Sunday, July 22, 2012

"Outsourcing" Is Not a Dirty Word

As if it were a surprise, it's another election season with negative campaigning. One of Obama's recent advertisements goes after Romney for outsourcing jobs. Romney replies by denying the allegations. Even Senator Harry Reid (D-NV) was bent out of shape over the fact that the U.S. Olympic team uniforms were made in China, as was John Boehner (R-OH). Aside from it being election year, what's the deal with being against outsourcing?

One of the primary arguments for protectionism is the argument of keeping jobs here [in America], also known as the "Buy American" argument. After great strides in technology, economic growth, and globalization, one would think that much of our consumption is done with products from foreign countries. This sentiment is prevalent for those who are against that which is "Made in China." The Federal Reserve Bank of San Francisco put out a report about a year ago addressing this issue. Two results peaked my interest. The first is that only 2.7% of our goods come from China. The second is that 88.5% of our consumption is of goods and services "Made in the USA."

Another argument for protectionism is national security. The idea is that if we become too dependent on other countries for goods, we compromise our national security. It's certainly an odd argument for the most militarily powerful nation in the world to make. Even if it weren't, it still doesn't hold water. If we look at something like gasoline, the commodity function in a global market. Energy independence is a fa├žade because supply disruptions will affect gas prices regardless. The argument ignores the democratic peace theory. The final point, which is an offshoot of the second, if there were a high level of interdependence, as opposed to the misperceived "dependency,"nations would think twice before going to war since not only does war cost money, but losing the comparative advantages with liberalized trade go out the window, as well, which is a loss for both sides.

There is also a nostalgia for the manufacturing sector in this country. Seeing the decline of the manufacturing sector since outsourcing began in the 1980's makes some, particularly those on the Left, agitated. In addition to increased worker productivity, the reason why the manufacturing sector is declining is because the service sector is on the increase (at 79.6% as of 2011) . This is actually a good thing because it improves the quality of life here, as well as provide us with better job opportunities that don't involve back-breaking labor from either the agricultural or the manufacturing sectors.

If the gripe is about how we are exporting jobs during a recession, then outsourcing is nothing more than a convenient scapegoat because it actually doesn't have the negative effect on aggregate jobs that many think it does. According to the London School of Economics and the U.S. International Trade Commission, it really doesn't have a net effect on employment. And never mind that the United States still leads the world in manufacturing (producing 21% of the world's manufactured products) or that foreign investment in the United States exceeds U.S. investment abroad by $4 trillion.

The reason why outsourcing happens in the first place goes back to comparative advantage, a concept I remember from Economics 101 back in my undergraduate studies, and something that the Paul Krugman of 1997 was able to understand. If Country X can produce Product A for a smaller opportunity cost than Country Y, it is better for Country X to produce Product A. That way, Country Y can focus on Product B because its opportunity cost is lower than if Country X produced it. Resources are better allocated, and has the potential to create more jobs on both ends in the long-run. Throwing on tariffs or enacting other protectionist laws is only going to make things worse (e.g., Smoot-Hawley tariff, sugar tariffs). The erroneous assumption many make is that there is a fixed pie, and that someone's loss is someone else's gain, when in fact it's a positive-sum game where everyone benefits, even for those working in "sweatshops." It also means more final output for less costs. As Cato Institute scholar Daniel Ikenson points out,

Trade is not a competition between "our producers" and their producers." In fact, U.S.-based firms benefit from collaborating with foreign firms by carving up the production process into distinct functions and processes that suit each location's efficiencies and strengths. Just as trade enables U.S. consumer to benefit from lower-cost final goods, globalization enables U.S. producers to benefit from access to lower-cost resources put into the manufacturing system. That enables them to compete more effectively at home and abroad.

Focusing on outsourcing also diverts our attention from domestic issues that can help with encouraging labor growth in this country, whether it's dealing with our taxation system, burdensome regulations, bringing down Obamacare because of its unintended consequences, addressing government spending, or other much-needed structural reforms.

Finally, I'm also trying to understand this animosity towards outsourcing, and I'd like to take it to its logical conclusion. We don't just outsource to other countries. If we're worried about outsourcing to another country, why aren't we equally worried about outsourcing to another state? If you live in Virginia, for instance, you shouldn't be outsourcing your jobs or paying for goods and services from Michigan. So we should get rid of any interstate commerce since it's a form of outsourcing. And to take it a step further, those in Arlington, VA, shouldn't do any outsourcing to Fairfax, VA. This reductio ad absurdum argument points out a relevant truth: we outsource all the time, whether we decide to move or decide go to a certain mechanic, restaurant, or bookstore. On an individual level, we are trying to figure out whether it's better for us to provide the good or service ourselves or acquire it elsewhere. Businesses do the same thing. Outsourcing is the result of a cost-benefit analysis which benefits both the producer and the consumer. Rather than vilify outsourcing, we should embrace it as a vital aspect of international trade that enriches our lives.

3-6-2016 Addendum: The Washington Post ran a piece on outsourcing, and concluded that the net effect on employment was negligible.


  1. COLORADO (Denever, aurora mall) shootings where just start(many more to happen) , I could see in the heart of frustrated COLORADO shooter(Maters degree holder with no job, your child can also be victim prey of jobless america) , with no job , no future , no hope , nothing to loose made him dare to fire ,(to become lone wolf terrorist ).
    Where r the jobs?, which would have made him busy I n daily chores , no there aren't any jobs as they all shifted to overseas Leaving our youth pathless , without future without hope.

    IF "BRING JOBS HOME ACT " is not passed immediately.(more incidents like denver shootings will take place , more bloodshed its grim future for american youths ).

    DON'T worry not only manufacturing jobs but also jobs like in service sector jobs , management level jobs, financial sector , banking , insurance , legal, pharma , Programming , software , Information Technology (IT) , Media , Animation l etc etc thousand of them r going to be outsourced overseas , (watch that YouTube link too).

    The dip in unemployment rate is temporarily and its cooked for election 2012 ,
    after election it will be risen considerably in tow digits (and don t forget about the quality of jobs).

    This current Call Centre bill And American jobs Act will be also not passed , same as previous outsourcing bill which was dead.Its an Election gimmick , with nexus of corporate s (wall street ) and government to fool people , and they r damn sure that this will too not pass very damn sure , infact Morgan Stanley and jp morgan chase (these both got large amount Bailout from fed (tax money)) is going to cut more jobs in US around most of them and they will will transferred to India , they want to transfer about 92 % more jobs outside , A mortgage company OCWEN FINANCIAL which has 90 % of jobs outsourced overseas ( India and some to Uruguay ) r buying more mortgage companies like LITTON from Goldman sachs and HomeEq servicing from Braclays and together with Altisource etc and transfer there jobs to overseas too ( mostly all of them ) same with IBM and other companies. so most of american companies will be employing overseas people in future ( might be 95 % of workforce). jobs of authors , contents writers , editors , copy writers etc etc will also be going to be outsourced so u too get ready to find other job in Mac Donald or wall-mart And all your jobs r here , Below in this links.;.

    Now JP Morgan chase will cut more jobs and outsource (transfer most of the jobs to overseas), most of there work force , so ready to get fired.

    1. Dear Anonymous,

      Based on what I read, your comments were a response to the title of my blog entry, not the blog entry itself. Although these comments do not directly address my analysis, I will nevertheless respond in hopes that the next round of discussions is more fruitful, as well as the fact they do have some bearing on the discussion at hand.

      First, you are making the argument that the Batman shooting was due the fact that he was unemployed, ergo he shot up the movie theater. This a cum hoc ergo propter hoc logical fallacy. Why? Because James Holmes is insane, plain and simple. The guy thought he was the Joker, for crying out loud! If you are going to make the argument that high levels of unemployment cause mass shootings, then places like Spain, Italy, and Greece, all of which have double-digit unemployment, should have shooting sprees as a regular occurrence. However, they don't. And as I already pointed out, outsourcing has a zero net effect on employment, so we're not going to see more shootings just because the unemployment rate is where it is (i.e., the correlation between outsourcing and mass shootings is nil).

      Also, you think this unemployment rate is temporary? This "recovery" has been highly stagnant for quite some time and can hardly be considered temporary.

      The Bring Jobs Home Act (S.3364) is a sign that taxation is highly complex in this country and is in dire need of reform. Also, as I bring up, there's a reason why companies are going overseas, as your Youtube video points out: hiring labor here is expensive and comes with the headache of many regulations and uncertainties in the labor market. The incentive to hire in this countries wanes as the government intervenes with more laws it thinks will help, but only actually hurt the typical American worker. And as for the Call Center Bill (S.3402), the government shouldn't be providing these grants in the first place not because we need to punish outsourcers, but because the government shouldn't be playing favorites. It's how TARP and the whole bailout business started, and we're worse off because of it.

      I'm not denying outsourcing is taking place. Quite the opposite! But as I pointed out, even after 30 years of outsourcing, nearly 90% of the goods and services we consume are still "Made in America." I also illustrate in multiple paragraphs why outsourcing is actually good for us. I highly recommend the Krugman article and the Cato Institute paper on the last hyperlink of the blog entry. Finally, unless you are a farmer and completely supply your goods and services while having zero interaction with the economy, you have also outsourced throughout your life, which is something I point out in the last paragraph of the blog entry.

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