees in the form of wage increases.
  • Go to remaining employees in another way, for example a reduction of hours worked per week.
  • Concentrate in the executives of the company.
  • Flow to shareholders in the form of higher dividends (which concentrates more wealth in the hands of a few).
What this study, in combination with the census data shows is that the savings are not going to existing employees. Worker hours certainly are not falling. Prices are not falling -- the nation's inflation rate is currently rising rather than falling. The wealth from these productivity increases is instead concentrating.

Wealth is concentrating at the expense of everyone else. This post points out a fascinating fact about John Maynard Keynes, one of the world's most famous economists. He noted in 1930 that:
    we should soon free ourselves from the struggle for subsistence, transforming the central problem of humanity from the struggle for survival into the challenge to find meaningfully use for our abundant leisure time. The little work that needed to be done would be spread out among the population in portions of perhaps 15 hours per week.
He believed that rising productivity, if spread among the entire working population, would mean that everyone would need to work less and less and less. Imagine a 15 hour work week -- that would be the logical effect of productivity increases like outsourcing.

Unfortunately, it has not worked out that way. Instead, almost all of the benefits from these productivity increases have concentrated in a wealthy few, leaving everyone else stuck in the same 40-hour work week that we had 70 years ago. Many workers in the U.S. need two or three jobs to make ends meet.

That is one of the many unfortunate effects of the concentration of wealth.