Q&A: Michael Cox, Chief Economist, Federal Reserve Bank of Dallas

Phil Searle, Advisory Board member of Shared Services News, questions Michael Cox, Chief Economist, Federal Reserve Bank of Dallas, about the current economic difficulties, outsourcing and his fears over protectionist policies.

(Michael Cox will be speaking at Shared Services Week 2009 in Orlando, Florida, March 22-26. For more information see the Shared Services Week website.)

Phil Searle: What is your view of the current state of the global economy and the US economy in particular?

Michael Cox: The economy is, of course, weakening and will weaken further before things start to improve again. The current recession could get as bad as the recession of the early 1980s. However, we should not fear recession too much. Recessions are a natural part of the economic cycle and are oftentimes helpful in correcting structural imbalances (such as the recent problems in the financial system) and in "weeding the garden."

Capitalism is a process of continuous change — out with the old and in with the new — and business failure is a natural part of that process. But microeconomic failure is not macroeconomic failure. The failure of an individual company, or even a severe contraction in a whole sector such as is now happening in the financial sector, is the overall economy’s way of moving resources into the hands of those who manage them better. It’s the way the macroeconomy succeeds. It’s too early to tell, but this recession may turn out to be shallower and shorter than some are predicting. Today’s economy has the potential to recover quickly. Based on the lessons of history, policymakers act more quickly and correctly today than yesterday. Certainly markets do too.

It should also not be forgotten in all this that the US has a shining services sector, with exports of services growing rapidly. This is a relatively new phenomenon. Technology and globalization have allowed services to be traded around the world and this has had a positive impact both on the U.S and the global economy.

There is, today, a great opportunity for US businesses to expand their sales of services overseas. Indeed, many have already done so. Last year, for example, AFLAC derived 70.5% of its revenues from overseas sales, eBay 51.2%, YUM Brands 50.1%, Google 47.6%, and so on across a wide variety of service companies. The significant growth and development of countries such as China and India have increased the possibilities for services sales as people in these countries demand what consumers in countries like the US already have today.

PS: What role — both good and bad — has globalization played in where the economy is today, and where do you see the globalization trend going from here?

MC: There’s no doubt that globalization, on net, is a good thing — especially for the US. Think about it like this. The US has been developing a service economy for the past 100 years but we’ve largely been unable to sell our services to the rest of the world owing to technological barriers. Now, however, those barriers are coming down at the same time that 2.5 billion people in China and India have joined the capitalist club, earning more to spend. How fortunate is that for us?!

Among the examples of services we are increasingly selling them are entertainment, education, medicine, architecture, consulting, engineering, research, insurance and finance. What’s more, globalization is allowing American companies to redesign their businesses to produce in whole new, better and cheaper ways so as to increase profitability and stay globally competitive. We lose some existing jobs along the way but wind up replacing them with new and better ones, higher up the value-added ladder.

PS: Where do you see outsourcing? What role has it played, and where do you think we go from here?

MC: Don’t forget that the US is itself an outsource provider to many other countries across the globe in many of the services I have just mentioned, especially in what might be termed "expert" services. We should not be afraid of outsourcing as it has generated prosperity for all in the form of lower costs plus, ultimately, more and better jobs with higher pay. Consider what I call the "hierarchy of human talents" —from muscle power upward to motor skills, to formulaic intelligence, to analytical reasoning up to imagination and creativity and finally to emotional intelligence and people skills.

Globalization accelerates our movement up this hierarchy and we should celebrate, not denigrate, the recycling of our labor onward and upward to higher-value use. With globalization, with advancements in technology, and with the growth of offshoring and outsourcing, other countries have been able to pluck out of that hierarchy some of the activities previously carried out within the US (e.g. manufacturing, some IT, and now more activities in the BPO space with certain finance, HR, and procurement services) as we have moved up this hierarchy. Even within specific areas such as information technology, certain activities such as HTML programming have been offshored to countries like India while the US has been able to focus on high-value-creating activities such as system architecture and design.

PS: Do you see a danger of protectionism entering national agendas during a time of recession at home and abroad?

MC: Yes, there is a real danger of this happening and I would strongly caution against it. We made a big mistake back in the 1930s when trade barriers came up and protectionism was widespread — all in the name of preserving American jobs. Of course, it didn’t work then and it wouldn’t today, either. Protection destroys many more jobs than it preserves — in part, because if we protect our industries foreigners will retaliate and protect theirs as well; in part, because it destroys the efficiency that comes with being able to set up your company’s production function in the most efficient and optimal global way; but mostly, because protection makes us weaker.

Competition is what makes us stronger, not protection. Protection weakens. How many children, for example, do you know who’ve been made stronger by being protected from life’s challenges and hardships by their doting parents? None, right? Neither do I. By weakening our industries, US protectionism in the 1930s deepened and prolonged the depression, and so it would today. Only through honing our competitive edge in the crucible of global production and trade can we hope to emerge from recession stronger and quicker — if we allow it. And don’t forget, demand from abroad has actually been holding up our economy recently. Exports have been growing faster than imports and certainly faster than our own shrinking domestic demand for housing, durable goods and the like. We already owe a lot to globalization for moderating the economic downturn.

PS: How well understood is "shared services" amongst businesses and economists?

MC: It is not well understood at all. The aims and methods that shared services use to deliver effective and efficient support services to businesses may be well understood but the term "shared services" is not. Say "shared services" and my mind conjures up no instantly clear image of anything. I just go "Huh?" and then you have to take five minutes to explain what it means to me. So, I would suggest that the term itself might actually be rather opaque in terms of expanding folks’ understanding of what it can achieve and how it can help companies through recession and beyond, to the good times.

Economists understand the concepts of specialization, labor availability and pricing, the gains in leveraging skills from different locations, the opportunities that come with technology, and the advantages of combining activities to achieve scale benefits. Within the broad context of efficient production and delivery of support services to business, this is what shared services does, right? As a "brand" for conveying this, shared services is not well recognized in the wider business community, at least to me, by that name. The challenge and opportunity is to explain and link the two with an instantly recognizable moniker so that businesses can leverage the aims, concepts and methodologies of shared services to deliver value — do more with less — which is ultimately what this is all about.

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About the Interviewee

Michael Cox is Chief Economist for the Federal Reserve Bank of Dallas, advising the Bank's president on monetary policy. He has been at the Bank for 24 years and currently coauthors the organization's annual reports on the global economy and living standards in America. His research has frequently been designated as required reading for Congress.

(Michael Cox will be speaking at Shared Services Week 2009 in Orlando, Florida, March 22-26. For more information see the Shared Services Week website.)

About the Author

Phil Searle is Founder and Managing Director of Chazey Partners Limited, providing business advisory services in finance, shared services, BPO and technology. Prior to his current work, Phil was Group Vice President and CFO of Cendant TDS’s International Markets Division, where he was responsible for finance functions across four continents, including accounting and control, decision support, financial planning and analysis, and financial shared services. Before that, Searle was VP Finance and Corporate Controller at 3Com Corporation, where he headed the Worldwide Shared Accounting Services team and led far-reaching organizational, technology, service delivery and business process improvement initiatives. Searle is an Advisory Board member of Shared Services News (a publication of the Shared Services & Outsourcing Network).