Paul Krugman: The New York Paradox

Why are corporations moving back to New York? Paul Krugman has the answer:

The New York Paradox, by Paul Krugman, Commentary, NY Times: I live and work in New Jersey, but I've always loved the energy and variety of the city that's just an hour's train ride away. So I was happy to read in The New York Times about a New York success story: the surprising resurgence of Manhattan as a site for corporate headquarters.

What's interesting about the corporate return to Manhattan is that it flies in the face of today's conventional wisdom.... Since work can now be done anywhere, the story goes, jobs move wherever the wages and other costs of doing business are lowest. And this should mean trouble for a high-wage, high-cost location like New York.

But somebody forgot to tell New York about the new rules: in spite of high costs, the city's economy is thriving. And the report ... suggests that New York may, paradoxically, be doing well precisely because technology has made it possible to move many jobs away from high-cost locations.

During the 1960's and 1970's, New York lost much of its historical role as a headquarters city ... Why are corporations moving back to New York? Manhattan's appeal is obvious: the Big Apple is the best place for top executives to "network face to face with their peers in the hub of the financial, legal and communications industries," as the article puts it...

In the past, however, this face-to-face communication came at a high price: in order to keep their top executives in Manhattan, companies also had to pay the rent on large office buildings and fill those buildings with thousands of lower-level employees... Many companies decided that the benefits ... weren't worth the cost.

Now, however, it's possible for many of the people who would formerly have worked at corporate headquarters to work somewhere else instead, communicating ... electronically. And that makes it worthwhile to move top executives back to the center of things. The same thing may be happening in the financial industry, which these days is New York's principal "export" ...

If you looked only at the employment numbers, you might think that New York's export base is in trouble. ... over the past 30 years, finance-sector employment has been shifting away from New York City toward lower-cost locations...

But what seems to be happening is that only relatively low-paid finance jobs are moving out of New York, while highly paid jobs are actually moving in. .... And it's a good guess that financial firms, like corporate headquarters, find it easier to put their top people in New York now that the back-office work can be carried out someplace cheaper.

The story of the New York economy isn't entirely a happy one. The city has essentially lost all of its manufacturing, and it's now in the process of outsourcing both routine office work and many middle-management functions to other parts of the country.

What's left is an urban economy that offers a mix of very highly paid financial jobs and low-wage service jobs, with relatively little in the middle. Economic disparities in New York, as in the United States as a whole, are wider than they have been since the 1920's.

But for once, let me focus on the positive: the world's greatest city, a city that a generation ago seemed to be in irreversible decline, seems to be doing O.K.

_________________________
Previous (7/7) column: Paul Krugman: The Treason Card
Next (7/14) column: Paul Krugman: Left Behind Economics

More from Krugman about New York.

Comments

[dryfly]

Krugman might live long enough to even see middle income jobs return to the area too... if peak oil makes it too expensive to import cheap trinkets from around the world.

I doubt we'll ever see factories return to Manhattan but I wouldn't be surprised to see them return to the region and some even into 'brown field' sites in and around the city proper.

It will really come down to how much it costs to transport stuff vs the cost differential to make in each location (labor & currency usually - energy, capital & raw materials are surprisingly similar worldwide).

And with lean systems & modern communications a lot of the advantages of scale go away. Smaller focused factories could be very efficient.

Right now most corp cost systems aren't fine tuned enough to give exec's the information they would need to make a wise decision here - too much aggregation. My guess is that will change too. In time.

Krugman might not live long enough to see it - but I bet it happens. Production moving back closer to the point of consumption due to high cost of energy to transport it. And not just in New York - worldwide.

[save_the_rustbelt]

I believe the article I saw on this recently said the offices were quite small, maybe averaging 70 - 80 people, which would account for a few senior offices and support staff.

Most middle level people could not afford to move into a NYC job, unless they were willing to commute long distances daily.

[cm]

Somewhat off-topic -- it depends on the details of course, but electronic/tele communication is overrated. One (admittedly important) place where it enables "geographic distribution" is where self-contained work packages are exchanged over well-defined interfaces. (The back office situation largely fits the description.)

It does not work where frequent interaction is needed, e.g. getting a number of people in a room to hash out the details of something, or deliberate/settle things that are not well-defined or well-formalized.

But then the latter is precisely why "shakers & movers" are (being) concentrated in NYC.

Many companies who think they can outsource/offshore part (not all) of their product development or business process, or move out the "grunt work" and keep "higher level stuff" in-house (but where substantial communication across the outsourcing boundary is nonetheless required), have yet to figure that out.

[Bruce Webb]

cm. Short term I would agree, but teleconferencing is advancing at a tremendous pace. The technology exists that would allow you to turn on your wall screen, pull a seat up to your real section of the virtual conference table and interact with a "room" full of people just as if you were there in person, the main difference being that you would have full climate control of the room you are actually sitting in. No more overheated stuffy meeting rooms.

Core management may choose to stay in physical proximity, for social reasons if nothing else (lets go to lunch, lets have a drink after work), but there is little reason for that factory manager in Trenton to physically shlep his way over to Manhatten for a meeting.

There has been a lot of focus on Moore's Law of computing, but not enough emphasis on whatever the equivalent would be for displays. We are fast approaching the time when any flat surface could double as a display from your table to your refridgeratior, and most likely will. 32" LCDs have popped the $1000 barrier, there will be no stopping the display revolution.

[Stormy]

Good points, dryfly, Bruce, calmo.

Another way of looking at it, at least for the moment:

What I am seeing now are areas of the country where only one class—the wealthy—can live with any satisfaction. Outlying districts, be they in the states or another country, feed wealth into those areas.

We are watching segregation by wealth on a global scale. The world of capitalism is taking on a feudal coloring.

Within these wealthy work centers and playgrounds, the service and support class will be severely stressed. (In many areas it already is.)

I grew up in a world where wealth, the middle class, and poverty were more evenly mixed, more homogenous, communities that functioned well. These coming communities will be more dysfunctional, a bit crueler.

[anne]

http://www.calvorn.com/gallery/photo.php?photo=4971&u=244|21|...

Male Red-tailed Hawk With Twig Hovering Near Nest at 927 Fifth Ave.
New York City.

[anne]

http://www.calvorn.com/gallery/photo.php?photo=4972&exhibition=15&u=244|22|...

Female Red-tailed Hawk with Twig Near Nest at 927 Fifth Ave.
New York City.

[groucho]

"We are watching segregation by wealth on a global scale. The world of capitalism is taking on a feudal coloring."

Stormy, Mark Twain coined the phrase "the gilded age" and one of his more famous quotes is "History doesn't repeat itself, but it does rhyme."

It will be interesting to see how "Gilded Age 2" plays out over the next couple of decades. My guess is that once the current credit bubble ends, a huge backlash by the masses will ensue.(once they realize they've been snookered into believing debt=wealth but when the "wealth" disappears all you have left is debt)

Soros and other powerful people are pushing hard to bring down the neocons. If they are successful, many changes in policy should soon emerge.

[Stormy]

Groucho,

Possibly. In some fashion or another, it will end. Along with dryfly, I think energy is an important card that is slowly sliding onto the table.

Even if the neocons were brought down, I see trade and business policies not changing; tax policies, possibly.

The so-called "liberals" have yet to grapple seriously with the driving forces behind the rising disparity of wealth. Education is not the answer. Trade policy is; that and how we deal with the tnc's and mnc's.

To address those issues, we have to revisit the policies of the WTO, both in terms of labor and the environment. Liberals in Congress are not willing to do that. Is Soros?

Globalization in its present form gets a "free pass" from everyone. Notice that I said, "...in its present form." It can take other forms, ones that would be far more beneficial for everyone, developed and developing nations alike.

Until then, the present trend will continue. Energy and global warming are waiting in the wings.

[dryfly]

To add to cm's & Bruce's point on telecomm & distributed organization...

While I agree with Bruce that you can do a lot via teleconferance, I also agree w/ cm that detail work needs a lot of day-to-day interaction & even some face time (to build trust) else the collaboration breaks down into 'silos'. You can't do it all via teleconference.

Most work, most of the time, isn't like that. Rather it is periods or working alone then short spurts of intense collaboration then another period of working alone. Teleconferencing is great if all the parties are on the same page & have been for a long time.

Where distributed organizations often fail is where basic supervision is required. I see this in my work all the time - where commodity buyers, broken up by expertise, will be sprinkled all across an organization... one buying castings here, another buying plastics there, etc. Usually on the same continent but often far apart enough to be in different time zones. These parts all feed into the same products - they mate - and so buyers need to collaborate A LOT. Or at least make sure their suppliers are aware of the need.

Even though they are all supposed to be reading off the same sheet music (plans & schedules from their corporate wide ERP) and operating from the same 'business process' play book... it doesn't happen UNLESS the corporate office has capable supervision to make sure everyone is on beat & enforce discipline.

This requires that the corp level supervisors be road warriors and not every big city makes that easy. I don't know how easy it is to get in and out of Manhattan to an airport (say JFK) but I do know it is VERY easy to get out of the Loop in Chicago to Midway or O'Hare... with O'Hare a short train hitch away from the lake shore office towers.

One exec I know who has corp offices in Chicago told me he can leave his desk and be at the O'Hare check in & security in less than 20 minutes - preapproved for boarding & no car to hassle with. The security line at the airport is the only real 'bottleneck'.

His office is outside the Loop & closer to the airport so has a shorter train ride than those downtown but even the loop isn't that far off. He flies both to Europe and to Asia often, as well as all around the US.

He frequently has little or no warning - comes into work, finds there is a major muck up in Shanghai... after a short teleconference, he's on a plane heading for China. And if the poop had hit the fan in Germany - he could be heading that way just as easily. Or to Juarez. Chicago is ideally suited for this.

These are the kind of urban infrastructures companies need to put in place to make sure their corp masters are happy. Most smaller & medium sized cities don't have it. Many have traffic as bad as large cities now.

Some of the larger medium sized cities are trying to step it up - put in train & such but the sprawl makes it quite difficult. They are WAY behind the curve in most cases. In many case they are hopelessly behind.

NY & Chicago will do well in this game... if it continues.

[Blissex]

«What's left is an urban economy that offers a mix of very highly paid financial jobs and low-wage service jobs, with relatively little in the middle.»

And for the same reasons that is the destiny of the most of the OECD countries, to be the financial headquarters of the world, because in that London and New York etc. have acquired a fairly large head start, thanks to network effects. A bit like eBay.

That is, if the OECD countries are lucky and the newly developing countries are stupid: because it might well happen that India and China will wonder why they should provide all the low value added back end work and leave the ''plantation'' owners and their gangmasters:

«it doesn't happen UNLESS the corporate office has capable supervision to make sure everyone is on beat & enforce discipline.
This requires that the corp level supervisors be road warriors and not every big city makes that easy.»

to the USA. The Japanese, Koreans, Taiwanese and even the Singaporeans have been pretty keen to retain or develop their own company headquarters.

The Japanese car factories are not owned and managed from Detroit, and neither are the Taiwanese PC factories owned and managed from San Jose.

The whole industry, headquarters included, has moved to those countries.

However until Shanghai and Kolkata flex their muscles London and New York have still a few decades of good times.

[cm]

Stormy: It's cm, not calmo.

Bruce Webb: Socializing is more than hanging out on an expense account. I agree with dryfly that trust is one aspect, but pehaps I would tend more in the direction of the comfort of "knowing the person". But perhaps that's more a function of long-term stability of business relations than the mode of communication. OTOH IMO the idea of telecommunication is to make it irrelevant who is on the other side. This works for service organizations, but not teams.

I have seen how people who used to work together "grow apart" when physically separated. To some extent that's because the physical move coincides with severing the business relation, but even if not, out of sight is out of mind. Social "bonding" needs continuous affirmation or it "cools off". From a business perspective, that you cannot walk over to somebody within seconds introduces a barrier, and many small-scale communications and "keeping in touch" will stop. A numerophilic business administrator may think it increases "efficiency", but quite the opposite.

Perhaps we are just used to particular modes of social interaction and will learn the "new ways" (or the next generation will). But I'm skeptical.

[cm]

dryfly: I'm hearing that O'Hare is a good start or end point for your trip, but hell for transit.

[Blissex]

«We are watching segregation by wealth on a global scale. The world of capitalism is taking on a feudal coloring.»

That's the dixie model.

«a world where wealth, the middle class, and poverty were more evenly mixed, more homogenous, communities that functioned well.»

That's the yankee model.

However from Tocqueville's great "Democracy in America" some comments on how the wealthy in the USA tended to dixie leanings even in the 1830s in New England:

«Just look at this opulent citizen. Wouldn't you say he is like a medieval jew who dreads that his wealth might be discovered? His clothes are simple and his demeanor is modest. Within the four walls of his house he adores luxury; he allows only a few chosen guests, whom he insolently calls his equals, to penetrate this sanctuary. No European aristocrat can show himself more exclusive in his pleasures, more jealous of the slightest advantages of his privileged position than he is. Yet here he emerges from home to make his way to work in a dusty den in the center of a busy town where everyone is free to accost him. On his way, the shoemaker may pass by and they stop; they both begin to chat. What can they say? These two citizens are concerned with affairs of state and will not part without shaking hands.

But beneath this conventional enthusiasm and amid this ingratiating ritual toward the dominant power, you can easily perceive in the wealthy a deep distaste for the democratic institutions of their country. The people are a power they both fear and despise.» [volume 1, part 2, chapter 2]

«While the worker, more and more, restricts his intelligence to the study of one single detail, the boss daily surveys an increasing field of operation and his mind expands as the former narrows. Soon the one will need only physical strength without intelligence; the other needs knowledge and almost genius for success. The one increasingly looks like the administrator of a vast empire, the other, a brute.

So the employer and the worker share nothing in common on this earth and the their differences grow daily. They exist as two links at each end of a long chain. Each holds a place made for him from which he does not move. The one is dependent upon the other.

The dependancy the one has upon the other is never-ending, narrow, and unavoidable; the one is born to obey as the other to give orders. What is this, if not aristocracy? [ ... ]
Thus as the mass of the nation turns to democracy, the particular class which runs industry becomes more aristocratic. Men resemble each other more in one context and appear increasingly different in another; inequality grows in the smaller social group as it reduces in society at large.

Thus it is that, when we trace things back to their source, a natural impulse appears to be prompting the emergence of an aristocracy from the very heart of democracy. But that aristocracy is not like any that preceded it.

In the first place, you will noticed that it is an exception, a monstrosity in the general fabric of society, since it applies only to industry and a few industrial professions.

The small aristocratic societies formed by certain industries inside the immense democratic whole of our day contains, as they did in the great aristocracies of ancient times, some men who are very wealthy and a multitude who are wretchedly poor. [ ... ]

The business aristocracy seldom lives among the industrial population it manager; it aims not to rule them, but to usa world where wealth, the middle class, and poverty were more evenly mixed, more homogenous, communities that functioned well.e them.

An aristocracy so constituted cannot have a great hold over its employees, and, even if succeeds in grabbing them for a moment, they escape soon enough. It does not know what it wants and cannot act.

The landed aristocracy of past centuries was obliged by law, or believed itself obliged by custom, to help its servants and to relieve their distress. However this present industrial aristocracy, having impoverished and brutalized the men it exploits, leaves public charity to feed them in times of crisis. This is a natural consequence of what has been said before. Between the worker and employer, there are many points of contacts but not real relationship.

Generally speaking, I think that the industrial aristocracy which we see rising before our eyes is one of the most harsh to appear on earth; but at the same time, it is one of the most restrained and least dangerous.

However, this is the direction in which the friends of democracy should constantly fix their anxious gaze; for if ever aristocracy and the permanent inequality of social conditions were to infiltrate the world once again, it is predictable that this is the door by which they would enter.» (volume 1, part 2, chapter 20)

There would be much to comment here, but I would only mention a vital detail without which some of the above is incomprehensible: in 1830 the economy was still 80% agrarian, mostly, in New England, smallholders.

[kharris]

I think Rusty and Paul need to be put together to get a true picture of what is going on in Manhattan. Lower and mid-level workers cannot afford to live a reasonable life in or near Manhattan. The demographic pattern for a very long time has been to move here from someplace else, then pick up once you've paid your dues. Not only is office space here quite dear, but workers demand quite high pay because real estate here is quite dear. Lots of workers would rather work elsewhere.

Krugman has given a decidedly un-lefty analysis, contrary to the rap he typically gets. Here is the analysis he left out. Having the top few people in a firm working near other top people from other firms, so they can spend time together, while working far from their own subordinates, means they value time with other people in their own class more than time with the people whose activities they direct. Making the deal, or eating the meal, is more important than running the firm and meeting the workers. Kinda what Blissex said. This is even more amusing, coming at just about the same time that Ben Stein is complaining that CEO pay is too high.

[Blissex]

«means they value time with other people in their own class more than time with the people whose activities they direct.»
Making the deal, or eating the meal, is more important than running the firm and meeting the workers.»

Well said, and I think that there is a deeper trend here, and not just a social/class one: that is how traders think, not how managers or enterpreneurs think.

It is also an outcome of deciding to base intra company relationships on a contractual basis, and management of the business with management of those contracts.

Several gurus have been mentioning the concept of the ''exploded'' rather than monolithic company, which is similar.

The replacement of organizational with contractual relationships turns managers into traders...

With a leap of imagination and memory I am reminded of a story by my uncle, a great guy who was a development economist, with particular attention to agricultural development.

The story was the big impression that California's ''telephone farmers'' had made on him when he was there for a while in the 1950s. The ''telephone farmers'' own no land and never even visit their farms, and transact all business by phone. First they phone landowners to lease land, then contractors to have it cleared, more contractors to have it seeded by plane, then other contractors to have it fertilized or dusted, then gangmasters to hire pickers, then phoned truckers to take the produce to market.

His point was that to a west european mind this sounds crazy (never mind to a farmer from Java or Japan), because of course it is very inefficient. But europeans are only really familiar with intensive cultivation, and in California both physical capital and labour are so plentiful and cheap that extensive cultivation is highly profitable in terms of returns on the financial capital involved.

The ''exploded'' company is similarly very inefficient, because contractual relationships are both difficult and rigid, but they can be profitable even if inefficient (I think Drucker introduced the distinction between efficiency and effectiveness in business thinking), if it can be run not intensively but extensively.

Side note: the fatal flaw of attempts like the UK PFI and ''target based'' management of government services is that the attempt to to have both ''telephone farming'' and ''intensive cultivation'', which are quite incompatible.

Similarly to ''telephone farmers'' I suspect that ''exploded'' business structures are viable only if the plenty of physical capital or labour is such that wasting a lot of either is not a big deal.

This seems to be the case, or at least it is thought to be the case, in IT or BP offshoring, where the perceived abundance of resources (as demonstrated by their low price) is such that even the dire inefficiencies involved (rigid contracts, long distances, poor practices, ...) are dismissed because one can oversize resource allocations (as in: 10 USA programmers are more expensive than 30 indian ones); but then I am skeptical as to the long term viability of this model, even if it makes a lot of money in bonuses in the short term.

However, the history of previous centripetal episodes in business history is that while at first the ''peripheral'' activities are offshored, eventually the the whole industry is. The headquarters of steel and shipbuilding companies are now in Japan and Korea too...

Even if to some extent some ''globalized'' companies, including say Mittal Steel, have moved their headquarters to say London, but I suspect that is not because those are headquarters, but they are the whole company, in the sense that Mittal may be regarded as an (Hanson style perhaps) investment fund in steel companies more than a steel company itself.

[Stormy]

Cm,

Profuse apologies.

Blissex,

Excellent point re Yankee vs Dixie. Tocqueville even now hits the mark.

However, I would not characterize it as

“…but at the same time, it is one of the most restrained and least dangerous.”

Restrained it is not. It is rapacious. Right now it has a great deal on which to gorge. We have only look at the wretched conditions of those in developing countries, conditions at times approximating the Dixie model, albeit without the religious underpinnings. Instead, it cloaks itself in an economic moral garb: “We are giving them work, are we not? Have patience: We will raise all boats.” Meanwhile, at the least noise of unions forming or wage pressures, they hustle to their barricades.

That this form of capitalism should dominate at this time in history may well be catastrophic. Time is short. A few more decades and we will be hip deep in global warming, environmental destruction, and an energy crisis Meanwhile, we will have squandered valuable time and even more valuable resources. They care not a whit for anything but the gold before their noses. Ownership, privatization, is everything. Money is the measure of all things.

Self-centered aristocracies have always been with us. Furthermore, each class prefers its own company, and its own tribal rituals. In that respect, most of us are no different than they—with the exception of their power and wealth.

Were we living in an earlier time, I would not have worried. I would have gone about my life quietly. But we are fast approaching a world that is truly scary.

[anne]

Interesting comments; by the way New York has become about the safest large city in the country. Safer than Boston.

[Blissex]

«the history of previous centripetal episodes»

That should have been ''centrifugal''...

[cm]

Blissex: Doing something (be it software R&D, military operations, phone support, etc.) "on the cheap" often works because it is done in the context of a working organization with a working product and working processes, and the "cheap" part tends to be incremental initially, so that deficits can be covered up from existing resources.

Over time, with deteriorating resources, attrition of personnel and "original" leadership, and underinvestment in upkeep, things will gradually fall apart to a point where repair can be done only by rebuilding the organization.

Apparently we are not yet quite there in the aggregate.

[dryfly]

dryfly: I'm hearing that O'Hare is a good start or end point for your trip, but hell for transit.

Its not too bad - I've done it a few times & never had a HUGE issue. At least you have options on what & where to eat.

Midway on the other hand is a breeze to make a transfer in and out of but you might starve to death unless you're wiling to take a chance with food poisoning.

People sleeping in the isles too. Very 'international feel'... well third worldish international.

[dryfly]

However until Shanghai and Kolkata flex their muscles London and New York have still a few decades of good times.

If Peak Oil is for real then I'd predict all major international cities will start to 'look & feel' the same. Unfortunately NYC is more likely to look like Shanghai today (small wealthy central core in a sea of toiling poverty) than Shanghai look like our '1950s & 1960s ideal' of what NYC supposedly was - mass commuter middle class.

I think there will be 'convergence' and NYC will hold its own as a power. It just won't necessarily be a nice place to live... if you are a toiler.

[Blissex]

«Doing something (be it software R&D, military operations, phone support, etc.) "on the cheap" often works because it is done in the contåext of a working organization with a working product and working processes,»

Sure, this is almost the same process as running down a block of flats by renting them out ever cheaper to ever worse tenants, to avoid spending money on maintenance.

But in the short term it gushes cash. It is what tech companies do when they have a large installing base and middle aged management, they milk the base as hard as they can, and damn the consequences for their successors.

«things will gradually fall apart to a point where repair can be done only by rebuilding the organization.»
«Apparently we are not yet quite there in the aggregate.»

No, but there is a twist that is quite important: that offshoring is not quite the same as running down a capital asset, because it creates a new one, an offshore one, at the same time that it runs down an onshore one.

When PC manufacture was transferred piecemeal to Taiwan etc., the first outputs were cheap and low quality, but then they improved a fair bit. Same with China and India now.

The difference with a block of flats is that a block of flats is not animate or intelligent, and putting off maintenance just runs it down; but workers offshore are not stupid (even if you call them ''little yellow monkeys'' as Detroit used to) and learn even if they are paid little.

But this is the big cycle of industries, and it works well except for the minorities in the dislocated sectors.

The problem with the current India and China story is that as these are sophisticated and pretty large countries the dislocated minorities in the USA and the other OECD countries are going to be rather bigger and rather harder hit than usual.

Emerging countries usually are uniformly backward, and then they have a low cost base and low productivity which improves slowly, so they tend to get into low value added labour intensive sectors like toys and textiles and shoes, and nobody much complains about offshoring to Indonesia.

The big issue is that India and China have a low cost base because most of them are very backward, but good productivity improving fast because they have a fairly large developed sector which can launch satellites and develop nuclear technology.

If Silicon Valley were not surrounded by expensive California but by destitute West Virginia it would be even more formidable.

I still wonder why American companies are not investing in their 3rd world style backwaters; one possibility is that they want to teach USA workers a big lesson.

Curious notion of the day: about 40 years ago USA tech industries started to offshore to the UK, because tech salaries there were much lower (1/2 to 1/3) than in the USA (and still ''nearshore'' to Canada, for much of the same reason). But offshoring to the UK and Canada has had a small effect on the job market in the USA because they are much smaller.

Other amusing detail: in the past 20 years the UK tech industry got offshored to the USA, because capital was so much cheaper there (and much of the tech industry is more capital intensive than labour intensive despite it being mostly a service industry).

[t11]

It would be nice for Krugman to give some details of the companies moving back to New York - are they all financial services type of firms or are they industrials?

Does someone have any details?

Thanks

[Mark Thoma]

t11 - I added a link to a little more from Krugman from a subsequent post from his Money Talks column. Hope it helps some...

[cm]

Blissex: "I still wonder why American companies are not investing in their 3rd world style backwaters; one possibility is that they want to teach USA workers a big lesson."

I don't think so. There is surely arrogance and the occasional (?) righteous jerk, but I believe it's largely accounting. The "problem" is that people in the backwaters enjoy certain rights and customs that are largely non-excludable within the US (there not being special development zones, regional citizenship, and internal moving restrictions), and have grown up in an environment that gives them "attitudes". Given subsidized (by exchange rate manipulation and tax breaks e.g. for repatriation) external "investment opportunities", they cannot be employed at "market clearing" prices, or that's what it looks like when not calculating beyond "butts in chairs".

As for "building assets", sure, but at the end of the day, the offshore "assets" are not going to stay under US management. At best US holding companies will have ownership stakes. But that needs a local economic base with a comparative advantage. You cannot be in the exclusive business of owning the world outside your country, remotely.

[Blissex]

«As for "building assets", sure, but at the end of the day, the offshore "assets" are not going to stay under US management.»

Ah of course! Running down onshore assets and creating new offshore assets has indeed the problem that those offshore assets are not like buildings, they are in large part people who have independent minds and vote for their own politicians; in the short term they just obey and suck it up and behave like appliances, but they aren't.

What tech offshoring is doing to India and China is to give them for free a lot of training in how to create products and services that sell well in the USA. The japanese 30 years ago learnt that themselves by doing hard work.

While India and China are being paid (even if not very much) by USA corporates to learn the trades that they will use to compete against them in coming decades.

But in the mean time those in the USA who benefit from labour and capital arbitrage will have collected enough profits to secure a very enjoyable lifestyle for themselves and their descendants for generations.

«You cannot be in the exclusive business of owning the world outside your country, remotely.»

That is sort of contradicted by history, which shows that it is a sustainable model.

Most obviously the British elites lived off foreign investments for a long time.

Their demise was the need to cash in those holdings at the start of WWII, as they needed the money pretty badly (to prevent another country's elites to take their place).

But yes, eventually foreign investors always lose out to local interests, simply because in the end local jurisdiction and politics are the determining advantages, but as long as a country needs foreign investment, they don't dare to push those advantages hard.

Note that I said "elites"; foreign investment is not something a whole country can live off that well; but then there are going to be lots of opportunities as personal chefs, maids, valets, gardeners for the rest... :-)

[cm]

Blissex: Here you go. OTOH, Ann Arbor is not exactly a backwater, but then, from Google's perspective ...
I have no idea what "ad handling" means. Doesn't sound like R&D positions, but who knows.

AP
Sources: Google to Hire 1,000 in Mich.
Tuesday July 11, 10:27 am ET
By David N. Goodman, Associated Press Writer
Sources: Google Plans to Open a Pay-Per-Click Facility in Michigan, Employ 1,000

DETROIT (AP) -- Google Inc. plans to open a new facility in the Ann Arbor, Mich., area that will employ 1,000 people within five years to handle advertising generated by the Internet search engine, people familiar with the deal said Tuesday.

[...]

The state offered Google $38 million in tax breaks over 20 years, should its employment reach 2,000, the people said. [...]

[Blissex]

«Blissex: Here you go. OTOH, Ann Arbor is not exactly a backwater, but then, from Google's perspective ...»

Well, something moves even in the Rustbelt, and UMich-AnnArbor has one of the best CS research departments in the country, and that matters to credentials-obsessed Google, and as the article notes there is a local connection:

«Google co-founder Larry Page is a native of East Lansing and graduated from the University of Michigan.»

But it is so uncool: :-)

«He defended the decision to build in the heart of the Rust Belt.»

Even if the defense is that it is actually cool because:

«"We don't get caught up in the conventional wisdom,»

But then the jobs are probably uncool too, mostly:

«I have no idea what "ad handling" means. Doesn't sound like R&D positions, but who knows.»

By the numbers and modest tax break ($2k-$3k per year per job), it sounds like a call center for billing and accounting, back-office functions, to be staffed by UMich students and locals.

http://www.bloggingstocks.com/2006/07/11/while-aol-lays-off-call-center-workers-google-is-expanding/
«Google will be opening a customer support center in Ann Arbor»

Because of the university there will be some research places too... Google is sprinkling little research labs wherever it finds clusters of potential employees (e.g. Redmond, WA :->).

[Blissex]

«By the numbers and modest tax break ($2k-$3k per year per job),»

It is $38,000k over 20 years for an average of a bit less than 1,000 jobs over 20 years, let's say 19,000 job/years, or around $2k tax break per job.

Uhm actually it is even worse than that, as it is said «The state offered Google $38 million in tax breaks over 20 years, should its employment reach 2,000.», which brings down the subsidy to around $1k/job.

«it sounds like a call center»

In other words the sort of $28k per year (if lucky) job that 'save_the_rustbelt' mentioned in an earlier thread:

«Ohio and Michigan have been losing manufacturing jobs since 1995, and the best numbers I can find suggests we have been shedding jobs worth about $47,000 a year and creating jobs worth about $28,000 a year.»

Do you think that Michigan would be paying only $2-3k/y for ''union'' jobs around $47k or for ''development'' jobs in in the $60k-80k range?

Well, somebody thinks so:

http://www.clickondetroit.com/news/9496784/detail.html
«The company announced it will be posting thousands of new jobs starting at an average pay of about $47,000 a year, Local 4 reported.»

However this sounds crazy imagination, as the PR says ''up to a thousand''...

Let's see, this page has a total benefit to the state:

http://www.easybourse.com/Website/dynamic/News.php?NewsID=18776&lang=fra&NewsRubrique=2
«Michigan estimates about $126.9 million in net positive revenue for the state will be generated by 2026, once tax breaks are factored in.»

Uhm, that means total revenue over 20 years of $164,000k, for 20 years for 2,000 jobs, so around $4k/y of which $1k is cashback to Google (very gross approximations).

$4k year average tax farming per employee is not like compatible with a $47k average salary; between sales tax and state tax and business and property taxes that would imply a total average take of around 8%. Uhm, the state advertises itself as low tax:

http://WWW.Michigan.org/medc/miadvantage/taxcuts/?m=11;2

but not that low. sounds more compatible with $28k than $47k.

Let's see there is a nice salary site:

http://SWZ.Salary.com/salarywizard/layoutscripts/swzl_compresult.asp?narrowdesc=&jobcode=FA06000073&statecode=MI&jobaltername=Billing+Clerk&state=Michigan&jobtitle=Billing+Clerk&narrowcode=OF01&metrocode=209&geo=Ann+Arbor%2C+MI&narrowdesc=&pagenumber=1&zipcode=&searchpage=&searchtype=&isswzupdateoptin=&isjswupdateoptin=&isnewsoptin=&choosesignup=0
«The median expected salary for a typical Billing Clerk in Ann Arbor, MI is $33,790.»

http://SWZ.Salary.com/salarywizard/layoutscripts/swzl_compresult.asp?narrowdesc=&jobcode=OF13000022&statecode=MI&jobaltername=Data+Entry+Clerk+I&state=Michigan&jobtitle=Data+Entry+Clerk+I&narrowcode=OF01&metrocode=209&geo=Ann+Arbor%2C+MI&narrowdesc=&pagenumber=1&zipcode=&searchpage=&searchtype=&isswzupdateoptin=&isjswupdateoptin=&isnewsoptin=&choosesignup=0
«The median expected salary for a typical Data Entry Clerk I in Ann Arbor, MI is $26,686.»

Yes, somewhere between these two.

[cm]

Blissex: I suspected so (re the job descriptions). Well, I guess that's as good as it gets. And it beats no jobs any day, for those that will get them.

[Blissex]

«Well, I guess that's as good as it gets. And it beats no jobs any day,»

Sure, most other companies would have announced offshoring those jobs and gained a stock price benefit. But fortunately Page is a local boy, and Google stock does not move on offshoring, so quite a few people in Ann Arbor will be happier. Ann Arbor has something like 100,000 population and 1,000 new primary jobs is a big thing.

Note however how special it is though: for a company like Google to ''offshore'' to the Rustbelt it takes a special connection, a stock price that is rising independently, and it still is $30/y jobs.

Perhaps Ann Arbor could reinvent itself as a location for the USA subsidiaries of indian and chinese companies. After all it is pretty well placed geographically. Then high paying marketing and supervisor jobs would follow.