Even health care is being effected by labor and taxation arbitrage:

The Indian government on Wednesday began an aggressive marketing campaign to promote itself as a medical tourism destination, hopeful that the expanding industry could be worth $2 billion by 2012.

Eager to attract some of the 50 million patients from the United States who are not covered by health insurance and millions more in Western Europe who face long waiting lists for treatment, India's Health Ministry joined with its Tourism Ministry to produce an international advertising campaign explaining the possibilities of Indian health care....

...But the main selling point was the low price offered by Indian hospitals. Promotional material claimed that while bone marrow surgery costs $250,000 in the United States, it is available for around $26,000 in India.

A few things leap out. First of all: health care is overpriced in the US. And not just by a little. All of that difference is not due to labor costs, or to higher taxation, or the higher cost of land. A fair bit of it is downright inefficiency and greed.

Second: for most of the Bush years a lot of jobs have been created in health care and education because they are places where you can't offshore and where suppliers have pricing power. (If you need health care, you pretty much must have it. Education is likewise a necessity if you are to have any hope for the future.) Technology is changing this -- I fully expect to see teaching by telepresence a lot more as time goes by, at least at the college level.

Third: the number of things that can't be off-shored and outsourced is a lot lower than people think. Most professional services can easily enough be done by Indians -- they aren't stupid. The main barriers are regulatory, but there are ways around many of these barriers.

Ironically, as oil becomes scarce and as transportation costs begin to rise again, the type of labor arbitrage which will likely wane is manufacturing arbitrage. Depending on how expensive transport becomes, it is quite likely that we will see the end of the big box stores like Walmart with their supply lines stretching around the world. Instead microlocal production is quite likely to become the norm, especially as functional fabricators become available.

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However "intellectual" work, which can be sent to where it's needed as bits and bytes, will experience the hollowing out that manufacturing once did.

Or that's the trendline. Politics trumps economics until crises occur -- and a crisis will occur when the US finally has to pay for all the years of good living on the credit card. At that point I expect the US to move, strongly, to protectionism.

But until the US moves to protectionism, and even once it does, expect labor arbitrage to continue. The US cost structure is simply too expensive (deliberately so, in the case of overhead like overpriced real estate) and there is likely to be a great leveling. How painful that leveling will be, and whether the US can recover from it and grow a great society again, will be one of the great challenges of the next twenty to thirty years.

Technology does not change everything. But it does change some things. And the, shall we call it, coefficients of friction for moving goods, people and information are very important variables. These variables define what is possible in term of trade, whether in services or goods. With very low coefficients, combined with lax currency regulation (or universal currencies like the Euro) and sharing of production information (i.e., not keeping techniques and technology secret) labor arbitrage becomes very much worth doing for rather small differences because arbitrage is the "stupid man's way of making money". For arbitrage all you're looking for is a place where something (goods, labor, services) costs less than you can sell it for somewhere else. Once you see that, you keep doing it till there isn't enough of a gap to make it worth your while.

When bone marrow surgery costs $26,000 in India, and $250,000 in the US -- there's a lot of arbitrage (and profit) to be made.