Outsourcing Debate Tainted by Myths, Misconceptions

The debate over American companies outsourcing jobs is often tainted by misconceptions and anecdotal evidence, which the media tends to accept at face value. But as outsourcing emerges as a hot-button issue in the presidential election, it is time that some of the most common myths about outsourcing be dispelled.

Take, for example, the complaint that outsourcing takes jobs away from Americans. On the most basic level, yes: when one company ships 500 jobs currently held by Americans to India, those 500 Americans do lose their jobs.

But that’s not usually the way it works. Many times, American companies will create new jobs specifically for overseas workers, jobs they’d never consider if forced by law to give them to Americans, because they’d be too expensive. Many recent domestic start-up companies have spent their first few years of existence employing only overseas workers, with a few executives here in the U.S. overseeing things. Once they’ve established financial footing, these companies can then expand, and begin to hire more expensive American workers.

America is actually a net importer when it comes to jobs. Far more foreign companies come to America to hire people than American companies go overseas to hire cheap foreign labor. We’re even a net importer of tech jobs.

The problem then, is that if we begin to punish American companies for hiring foreign workers, as some politicians and protectionists have suggested, it’s almost certain that the countries exporting jobs to the U.S. will forbid their own companies from coming here. The net result will be an overall loss of U.S. jobs. Not to mention that we’d have fewer goods to choose from as consumers, and what goods we could choose from would be more expensive, which also costs jobs.

Often, outsourcing opponents will be quoted as saying that American companies ought to be patriotic, and hire American workers.

The result of this, however, would be American companies losing business to foreign competitors, and perhaps going out of business themselves.

The idea that American companies should handicap themselves by hiring more expensive domestic labor solely out of patriotism is itself un-American. America’s prosperity was built on entrepreneurship and free enterprise. If American companies can’t capitalize on cheap overseas labor, foreign companies in the same field will, and American companies (as well as the people they still employ in the U.S.) will suffer. Is that really the example that the world’s beacon of capitalism ought to set?

Another common myth is that America was built on manufacturing. If we ship all of our manufacturing overseas, we won’t be able to create wealth. And what will we do if there’s a major war?

We aren’t shipping all of our manufacturing jobs overseas. There’s plenty of manufacturing power on American shores. Given that the most of the rest of the world has seen a net loss in manufacturing jobs over the last decade or so, the idea that we’re shipping all of our blue-collar jobs to the third-world just doesn’t hold water. If we’re moving jobs, someone ought to be gaining them.

So where have all the jobs gone? Well, the short answer is that we’ve gotten more efficient.  We’ve figured out how to make the same goods with fewer hands. And while that may seem like a bad thing for the hands that aren’t working anymore, you have to keep in mind that this has been going on for the last century.

The invention of the automobile displaced people who manufactured and drove carriages, and who raised and trained the horses who pulled them. Computers displaced all sorts of professions. At the turn of the century, almost half of the American workforce worked on a farm. Today, that number is less than five percent. Yet we produce exponentially more food now than we did then, due to new agriculture technology. American ingenuity resulted in many farmers and farmhands being displaced, and those people were hurt in the short run. But as a nation, we’re better off for it. We have more to eat, and we can do more productive things with the land and labor no longer used for agriculture.

Despite the ramifications for those who lose their jobs, society as a whole benefits from increased productivity while the jobs displaced in declining sectors are replaced with jobs in emerging sectors. Finding cheaper labor is just as much a part of increasing our productivity as inventing a faster computer.

A key focus of the outsourcing debate is the charge that American companies go overseas to exploit third world labor because they’re greedy.

It depends on what you mean by greedy. American companies do look to maximize profits and minimize costs, just as we all do as individuals. But it costs a lot of money to close down a domestic plant and move it overseas. Investing in developing economies also typically carries huge risks. The workforce may be cheap, but it’s also unreliable and uneducated. The Third World also lacks the stable institutions you need to run an efficient business, such as a consistently enforced, predictable rule of law and property rights. Developing countries also tend to be politically unstable, and foreign firms can be the target of insurgencies and civil unrest.

In short, companies typically pack up and move overseas only when the tax and regulatory environment at home gets overly burdensome. Indeed, a cursory look at the data shows that the states with the most aggressive tax and regulatory policies tend to be the states that are losing the most jobs to other countries.

There is also the claim that the U.S. government ought to look out for Americans. If that means forbidding American companies from giving jobs to foreigners, so be it.

There are several problems with this way of thinking. First, as noted above, any action by the U.S. government to limit how many foreign workers American companies can hire will most certainly lead to reprisals, which will likely mean a net loss of jobs for Americans. Is that “looking out for Americans?”

Restrictions will also mean less choice for American consumers, and higher prices for all of us.  Higher prices also mean fewer jobs. Is forcing all Americans to sacrifice for the jobs of a few displaced workers “looking out for Americans?”

The people who start up, invest in and run corporations are Americans, too. In fact, they’re the epitome of the American dream, and American-style free market capitalism. If an American puts his own financial reputation on the line to start up a tech firm, and can only afford to hire foreign workers until he gets his feet on the ground, do we really want the U.S. government telling him he has no choice but to hire more expensive domestic labor, even if it bankrupts him? Even with big firms that are well-established, do we really want to empower the government to restrict who they can hire? Is that “looking out for Americans?”

Finally, several states have now passed laws forbidding any company that does business with state governments from employing cheap overseas labor. In Indiana, politicians decided to cancel a contract with a firm to upgrade the state’s computer systems because the firm employed workers in India. As a result, the state hired a competing firm from Florida, at an additional cost of $8 million to Indiana taxpayers. Even if an Indiana firm had bid on the job (and none did), it at most would have meant an additional 50 jobs in the state. Were Indiana lawmakers really “looking out” for Hoosiers by charging taxpayers an extra $8 million so Floridians could upgrade the state’s computers instead of Indians?

There’s no doubt people get hurt in the short-run when the economy shifts and embraces new business models, but it’s been that way since the industrial revolution. Those self-correcting measures have in the long run made us the most prosperous, comfortable and productive society in history.

Radley Balko is a policy analyst with the Cato Institute and publishes a Weblog at TheAgitator.com.

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