In Defense of Outsourcing
In virtually every election cycle it seems as if we're subject to prolonged debates about phony issues. Not phony in the sense of imaginary, but phony in the sense of being so badly distorted by the press and/or public misunderstanding that the resulting discourse invariably leaves us all a little dumber on the topic.
Take for instance the 2010 U.S. Senate race here in California. Carly Fiorina -- the Republican nominee and former CEO of Hewlett-Packard -- was widely criticized for the layoffs that took place during her time with the company. That's fair enough. Candidates with business experience -- particularly when they use that experience as part of their rationale for being suited to office -- deserve to have their records scrutinized. But this didn't play out as a sophisticated discussion over whether or not Fiorina was culpable for the economic situation that compelled HP to let 30,000 workers go. It simply came down to this: laying off workers is bad.
That's an easy opinion to hold in the abstract, but its cash value is approximately zero. CEOs and small business owners alike aren't allowed the luxury of planting their flag in categorical imperatives like this for a simple reason: they have to balance the books. No one really likes firing people (not even Mitt Romney -- the great tragedy of that gaffe was that he wasn't even talking about cutting employees loose; he was talking about taking your business elsewhere when someone's providing you with a sub-par product). But often times business leaders are faced with enduring the short-term pain of a round of layoffs to attempt to preserve the long-term health of the company. It's the business equivalent of the principle of delayed gratification -- the hallmark of maturity. You don't throw a feast tonight if you won't be able to restock your empty refrigerator tomorrow.
The latest round of this kind of nonsense is coming over the outsourcing debate between Mitt Romney and President Obama. Interestingly, the Romney campaign is accepting this argument on the president's terms. While Obama alleges that Romney was behind massive outsourcing efforts during his time at Bain, Romney is hitting back with accusations that many of the policies of the Obama Administration have had the same effect. You can't help but notice that both sides are conceding the premise that outsourcing is an unalloyed bad.
As a practical matter, Romney probably has to do this. It's hard to imagine how he resets the argument with a soundbite. ABC News is not going to cover him behind a podium, reading glasses around his nose, expounding on David Ricardo to a group of bewildered rally attendees. As for Obama, I'm sure he really believes it. Thankfully, however, there are a few people in the media who aren't going to let them beg the question. One of them is Michael Kinsley -- a reliable voice of the left, but one who has a high immunity to what our own Mickey Kaus would call "liberal [bovine excrement]." Here he is in today's Los Angeles Times:
In the presidential campaign, President Obama is trying to paint Mitt Romney as an incorrigible outsourcer, as if it were obvious why this is so terrible. Maybe it seems obvious: People lose their jobs when companies transfer parts of their operations overseas. But most economists believe in the theory of free trade, which holds that a nation cannot prosper by denying its citizens the benefit of cheap foreign labor.
It's a hard sell because the victims are concentrated and easy to identify, while the benefit is diffused through the whole economy. That's why so many politicians pay obeisance to free trade in the abstract but oppose it in the particular...
Obama decries Romney's practice of outsourcing as if he thinks that all outsourcing is wrong, even if it can't or shouldn't be made illegal. Obama proposes a heavy dinner of grants, subsidies and tax credits to discourage outsourcing and encourage "insourcing" — bringing jobs from abroad back to America — all of which are bad ideas. Among other reasons, one nation's insourcing is another nation's outsourcing, and retaliation can quickly lead to a trade war in which everybody loses.
Who said this — "I don't want the next generation of manufacturing jobs taking root in countries like China or Germany" —Romney or Obama? Early in the Republican primary campaign, China was the one subject Romney seemed genuinely agitated about. Imposing tariffs on Chinese goods was on the long list of things Romney said he was going to do on Day 1 of his presidency. Maybe he still is, but he doesn't play it up the way he used to.
Meanwhile, if Romney is a free trader at heart, faking a bit of protectionism, Obama seems to be a protectionist at heart, faking a belief in free trade. That quote in the previous paragraph is from Obama, and it shows a fundamental misunderstanding of how markets work. Trade is not a zero-sum game. There isn't a certain number of manufacturing jobs that will either go to China or Germany, or come to us. We want China and Germany to have lots of manufacturing jobs. The more they have, the richer they are, the better off we will be as well. Beggar-thy-neighbor policies don't work.
I don't expect this argument to carry the day with voters anytime soon. But I'm deeply grateful that those long odds haven't kept people like Kinsley from making it.
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Comments:
Jun '10
Re: In Defense of Outsourcing
When 100-million Americans buy an American pair of shoes for $60, they each have a pair of shoes. When 100-million Americans buy a Chinese pair of shoes for $30, they each have nearly the same pair of shoes, but the American economy has an extra $3-billion to work with. Repeat that with fifty more consumer products, and we're talking real money. That's money that can be invested in things much more profitable than making shoes.
Apr '11
Re: In Defense of Outsourcing
It is not even about investing the money Mel. If Americans can buy shoes made in China for $30 it means they can now buy twice as many shoes, or buy shoes and pants. Wealth as all right thinking people know is how much stuff you have and how much stuff you can get. Lower shoe prices means we are all wealthier.
Jan '11
Re: In Defense of Outsourcing
Yes! Not to mention the money flow back into the United States: the ForEx bank that gave the American importer of shoes the Yuan to make a large shoe order now has to find a place to put US$s. Providing that this ForEx bank doesn't have enough Chinese importing firms needing US$s to make purchases from American manufacturers, the money flows back in to the U.S. because Net Exports are equal to Net capital Inflows. To see why, this link provides the details to the mechanics of it.
May '11
Re: In Defense of Outsourcing
The real question behind all of this is what are we producing in the U.S. that the world wants but CANNOT get cheaper elsewhere.
The idea of a service economy where we just swap dollars with each other but don't actually make anything is leading us to a second rate economy.
Someone mentioned "extractive" industries here a few days back. The "extractive" industries, mining and drilling, along with agriculture based industries, farming, logging, animal production are the only true industries where something "new" is brought into the market. Everything else is simply "value add". Yet, the value add makes a the majority contribution to our economy...or it used to. Now we are letting the value add go to other places instead of finding ways to do it here cheaper, better, faster.
Not everyone can be a manager, engineer, scientist that gets paid a good salary to think. Even if everyone were capable, there aren't enough of those jobs. There HAVE to be manufacturing jobs for the rest of us. Otherwise burger-flipping is the only option.
Dec '11
Re: In Defense of Outsourcing
Being against lay offs is kind of like being against people getting dumped.
You agree to provide services for money, and then you wrap up all kinds of emotional self worth into the thing, and then you get dumped. People dont want your services anymore. Then you see your former BF/GF strutting around town with a newer model and your self esteem takes another whack.
People completely lose sight of what a job is, and then lose themselves in it.
Jul '10
Re: In Defense of Outsourcing
The problem with the analogy of the shoes is it assumes that after those jobs have been outsourced, all 100-million Americans still have income to buy shoes. If your job is gone, you're not buying shoes at $60 or $30. I agree with free trade; I understand the inherent inflation that builds in an economy that pays higher labor costs by not outsourcing. However, this ignores the fact that it leaves people without jobs who, to be blunt, are not qualified to take on better paying jobs in the service sector. So now you're asking them to either try to get a job they aren't qualified for (and I'm not just talking education, some people simply do not have the capacity for certain kinds of work regardless of how much training they get), or to take a lower paying job. The kind of people who are getting laid off are typically not the innovators and intellectuals; they are the grunts and bodies filling a position. Someone who worked hard and lost their job not because of performance, but because someone would do it cheaper, seems like a race to the bottom for low-skilled workers.
Nov '10
Re: In Defense of Outsourcing
Never had much luck with comparative advantage arguments on Ricochet...
Edited on July 12, 2012 at 9:15pmApr '11
Re: In Defense of Outsourcing
Pilli: The real question behind all of this is what are we producing in the U.S. that the world wants but CANNOT get cheaper elsewhere.
Not everyone can be a manager, engineer, scientist that gets paid a good salary to think. Even if everyone were capable, there aren't enough of those jobs. There HAVE to be manufacturing jobs for the rest of us. Otherwise burger-flipping is the only option. · 40 minutes ago
See, I think you are exactly wrong. What America does make that no one else does is things like science, technology, medicine, art, music, etc. These are actually things that everybody wants, including the Chinese. The problem is many people in the world can not afford to buy or use these American products. At least not yet. The last thing that we do is give services to each other. Now you may think that means burger flipping, but it also means being a cheff, baker, cheese monger etc. Not everyone can be a scientist, but scientists and managers will want artisan bread, which some other American will have to make for them. Being a baker isn't so bad...is it?
Feb '11
Re: In Defense of Outsourcing
Fascinating. So Kinsley also believes it's bad for the US even to attempt to arrange the tax code to encourage employment in the US.
You know- because it will lead to a trade in which everyone will lose.
Instead, we get a trade war in which only the United States loses.
I remind everyone that the US has had a "free trade" policy for decades. In that time the US has gone from the richest country ever seen to the brokest nation in history.
And the US government, seeing itself as the global hegemon, doesn't even pretend to care.
Tens of millions on food stamps, huge unemployment, and a government that is effectively printing money to pay bills. This won't end well, and that should be obvious by now.
Feb '11
Re: In Defense of Outsourcing
Pilli..."Not everyone can be a manager, engineer, scientist that gets paid a good salary to think. "
There is a LOT of management, science, and engineering involved in manufacturing. The idea that manufacturing is an undesirable industry involving only repetitive, low-skilled jobs is quite incorrect.
Apr '11
Re: In Defense of Outsourcing
I realize that all my examples of services are food related, but I skipped lunch. Other services we offer are financial services, and retail services. Also let us not forget entertainment and art. Worrying that we are loosing manufacturing jobs to me seem like people worrying at the turn of the 20th century that all these farmers were becoming unemployed. People will find other jobs, and as the value of people performing those jobs increases they will be paid more for them.
Also in a quick aside. Scientist do get paid to think, but actual science is all just manual labor. For the most part unskilled manual labor. Right now after I post this I will go sit in a sterile hood and plant seeds on a sterile plate, hundreds of seeds. Doing this is vital to my science, none of it requires a degree. I think you will see in the future many more people coming into science to do this kind of menial science labor. It will really be a boon to science and to the "unskilled". I mean seriously, half of science is doing unskilled labor....
Feb '11
Re: In Defense of Outsourcing
LowcountryJoe
Yes! Not to mention the money flow back into the United States:
No! The US has had trade deficits for decades, so the money did not flow back into the Unites States. What should have happened was that the US dollar lost value to bring that deficit back into balance. But as the US dollar is the world's reserve currency- at least for the next few months- and the US government fancies itself the global hegemon- the US government failed to react rationally to the problem.
http://en.wikipedia.org/wiki/Triffin_dilemma
From that link "The Triffin dilemma (or the Triffin paradox) is a theory that when a national currency also serves as an international reserve currency, there could be conflicts of interest between short-term domestic and long-term international economic objectives. This dilemma was first identified by Belgian-American economist Robert Triffin in the 1960s, who pointed out that the country whose currency foreign nations wish to hold (the global reserve currency) must be willing to supply the world with an extra supply of its currency to fulfill world demand for this 'reserve' currency (foreign exchange reserves) and thus cause a trade deficit."
Jan '11
Re: In Defense of Outsourcing
Xennady:
I remind everyone that the US has had a "free trade" policy for decades. In that time the US has gone from the richest country ever seen to the brokest nation in history.
No! It's had a very managed trade policy with plenty of carve-outs for the least productive and whiniest. And the brokest angle that you've brought up has nothing to do with trade [or the essence of capitalism] but everything to do with the government spending more than it takes in [not that I want it to take more] and making promises it cannot keep to a voting population that likes benefits without actually paying for them.
Jan '11
Re: In Defense of Outsourcing
Xennady
LowcountryJoe
Yes! Not to mention the money flow back into the United States:
No! The US has had trade deficits for decades, so the money did not flow back into the Unites States.
So, the funds that bought the U.S. Treasuries which allowed most interest rates to be much lower than they could have been [causing Americans to leverage their debt for housing equity and business expansion] and which allowed the U.S. government to provide more goodies to its constituents, didn't really happen?
Xennady
What should have happened was that the US dollar lost value to bring that deficit back into balance.
Absent governments intervening in their own monetary policies and for their own make-work-bias purposes, I would have agreed with you. But we all know that this does happen.
Jan '11
Re: In Defense of Outsourcing
Xennady
LowcountryJoe
Yes! Not to mention the money flow back into the United States:
From that link "The Triffin dilemma (or the Triffin paradox) is a theory that when a national currency also serves as an international reserve currency, there could be conflicts of interest between short-term domestic and long-term international economic objectives. This dilemma was first identified by Belgian-American economist Robert Triffin in the 1960s, who pointed out that the country whose currency foreign nations wish to hold (the global reserve currency) must be willing to supply the world with an extra supply of its currency to fulfill world demand for this 'reserve' currency (foreign exchange reserves) and thus cause a trade deficit."
I'm going to take a stab that you'll not believe anything I previously wrote regarding trade or the mechanics of it and that this debate you want to engage me in will further morph into something currency related and move away from the real topic. So, anticipating this, I think you should be exposed to the beliefs that I've adopted regarding currencies =>
Why Is That Dollar Bill in Your Pocket Worth Anything? by Hal Varian, January 15, 2004
Feb '11
Re: In Defense of Outsourcing
LowcountryJoe
So, the funds that bought the U.S. Treasuries which allowed most interest rates to be much lower than they could have been [causing Americans to leverage their debt for housing equity and business expansion] and which allowed the U.S. government to provide more goodies to its constituents, didn't really happen?
Are you arguing that this was a good thing? Really?
As far as I'm concerned this only allowed disastrous overspending and overleveraging which allowed the present political class to purchase enough support to win re-election despite their failure. And allowed their Wall Street contributors to dump trillions in losses upon the tax payers, after paying themselves vast bonuses. That- btw- is not how the free market would work, if we had one.
LowcountryJoe
Absent governments intervening in their own monetary policies and for their own make-work-bias purposes, I would have agreed with you. But we all know that this does happen.
My point is that other governments quite plainly intervene in monetary policies for the benefit of their nations, while the wanna-be global hegemon on the Potomac does not.
To be continued...
Feb '11
Re: In Defense of Outsourcing
LCJ,
If you want to argue that this is mere make-work bias, fine. I'll grant that this is what theory suggests.
But my take is that because of the policies of the US government- and the vast wealth of the US market- the theory fails because of peculiar circumstances.
That is, a country could take actions that theoretical would lead to mere make-work but still come out ahead because they could extract more wealth from the US market than any efficiency loss from the theoretical make-work their governmental intervention gained them. That why so many government- all of them, it seems- adopted those meddling policies.
This situation is ending now, and note many countries are dumping use of the US dollar for bilateral trade.
Side note- I have to leave. So If you want to reply be aware I won't be able to respond until tomorrow.
Jan '11
Re: In Defense of Outsourcing
Xennady
LowcountryJoe
So, the funds that bought the U.S. Treasuries which allowed most interest rates to be much lower than they could have been [causing Americans to leverage their debt for housing equity and business expansion] and which allowed the U.S. government to provide more goodies to its constituents, didn't really happen?
Are you arguing that this was a good thing? Really?
Apparently you selectively read my comments. I think I made myself pretty clear during comment #13. If you're seriously asking me this question, you should visit (or re-visit) it.
Xennady
LowcountryJoe
Absent governments intervening in their own monetary policies and for their own make-work-bias purposes, I would have agreed with you. But we all know that this does happen.
My point is that other governments quite plainly intervene in monetary policies for the benefit of their nations...
So we agree‽ Can we also agree that there are no free lunches? And further; that countries that do this sort of thing experience consequences -- consequences such as inflation and higher raw material costs for their industries?
Feb '11
Re: In Defense of Outsourcing
I skimmed your link. It doesn't contradict anything I said.
and re #18 of course there aren't any free lunches.
The question who pays for the lunches. The US has been so rich that the American people have been paying for the lunches for decades.
And now we're broke.
Jan '11
Re: In Defense of Outsourcing
Xennady: LCJ,
...
That why so many government- all of them, it seems- adopted those meddling policies.
I addressed the trade-off of these policies while we were apparently passing comments by each other. But I did want to answer this portion above with my own thought. I believe governments adopt short-sighted make-work policies because that's what people will demand; a way to make an income no matter if that income may purchase less than it could. In the U.S., it's easy to see why our politicians do it [because they'll be voted out if they don't]. But in China, if they don't do it, eventually there will be tens of millions ready to stand in front of a column of tanks.