I missed the CNN sparring session between Lou Dobbs and Diana Farrell, director
of the McKinsey Global Institute (MGI) but the summary in the August 23, 2004 issue of Fortune seems to cover the highlights.
Mr. Dobbs correctly hit Ms. Farrell on their ridiculous claim that a $1.00 moved off-shore brings $1.13(#) back to the US
economy. I also discount McKinsey's claim that MGI "works are arm's length from the consultants. Yeah, right. Just like the
stock analysts work arm's length from the investment bankers. Anyway, the one valid point to emerge from either side was Ms.
Farrell's, "This (off-shoring) isn't something you are for or against any more than you can be for or against the weather."
Maybe so, but we still insist the weatherman give us an honest forecast on
the nightly news or in the paper.. If he (or she) keeps telling us it's sunny while it's raining outside, somebody is going
to start demanding the legislative control over weather forecasters. This is essentially my point about off-shoring. Let's
admit the downside instead of glossing it over. When the gloss wears off, real issues will suddenly become evident and THEN
there will be real trouble.
Today's missive is another visit to the wonderful world of "McKinsey-land."
Just tell McKinsey the answer you want and "presto", they'll give you "research" which "proves" it's true!
Oddly, it looks like MGI doesn't actually review their own stuff for consistency
before they rush it out. Maybe they should start using their consultants to help keep their story straight?
McKinsey is now pushing a paper on the "The hidden dangers of the informal
economy"(*) The title caught my eye since any way to boost the US, not to mention California and Silicon Valley, economy would
be of tremendous value.
I am stunned by the irony, and hypocrisy, of McKinsey's arguments in this
paper. On the heels of a treatise twisting economic "research" to fabricate the claim a $1.00 moved off-shore is worth a $1.14
at home, McKinsey is now criticizing companies and/or countries who have work performed in low-tax, low-regulation environments
just to save costs.
It's difficult capture the full breadth of McKinsey's claims but I will try
to hit a few of the high points. In short, McKinsey's premise is;
"(A) substantial cost advantage that informal companies gain by avoiding taxes
and regulations more than offsets their low productivity and small scale. Competition is therefore distorted... Any short-term
employment benefits of informality are thus greatly outweighed by its long-term negative impact on economic growth and job
creation."
Read this double-speak through again, substituting "off-shoring" for "informal":
"Substantial cost advantage that <off-shoring> companies gain by avoiding
taxes and regulations more than offsets their low productivity and small scale... Any short-term employment benefits of
<off-shoring> are thus greatly outweighed by its long-term negative impact on economic growth and job creation."
McKinsey now argues exactly out of the other side of their mouth from prior
touts of the universal and long-lasting benefits of off-shoring. This paper is another round of details which do not receive
widespread discussion but have direct bearing on the off-shoring debate.
McKinsey seems not to recognize US companies are off-shoring to Asia in order
to "avoid taxes and regulations," on top of lower wages, which then offset, "low productivity and small scale."
US companies often defend off-shoring, in part, as making themselves more
efficient users of capital. Yet McKinsey criticizes companies resorting to the informal (read: off-shore) economy since it
allows "inefficient…players to stay in business" by reducing costs.
Doesn't moving jobs off-shore, "prevent more productive, formal (read: non-off-shoring)
companies from gaining market share"? (Here maybe is support for prior advice from consultants that companies should rush
their off-shoring in order to be the first to seize the competitive low(-cost) ground…)
Aren't, "short-term employment benefits of <off-shoring> greatly outweighed
by its long-term negative impact on (US) economic growth and job creation"? OK, maybe we need to wait and see the final proof
on this last one, but you get the idea.
Free trade advocates argue they must be allowed to export jobs to low-cost
locales. Is it just a coincidence the low-cost locales happen to also be low-tax and low-regulation locales? Aren't lower
taxes and fewer regulations a big component of why off-shore costs are lower? Duh!...
One of the defenses offered to justify off-shoring to low-tax/low-regulation
locales it that, over time, Asian regulatory environment will match that of the western world. Don't count on it, according
to McKinsey.
McKinsey then claims any short-term benefits of avoiding taxes and regulations
are outweighed by the long-term negative impact on home-market economic growth. Didn't their off-shoring puff-piece argue
just the opposite? Where's the $1.14???
McKinsey goes on, saying, "The idea that informal businesses might grow and
join the formal economy is therefore a myth. On the contrary, they shun opportunities to modernize and remain trapped in low-productivity
operations." This is more or less the claim of many businesses seeking political cover for off-shoring. Only low-end or repetitive
of menial tasks will be off-shored.
I expect time will show this is one aspect of this McKinsey comparison which
will not translate. Off-shored jobs and tasks will grow from "low-productivity operations" into a spectrum comparable to those
performed in the developed world. If the productivity of the operations improves in "low-tax, low-regulation countries," you
begin to notice another reason why the US cost structure and Asia's will not be bridged any time soon.
Then McKinsey intones, "Pervasive informality also slows economic growth by
substantially reducing the tax receipts of governments, which must therefore raise the tax rates imposed on formal businesses."
Insert "off-shore" for "informal" and tell me the ramifications for future
US tax receipts. This point is rarely admitted. McKinsey's previous off-shoring justification conspicuously omitted mention
of tax consequences (except to take credit for taxes the off-shoring companies dodge).
To try to draw a parallel, politicians are quick to lament the flight of children
from low-performing public schools to better-performing institutions. Simultaneously, politicians are supporting parents'
desire to "off-shore" their child's education to a non-neighborhood school. The abandoned neighborhood school than has fewer
resources available to educate the remaining children, leading to worse performance, leading to more flight, etc.,etc. US
companies who continue to hire in the US are left holding the bag for unemployment insurance, social security, federal and
local taxes, etc. since these systems receive fewer contributions from the companies moving jobs off-shore.
I could go on and on (OK, maybe I already have) but there are many more instances
where substituting "off shore" for "informal" in this paper exactly contradict McKinsey's prior claims.
This whole report is utter hypocrisy. McKinsey was so focused on getting to
the "answer" requested by their client they apparently failed to see any contradiction.
Regardless of our opinion, off-shoring figures to continue. If we are to honestly
debate the issue, it's important to sort "spin" and "optimism" from hard facts. I recommend we bar McKinsey from either side's
debate team. They can't be relied on to forecast the weather.
