Skip to comments.The Economics of Outsourcing: Americans need to understand and adapt to such developments.
Posted on 08/02/2012 7:01:12 AM PDT by SeekAndFind
Economic change unleashes powerful forces. We can stubbornly resist them and cling to the status quo, but at best, that ushers in a slow but inevitable decline. A better approach lies in understanding the forces that periodically remake the economy, so we can seize the emerging opportunities they bring. This strategy has worked in the past, and it will work today.
A significant force in recent decades has been globalization. It has brought with it a surge in outsourcing, the shorthand term for businesses cutting jobs in the United States and moving production overseas to gain access to lower-cost labor. Many Americans view this development as a scourge, meaning the business practices of Mitt Romneys private-equity firm, Bain Capital, have become fodder for the presidential campaigns mudslinging.
Outsourcing makes for perfect political posturing a quick-jab sound bite, serving up big business and foreign workers as villains and unemployed Americans as victims. But the economic reality of outsourcing isnt so black and white. The issue goes far beyond the simple fact of job losses and touches on the broader realities of trade, basic human rights, and economic progress.
In economic terms, outsourcing jobs differs little from importing goods. Both involve using labor abroad rather than at home so theres no logical consistency in cursing one while tolerating the other. In 2011, America imported $2.6 trillion in goods and services, suggesting that outsourcing has just a tiny share of the effect foreign trade overall has on American jobs.
But people also commonly consider imports bad, calling them job killers, and consider exports good because they create domestic employment. In reality, that view is incomplete. When goods and services come from overseas, foreigners work and Americans consume, so imports contribute to higher U.S. living standards. Our exports go to foreigners, so we work and they consume. Some lament Americas trade deficits, but theyre only part of the countrys international balance sheet. In 2011, our red ink in goods totaled $738.4 billion, offset by a services surplus of $178.5 billion and foreign-investment inflows of $559.8 billion. As a matter of strict accounting, all countries international transactions balance so nobody is taking advantage of anyone else.
Within the overall international balance, countries have trade surpluses in the industries theyre relatively good at, and deficits in those theyre not good at. Turns out, Americas surpluses are in high-value-added manufacturing and sophisticated services, where wages are high. Our deficits are in low-skilled manufacturing, where wages are low. With or without outsourcing, the U.S. economy is exporting low-wage labor.
Once we accept that payments balance, it becomes difficult to sort out trades overall impact on U.S. jobs. Imports displace U.S. production and jobs, but exports and capital flows increase the countrys economic activity and stimulate employment. We shouldnt just focus on the job losses from trade and conclude that it hurts the economy.
Moreover, trade is a question of individuals freedom to choose. Countries dont trade, individuals and companies do. They buy foreign goods and services because of price, quality, availability, tastes, or any number of other reasons. These are voluntary transactions between individuals, distinguished only because the nationalities of the buyers and sellers differ. Free trade among individuals is a basic human right. Protectionist interventions that attack imports or outsourcing rob Americans of a piece of their economic freedom.
Freer trade and cheaper communications have spurred globalization in recent decades, exposing once-insulated parts of the economy to foreign competition. Americans cant cling to the jobs of the past. We need to find the best opportunities in the global economy. In the new international division of labor, we can be the managers, consultants, and even facilitators of outsourcing.
Trade and new technologies are a lot alike. They both upset the existing economic order, undermining some products, industries, and professions while giving rise to new ones. Americas prosperity has been built on wave after wave of such upheavals, with new jobs continually replacing old ones. Thats why American workers are insurance salesmen and dentists, not blacksmiths and buggy-whip makers. We dont have to know exactly where the new jobs are. We only need faith in the American people and the capitalist system.
Politicians attacks on outsourcing wont work any better than the Luddites assaults on technological innovation. If their argument prevails, it is a path to decline. America will be better off if we grab the opportunities arising out of globalization. That is the only thing that will work.
W. Michael Cox is director of the William J. ONeil Center for Global Markets and Freedom at Southern Methodist University. Richard Alm is writer-in-residence at the center.
A rising tide lifts all boats - except when you’re using the water from one boat to do all the lifting.
The problem with the economy is not Globalization, its Fascism and Marxism in Washington DC. Our industries moved over seas not because Americans were lazy or wanted too much money, it was because Washington wanted too much money and put up so many obstacles that it became cheaper to build it overseas without all the paperwork.
The tone of this article is accept it, get used to it.
Horse shirt. FIGHT IT. The One World Government is Tyrany.
“Some lament Americas trade deficits, but theyre only part of the countrys international balance sheet. In 2011, our red ink in goods totaled $738.4 billion, offset by a services surplus of $178.5 billion and foreign-investment inflows of $559.8 billion. As a matter of strict accounting, all countries international transactions balance so nobody is taking advantage of anyone else.”
This is a point that is, unfortunately, not widely recognized, even here on FR. The trade imbalance is, in fact, brought into balance by foreign investment in the US. Some of that investment flows to the stock, bond and real estate markets while I suspect a significant portion of it goes to the purchase of U. S. Government securities.
Bottom line: there is no net trade imbalance.
It is long past equality time, regarding jobs.
Bring Jobs Back!
Your post is right on.
There have been health issues as in the whole Chinese drywall fiasco. Engineers have found substandard steel in steel that had been supposedly tested and passed.
On the national security front, the Chinese have been accused of building backdoors into chips that go into computers that control military equipment and civil aircraft.
Not having manufacturing facilities on US soil could be a huge liability if the US is involved in any prolonged confrontation.
Outsourcing is a win-win for everybody in the long term.
Customers and investors drive businesses, and customers demand lower prices and investors demand higher profits. In order to lower their cost structure, companies outsource non-critical activities to places where they can get the most value for their money.
This, in turn, allows them to offer their products at a lower price, and depending on what the company does, millions of customers could benefit. Likewise, the investors then receive higher profits and better returns on their investments.
1) The U.S. government has crippled American companies with its taxes and regulations, particularly with all the ridiculous reporting requirements and crazy environmental and ADA mandates.
2) The U.S. is not playing on a level field---the jobs are going to places like Communist China, lawless Mexico, and Southeast Asia, where slave-like labor is common place, especially with children.
3) The unions and lawyers have driven costs of production through the roof.
I don't see any hope for this country---the factories will never return, and the U.S. will be service industry only in the future, if that.
The correct term for sending jobs out of the country is “offshoring,” not “outsourcing.” But that shows how much the supposedly smartest people know about economics.
Yeah their purchases of our companies, debt and manufacturing capacity = our purchases of their communist slave labor trinkets.
As of 2010, the US census reported there were 336,000 factories operating in the USA.
12.5 million Americans work in manufacuring, and they produced over $1.8 trillion worth of goods in 2010.
Manufacturing productivity has skyrocketed over the past 10 years thanks to technology. We are able to produce more goods with less workers.
Not one word in this crap piece about national security and our ability to defend ourselves in the event of a an actual war of attrition or world war. Name a world power that off shored its industrial base.
This article is BS on so many levels.
Weak nations import most of what they use, strong nations produce most of what they use. Do you think its wise that we have outsourced our energy production?
500 Billion a year that leaves the country and leaves us vulnerable to blackmail.
How well do you think articles like this will play out with an angry electorate? The country is short 10-20 million jobs, due to poor government policy that encourages outsourcing.
China is on the way to becoming the most powerful country in the world. Think about that...
Americans have spent the better part of 30 years filling their homes to the rafters with foreign made products.
We look silly and hypocritical sitting around lamenting “outsourcing”.
Also, our hyper-comsumption (based largely on debt) economic model was never sustainable in the long run. We are now seeing the results of putting all our eggs in one unsustainable economic basket.
Again, we look pretty silly whining and complaining now while steadfastly clining to a model that CAN NOT BE SUSTAINED.
Adapting to outsourcing: babysitting 10,000 mile long supply lines with people who will tell you flat out they understand all your issues exactly and who will then turn around and make any damn thing they can that will fit in the shipping container and look close enough to what your ordered to get you to cut a check.
The per capita GDP for China is about $5400/year. The per capita GDP for the USA is about $48,000/year.
The Chinese are not going to catch up to us in the foreseeable future if ever. The reason: they will never reach the level of productivity of the American worker. At least not in our lifetimes.
We have always imported goods.
From the 1770s to now.
This is nothing new.
Your so naive.
We are giving them our know-how and factories. They will catch us economically faster than you think.
Not a single economist thinks the USA will have the worlds largest economy in 20 years. We did this to ourselves. It’s amazing to me that people are still in denial about this.
The only thing that can prevent this now is political instability, which is possible.
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