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.”
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.