Comparative Advantages of Outsourcing

This is a partial transcript of "Special Report with Brit Hume", Feb. 12, that has been edited for clarity.

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MANKIW: I think outsourcing is a growing phenomenon. It's something that we should realize is probably a plus for the economy in the long run.

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BRIT HUME, HOST: That comment on outsourcing by the president's top economic advisor is being treated by Democrats, as you heard earlier, as a political gift from heaven. And they have reacted with everything from denunciation to ridicule. The administration, they say, is now in favor of the loss of American jobs to outside and overseas sources. So what could Dr. Mankiw have possibly meant by saying such a thing?

For answers we turn to a fellow, conservative economist, Daniel Mitchell, of the Heritage Foundation.

Welcome, Dr. Mitchell. Glad to have you.

DANIEL MITCHELL, HERITAGE FOUNDATION: Glad to be here

HUME: So what is this man talking about? He says outsourcing, and he means by that jobs going overseas of a certain kind, is in the long run a good thing. How could it be a good thing?

MITCHELL: American consumers, American families are always looking to stretch their dollar the farthest. They're looking to buy the best products at the lowest prices. That puts tremendous competitive pressure on U.S. companies, who are competing against foreign companies.

And those U.S. companies have to reduce costs. They have to get rid of fat inside their own operations. They have to look for the lowest input prices.

Labor is an input. And for certain lower-level, lower-skilled jobs, it's indeed possible that you're going to get a better deal by outsourcing those jobs overseas. So the company can then free up money that it can use to hire other workers, to lower prices for consumers, to pay higher dividends to shareholders.

And that money then winds up being used throughout our economy in a way that actually puts us ahead in the long run. And that's what Mankiw meant.

We economists aren't very good; we're not very glib at explaining these economic concepts. But I think what Mankiw said ultimately is right. In the long run, having this policy of free trade is going to make us more prosperous. It's why the U.S. creates jobs and countries like France don't.

HUME: Now, if you -- let's pick a particular example. I mean, let's assume that we're talking about lowering the cost of what kind of thing are we talking about? Computer over-the-phone technical support.

MITCHELL: Call centers for computer operators for credit card companies. Those are the stereotypical examples we deal with.

HUME: All right. Now, you end up talking to somebody who is halfway around the world. I suppose that the telephone costs are minimal, so that the charges don't add up. And this saves the company, who is giving you the service, a lot of money.

And presumably it saves you money too in the cost of the product and the cost of buying the product. So the consumer is, to some extent, enriched by this. Right?

MITCHELL: Yes. The consumer is driving this. Companies -- U.S. companies that are, quote, "outsourcing" these jobs, are facing competition from foreign companies. And those foreign companies often are in those markets where the labor costs are lower.

And so the U.S. companies really have to hustle to keep up with this process. But what's driving it is the fact that consumers want the low prices for the good quality that they expect. And if the American companies don't make these changes, they're more likely to go out of business and having all the jobs disappear, than if we simply say, Oh, you know, we can't outsource at all

HUME: Now, talk about the consequences for other countries of American outsourcing.

MITCHELL: Well, this is the kind of ironic thing. You have a lot of the liberal Democrats saying this is a terrible idea. Well, what's so terrible about people in the third world having economic opportunity, having the ability to get a reward for the fact that they've gone through the trouble and time and energy to learn the English language?

This is why free trade benefits countries whether you are importing, whether you are exporting, or vice versa. Free trade benefits us because of the old notion of comparative advantage. Now, what does that mean? It's an economic term. It simply means that if we can generate more economic growth and more prosperity by concentrating on certain things, we should concentrate on those things.

HUME: Things we're better at.

MITCHELL: The things we're better at. And if the lower-level, less- skilled jobs are better off done in India, which is a common place for some of this outsourcing, then India should concentrate on that. Both countries wind up wealthier.

Now, it doesn't mean that, as you look at that whole process that there aren't families or communities that somehow might get disrupted. And if you are the textile time worker -- of course, this wouldn't be an outsourcing job, but you know, this typical trade story.

If you are a textile worker and have to wind up to then going to the BMW factory in South Carolina and try to get one of those jobs, and you are going through the process of learning a new skill, it can be a very difficult thing. Much as when the electric light bulb was invented, it wreaked havoc in the handle industry.

But again, do we want to lock our economy in place, give up progress, forego economic growth? And again, make ourselves more like this sort of highly regulated, overburdened European economies where there is no economic opportunity?

HUME: Why do people say this leads to -- that inevitably it means that the better jobs end up here, and it's the lesser jobs that are outsourced? Isn't it just as likely that in a now technology-oriented place, like India, that some of the really good programming jobs that pay well will end up over there because we don't have to pay them as well?

MITCHELL: Well, it could be over time that does begin to happen, but we have already seen what the few companies that India isn't maybe quite ready for that yet. That they've actually brought some of the programming jobs back to the U.S.

And what you do tend to find is because the human capital isn't as developed there, because they don't have the educational system that we have, especially the higher education system, where you tend to really generate, you know, the real brain power for the software industry.

What we have is the lower-level jobs are more appropriate for India because their human capital is at that level.

HUME: Got you. Dan Mitchell, nice to have you. Thanks for coming in.

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