THE SMITH CENTER

for Private Enterprise Studies

Outsource This!

by

Teena Khatri

CSUEB Student and Business and Economics Editor of
California Statesman, the campus' conservative alternative newspaper

As the presidential election year coincides with an (increasingly less) uncertain U.S. economy, many politicians have focused a substantial amount of attention on the economic issue of offshore outsourcing as a serious threat to the welfare of American workers. Outsourcing of manufacturing and service jobs has been occurring for well over a decade, primarily by companies seeking to lower their operating and human resource costs through efficiencies and lower wages. It is interesting how economic globalization is praised during economic booms, but the same practices are attacked during downturns of the business cycle.

Critics emphasize that manufacturing jobs are being sent to China, while service sector jobs are increasingly fleeing to India. At first glance, outsourcing does appear to have a negative impact on jobs in the United States. However, some job losses are an inevitable fact of life in a dynamic, free market economy. Jobs are continuously being eliminated from old sectors (such as some manufacturing) while other jobs are created in new sectors (such as mortgage brokering). Politicians have tried to instill fear of job shortages for Americans, while conveniently failing to mention the associated creation of new jobs. In fact, there has been a net increase in total U.S. private-sector jobs of about 17.8 million between 1993 and 2002.

Politicians blame outsourcing for our alleged sluggish economy. Many of them are even attempting to restrict outsourcing by imposing protectionism through government coercion. This will do far more damage to the U.S. economy and to American workers in the long run than the loss of some jobs in the short run. Before seeking the short-term political advantages of protectionism, lawmakers and other critics need to assess what will happen in the labor market in the long run. Because the U.S. has an open market economy, outsourcing will tend to produce concentrated and visible costs (specific job losses) in the short term and more than offsetting benefits in the long run. Gregory Mankiw, the White House chief economist, regards outsourcing as a new aspect of international trade which, as usual, allows countries to specialize in those sectors in which they have a comparative advantage. International trade has always produced substantial benefits throughout the world, and attempts to halt the processes of a free flowing economy will undoubtedly restrict the growth of American jobs in the long run.

The hysteria caused by short-run job losses overlooks several benefits of outsourcing that ultimately more than offset the costs. The U.S. is known as the world's most successful economy. The effectiveness of American businesses is due to their ability to maximize efficiencies and produce at low costs, and to the wide scope for creative entrepreneurship afforded by free markets. The cost savings attained by companies through outsourcing enables higher investment, expansion, and growth, resulting in a more robust industry. This ultimately creates a greater number of high quality jobs that require innovation, talent, creative thinking, and business expertise.

Outsourcing benefits not only businesses but also U.S. consumers. Lower prices enable consumers to buy more. Money saved from outsourced products/services gets spent in other high-end goods and services, therefore improving the attractiveness of that segment of the industry. When American businesses cannot compete in price for the goods they currently produce, they tend to shift their focus towards more value-added products and services, which generates greater competition and reallocates labor and capital towards the more profitable sectors of the economy. Consumers benefit from this process because they are offered higher quality and more diverse products. Finally, the outsourcing of jobs to foreign countries promotes higher productivity and higher standards of living in those foreign countries. This permits foreigners to demand U.S.-made commodities associated with higher standards of living, such as medicine, computer software, and music CDs.

In sum, the long-run benefits of outsourcing more than offset the associated short-run costs. Outsourcing enables growth, expands industries, creates higher quality jobs, and provides improved products and services to U.S. consumers. Any sensible person should dismiss the notion of imposing restrictions on outsourcing. But then again, politicians are rarely sensible.