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In Defense of Outsourcing

Posted By Jacob Laksin On July 20, 2012 @ 12:35 am In Daily Mailer,FrontPage | 33 Comments

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.If this view is not more politically palatable, it’s because politicians view outsourcing without context. They consider the jobs lost, but not the jobs created. Just as important, they fail to factor in the jobs that are outsourced to the U.S. from foreign countries. Japanese auto manufacturers like Honda, Nissan, and Toyota have been building manufacturing plants in the U.S. since the 1990s. Today, Toyota operations in the U.S. sustain 365,000 jobs nationally and pay out over $20 billion in compensation to American workers. German firm BMW is another major outsourcer to the U.S., announcing just this January that it would invest $900 million in a Spartanburg, South Carolina factory, adding to the 7,000 jobs it has created in the state. Even India, traditionally a destination for U.S. outsourcing, is now outsourcing call center jobs to the United States, bringing the process full circle.

Cost-benefit analyses of outsourcing will never convince everyone, of course. Unions, for instance, have long blamed outsourcing for destroying the manufacturing sector in the U.S. That’s mostly false. In reality, the decline in manufacturing jobs has less to do with jobs going overseas than with improvements in technology that have replaced manual laborers. As a percentage of GDP, manufacturing has remained relatively constant in recent decades. What has changed is that the work is now more often done by machines than by men. One can lament that change or embrace it, but outsourcing is not the culprit.

Considered on a broad scale, outsourcing creates more good than harm, more wealth than economic loss. A more honest political leadership would admit as much. But busy as they are with vote pandering and mud slinging, neither presidential candidate seems up to the task.


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