Obama is wrong about outsourcing

Posted: July 24, 2012

President Obama has become increasingly critical of Mitt Romney's career at the private-equity firm Bain Capital, particularly based on evidence that Bain purchased companies, closed their domestic factories, and opened or contracted with factories overseas to do the same work. This, Obama argues, took jobs from American workers.

Democratic candidate John Kerry raised the same issue in 2004, arguing that increased outsourcing was damaging the U.S. economy and that the Bush administration wanted to "export more of our jobs overseas." Greg Mankiw, then head of Bush's Council of Economic Advisers, countered that outsourcing was "just a new way of doing international trade" and actually a "good thing."

So is outsourcing good or bad for the economy?

Numerous studies have shown that outsourcing has a minimal role on job losses and, in the aggregate, has actually added jobs. Companies usually choose to manufacture products or provide services with foreign labor for a very simple reason: It's less expensive, even considering the logistical costs. As a result, companies can lower their prices, allowing more Americans to consume their products, and increase their profits. These cost reductions and profit increases often result in more employment.

In 2003, for instance, Delta Airlines moved 1,000 jobs from America to India. In doing so, it was able to reduce costs by $25 million. It used that money to fund 1,200 new reservations and sales positions in the United States, resulting in a net gain in domestic jobs.

Similarly, consider a consumer who buys a state-of-the-art laptop for about $600. If the computer were made entirely in the United States, it would cost more than $1,000. But because it's manufactured outside the United States, the consumer saves $400 that she can spend on other goods and services, creating more demand, which in turn results in economic and employment growth.

The bottom line is that outsourcing results in lower costs for firms, increased profits for stockholders, reduced prices for goods and services, and therefore higher standards of living and employment.

Why, then, do polls show most Americans think "outsourcing" hurts the economy? Because it's very easy to see the negative effects of outsourcing. We watch plants close, and we sympathize with the displaced workers. The jobs added as a result of lower costs, and the positive effects of lower prices, are much more diffuse and difficult to see.

As our economy matures, outsourcing is likely to expand. One theory says that economies evolve from agriculture to manufacturing and finally to services. This is happening in the United States, where almost 70 percent of gross domestic product comes from services rather than goods. And we move away from manufacturing partly by outsourcing.

We should be concerned about the temporary structural unemployment that results from this, when the skills of the unemployed do not match the skills needed for open positions. But that should not deter us from allowing outsourcing, which ends up benefiting the vast majority of Americans.

Michael Busler is an associate professor of business at Richard Stockton College.

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