WASHINGTON, September 18, 2014 — Many prominent economists, like Paul Craig Roberts, blame outsourcing for a number of economic problems, including declining wages, high rates of unemployment, a shrinking middle class and a stagnant economy. This has been an issue for many years. But is outsourcing bad for the economy?
President Barack Obama criticized Mitt Romney’s position in venture-capital firm Bain Capital during the 2012 presidential election. Bain Capital often purchased companies and then closed the domestic factories that these firms utilized to manufacture their products. Bain then opened factories overseas or contracted with foreign manufacturers to produce the goods or provide the services. This, Obama argued, created unemployment in the United States at the closed factories.
This issue was also raised during the 2004 presidential election. John Kerry said that the increased use of outsourcing was damaging our economy and that President George W. Bush wanted to “export more of our jobs overseas.”
Just prior to that election, Greg Mankiw, the head of Bush’s Council of Economic Advisors, noted that “outsourcing is just a new way of doing international trade” and that outsourcing is actually a “good thing.” Senate Minority Leader Tom Daschle responded, “If this is the administration’s position, I think they owe an apology to every worker in America.” Speaker of the House Dennis Hastert warned, “outsourcing can be a problem for American workers and the American economy.”
But is outsourcing bad for the economy?
Numerous studies have indicated that outsourcing has had a minimal effect on job losses and, in the aggregate, may have actually added jobs. How can that be?
The reason a company chooses to manufacture a product outside of the U.S. is very clear: The company finds it is less costly, even considering the logistical costs of shipping raw materials and the finished goods. The cost savings are often significant. This allows the company to sell the products at much lower prices, so more Americans can consume them. And, of course, it increases profit.
That cost-reduction and profit improvement often results in an increase in employment. Consider, for instance, Delta Airlines in 2003. Delta moved 1,000 jobs to India. By doing so, it was able to reduce costs by $25 million. It used the money to fund 1,200 new reservation and sales positions in the United States, resulting in a net job gain.
Similarly, consider a consumer who needs to purchase a new smartphone. She finds that she can purchase a state-of-the-art model for about $600. If the phone were made in the U.S., the cost would be more than $1,800. After saving $1,200, she has more money to spend on other goods and services which will encourage the economy to grow.
The bottom line is that outsourcing results in lower costs for firms, greater profits for stockholders and lower prices for consumers — leading to an increase in the standard of living and an overall increase in employment.
Why, then, did an Associated Press-Ipsos poll in May 2004 find that 69 percent of Americans thought that “outsourcing” hurts the U.S. economy, while only 17 percent thought it helps? Today the percentage who believe outsourcing hurts, is probably higher.
The reason is that it is easy to see the negative effects of outsourcing as we watch manufacturing plants close and our sympathies are geared toward the displaced workers. It is difficult to see which new jobs were added as a result of the lower costs associated with outsourcing. Similarly, it is difficult to see the positive effects on our standard of living from products and services being profitably offered to consumers at much much lower prices. In short, the negatives are easily seen, and the positives aren’t.
As our economy matures and continues to develop, outsourcing is likely to expand. One theory says that economies go through stages of development from being primarily dependent on agriculture to then becoming dependent on manufacturing to then moving into services. Today this is happening in the United States. Already, almost 70 percent of gross domestic product results from producing services rather than goods. We move away from manufacturing by outsourcing.
We should be concerned about the temporary structural unemployment. This occurs when the skills of the unemployed (manufacturing workers) do not match the skills needed for the open positions (service providers). But while this should be a concern, it should not deter us from encouraging outsourcing.