Do We Like Outsourcing? Maybe We Should!


London School of Economics Study Suggests America Has Done Well By Outsourcing.

While we hate being outsourced, it is a natural and necessary reality to building a strong and robust economy.

Recently, CNN featured a special entitled “Putting American’s to Work” about outsourcing. It highlighted some realities that we may not usually realize when we speak of outsourcing. In general, the word brings up very negative images – Chinese factory workers taking our jobs and adding another person to our unemployment lines.

Both President Obama and hopeful Mitt Romney have said they are against outsourcing and have criticized the other for taking part:

Here are two excerpts from a Barak Obama campaign ad (official, click here to watch):

“Mitt Romneys companies were pioneers in outsourcing US jobs to low wage countries, he supports tax breaks for countries who ship jobs overseas.

President Obama believes in insourcing, he fought to save the US auto industry and he favors tax cuts for companies who bring jobs home.”

Here is Romney on the campaign trail:

“If there’s an outsourcer in chief, it’s the president of the United States, not the guy who’s running to replace him,”

No doubt it is a heated topic that gets people really upset. In a time where unemployment is high and people are out of work, outsourcing jobs is seen as a really horrible thing. However, the fact of the matter is that both candidates use outsourcing to mask a real lack of ideas and brass to turn the economy around.

But is outsourcing so horrible?

Objectively, it really depends on the types of jobs being outsourced and why they are outsourced.

Americans have the misconception that outsourcing is a zero-sum game, meaning that there are clear winners and clear losers. The reality is quite different.

A recent report by the Center for Economic Performance with the London School of Economics suggests that there really are no losers, just winners. Examining economic performance across 58 different industries they come to some interesting conclusions.

First, immigrants do not compete with native workers for manufacturing positions – each are usually specialized in different tasks with different abilities (natives have more skill, training etc.). This applies outside of the US as well, we produce things that unskilled laborers cannot.

Second, offshoring has no effect on total employment in the United States.

Third, Immigration improves total employment in the United States.

The reason? They cite the “productivity effect,” where because of additional labor resources companies are more efficient, save money, and can hire additional workers.

The argument is that if a company can reduce its costs of production by outsourcing and hiring cheaper labor it is going to be more productive, and with that additional growth will need to expand its workforce. Outsourcing probably does save some companies from going under and allows them to maintain at least some of its workforce here.

The idea isn’t that crazy. The first thing you learn about in economics is that specialization is good. When we specialize we learn a task, get good at it and can produce a lot more widgets. We can then turn around and sell those widgets to others for their widgets.

The father of modern economics, Adam Smith coined the widespread belief in specialization. In 1776 he wrote “The Wealth of Nations,” and had this to say:

It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy…. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.

The truths still exist today, we should produce what we are best at. It America were to decide tomorrow we would all start producing bananas, you would see our economy at a standstill. Why? Because we can’t produce bananas like they can in Asia or South America. To a lesser extent labor is like the weather, some places are better suited to make widgets with a laser, and some are suited to make spaceships.

Trade is a good thing, and because of specialization we have the opportunity to do lots of it. But because of outsourcing we can also continue reaping profits from outdated or unskilled industries that are better suited for other countries. I would rather have Ford build trucks in Mexico than have no Ford at all.

The basic principle that a person will always look for the best value on the market is true, we all do it to an extent. When we are talking about selling widgets, the market is global and we must be competitive or we won’t sell any widgets – no widgets = no jobs.

So the result from outsourcing is that consumers get cheap goods and services, we still have a Ford, and we specialize in tasks we are better at doing. Our services industry is huge, look at silicon valley and the tech sector, this are what  America is good at. What we say about China taking toy manufacturers jobs, other countries say America takes our Google’s.

Another benefit comes from the fact that many countries such as China are becoming larger markets. As their incomes grow they want to start buying things. Had General Motors not had a presence in China, they wouldn’t have the been able to produce its best-selling car. They would have chosen a cheaper, more readily available alternative.

And lastly, we should look at a parallel. Think how many postal jobs we have lost since the invention of e-mail and the computer. Does that mean that we should get rid of the computer? No, it has shaped our new more robust economy, lead to innovation and progress. Just because outsourcing loses us jobs in one company or industry, doesn’t imply the concept is bad, more likely it is just progress.

Now, if we are becoming uncompetitive and outsourcing jobs for the sole reason that our government is taxing at unfair rates – that is what we should consider a bad thing. This is a balancing act, the government has to have some tax revenues, but can’t squeeze out the market. The real discussion in the United States should be that balance, and how to reduce trade barriers around the globe (even here in the US).

What do you think?

2 thoughts on “Do We Like Outsourcing? Maybe We Should!

  1. Pingback: Do We Like Outsourcing? Maybe We Should! | Economic Features |

  2. Reply Robin Jan 29,2013 %I:%M %p

    Interesting argument. It’s true that our service industry is growing in the U.S., but they are generally lower wage earning jobs than manufacturing, for example, which much is outsourced and traditionally pays higher wages. As for the computer and innovation, it’s that innovation that will offset lost jobs by creating new ones. Thanks for another good post!

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