In Defense of Outsourcing

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One of the less edifying features of the presidential campaign season has been the contest between Barack Obama and Mitt Romney to define the other as the true “outsourcer-in-chief.” Party surrogates have also gotten in on the action, with the result that outsourcing has become a political hot potato. That’s unfortunate because obscured by the thicket of bipartisan demagoguery is the fact that outsourcing, while not without its drawbacks, is a net positive for the U.S. economy that deserves to be defended on its merits.

At the most basic level, outsourcing is form of trade. It produces economic gains by maximizing what the economist David Ricardo termed “comparative advantage.” The idea is simple: By outsourcing low-skilled jobs abroad – for instance customer service, data entry, or labor-intensive manufacturing – companies can obtain products and services at a lower cost than if they had tried to create or perform them. That allows companies to increase efficiency and productivity, creating an overall benefit to the economy. Meanwhile, the lower costs of less expensively produced services and goods are passed on to consumers. In short, all parties benefit.

The biggest economic benefit may be efficiency. Outsourcing allows companies to perform functions that that they either can’t do or can’t do in a cost-effective way. Few firms waste precious time and resources doing their own taxes when they can outsource the task to professional accountants. That’s good for the company, which doesn’t have to waste resources on the service, for the accounting firm that gets the business, and for the firms’ clients, who won’t have to pay the added cost of the service.

Domestically, this idea is not controversial. Companies outsource within the country all the time. Politics enters into only when outsourcing is directed overseas. It’s not obviously clear why that should be. By allocating resources more efficiently, outsourcing makes social and economic progress possible.

Consider computers. During the 1990s, computer hardware was outsourced abroad. In the short term, that caused pain for U.S. manufacturers. Between 1985 and 2005, 125,000 jobs were lost in the computer hardware industry. But outsourcing caused prices on computers to drop by 10 to 20 percent, making computers more affordable. As computers became more common, productivity and economic activity surged. Economists estimate that outsourced computer hardware boosted productivity by 2.5-2.8 percent between 1995 and 2002, driving an Internet and technology boom and adding $230 billion to total U.S. output. On balance, outsourcing computer hardware proved a huge boon to the U.S.

That’s not to deny that outsourcing has downsides. As with computer hardware, shipping jobs overseas leads to job losses in some industries. It can be a painful and disruptive process for workers who lose their jobs, and that should not be glossed over. But neither should it be ignored that many of these outsourced jobs or industries would not be sustainable for the long term. Think of the horse shoers, or milk delivery men, or typewriter repair shops that were replaced as new and improved technology came into use. Similarly, outsourcing enables companies to re-invest their profits in new products and services, as well as new and more sustainable jobs. At the same time, outsourcing fuels affluence abroad, opening new markets for American-made goods. In this context, it’s not surprising that economists believe outsourcing strengthens rather than weakens the U.S. economy.

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  • Geraje Guzba

    The outsourcing of manual labor and manufacturing is not the only form of outsourcing we are seeing. Increasingly we are seeing outsourcing of professional services that require higher education such as computer programming, accounting, medical services, legal services, and sales. Perhaps we can survive the systematic dissolution of a once prosperous labor force, but I do not believe we can survive the dissolution of our middle class, white collar work force without witnessing an extreme decline in the American standard of living and the attendant problems of decreased tax revenues, decreased consumer demand, etc.

    Productivity and efficiency may be good for the company, but it is not necessarily good for the people of the United States. It is conceivable that American based corporations can cater entirely to the growing consumer bases in India and China while still taking advantage of the relatively inexpensive labor in those states. China's middle class is now in excess of 300 million people (and growing), which roughly the population of the entire United States, and India's consumer middle class is quickly catching up. However, with populations in excess of one billion for both China and India, there is enough of a reservoir from which to draw inexpensive labor while still preserving a strong consumer middle class consumer pool that some studies estimate will be three times the entire U.S. population, combined, by the end of this decade.

    If Americans are not producers nor consumers, we will experiences many decades of stagnation and economic contraction until the balance in wealth creates an incentive to outsource back the United States. There may come a time in the near future where the American consumer is simply irrelevant and the economic situation is one that we see in many impoverished nations today – a strong base of corporate power sustaining domestic operations using an increasingly shrinking segment of the population and creating products that the local populace can never afford to purchase.

    • Ageofreason

      Strange that you never mentioned that high taxes, and excessive government regulation have a negative effect on the economic health of the middle class. Strange that you never mentioned that excessive union power, in both the private and public sector thanks to government favoring of unions, raises wages to excessive and unsustainable levels far beyond what a free market in labor would allow. Strange that you failed to mention that bloated government bureaucracies suck the life from businesses and individuals. Strange that you failed to mention that government adventures (wars) in foreign lands, adventures that have nothing to do with American interests or defense strip away the treasure and lives of Americans. Strange!

      • Geraje Guzba

        Why is it strange that I did not mention those things when the scope of the article, the relevant scope of the article, was outsourcing?

        Is it really that strange that I understand the meaning of relevance? If you wanted to make a point about taxes, unions, wages, and government spending, you could have made it without the negative implication that I am deliberately concealing or overlooking palpable economic factors.

        Relevance is key. Mindlessly bloviating about irrelevant topics, with a hostile tone, is unnecessary.

    • Dismal

      "Productivity and efficiency may be good for the company, but it is not necessarily good for the people of the United States. It is conceivable that American based corporations can cater entirely to the growing consumer bases in India and China while still taking advantage of the relatively inexpensive labor in those states."

      This is drivel. If there is to be growth in REAL INCOME, there must be growth of productivity and efficiency. That is true in America, China, India and the entire globe.

      Your entire last paragraph is economically meaningless. A future where the American or any other consumer is "irrelevant"; where something called "the "balance of [national] wealth" seeks cheaper labour; and where the "local [domestic?!] populace" is unable to "afford" domestically made products (and services?) does not even rise to a credible threat for political (protectionist) purposes. These are spurious ideas, the misconceived offspring of vulgar Keynesianism and sophisticated Luddism.

      • Geraje Guzba

        I challenge you to explain why the "entire last paragraph is economically meaningless" on a ground other than the bare assertion that it is so. Accusations of spuriousness and incoherence are useless in developing a meaningful dialogue. If you have an objection, state the objection, the reasoning underlying the objection, an alternative, and why that alternative explanation is a better.

        Having said that:

        In a global market Americans are not only competing for multi-national jobs, they are competing to be multi-national consumers. The pool of consumers in China (Southeast Asia) and India is expected to completely eclipse the number of American consumers within the next two decades. It is entirely feasible that an American based corporation can sustain itself relying entirely on foreign markets for investments and foreign consumers for product purchase.

        Take a look at this piece for a cursory introduction to the concept of the diminished American consumer:

  • Amused

    "In Defense of Outsourcing " ? Man you conservatives would sell your own mothers out for the sake of your partisan politics .
    Why would you "defend outsourcing " ? Easy , Romney does it , Romney's a Republican , and Romney's your only game in town ./
    Laskin you're a sellout . LOL……"outsourcing back " you say ? Your fractured fairy-tale theory is as bad as your fuzzy math . Are you serious ? Maybe you'd like to peddle that tripe over at ALEC eh ?

  • Amused

    Take a lesson Laskin , from the first post by Guzba , he's light years ahead of you in reason and reality .But mainly , he's not shilling for anyone .

  • Amused

    What's going on with you people ? Last week , an " author " of an article on this blog was defending colonialism , now YOU defending outsourcing . Whats next ?

    • WilliamJamesWard

      Amused for President, how's that?……………..William

  • Gene W 1938

    The culprits are the investors and managers who want intant profits with no or minimal investment.
    If we keep low tech, but expensive, labor inhouse and addressed it as a problem to solve … american ingenuity would find a solution … but that requires an investment and time … but then that entire product would still be USA made..
    Where there is no vision … nation will perish.
    Is there a corporation that still publishes and anuual report with a 5 year plan and cites how they are meeting last year's 5,3 and 1 years plans and objectives.

  • Amused

    While the know-nothings continue with their endless rant that unions , labor costs etc .have caused the downturn in US manufacturing and closing of plants ..oh ..and outsourcing , the real culprits are the greedy corporations ,lacking foresight , concerned only with TODAY'S bottom line ,and their failure and refusal to upgrade their plants . If the above article's rationale is to be followed , then all that outsourcing which is supposed to be so good for the corporation [lol and for us ] should have started paying off , ya know the corporations making their big profits and "providing jobs ' etc.blah blah blah .It's all bullshheeet . You'd be lucky to find a "30 day plan " let alone a five year plan .

  • Gamaliel

    Companies would not survive without outsourcing because they would not be able to compete with other companies that do or foreign companies that use cheap labour. We could tax foreign goods but then two things would happen, other companies would tax our goods and we would have to pay more for foreign goods. That's less money to spend on buying American products that create jobs here. If we want jobs to shift back to this country are wages have to drop to a level in which they are competitive with foreign wages. If this were to happen goods would become cheaper because the labour to create them would become cheaper. So lower wages would not necessarily mean lower buying power. Instead what is happening in this country is we borrow money to support unemployed people and we tax away the money of those who would otherwise hire. It's a vicious circle and like a whirlpool it is sucking us under.

  • Mike Villano

    Laksin is absolutely correct about the economic value of outsourcing.
    Only the economically illiterate don't get it and unfortunately too many are just that.

    What Laksin did NOT explain and elaborate on is the incentive to outsource in the first place is created by excessive taxation and regulation coming from places like Washington and Sacramento where the parasites like to waste money fighting hobgoblins like global warming.
    The jobs used to be here.
    The perverse incentives to move them overseas were created by politicians raising the cost of doing business here. So we're now supposed to believe anyone can just bring them back with stroke of a pen.
    Sorry. It doesn't work that way.
    Just about any new product designed and invented here will have to be produced overseas.
    You can't bring production back when legislators and regulators have raised the cost of production 5-10X or more especially when they insist on wasting the money fixing problems that don't exist.
    Keep demonizing the Rich.
    When they are gone, who's left?? Economically speaking what's left??
    Nothing but a carcass.
    Just keep blaming the "Evil Rich."

    • Goemon

      If outsourcing is good, and excessive business taxes motivate businesses to outsource to oversea lands, then do we need more excessive business taxes?

  • FPF

    Outsourcing is one way to lower cost for businesses, if anyone knew anything about ECON 101 or how to run a business, they knew the least cost means the max profit for a business, since no one is in business to loss money, therefore outsourcing to lower cost is a logical way for a business. But one must ask why business can't hire more locals to work instead? Higher union dues? Higher health insurance? Broad and strict restrictions and fines for "environment protection"? Higher taxes? International treaties such as NAFTA that allow cheaper labors to gain advantage over domestic goods? How about all of the above!?Outsourcing is created and mandated by the government, period!

  • Amused

    FPF and Villano , you both have brown spots on your nose .Same place Laskin got his eh ? After almost 40 years of outsourcing , and where are all those " good bebefit " we should be seeing ? All that has been accomplished by outsourcing is ,Corporate executives get to give themselves multi-million dolaar pay raises , have multiple mansions in the Hamptons ,Boca , Colorado etc .Oh and we get to build their houses with dirt cheap illegal immigrant labor , who send the money they make HERE …back THERE , but not to worry Americans can pressure clean their driveways , detail their Rolls and wash their windows . Don't fool yourself , these jokers don't give a F–ck about illegal immigration , they know the benefits of DIRT CHEAP LABOR .And as if THSAT wasn't enpough the uinbridled greed is a good thing right ?

  • Amused

    - and afterall , these BUMS , have created a multitude of OFFSHORE " Cottage Industries " ! Phony corporate headquarters and P.O.boxes established , benefiting those local economies -OFFSHORE and ducking literall TRILLIONS in tax revenue that should be coming to the United States , so they make more money with which to lobby [BRIBE ] our politicians to create even MORE favorable legislation to facilitate their scams , and YOU never even hear about that , let alone have a say or vote in it all . And you lackeys just bend over for more ……remember those bumper stickers from the mid 60's and on up through the 70's ?


    No one listened …and all forgot what their fathers taught them – THERE AIN'T NO FREE LUNCH [ only for corporations ]

  • Western Spirit

    IBM is in the process of outsourcing everything and getting rid of its entire American employee's including in its sophisticated jobs.

    No jobs for Americans means the country is in trouble period. You can't pretty that up with rhetoric. It means the middle class in this country is being brought down without a place to employ them.

  • Western Spirit

    IBM is outsourcing its entire business to foreigners and letting its entire American work force go including its more sophisticated jobs. I know this for a fact.

    You can't pretty this up with rhetoric. Americans can't find jobs if there aren't any and that is not good for America, no matter how you shake it. We're going down period as other country's prosper.

  • Goemon

    I imagine outsourcing medical work to Indians who can operate on Americans using robots hooked up to the internet. How about outsourcing more jobs to machines? I can see trucks loaded up with cargo that drive themselves across the country at over 100 mph and all the lost trucker jobs. Machines and 3rd world countries will be able to replace a lot of blue and white collar work…Maybe The Club of Rome is on to something when they want to turn the world into 10 different regions that each specialize in certain tasks.

  • quark1912

    Everybody outsources one way or another. For example I am a unionized railway worker and my union dues pay for outsourcing office politics.

    • amused

      Please Explain that ….out sourcing of office politics ???? by a Union ? Then you'v got a pretty shiiity union ….unless you're just making it up .

      • quark1912

        What I meant was the collective agreement stipulates that an employee can only be dismissed for cause and such cause must be established by a fair and impartial investigation. In the case of layoffs due to a reduction in the volume of business such layoffs are based on seniority, that is the senior qualified employees are retained in the remaining positions and junior employees are laid off. In any case disputes over employee discipline or seniority between the corporation and the union may be referred to an independent arbitrator for a binding decision. Few working class people, such as myself, have tens of thousands of dollars to spare for a lawyer to sue for wrongful dismissal. As I said by paying union dues these issued are outsourced.


    Every businessman knows that the decision of where to expand is made after an analysis of the legal environment existing in the proposed location, the labor environment and other rules and regulations which drive the cost of doing business. Many on this blog seem to believe business should stand still while they are whipped to death for having the gall to make a little money. Why should I hire whome I cannot fire. An example of this folly is the power of certain groups. The most powerful person in America is an african american lesbian in a wheelchair.


    The United States was largely built on British money. Britian was financed for 300 years by one voyage of "The Golden Hind".

  • Andy Lewis

    Outsource your worthless opinions. Then we won't accidentally read them.

  • alex

    We were told: "savings will be passed to consumers"….. LIES!……………….. PROOF:
    before outsourcing, average CEO was making ~4 million dollars a year. "After" outsourcing: 50 million!!!


    While it's true that some outsourcing (and offshoring – the two are not synonymous) is beneficial, in some cases the government is driving jobs out of this country by artificially inflating labor costs (Obamacare, etc.). So Romney would first have to distinguish between "good" and "bad" offshoring. Next, even "good" offshoring is only good IN THE CONTEXT OF A GROWING ECONOMY, which we don't have. Right now, jobs that are lost to offshoring are not being replaced by other jobs. Does Laksin really think that Romney can make the case that offshoring is good to a lot of people who have lost their jobs and can't find new ones?

    This is just plain crazy! (Michael Tanner made basically the same argument as Laksin over at National Review online). The case for offshoring is simply too difficult to make right now – it would be political suicide. Instead. make the case for more jobs HERE IN AMERICA under Romeny – that's how you win this election.

  • amused

    HaHaHa … other words LIE . And then simply maintain the status quo …..oh how typically CONSERVATIVE !
    You've just described the Repo/Con platform . Pretrty neat trick , hope thedumbed down Americans figure it out before Nov.

  • Cassey Curtis

    I want to recommend to everyone my outsourcing provider. They made our operations easier.

  • Nathan Miller

    It is nice observation about the outsourcing services. It has its own merits and demerits.

  • Michael Bian

    Outsourcing has become big business and has allowed many new companies to be created and new jobs.

  • Michael Bian

    Thank you for sharing such an informative article…