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									Remarks of Michael Milutis
Programmer’s Guild Conference
Morristown County Library
Morristown, NJ
June 8, 2004


How many of you are wearing bras right now?

For those of you who raised your hands, you might be interested to know that there is an
80-year-old tariff on brassieres in this country. It’s a tariff, moreover, that doesn’t even
make economic sense, since there are virtually no bras manufactured in the United States
anymore. Nevertheless, it's still in place, and it hovers at 17% (that means that the $20 to
$30 cost of a bra includes $4 to $5 for tariffs).

This actually fits a pattern. In fact, almost everything that is mass market has a tariff. By
way of example, the average tariff on sweatshirts is 32 percent, the average tariff on
cheap sneakers is 48 percent, and the average tariff on socks is 13 percent.

I am bringing this all up because we are frequently asked to consider how much of our
own personal wardrobe originates from overseas, or sometimes we are asked how many
of us drive foreign cars, and the implication is always the same: that international trade is
nothing new and that globalization is an unstoppable ideal state that we are all heading
towards and that, in the face of this, the issues and concerns and complaints of IT workers
are somehow primitivistic or reactionary

However, this is the crudest oversimplification— and misleading, too-- since many of
these goods, despite the fact that they may be originating from foreign manufacturers, are
still burdened to some extent with tariffs, protectionist tariffs that protect American
workers and, that, strictly speaking, run contrary to the spirit and principles of free trade.

But there are no such mechanisms in place to protect service workers in this country.
Nothing to compare even to the sock tariff or the bra tariff, as ridiculous as that may
sound.

And yet, according to "The New Wave of Outsourcing", a report put out by the Fisher
Center for Real Estate and Urban Economics at the Haas School of Business of the
University of California, the United States will be losing 14 million service sector jobs to
offshore outsourcing, with the IT sector leading the way.

14 million jobs. That represents 10% of the entire U.S. working population. Now, that
would seem to be a big enough number to warrant some kind of policy response. It’s
certainly bigger than the number of jobs being created by the U.S. bra sector, which, right
now, with the last U.S. manufacturer moving its operations to China, hovers somewhere
around zero.

Since WW2 a guiding principle of US economic policy has been that trade barriers
should be reduced. Thus, the US spearheaded the creation of GATT, which almost 50
years later became the foundation for the current WTO. Since then we have seen the
creation of GATS and NAFTA as well as new multilateral efforts such as Free Trade of
the Americas.

However, negotiations at the last two WTO conferences as well as the most recent Free
Trade of the Americas meeting collapsed almost immediately as a result of a single
factor: the intransigence of the U.S. over the issue of agriculture subsidies. Specifically,
the U.S. was not willing to give up its protectionist subsidies in this sector; subsidies that
make it easier for US farmers to compete internationally.

Both the WTO and the FTAA are vehicles for advancing trade liberalization. They are, in
fact, the very engines of this process. Yet the US government is willing to sink such
conferences right out of the gate in order to protect an extremely small sector of the US
economy-- one that is dwarfed in every way by the offshorable services sector.

Clearly, Americans as a whole would in no way be worse off for the removal of these
subsidies. Moreover, the entire global economy would benefit substantially as well. The
World Bank actually estimates that 140 million people could be lifted out of poverty by
2015 if agriculture subsidies were brought to an end. Nevertheless, such subsidies will
remain in place for obscure political reasons that have nothing to do with either
macroeconomic or humanitarian calculations.

Mark Weisbrot of the Economic Center for Policy and Research in Washington
approaches these issues from yet another angle. He writes: "Our leaders have rewritten
the rules of the game in a way that has driven down wages for the vast majority of
American employees. One may agree or disagree with this policy, but it should be
understood as a conscious political choice. The same thing could have been done to the
salaries of doctors, for example. With much less effort and expense than it has taken to
negotiate investment and trade agreements like NAFTA and the WTO, we could license
and regulate the training of doctors in foreign medical schools. By allowing these doctors
to practice medicine in the United States, we could lower the salaries of doctors and
greatly reduce health care costs, without any loss of quality. Interestingly, the savings to
consumers from reducing American doctors' salaries to even those of Europe would be
enormous: about $70 billion a year. This is about a hundred times more than the gains
from tariff reduction in our most comprehensive trade liberalization agreements, such as
the one that established the WTO five years ago. Huge savings could also be achieved by
introducing international competition to the practice of accountants, lawyers, economists,
and other professionals. But it is unlikely to happen, because these professionals-- unlike
the majority of the US labor force-- have enough political clout to protect themselves
from international competition"
The point I am trying to make is that free trade theory, and all of its theoretical gains,
although indisputable on the drawing board, really has very little bearing on reality, if
only for the patent inconsistency with which such theory has been historically applied
across our society. It is nowhere invoked when at odds with elite interests. But should
such principles—the principles of free trade—ever coincide with these very same
interests, then—not surprisingly-- the authority of free trade is resurrected, as it were,
with all of the grandeur and nobility of a national religion.

In this sense, the plight of 14 million US service workers is not so much an economic
issue as a purely domestic political struggle between the middle class and elite corporate
interests. It is, in this sense, a zero sum game.

We are being conditioned, from every angle, not to look at it this way.

To put it generously, I believe that the manner in which most of the media frames these
issues is simply too narrow. Many economists make the same mistake. They formulate
their opinions as if these were purely theoretical economic arguments that can be solved
with graphs and calculators. But they’re not. They are messy, real world problems
involving people, power, privilege, political representation, inequality, wealth
distribution, history, and political precedent and anybody who neglects to incorporate
these elements into their analysis is not really presenting a very accurate picture of the
outsourcing problem to their audience.

But the crowning indignity in all of this will ultimately be that in doing nothing and
“trusting markets"-- the mantra of “free traders” everywhere— IT workers will
essentially be leaving less visible, more institutionalized forms of protection in place,
protections which will continue tilting the playing field against them while providing
indirect and unfair stealth subsidies to big business.

This isn’t so obvious. For example, prevailing wage rate loopholes built into the H-1B
program effectively represent a form of protectionism, protectionism for U.S.
corporations, interested in maintaining access to large pools of cheap, high-skilled labor.
The same is true for rigid H-1B sponsorhip regulations which make it nearly impossible
for H-1B recipients to carry their green card paperwork over from one sponsor to the
next. The lack of green card fluidity creates a strong disincentive for switching employers
which, in the absence of effectively enforced prevailing wage rates, means that H-1B
salaries are kept artificially depressed. Since neither the negotiation of a raise nor the
search for a higher paying employer would be realistic options for H-1B recipients
interested in obtaining green cards, an inefficiency is essentially introduced into the
market which prevents these recipients from trading up to market rate salaries. Thus, the
legal and administrative anomalies in the H-1B program effectively facilitate dumping,
something considered an unfair trade practice by the U.S. International Trade
Commission, being defined as "the sale or likely sale of goods at less than fair value."

How does this relate to offshore outsourcing? Insofar as many offshore business models
are dependent on an on-shore component-- in the form of either an H-1B or L-1 project
manager— the immigration reform issue is an offshore issue, too. This was outlined by
the National Research Council in "Building a Workforce for the Information Economy"
as well as by the Center for Industrial Competitiveness at the University of Massachusetts
in "H-1B Visas in the Globalization and Restructuring of IT Services." In fact, in a
September 2003 edition of CIO Magazine it was actually reported that “...some CIOs
experienced in offshore outsourcing say that if foreign managers are prevented from
entering the country on L-1 and H-1B visas, projects with their offshore outsourcing
partners would collapse...”

We can find other forms of protectionism-- stealth protectionism, that is, for U.S.
corporations-- in the tax breaks which arise from unrepatriated earnings regulations.
Unrepatriated earnings are the income earned abroad by U.S. multi-nationals which
remains invested abroad and, as a result, is allowed to avoid the full 35% U.S. tax rate.
As evidenced by the 200 billion dollar rise in unrepatriated earnings from 1999 to 2002,
this tax anomaly is alive and well in the United States and continues to create a strong
incentive for the offshoring of American jobs by U.S. multi-nationals.

A bill recently introduced by the House Small Business Committee (H.R. 1769) would
seek to correct this imbalance by providing similar tax incentives for U.S. companies that
keep jobs on-shore in the first place. Such a bill, however, runs the risk of being
considered "protectionist.” The same is true of the “USA Jobs Protection Act” (H.R.
2849), an H-1B/L-1 reform bill introduced by Congresswoman Nancy Johnson of
Connecticut last summer.

I find this all rather ironic since what masquerades as "free trade" these days really just
seems to be a much more sophisticated form of protectionism. In fact, if the charade is
allowed to continue, the net effect of "trusting markets" will ultimately be that many U.S.
companies will only be able to remain competitive by exploiting protectionist tax
incentives (for the offshore replacement of U.S. workers with foreign resources) or by
exploiting protectionist loopholes in non-immigrant visa programs (for the on-shore
replacement of U.S. workers with foreign resources).

But the heart of the matter is this: in the absence of deeply institutionalized protections
and solely looked at on the basis of wage rate savings, the offshore model would not be
nearly as cost-effective as people are being led to believe.

The Gartner Group, after factoring in due diligence costs, travel costs, vendor selection
costs, process improvement costs, productivity lag costs, and litigation risks estimates
that the average realistic offshore savings rate for U.S. businesses comes out to about 20-
25%. That’s great but it’s the exact same savings rate that any of these businesses would
be able to find by partnering with efficient, small-to-mid-sized firms like CAI, firms
whose core competency is IT and who are furthermore able to generate year over year
cost savings and productivity improvements simply through metrics management and
proprietary productivity enhancing software, all without giving up the user-developer
intimacy that can be so critical for the success of many of these projects.
So perhaps you can understand then why the improper use of on-shore H-1Bs and L-1s to
further lower the overall offshore cost per function (by smoothing up the requirements
process, by improving communications, and by reducing rework, all at rates well below
the prevailing wage).... perhaps you can understand then why this is such an issue for a
company like Computer Aid. Using CAI as a benchmark, onshore cost savings and
legitimate offshore savings would be more or less comparable. The ability of firms,
therefore, to derive, with impunity, additional cost savings through the abuse of H-1Bs
and L-1s is something that will price firms like CAI, unfairly, out of the market. We face
similar difficulties with US competitors who are exploiting the same legal loopholes and
poor regulatory structure to unfairly lower their onshore delivery costs.

Which brings me to a key point: many of the 14 million US service jobs that are expected
to be lost to offshore outsourcing will be lost not on account of international competition
or lack of education, a set of bromides that Tom Friedman & Co. like to intone,
repeatedly, but because US employers and foreign multinationals were exploiting legal
loopholes while gaming a dysfunctional, poorly regulated visa system.

In support of this, one simply needs to look at the unemployment rate for scientists and
mathematicians, which rose from 0.7% in 1998 to 6% in 2003. The news for engineering
managers was even worse. Their current unemployment rate is 8%.

To put this in perspective, in the 30 plus years that the Department of Labor has been
collecting statistics, the past two years have been the first in which unemployment rates
for electrical, electronic, and computer engineers were higher than the unemployment
rate for all workers as a whole. In other words, according to the statistics, it is precisely
the most educated among us who are most at risk right now, precisely the reverse of what
the establishment has been saying.

But it isn’t even necessary to turn to statistics to understand what has been going on.
There is now sufficient anecdotal evidence, as everyone in this room is by now aware,
I’m sure, that American IT workers have been forced to actually train their non-
immigrant replacements. To train them. Clearly, lack of education is not the biggest
problem for American IT workers right now if they are training their own replacements.

This education canard is not the only deception being thrust upon us by Friedman & Co.
right now. The establishment likes to play games regarding the scope of this problem,
too. For instance, and here I am actually quoting from one of Tom Friedman’s own op-
eds from March 7, 2004, Friedman writes, in one fell propagandistic swoop that distorts
both the scope of the problem while insinuating the education myth all over again,
“These institutions, which nurture innovation, are our real crown jewels that must be
protected — not the 1 percent of jobs that might be outsourced.”

Now where does he get this number 1%? 1% of the US working population represents
1.4 million jobs. However, the most conservative job loss estimates out there right now,
the ones that Forester Research published in April of 2002, put the estimate almost two
and half times higher at 3.3 million. I’ll repeat that: the most conservative estimates are
two and half times higher than 1 percent.

Clearly, Tom Friedman, who fancies himself an expert on globalization, knows about
these estimates. It’s his job. He spent, after all, the earlier part of the year on assignment
in Bangalore. One can only conclude that the man is either deliberately deceptive or
incompetent.

What’s worse is the degree to which the Forrester Report itself has been dwarfed by the
other competing studies. A year after the Forrester study was released, Goldman Sachs
came out with their own report (“Offshoring: Where Have All the Jobs Gone?”) in which
they estimated that 6 million jobs would be lost, up from Forrester’s 3.3 million. And
then, about 3 months later, the University of California came out with yet another report
(“The New Wave of Outsourcing”) in which they predicted that 14 million US service
jobs were at risk. 14 million would make this the greatest structural readjustment in US
economic history.

Interestingly, in "Behind Outsourcing Debate: Surprisingly Few Hard Numbers" (Wall
Street Journal, April 12th, 2004), Jon Hilsenrath refers to the April 2002 study by John
McCarthy of Forrester Research in which McCarthy self-admittedly “guestimated” that
the U.S. would lose 3.3 million jobs to offshore outsourcing by the year 2015.
Hilsenrath's point was that McCarthy, by his own admission, did not apply a rigorous
methodology to this study, basing his conclusions instead on "assumptions about the
vulnerability of various job categories to outsourcing." Hilsenrath was obviously seeking
to minimize the threats facing U.S. service workers. His clear implication was that the
recent furor over the offshoring of jobs was much ado about nothing.

Ironically, the article only winds up bolstering the claims of the Goldman Sachs and
University of California studies, since the authors of both these studies actually employed
methodologies, real methodologies, and these methodologies were discussed and
explained in the course of their reports. Naturally, neither the Goldman Sachs report nor
the University of California report were mentioned by the Journal. In fact, to my
knowledge, I have only ever seen the University of California study, the 14 million lost
jobs study, referred to once, anywhere, in the course of all of my research, and that was in
a press release from the Lou Dobbs web site, on the day that the study was first
published.

So between the “giant sucking sound” itself, and all of these Orwellianisms trying to
convince us it’s actually a “filling up” sound and, on top of that, all of the agitprop telling
us there’s no sound at all, we’ve really got our work cut out for us. Which brings us to
the most important point of all: what are we doing about all of this?

First of all, although it is practically indisputable that trade liberalization creates gains for
society as a whole, it is also indisputable that certain citizens will always carry a
disproportionate share of the costs associated with these gains; specifically, those who
lose their jobs. This is why most economists believe that the government must use a
portion of its won gains to assist those citizens who carry these costs. President Kennedy
institutionalized this view of international trade when he created the Trade Adjustment
Assistance program in 1962.

TAA reflected the view, in President Kennedy's own words, that "those injured by...
trade competition should not be required to bear the full brunt of the impact. Rather, the
burden of economic adjustment should be borne in part by the federal government..."
President Kennedy further elaborated that "there is an obligation to render assistance to
those who suffer as a result of national trade policy." TAA provisions include federal
money for retraining, unemployment benefits totaling 104 weeks, health care tax credits,
job search allowances, and 90% coverage of job related relocation costs.

Nevertheless, the TAA program was only designed to help those laid-off from the
manufacturing sector. The growth in services was simply not envisioned at the time, nor
were the technological advancements that would render international competition in this
sector such a reality. As a result, Trade Adjustment Assistance is not currently available
for any American who becomes unemployed as a result of offshore outsourcing.

While I strongly disagree that education is at the root of the problems we are currently
facing, it certainly can’t hurt to incorporate it into the solution. However, without an
expansion of Trade Adjustment Assistance to include all workers, and not just
manufacturing workers, many of the 14 million at risk US service sector workers will
lack both the time and the resources to effectively transition themselves.

In response to this, House and Senate lawmakers introduced legislation three months ago
that would expand these benefits to include service workers. Reps. Adam Smith and Jay
Inslee, both Washington state Democrats, were the primary sponsors of this bill, the
Trade Adjustment Assistance Equity for Service Workers Act of 2004. A Senate
version of the bill was introduced by Max Baucus of Montana.

Second, we believe that Congress must address the problem of these unrepatriated tax
earnings anomalies. Possible solutions would include a counter-balancing tax incentive
for onshore companies who keep jobs onshore, or even an elimination of the offshore tax
break all together. A bill introduced in the House by Donald Manzullo proposes the
former as does a 170 billion dollar tax cut bill recently passed by the Senate in May. The
difference between the two is that the Manzullo bill includes software production in their
definition of manufacturing while the Grassley bill does not. Also worth noting is that
the Grassley bill temporarily cuts taxes on income held abroad, in the event that it
actually gets brought back to the United States. This is presumably intended to create an
incentive for onshore investment, although it’s honestly difficult to make a convincing
argument for that, since multi-national firms can simply avoid the tax completely by
continuing to invest abroad.

Third, we would like to require that the Bureau of Labor Statistics keep data on how
many U.S. jobs are going offshore, so that the trend can be properly monitored.
Fourth, we would like to ensure that the U.S. Trade Rep. does not continue to create
additional H-1B provisions, in a unilateral manner, without pre-consent of Congress, as
they did with the Singapore and Chile Free Trade Agreements last summer. Responding
to this, Sen. Dianne Feinstein actually introduced an amendment last September to an
appropriations bill which sought to reassert Congressional authority to define
immigration law as specified under Article I Section 8 of the U.S. Constitution. The
administration objected to the amendment in January and it was withdrawn. This is an
on-going exposure.

Fifth, we would like to see state and federal taxpayers money prevented from moving
offshore. We reject all criticism that this is in any way protectionist. We feel strongly
that this is an issue, not of protectionism, but of sovereignity, the sovereign right of states
to use their own tax money for their own economic development. As you might already
know, 36 states have tried to introduce such legislation over the past year or two,
including PA, where CAI has been directly involved in the legislative process. However,
with the exception of Tennessee, none of these states have yet managed to pass anything
substantial. Nevertheless, as you might have read back in January, Congress did pass, as
part of an omnibus appropriations bill, an amendment banning all offshore outsourcing
on federal contracts this year, the Thomas-Voinovich amendment. This was good news,
of course, but it will only last until next January. Chris Dodd of CT subsequently
introduced another piece of legislation—the Dodd amendment—which would render the
ban permanent. The Grassley tax bill seeks a similarly permanent ban, too.

Sixth, we would like to prevent companies that abuse H-1Bs and L-1s from ever doing
future business with either the state or federal government. We would also like to see
state and federal government entitled to a right of action against companies that abuse H-
1Bs and L-1s while receiving, or simply bidding on, government related contracts.

Seventh, we want to make sure that the sovereign right of state and national governments
(to use their tax monies to encourage economic development) is not undermined by new
WTO and FTAA government procurement proposals which would consider the favoring
of national or local service providers a non-tariff barrier. That’s a serious concern. So
serious that several states, including Pennsylvania, have already stated their intentions to
disregard the authority of such new restrictions, should they actually become law.
Fortunately, the US Trade Representative is bogged down this year and is unlikely to
complete any new deals until well into 2005. The irony, of course, is that the Trade Rep.
is currently bogged down due to U.S. intransigence over the issue of agriculture
subsidies. In other words, those agriculture subsidies I spoke of earlier, in some crazy
roundabout way, insofar as they pose a stumbling block to WTO negotiations, thereby
preventing non-tariff barrier proposals from being ratified, are actually protecting IT
workers.

I wish I could tell you that the brassiere tariff was having the same effect on our industry.

Finally, and perhaps most importantly, we feel it is unconscionable to allow the
weaknesses in the H-1B and L-1 programs to be exploited, in a manner that violates both
the spirit and the letter of the law, when our country is going through one of the greatest
structural readjustments in its economic history. To this end, Congress—last year—
introduced five immigration reform bills. CAI has been working hard at making sure
these bills don’t just get passed, but get passed in a comprehensive and genuinely
effective form.

I’d like to leave off now and open the meeting up for a discussion of any of these visa
bills. That seems like the best way to proceed at this point since most of you here already
maintain a sophisticated grasp of H-1B and L-1 visas anyway and, in light of this, would
probably be better served by more of an interactive atmosphere.

Thank you.

								
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