INDUSTRY ANALYSIS

Outsourcing Is Good for America

This week, the General Accounting Office (GAO) released a study on the outsourcing of jobs overseas, prompting at least two Seattle-based unions to call for government action.

But while protectionism might be a typical reaction, America’s future depends on embracing trade.

Efficiency and Outsourcing

The reasons to support greater trade are based on solid economic principles such as comparative advantage. As outlined by David Ricardo in the early 19th century, comparative advantage says that even if the United States had an absolute advantage in making all goods and services, it’s still mutually beneficial to trade with another country.

Such trade allows the U.S. to specialize in the area where it enjoys the most efficiency, thereby creating more productivity and wealth. Simply put, one should focus on what one does best. America is extremely good at innovating and starting new businesses — and outsourcing boosts this efficiency.

For instance, before it became easy for companies to outsource software coding jobs to India or elsewhere, a start-up in Silicon Valley would have to hire local labor at higher rates, driving up the cost of starting the business. But if it’s cheaper to hire labor, more businesses are likely to be created, spurring greater economic growth, investment and ultimately local job creation when companies re-invest their profits.

Fear and Hysteria

Yes, outsourcing also creates new jobs in other countries, but the marketplace is not a zero-sum game. Aside from the obvious benefit of helping pull poor countries out of the economic basement, it’s also the case that by stimulating economic growth overseas, the U.S. is creating new markets in which to sell its products.

Think about it: the more disposable income a Chinese engineer has to spend, the more likely it is that he or she will buy a new gadget from an American company or perhaps see Hollywood’s “Sky Captain and the World of Tomorrow.”

But while these arguments make sense, the debate over outsourcing is clouded with fear and hysteria.

Losing a job is never easy and, like the shift from an agricultural to a modern economy, outsourcing does temporarily displace workers. The GAO report notes that “private researchers predict that offshoring [outsourcing offshore] may eliminate 100,000 to 500,000 IT jobs within the next few years while others note that offshoring can also generate benefits such as lower prices, productivity improvements and overall economic growth.”

Creative Destruction

A study by Maury Harris of UBS Investment Research reports similar numbers: “[O]ver the past three years U.S. companies’ foreign job outsourcing caused a gross job loss of just over 400,000 per year.”

While these numbers might sound frightening, 400,000 jobs constitute only 0.3 percent of the U.S. labor force and the data indicate that workers who lose their jobs find new ones relatively quickly.

As Fed Chairman Alan Greenspan put it, “A million American workers currently leave their jobs every week, two-fifths involuntarily…. A million, more or less, are also newly hired every week.”

This type of creative destruction is normal in a healthy economy. But since people are often upset by change, the issue easily takes on emotional tones. Politicians and media-types know this and use it to their advantage.

For instance, presidential candidate John Kerry targeted labor votes by calling CEOs who outsource “Benedict Arnolds” and CNN’s Lou Dobbs is attempting to raise his viewership by focusing on such an emotional issue.

Politics and Popularity

Both men know better. In visits to Silicon Valley, John Kerry has attempted to downplay his opposition to outsourcing and, in a private subscription email, Lou Dobbs praises the very companies he attacks for outsourcing. In his article “Two Faces of Lou Dobbs,” author James Glassman points out that on television Dobbs acts like an “antitrade zealot” with his “hit list” of companies diabolically outsourcing jobs.

But in letters to his private email subscription list, Dobbs praises those same companies for “leadership and innovation.” Given that many people get their economic education from television, Dobbs’s antics are a huge public disservice.While this week’s GAO report refused to make any policy recommendations, unions seized on the publication as a way to convince others to help stop temporary loss of jobs. But protectionism harms productivity and, therefore, the economic future of the nation.

Public figures like Kerry and Dobbs should stop using such an important issue to score points with a fearful public. Like the switch from an agricultural to a modern economy, outsourcing will bring temporary pain but long-term gains.

8 Comments

  • I would like to personally thank whoever wrote this article, it makes things a little bit easier for me. I now know that I should, find a list of every company that advertises on the website, supports this website, or otherwise does any sort of business with this website, and organize a boycott against them. All of them. In the case of companies that make their money selling any sort of software, or entertainment, or any sort of easily transferable intellectual properties, I will make a point of distributing illegal copies of their products over peer to peer networks. I AM aware of the fact that piracy is illegal, and it is harmful to the economy, but I AM sure that the writer of this article will understand completely, because, piracy is a lot like outsourcing. Buying software, is a lot like buying labor, you can either get it from someone who charges a fee that is commensurate to it’s value and the costs associated with obtaining it, or you can get it for a substantially reduced cost, by not compensating the people who’s labor and investment made it possible in the first place. The wirter of this article, is a big supporter of these sorts of self destructive practices, and has no regard for the sort of harm that they do to the economy as a whole.

    The thing is, I want to hurt people that are responsible for outsourcing American jobs. I want to hurt them in any way that I can, by any means necessary. Distributing pirated software is a non-violent way to do this, it’s much more palatable than the things I would prefer to do, although it is illegal. You can do a lot to increase profits by outsourcing, but you should be aware of the fact that over time, there will be some very serious consequences. The consequences may not be very dire right now, but twenty years from now when your corpse is on public display and rotting in the street, you will regret taking part in actions that enrich yourself while disenfranchising millions of hard working people. I want you, and everyone else like you, to remember this.

    • "The inovation will always come from educated peoples." Excuse me? I thought you just implied that only educated people are innovative. I have a High School Diploma and a little college and started a company in a basement with $100.00, a broken Radio Shack phone and a table made of drywall. Last year we grossed 1.5 Million and employed 15 people. (With health insurance by the way.)In fact a vast majority of small businesses and entrepenurial ventures are stared by people like myself, not ones with a PHD- They work for me!
      Thanks

      • Although it is very impressive. Let me ask you what did you inovate? People here were talking about scientific and engineering inovations (which obviously more possible to do with higher education) buit not about another way to sell something to someboby with huge margin. The article’s author said that America is good in business (supposedly sales business). But let me ask what will you sell if nothing new is produced and who will you sell to if nobody is able to buy it because one has no money?

          • You make a great point on that soon there will be no more people to buy the product. People who make the big bucks eventually get hit hard when the money runs out from the average American.(For the story sake, let’s call these people, upper middle class workers with high school diplomas and little college.) They don’t think longterm. Sure you can sell yourself for a short period of time. I hope this person is a savvy investor. Another thing, this person says they employed 15 people, big deal. What about the hundreds of thousands of people in the US who don’t have jobs? Does he have room for them too?

  • However many times it is mentioned that sending jobs overseas is good for AM erica. Is it really good when because there are no jobs, poeple can’t buy the products and America collapses because of businesses not recieving anymore money in America?

  • My biggest problem is the argument that by creating a world full of consumers just like Americans we will justify the costs of outsourcing. I didn’t know consumer culture was such a positive thing to spread. Yeah…I really hope we can create 6 billion people that are as wasteful as us and maybe we can complicate our environmental problems further…

  • It is AM azing to see a such of combination of nonsense as within this article.
    General Accounting Office (GAO) released a sudo-study reaching the conclusion that loosing jobs in US is a good thing.
    http://www.technewsworld.com/story/36877.html
    However, a couple of points are obviously trash:
    Myth #1
    "America is extremely good at innovating and starting new businesses — and outsourcing boosts this efficiency."
    And who is going to inovate if the jobs with advanced degrees are sent to India? A PhD. washing dishes into a restaurant is obviously not in the position to use his potential to create inovation.
    The inovation will always come from educated peoples. And now these peoples are without a job.
    Myth #2
    "But if it’s cheaper to hire labor, more businesses are likely to be created, spurring greater economic growth, investment and ultimately local job creation when companies re-invest their profits."
    Here are 2 lies into single statement:
    #2.1 Why the profit is going to be invested here and not there, since with the same AM ount of money they will get more workers?
    #2.2 After a couple of years when they may (but likelly not) want to re-invest here, the qualified workforce here lost the skills by not using them for a long time. Since there is no money to be made into technology,
    the students will not follow that career anymore. So, why invest back here when there are no skills and you have to pay more for low skills, how long you find curent skills there and they are cheap?
    Myth #3
    "Aside from the obvious benefit of helping pull poor countries out of the economic basement, it’s also the case that by stimulating economic growth overseas, the U.S. is creating new markets in which to sell its products."
    The guys writting this are out of their mind. Why they would buy
    a US product when they can buy something cheap from China or India?
    Since the workforce in US is more expensive than outside, the products will
    obviously be more expensive.
    The only reason US may sell something is if we can inovate something that China or India can not. But to inovate you need to have specialists here. Politicians and dish washers will never create a new technology, however
    the jobs with high education are send overseas. Without inovation, US will not produce anything that can be sold overseas UNTILL wages here will be LOWER than the lowest in India and China.
    The biggest lie:
    "But while these arguments make sense, the debate over outsourcing is clouded with fear and hysteria."
    Well, the problem is that these arguments DO NOT MAKE SENSE AT ALL.
    Are just lies. Or if the authors trully believe them, then we have there a bunch of incompetents. Who is hysteric here? Or do they expect that any
    lie have to be believed only because Greenspan wants that?
    Myth #4
    "Losing a job is never easy and, like the shift from an agricultural to a modern economy, outsourcing does temporarily displace workers"
    In a balanced economy (like Europe have) the social security it is used as a feedback loop to regulate the job market. When the gov. is due to SS benefits over it can afford, it have to do something to reduce the job loss.
    In the US, the benefits will simply expire after a short AM ount of time,
    and the feedback loop is broken. The result => social instability, crime explosion and ……..
    Those who do not know history are condamned to repeat it !!!
    Myth #5
    "While these numbers might sound frightening, 400,000 jobs constitute only 0.3 percent of the U.S. labor force and the data indicate that workers who lose their jobs find new ones relatively quickly."
    But how much of the educated workforce? This is not allowed to be written, isn’t it?
    An PhD. in Artificial Intelligence who work as a disk washer will be acounted as a employed disk washer and not as a unemployed scientist.
    The 0.3% statistics looks good, but who is going to create a new product that can be sold oversea? Greenspan?
    The final lie:
    "Public figures like Kerry and Dobbs should stop using such an important issue to score points with a fearful public. Like the switch from an agricultural to a modern economy, outsourcing will bring temporary pain but long-term gains."
    So here we go…. This is the reason for all this report.
    The fact that a journalist say something like that is her rights. But why in the world GAO will compromise itself for a political game?

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